Argentina's ruling party warns of economic fallout without gas price hike

Buenos Aires (Platts)--8 Jul 2016 505 pm EDT/2105 GMT

Argentina's court-ordered suspension of natural gas price hikes could slam consumers with faster inflation and higher taxes, a ruling-party leader warned Friday while also calling on the Supreme Court to intervene as social tension swells.

"If there are no increases, the cost of energy will be paid with taxes and resources of the Treasury, and this will generate inflation," Federico Pinedo, the Senate's provisional president, said on Radio Mitre.

Pinedo spoke a day after a federal court suspended the 400%-500% increases in gas bills nationally, arguing that the conservative government of President Mauricio Macri failed to hold public hearings for the hikes, as required by law.

Pinedo said the increases are needed to encourage investment for rebuilding energy supplies after a decade of decline.

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"Argentina was going to be without energy, and without energy there are no jobs," he said.

The energy sector needs $20 billion a year in investment over the next decade for the country to regain the energy security it lost in the early 2000s, according to estimates by the Argentine Oil and Gas Institute, an industry group.

The previous political leadership, a populist-left party in power from 2003 to 2015, kept a lid on energy pricing, which along with other interventionist policies like capital controls as well as high taxes and legal insecurity cut profit potential and drove away investment.

In response, gas production has dropped 16% to 120 million cu m/d from 143 million cu m/d in 2004, leading to a surge in imports now meeting about a quarter of national demand.

Pinedo said the pricing caps by the previous administration made bills cheap for consumers, but resulted in 700% inflation during their rule.

To turn things around after taking power in December, the Macri government has nearly doubled the wellhead price of gas $5.20/MMBtu and offer incentives of up to $7.50/MMBtu, which were to be financed by the higher gas bills.

The Energy Ministry said Thursday it plans to appeal the court-ordered suspension.

Another step is for the Supreme Court to intervene in the case, Pinedo said.

The outcome of this strategy, however, is uncertain.

Luis Arias, a judge in an appellate court in La Plata, Buenos Aires province, said the Supreme Court would not be able to rule on the rate hike soon.

In comments on Radio Belgrano, Arias said the gas rate hike "is illegal and irrational" on grounds that a public hearing was not held and because the prices have gone up so much that "they cannot be paid by users."

Fernando Navarro, a lawmaker in the province of Buenos Aires, said on Radio 10 it is important for the public hearings to be held so the rates can "be revised without altering the economic life of millions of Argentines."

The gas rate hikes have faced widespread criticism as inflation surpasses 40% this year, up from 26% in 2015, and the economy shrinks by more than 1% this year, leading to a rise in the unemployment rate, according to economists.

--Charles Newbery,

--Edited by Derek Sands,

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