Power generators will benefit from Argentina-IMF agreement

(Bloomberg) — Power-generating companies in Argentina will benefit the most from the South American country’s latest deal with the International Monetary Fund, according to analysts in Buenos Aires.

The reduction of the fiscal deficit through the reduction of the Government’s energy subsidies, which last year amounted to US$10.9 billion, was one of the main points of friction in the negotiations. Now that the deal — embodied in a memorandum of understanding and awaiting final approval — has been finalized, investors are preparing to find out what its impact will be on Argentine energy assets.

In both the electricity and natural gas sectors, the flow of energy—and money—involves generators, carriers, and distributors. Of the three, generators are likely to benefit the most from cuts to subsidies, which this year were set at 0.6% of gross domestic product.

The agreement between Argentina and the IMF emphasizes the transfer of a greater proportion of the price of electricity generation and the drilling of natural gas wells to households and companies.

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In the last month, since the government said it would withdraw energy subsidies as part of the deal with the IMF, Argentine power generator bonds have outperformed sovereign debt. The titles of Pampa Energía SA have had a return of almost 2.5% and the 2025 bonds of the natural gas generator MSU Energy 1.4%, while the sovereign bonds that mature in 2030 lost 5.6 %, according to the Bloomberg Emerging Markets Hard Currency Index.

Producers frequently suffer from payment delays when it is the Argentine government, and not consumers, who pays the bulk of the bill. In the electricity sector, the state wholesaler Cammesa is in charge of paying the subsidies; in natural gas, the Treasury intervenes directly.

“Producers will benefit because the state is a poor payer and you always run the risk of delays,” said Lucas Caldi, a credit analyst at Portfolio Personales Inversiones in Buenos Aires. By being able to pass on a greater part of the wholesale costs to consumers under the Argentine plan backed by the IMF, and also increase their own rates, “it improves the profitability of the business and has money to pay the producer,” says Caldi. .

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Some of the periods in which Argentine power generators had the most difficulties in receiving their payments were the last two years, with companies such as MSU being affected, and another company in the sector going bankrupt. Also, the second half of the government of Mauricio Macri was especially damaging for natural gas drillers because income flows were reduced, both from a government subsidy program and from distributors with regulated billing.

Pampa, Central Puerto SA, Enel Argentina and AES Argentina are among the largest generators of electricity in Argentina. YPF SA, Total Austral, Pan American Energy and Tecpetrol SA are among the main producers of natural gas.

There are two major risks for Argentina to meet the subsidy reduction targets:

Russia Risk

The first, highlighted in the memorandum with the IMF, is the rising cost of energy amid the Russian invasion of Ukraine. While the prices of oil and gas in Argentina are decoupled from world references, the country covers its energy deficit with imports of liquefied natural gas and other fuels. With these purchases becoming more expensive, the bill for government subsidies may even increase this year, according to Konstantinos Papalias, an energy analyst at Puente in Buenos Aires.

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