Election tilts shale-rich Argentina to right
OREANDA-NEWS. Market-oriented opposition candidate Mauricio Macri swept shale-rich Argentina´s presidential run-off election yesterday, marking a shift away from more than a decade of interventionist government policies that had alienated many investors.
Macri's victory, with 51.4pc of the vote compared to 48.6pc secured by Daniel Scioli of the ruling Front for Victory (FPV), represents a seismic political shift and could reinvigorate investment in the oil, natural gas and electricity sectors.
Macri, the outgoing center-right Buenos Aires mayor, ran as part of the Let's Change alliance (Cambiemos) and throughout the campaign vowed a fundamental overhaul of the country's economic policies.
He promised to end restrictions on foreign-currency access, profit repatriation and imports, areas widely seen as impediments to investment.
Energy executives, including the local chief executives of Total and Shell, have publicly said the country cannot hope to develop its unconventional resources without deregulating the sector and allowing companies to send profits back to headquarters.
The US Energy Information Administration (EIA) ranks Argentina second for gas and fourth for oil in global potential shale resources. But while several firms, including Shell and Total, hold significant stakes in Argentina´s emblematic Vaca Muerta shale formation, state-controlled YPF is the only company that is carrying out large-scale shale production, largely in partnership with Chevron.
Macri's victory was not a surprise. Share prices tied to Argentina have been soaring since a tight general election last month, reflecting the business community´s hope for an end to the Kirchner era.
But the incoming president is under pressure to manage expectations. He inherits a shrinking economy, unofficial annual inflation of around 30pc, an overvalued currency and dwindling hard currency reserves in addition to a divided congress, a polarized electorate and a flurry of last-minute political appointments by outgoing president Cristina Fernandez de Kirchner.
On energy policy, Macri has specified little beyond broad commitments to boost oil and gas production as well as alternative renewable power generation. He has also said he would cut back on subsidies that could help electricity generators and distributors that have long suffered from artificially low tariffs.
His choice of former Shell Argentina chief executive Juan Jose Aranguren as a key energy adviser is undoubtedly a harbinger of change. During outgoing president Fernández's back-to-back terms and that of her late husband and predecessor Néstor Kirchner, Aranguren was an outspoken opponent of government energy policies, and Shell itself was subject to government-backed boycotts and protests.
Macri´s upcoming cabinet appointments, including the strategic planning ministry that includes the energy secretariat, will shed more light on his specific priorities.
Plenty of hurdles lie in his path. The Kirchner years that began in 2003 coincided with the transformation of Argentina from a regional gas exporter into a major importer of LNG and pipeline gas from Bolivia.
The president-elect's allies and advisers have said that before Argentina can attract more foreign investment, it must end litigation in New York with a group of holdout creditors that pushed the country into technical default last year. A small group of hedge funds that have refused to restructure defaulted bonds, a remnant from the country's record-breaking 2001 default on almost $100bn in debt, has kept Argentina largely locked out of international capital markets.
Dismantling subsidies that have distorted Argentina´s economic fundamentals will take time and political capital. Beyond consumer subsidies, Macri's advisers have criticized government programs that subsidize industry, paying different prices for new gas output compared to existing production and that have kept domestic wellhead crude prices artificially high.
"There must be the same price for the same product," Aranguren said during the campaign.
But Macri insiders say changes to ongoing programs will not happen right away.
"It's not something that is on our agenda for now," Macri campaign chief Marcos Peña told Argus on the sidelines of a news conference earlier this month.
And Macri himself has made clear that some Kirchner legacies will not change at all, repeatedly emphasizing for example that he has no plans to undo the controversial 2012 expropriation of a majority stake in YPF from Spain's Repsol.
While Macri has vowed to lift controls on dollar purchases, advisers warn that lifting other restrictions, including limits on repatriating dividends, are likely to take longer to implement.
Macri will be sworn-in as president on 10 December.
Beyond Argentina, Macri´s victory compounds pressure on populist governments in Brazil, Bolivia and especially Venezuela, where voters will elect a new national assembly on 6 December.