argentinas economic outlook temporary equilibria: mild recession and high inflation ahead juan luis...
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FUNDACION DE
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Argentina’s Economic OutlookTemporary equilibria: Mild recession and high inflation ahead
Juan Luis BourCouncil of the Americas
New York City, May 9th, 2014
Manufacturing and Construction: 3 quarters of (sa) falls.
Quarter to quarter % change (sa)
QuarterManufacturing Construction
INDEC (EMI) FIEL (IPI) INDEC (ISAC)Q3 2013 -1.6% -0.9% -1.1%Q4 2013 -2.0% -2.0% -1.2%Q1 2014 -0.6% -2.7% -2.6%
GDP: fall (sa) since Q4 2013. (I) The demand side. Net exports (no growth contribution, except in 2014 because of major import fall)
Investment: cyclical downturns in Equipment and Construction. Private consumption: from Consumption-led growth to adjustment.
(II) The supply side
•No major contributions to growth since 2012 from Manufacturing, Construction and Commerce.•Most sectors with a lower contribution to growth than average previous 4 years, except Agriculture.•The main buffers in 2014, other than Agriculture: Transport &Communications, Financial sector.
CONTRIBUTIONS TO GROWTH (percentage points, GDP at factor cost)
Agriculture Manufacturing Construction Commerce, Hotels Financial Other services
2010 1.69 1.31 0.41 1.87 0.35 2.95
2011 0.20 0.65 0.50 0.97 1.13 3.11
2012 -0.73 -0.09 -0.18 -0.16 1.03 1.27
2013 0.37 0.09 0.06 0.25 0.54 1.53
2014 0.42 -0.83 -0.26 -0.53 0.15 0.36
(A) 2010-13 0.38 0.49 0.20 0.73 0.76 2.22
(B) 2014 - (A) 0.03 -1.32 -0.46 -1.26 -0.62 -1.85
The statistical nightmare
Before After Difference Observ
TRADE (billion USD)
Exports (year) 83.03 81.66 -1.37 Billion USD
Imports (year) 74.00 73.66 -0.34 Billion USD
Trade Bal (year) 9.03 8.00 -1.03 Billion USD
INFLATION (accumulated)
CPI (Jan-March) 2.37 9.97 320.7% % change
Supermarkets (Jan-March) 0.83 11.21 1258.2% % change
GDP
EMAE/GDP (year) 4.9 3.0 -1.9 pp
What’s behind trade figures? Exports stagnated since late 2010 – Now they fall
Inflation close to 40% (yoy) – Foods & Beverages >40%Short term deceleration – Logistic curve: temporary stability around the new (higher) level
The antiinflation program: another temporary anchor (the ER)
Last year we warned on wage deceleration: impact on the consumption-led growth strategy.This year: wages as nominal anchor. The consumption boom is over.
Santiago UrbiztondoCouncil of the Americas
New York City, May 9th, 2014
Undoing subsidies without regulatory reform
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• Since 2002, regulatory paradigm increasingly diverged from any broad “best-practice” ideal: • Confusion of public and private roles
• Direct & discriminatory price regulation in competitive segments (upstream)
• Short-run (myopic) perspective, promoting inefficient operation / investment through cost-plus tariff / subsidy adjustments, discriminating old and new investments
• Disregard to transparency, institutional credibility, consistent contracts, technical analysis, etc.
Public Utilities’ Context
• Consequences:1. Substantial reduction of (real) tariffs, covering a fraction
of total (long-run) costs
2. Excessive consumption growth, but contraction of investments, exhausting existing capacity
3. Complications: exploding subsidies, poorly focalized, with deteriorating coverage, quality and cost
4. Perceived end of period: magnitude and composition of subsidies (energy imports) would require a major correction, reducing subsidies and increasing tariffs (and changing new paradigm)
Public Utilities’ Context
Overall size & evolution of subsidiesIn 2013: subsidies to public utilities added USD 22 billions, or 4.4% of GDP
• CAMMESA & ENARSA: from 55% of total in 2009 to 73% in 2013
2014: First 2 moths explosive: total subsidies increased 13% in USD, approaching 5.7% of GDP without subsidy cuts
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US$ (MM) % GDP (right axis)
Subsidies to public utilities (in MM USD and as % of GDP), 1989-2014pSource: Own elaboration based on SIGEP (1989-1995, MECON (1996-2003) and ASAP (2004-2014): 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. 2014p based on first 2 months only (annual variation), and USD GDP growth is assumed at -13% .
1) New incentives (higher prices and promises) to YPF and other hydrocarbon producers since 2012, with no major results yet
Recovered prices of crude oil and gasoline before YPF’s expropriation
Stiff rise of new NG price since 2013 –7.5 USD/MMBTU
YPF’s public profit function post-2012 (internalizing cost of subsidized energy) → relative price recovery….
… certainly helped the “new YPF” to stop its previous production fall
Recent attempts to attack subsidies
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2005-2009 2009-2011 2011-2012 2012-2014
Price of domestic crude WTI
Price of gasoline - YPF Price of gasoline - Rest
Price YPF/ Price Rest (right axis)
Evolution of gasoline and crude oil prices (average annual variation of USD values), 2005 - 2014 (months of march)
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Natural Gas (MM m3) Oil (1,000 m3)
YPF's monthly production: 2001 - March 2014Source: Own elaboration based on SE.
1) New incentives (higher prices and promises) to YPF and other hydrocarbon producers since 2012, with no major results yet
Not effective to stop total market fall
Nor to induce higher investment effort (# of exploration and development wells drilled)
Vaca Muerta? Announced investments still minor vis-à-vis previous industry investment (5.2 billion USD in 2011). Substituting conventional oil and NG?
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Oil Total NG Total Oil YPF Oil Rest NG YPF NG Rest
Production of oil and natural gas: Yoy variation, Total, YPF and Rest, 2004-I.2014Source: Own elaboration based on SE.
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Total YPF Rest
Number of exploration wells drilled, oil and natural gas, 2005-2014*Source: IAPG. * 2014 estimated with SE's aggregated data for first two months.
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Total YPF Rest
Number of development wells drilled, oil and natural gas, 2005-2014*Source: IAPG. * 2014 estimated with SE's aggregated data for first two months.
Recent attempts to attack subsidies
2) AySA’s tariff hike (nominally 170% to 405% according to location of user –high, medium and low neighborhoods) is significant, but has a small impact on total subsidies and no effect on total costs under current de facto cost-plus regime with endogenous subsidy• With average 310% nominal tariff increase, 35% inflation and 15%
real devaluation in 2014, AySA’s annual (post-august) subsidy falls 37% -USD 500 million– , or 2.3% of overall 2013 subsidies to public utilities
Recent attempts to attack subsidies
Total elimination of subsidy to AySA would still require 170% additional tariff increases (with 2014 assumed USD costs)
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2001 2006 2007 2008 2009 2010 2011 2012 2013 2014*
Total income Tariff income Subsidy income
AySA's tariff and subsidy income, 2001 and 2006-2014* (in MM USD)Source: Own elaboration based on AASA, ERAS and INDEC.
3) Natural gasa) 2013 subsidies through ENARSA of 5.7 billion US$, 50%
directed to residential (R) and commercial (C) users
b) April 2014: partial withdrawal of subsidies to R and C, through higher wellhead prices, from +400% (<800 m3/year) to +900% (>1,800 m3/year), averaging 730% nominal AR$ increase (or 400% increase of cost of NG as large R users pay charge for imported gas), to be completed in August
c) Price hikes avoided if consumption falls 20% vis-à-vis previous year (hikes halved if consumption falls 5% - 20%)
d) Effect on ENARSA’s deficit unknown, but 25% is maximum reduction (as explicit subsidies informed to R users -1.0 billion USD- remain), i.e., 1.5 billion USD (or 6.9 % of total 2013 subsidies)
e) Also, increases of T&D tariffs to same users (130% average, nominal ARG$, same distribution, avoiding mechanism and timing)
f) 60% of NG exempted (industrial users, generators, Patagonia’s R&C)
Recent attempts to attack subsidies
Recent attempts to attack subsidies
3) NG: distortive upstream NG prices for residential users• Upstream NG prices (w/o Decree 2067) increased much more for
large R users, but % changes become more homogenous –+/- 380%– considering final cost of NG (including estimated payments under Decree 2067/08)
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R1 R21 R22 R23 R31 R32 R33 R34 Prom R*
March 2014, w/o Decree 2067 March 2014, with Decree 2067August 2014, w/o Decree 2067 August 2014, with Decree 2067
Upstream NG price for Residential users, with and without Decree 2067/08's charges (USD/MMBTU)Source: Own elaboration based on Resolutions ENARGAS 1982/11 and SE 226/14. Exchange rate 8 $/US$ in
March and 8.5 $/US$ in August.
3) NG: full-year effect of various changes on Discos’ R&C users• In USD, direct payment by NG users post-august 2014 would be 3%
higher than in 2001, and total cost of NG service provided by Discos 25% higher
• Subsidy falling from 52% to 19% of total cost of R&C NG service• Still, USD T&D margins are 50% lower than in 2001, and upstream cost
of NG is 70% lower than imports from Bolivia (10 USD/MMBTU)…
Recent attempts to attack subsidies
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Net sales T&D Cost of gas upstream
Subsidy to Disco users through ENARSA Total cost
NG expenditure by "average Disco user" Subsidy (as % of total cost, right axis)
NG price and cost to users served by distribution companies, in USD per user/year, 1993-2014*Source: Own elaboration based on ENARGAS and ASAP. * Year 2014 assumes 5% lower consumption, 70% higher
constant $ T&D margins, 490% higher real $ upstream price paid by Disco users (but no change in not subsidized portion of Decree 2067/08) and 50% reduced constant $ subsidies (with 35% inflation and 15% real exchange rate devaluation).
Conclusions
1. In 2014 the government finally recognized the inconsistency of its regulatory paradigm: fiscal needs call for tariff hikes
2. Yet, overall fiscal impact is estimated low (total subsidies fall 9%)
3. Also, tariff hikes are ill-designed:
• High impact on R&C, but many high-consumption users exempted
• Highly distortive, increasing discrimination across users through price signals (instead of fixed ARG$ breaks for a social tariff focus group)
• Unknown follow up: R’s USD T&D tariffs still 50% below 2001; cost of wellhead NG at 3.1 USD/MMBTU for R still 70% below imported NG…
• Does not include overall restatement of incentives, contracts, institutions, etc., to approach some form of “best practice”
4. Beyond 2015, moving to cost-reflective prices and a more efficient new regulatory paradigm will still be politically difficult (less than in march), but it promises great efficiency (cost-reducing) rewards
Fixing the Fiscal Deficit
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Daniel ArtanaCouncil of the Americas
New York City, May 9th, 2014
The problems at the end of 2013
• High Fiscal Deficit financed with money emission and the use of Central Bank reserves
– High Inflation
• Appreciated Peso in real terms
• Pervasive distortions of relative prices
• Controls “fatigue”
The government “strategy” to fix the fisc
• Reduction in subsidies to energy: low fiscal impact
• Reduction of transfers to provinces: Limited by wage hikes for provincial employees
• Reduction of pensions and wages in real terms: seems to be the source to compensate the impact of the recession on tax collections
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Federal Public Debt (% of GDP)
Net debt Central Bank AnsesContingent in Fgn Currency Contingent with pensioners
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Federal Public Debt (% of GDP)
Net debt Central Bank AnsesContingent in Fgn Currency Contingent with pensioners
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Federal Public Debt (% of GDP)
Net debt Central Bank AnsesContingent in Fgn Currency Contingent with pensioners
Lower than Brazil’s Gross
Net Debt
Projection with 30% increase in 2014 (Arg $ 100 billion).Purchases of foreign exchange +20, Public Sector + 135 Lebacs/Nobacs -55
• What would provide relief to the economy1. An agreement with the Paris Club
2. Investments to develop non-conventional natural gas and oil
3. New foreign loans (Federal or Provincial governments or Private Sector)
• What would create additional problems
1. More controls and more mistakes on policy options instead of measures to correct economic imbalances
2. A sizeable decline in reserves that frightens depositors
3. A US Supreme Court decision that rejects Argentina’s appeals on the hold outs case
The opportunities ahead
• Large non-conventional gas and oil resources– With adequate contractual regime sizeable
investments are likely• Getting back to “normal”
Argentina belongs to the “low-investment” group in the region
• Ranking out of 148 countries.
• Looks at 12
indicators of competitiviness
• Average of Brazil, Chile, Colombia, Mexico, Peru & Uruguay is 60
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Thank you!