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Private sector utility subsidies eliminated

by on November 3, 2011

Mere days after imposing new currency regulations, the Kirchner government moved to end utility subsidies for a host of industries that are earning a profit. The move is expected to save the government $140 million a year, cutting 1.3% from the annual budget.

As of today, oil, gas, and mining companies, airports, passenger terminals (think railway stations, bus depots and ferry terminals run by private companies), gaming establishments, insurance companies and banks will drop subsidies but are being warned to not pass these extra costs on to customers. It is hard to imagine that they will not, though the government, through this second measure in a week to cut capital flight and bring more money back into their coffers, will be watching closely. It is easy to say that this is another swipe at banks, but the direction of this legislation was towards commodities.

It’s no surprise that oil, gas, and mining companies were once again in the spotlight. Monday’s effort on currency controls included a caveat that these companies, which formerly had to only invest 20-30% of their profits in national investing, now will have to invest all of their profits within Argentina. For some smaller, more marginal companies that are locally based, this could prove lucrative. But, the majority of firms, including the once state-owned YPF, are owned by foreigners (YPF is now part of Spanish-owned Repsol-YPF). There is nothing new about the Kirchner government’s mistrust with foreign oil and gas firms. During Nestor Kirchner’s term, he helped create Enarsa that is majority owned by the state, albeit seen less as the government’s sole oil company but a pet personal project to increase the wealth of the Kirchner’s.

It is still unclear whether Enarsa, as a government-supported company, is part of this cut in subsidies. Most likely, it will not be. Argentina, with until recently small amounts of national oil reserves, became inflamed when British-owned firms recently began exploring off the coast of the Falklands/Malvinas. Eyeing the “imperial power” that is “stealing” their “rightful oil” from the Malvinas, the proposed investiture by ExxonMobil into natural gas drilling of the Neuquen basin has Argentina trying to wring every cent they can out of them. And in some ways, this is rightly so. The large profits that will come from the natural gas and oil fields could indeed help fund many of the social programs and infrastructure projects proposed by the government. They could also scare off busineses and lead to higher inflation.

The effects may be marginal, but the government, with a fall in budgetary surplus by 86% from the year before, is trying to stabilize revenues for the coming year.

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From → Economic Policy

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