Argentina Cuts Utility Subsidies

Argentina announced that it will reduce the rate at which it subsidizes natural gas and water in order to trim its budget deficit. "What we are going to do now is reduce subsidies in approximately 20% on gas and water," Economy Minister Axel Kicillof said during a news conference Thursday, according to the Wall Street Journal. "We are going to provide incentives for responsible use."

Pairing back subsidies could save the government as much as 13 billion pesos ($1.6 billion), and according to Kicillof, the savings will be used to finance more government spending. Industrial consumers and low-income residents will be exempted from the subsidy cuts. The government intends to have the middle and upper classes bear the brunt of higher utility costs. Higher income individuals may see their gas bills rise by as much as 161% and their water bills by over 300%.

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Despite annual inflation of at least 25%, Argentine President Cristina Fernandez de Kirchner has kept utility prices for most consumers frozen since taking power in 2007 – and utility rates have been largely unchanged since Argentina’s economic crisis in 2002. Ratepayers only pay about 20% of the cost of natural gas in Argentina, with the balance subsidized by the government. Such subsidies amount to around 5% of annual GDP. The government hopes to slash that share in half.

The government has resisted raising the cost of utilities for fear of a political backlash. But the government is running out of options as deficits continue to balloon. Argentina’s budget deficit hit its highest level in over 21 years. And inflation is only growing worse – many economists estimate that the unofficial inflation rate is now above 30%. The markets reacted positively to the announcement, with government bonds jumping to their highest levels in over six weeks.

By Charles Kennedy of Oilprice.com