New gov to boost Vaca Muerta with special legislation

Officials mull special legislation for Argentina’s Vaca Muerta formation to provide certainty to investors, if power changes hands in December.

Matías Kulfas, who has chances of becoming an influential economic adviser to frontrunner Alberto Fernández, confirmed that the shale formation will become the focal point of economic policy under a potential new administration.

Fernández trounced President Mauricio Macri in Argentina’s primary elections with a 15-point lead.

Speaking at the Finance Summit organized by local newspaper Clarín, Kulfas said the only chance for the Argentine economy to recover in the short term was increasing the country’s dollar input through exports. And Vaca Muerta is ideal to achieve just that.

“Argentina has a real possibility of doubling its exports. And it has that possibility basically because, on one side, Vaca Muerta has been developed to only 4% of its full potential,” Kulfas said, adding that, “if we [a Fernández administration] can generate the conditions to attract foreign investment, we could generate an additional US$35bn in additional exports in the next four years.”

Vaca Muerta, the world’s second largest shale gas deposit, has undeniable potential, although Argentina has had trouble avoiding policy shifts that undermine investor confidence. This is partly due to lacking regulation for the formation’s development, relying instead on presidential decrees that can be modified arbitrarily by the executive branch.

During good times, this matters little. But when crisis hits and fiscal pressure mounts, the Argentine government has a history of freezing prices, capital controls, forcing companies to liquidate dollar reserves, and renege on paying promised subsidies.

The Fernández campaign is proposing, as a solution, the creation of a new law that safeguards investments at the site. “If we can generate mechanisms of consensus that can be translated into a legal framework of fiscal stability and repayment guarantees for the resource, this will be a significant incentive for investment and growth in the coming years,” Kulfas said.

The economist also mentioned the importance of respecting the rules when it comes to attracting foreign investment. International companies have already raised concerns about several recent policy changes, such as an oil and fuel price freeze and capital controls. Policy changes also characterized the previous tenure of Cristina Fernández de Kirchner, Alberto Fernández’s running mate.

Kulfas, however, was vague on details about the bill. Another well-known advisor to Alberto Fernández, economist Guillermo Nielsen, recently said he was looking into lowering taxes for producers, from 35% to 20% with new tax benefits.

ECONOMIC POLICY

Regarding other areas of economic policy, Kulfas insisted on a “social pact” between business, workers and the state to try and control inflation. He also said the central bank should gradually move toward reducing interest rates, which, he said, have “a chokehold on the economy.” The central bank reference rate currently approaches 80%, but inflation remains rampant.

He also said a new government was likely to maintain some form of capital controls, although less strict than the current ones to not discourage international investment.

About the restructuring of the country’s foreign debt Kulfas said the administration would follow the model of Uruguay, which postponed its foreign payments in 2002 without slashing amounts or interest rates.

While he said the country had to keep aiming for a fiscal surplus, he thinks this could not be achieved by spending cuts or taking on new debt, and seemed open to expanding the monetary base, or printing money, as a tool for financing government spending.

Cristina Fernández de Kirchner was repeatedly criticized for using monetary expansion to finance her government's growing deficit, which her critics said fueled inflation. While Mauricio Macri maintained a stable monetary base during his four-year term and cut spending to a fiscal surplus, he was unsuccessful in reducing or even controlling inflation, which almost doubled during his tenure.

Kulfas warned, however, that the tool had to be utilized in a “very moderate, prudent fashion,” adding that “those who believe that one can print [money] and finance any [amount of] fiscal deficit. I wish it was so simple.”