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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
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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
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS
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
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Public firms
Private firms
Real tariffs in 2015 (2001=100)Source: based on sectorial information; retail deflactor
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS
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
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS
Despite procedural mistakes (sidestepping Public Hearings), energy prices & tariffs are evolving towards actual opportunity costs (perhaps even more)
•Achievements
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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$/MMBTU. Source: MINEM
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS •Achievements
Today, T&D NG tariffs after RTI surpassed Apr-2016 hikes 40% average increase in T&D margins pending in 12 months 100% average increase in upstream prices pending in 2.5 years
2,6
3,9
7,3
5,9 5,8 6,2
8,6 8,5
9,710,6
8,0
9,3
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4
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R1 R21 R22 R23 R31 R32 R33 R34 Avg (weight user)
Avg (weight volume)
Dec 2015 April 2016 October 2016 April 2017
Metrogas: Residential tariffs, before taxes, in US$/MMBTU
m3/y <500 <650 <800 <1.000 <1.250 <1.500 <1.800 >1.800
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
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33
5 10 13 1729
35
48
113
36
71
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40
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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$/month
m3/y <500 <650 <800 <1.000 <1.250 <1.500 <1.800 >1.800
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS •Achievements
300% tariff hike in 2016 allowed 14% total US$ 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)
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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$Source: Own elaboration based on AASA, ERAS & INDEC.
•Impact on fiscal subsidies FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
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5.000
10.000
15.000
20.000
25.000
30.000
US$ (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
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25.000
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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.
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS
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
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88
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1810 20 27 33 4157
106
171
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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$/month)
1,5 3 5 69
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78
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R1 R2 R3 R4 R5 R6 R7 R8 R9 Avg R
Dec-15 Feb-16 Feb-17 Feb-18
Edenor: Fixed Residential Charges, in US$/month, Dec-2015 - Feb-2017(Feb-2018 assumes real exchange rates remain constant).
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)
•Fixed charges are 50 times higher! (78 US$/month vs. 1.5 US$/month)
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS •Drawbacks
-100%
-50%
0%
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100%
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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)
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)
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS •Drawbacks
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)
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS
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
FUNDACION DEI NVESTIGACIONESECONOMICASLATINOAMERICANAS
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External Deficit and Investment (% of GDP)
•External deficit (left axis)
•Total Investment (right axis)
Large portfolio capital inflows in Q1 2017
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Increase of 16% of GDP in 16 years
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Deficit of 6.5% of GDP
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•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
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During the K years Argentina did not benefit from the reduction in the cost of capital that all emerging countries enjoyed
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Catching up during 2016
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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
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