Council of Americas - Council of the Americas · Council of Americas New York, May 2 nd, 2017...

Argentina: Disinflation and recovery Juan Luis Bour, chief economist, FIEL

Council of Americas New York, May 2nd, 2017

FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS

Inflation: high volatility during 2016

Acceleration in Q1 2017 followed by reversion in Q2

Pensions benefit from backward looking

adjustments. Additional payments (not pictured here)

account for 0.8% of GDP

Wages: recovery in real terms

since Q2 (lower inflation)

Inflation is on the path to converge to a monthly rate below or close to 1.3% for most of the rest of the year. The average annual rate for 2017 will approach 24.7%, 13 percentage points below the average rate in 2016 (37.9%). December rate (yoy) is expected to be 2-3 pp above the upper bound of Central Bank target (FIEL current estimate: 20%) Inflation could pick up late in the year (after October) due to several factors, including tariff adjustments delayed in the first part of the year and an excess of monetary supply over demand (due to fiscal dominance and the strategy chosen to finance the deficit).

Inflation: summary

8

The real economy: a slow

recovery

Agriculture: major jump in production since harvest 2016/17 Expect strong growth to remain in next years.

Public construction at full speed since 2nd Half 2016. Private works wake up in 2017: prices and real estate transactions go up

Formal employment lags: moving to self employment

Perspectives: FIEL projections for 2017

Santiago Urbiztondo

Council of the Americas, New York, May 2, 2017


Regulation of public utilities: achievements, drawbacks and challenges

Counter-reform during K-administrations (2003-15): • tariff freezing, • cost-plus spiking fiscal subsidies, • cross-subsidies, • regulatory discretion, institutional degradation, • investment contraction, • late quality deterioration, • spiking marginal costs, • systemic energy crisis, reversed energy trade balance, etc.

Overall task: Four dimensions of “normalization” • reduce fiscal subsidies (higher tariffs) • attract investment • minimize distributive (& political) impact • avoid inflationary shock

Initial context for Cambiemos (Dec-2015) FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS

Initial context for Cambiemos (Dec-2015) FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS

120 120 120110

50

33 3020 20 20

7

Public firms

Private firms

Real tariffs in 2015 (2001=100)Source: based on sectorial information; retail deflactor


Immediately: • Deal with emergency in electricity sector (small scale

emergency power additions), and renewable energy auctions • Significant tariff & regulated wholesale price hikes in all public

utility sectors, with focalized social tariffs for the poor • Start normalization of energy T&D concession contracts

through RTI (“integral tariff reviews”), within 1 year • Start process to end intervention of ENARGAS

August 2016: • Supreme Court ruled against NG residential price-hikes,

requiring Public Hearings • Higher than expected inflation & recession pushed for slower

pace of price hikes & subsidy reduction Revised strategy:

• Conduct Public Hearings, top maximum bill increases (400%), slow down price adjustments

The strategy adopted


Despite procedural mistakes (sidestepping Public Hearings), energy prices & tariffs are evolving towards actual opportunity costs (perhaps even more)

•Achievements

-

1

2

3

4

5

6

7

Apr-16 Sep-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19

R1-R21-R22-R23 R31-R32-R33 R34 Weighted average

NG upstream prices for residential users: Values sanctioned in Apr-2016, and announced evolución post-Supreme Court ruling in Aug-2016

In US$/MMBTU. Source: MINEM

FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS •Achievements

Today, T&D NG tariffs after RTI surpassed Apr-2016 hikes 40% average increase in T&D margins pending in 12 months 100% average increase in upstream prices pending in 2.5 years

2,6

3,9

7,3

5,9 5,8 6,2

8,6 8,5

9,710,6

8,0

9,3

-

2

4

6

8

10

12

R1 R21 R22 R23 R31 R32 R33 R34 Avg (weight user)

Avg (weight volume)

Dec 2015 April 2016 October 2016 April 2017

Metrogas: Residential tariffs, before taxes, in US$/MMBTU

m3/y <500 <650 <800 <1.000 <1.250 <1.500 <1.800 >1.800


Today, T&D NG tariffs after RTI surpassed Apr-2016 hikes • 40% average increase in T&D margins pending in 12 months • 100% average increase in upstream prices pending in 2.5 years

15

33

5 10 13 1729

35

48

113

36

71

-

20

40

60

80

100

120

140

R1 R21 R22 R23 R31 R32 R33 R34 Avg (weight user)

Avg (weight volume)

Dec 2015 April 2016 October 2016 April 2017

Metrogas: Estimated Residential bills, before taxes, in US$/month

m3/y <500 <650 <800 <1.000 <1.250 <1.500 <1.800 >1.800


300% tariff hike in 2016 allowed 14% total US$ cost reduction, eliminating AySA’s deficit In 2016, labor force up 3%, real wages constant, higher costs associated with tradable inputs In 2017, AySA is receiving subsidies only for investment (with 27% yoy overall nominal fall)

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2001 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Subsidy (% of total income, right axis) Subsidy + deficit (% of total cost, right axis)Tariff income Total incomeTotal cost

AySA: Tariff income, subsidies, total income and total costs, 2001 & 2006-2016, in MM US$Source: Own elaboration based on AASA, ERAS & INDEC.

•Impact on fiscal subsidies FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

-

5.000

10.000

15.000

20.000

25.000

30.000

US$ (MM) % GDP (right axis)

Subsidies to public utilities (in MM USD and as % of GDP), 1989-2016*Source: Own elaboration based on SIGEP (1989-1995, MECON (1996-2003) and ASAP (2004-2016): Until 2003 it includes YPF, GE, AyEE,

Hidronor, AA, FFAA, ELMA, ENTEL, ENCOTEL and OSN. Since 2004 it includes subsidies to public and private firms in the energy, transportation and W&S sectors. 2016* projects nominal variation of 4 months, with FIEL's GDP forecast..

Expectation / projection presented one year ago: 2016 (4-m): significant fall (50% in USD, 1.7 pp down, from 4.4% to 2.7% of GDP) 2016 projected: final drop probably less, still around 1.5% of GDP

•Impact on fiscal subsidies FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS

Reality / revised projections: 2016: less than 1% of GDP fall 2017 projected: no significant variation (higher tariffs OK, but also higher NG prices –

imports and Plan Gas– & appreciated peso)

0%

1%

2%

3%

4%

5%

6%

0

5.000

10.000

15.000

20.000

25.000

30.000

US$ (MM) % GDP (right axis)

Subsidies to public utilities (in MM USD and as % of GDP), 1989-2017*Source: Own elaboration based on SIGEP (1989-1995, MECON (1996-2003) and ASAP (2004-2017): Until 2003 it

includes YPF, GE, AyEE, Hidronor, AA, FFAA, ELMA, ENTEL, ENCOTEL and OSN. Since 2004 it includes subsidies topublic and private firms in the energy, transportation and W&S sectors. * Own estimation based on first quarter.


Institutional reform: new ENARGAS directory with upstream NG –not T&D or overall regulation– background dominance

Public Hearings seen as a non-substantial, formal, obstacle (ENRE’s RTI discussing firms proposals, deciding on alternatives not debated)

Deepening cross-subsidies (besides social tariff) through manipulation of cost measures (new electricity tariffs)

Extension of Plan Gas (higher prices on additional production) only to non conventional NG in Neuquina basin (not general, discriminates by region and technology, without convergence plan & long-term market rule)

No new contractual rules –to stop cost-plus subsidies– applying to firms other than T&D NG and electric utilities

•Drawbacks

FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS •Drawbacks

Electricity tariffs after RTI: Deepening cross-subsidies (on top of social tariffs) through manipulation of cost measures, “designing” residential fixed distribution costs to induce rational use, in fact bypassing legal ban (new electricity tariffs)

7 14 20 24 3041

59

88

154

1810 20 27 33 4157

106

171

264

28

0

50

100

150

200

250

300

R1 R2 R3 R4 R5 R6 R7 R8 R9 Avg R

Dec-15 Feb-16 Feb-17 Feb-18

Edenor: Estimated Residential Bills, before taxes, in US$/month(Feb-2018 assumes wholesale prices and real exchange rates remain constant).

• 150 300 380 430 480 560 660 1,100 2,000 kwh/month

Fixed charges are 50 times higher! (78 US$/month vs. 1.5 US$/month)

1,5 3 5 69

18

47

63

78

6,4

-

10

20

30

40

50

60

70

80

90

R1 R2 R3 R4 R5 R6 R7 R8 R9 Avg R

Dec-15 Feb-16 Feb-17 Feb-18

Edenor: Fixed Residential Charges, in US$/month, Dec-2015 - Feb-2017(Feb-2018 assumes real exchange rates remain constant).



•Fixed charges are 50 times higher! (78 US$/month vs. 1.5 US$/month)


-100%

-50%

0%

50%

100%

150%

200%

0 250 500 750 1.000 1.250 1.500 1.750 2.000ST R1 R2 R3 R4 R5 R6 R7 R8 R9

Edenor: Changes in US$ Residential Tariffs, Dec-2001 to Feb-2017, by consumption level (kWh/month)



This manipulation did not occur in the NG RTI closed two months later by ENARGAS

0,6 0,7 0,8 0,9 1,1 1,31,7

2,81,9 2,0 2,3 2,6

3,43,9

5,2

8,5

0123456789

10

R1 R21 R22 R23 R31 R32 R33 R34

2015 2016 2017

Metrogas: Fixed monthly charges, in US$, 2015, 2016 and 2017

m3/y <500 <650 <800 <1.000 <1.250 <1.500 <1.800 >1.800

Fixed charges are only 3.5 times higher (as they were in 2015)


New rules for price adjustments in competitive markets (energy) not announced yet: Upstream NG & wholesale energy prices still set by the

government, under cost-plus principle, approaching current marginal costs, without announcing long-term rule

New investments require knowledge of the rules that will govern them in the future, and paced convergence to unique competitive prices would be both credible and efficient

Need to clearly escape de facto cost-plus rule: raising tariffs without anchoring long-run costs will likely be excessive & deceiving

More generally, current efforts to cope with inherited “K counter-reform” need to be inserted into a new master-plan of consistent structural public utilities reforms

•Challenges

Fiscal and External Challenges

Daniel Artana

May 2017


30

External Deficit and Investment (% of GDP)

•External deficit (left axis)

•Total Investment (right axis)

Large portfolio capital inflows in Q1 2017

31

32

33

Increase of 16% of GDP in 16 years

34

Deficit of 6.5% of GDP

35

•A gradual program to reduce the fiscal deficit

During Q1 Primary Balance improved 0.8% of GDP, but

when extraordinary revenues and expenditures are excluded the deficit was slightly worse

than a year ago

36

37

38

39

40

41

During the K years Argentina did not benefit from the reduction in the cost of capital that all emerging countries enjoyed

42

Catching up during 2016

43

An additional reduction is

possible if fiscal consolidation is

achieved

The short-term and medium-term outlook

• Upside – The international context is likely to be benign – An additional reduction in the cost of capital – The opportunities opened by the removal of distortions (e.g.

multiple exchange rates, taxes on exports, unnecessary regulations)

• Downside – Gradual improvement in fiscal accounts delays positive

effects on the economy – High costs in US$ – Increase in investment constrained by current account

deficit

44

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