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Fuel subsidies out in Latin America in a move to fiscal austerity

Latin America killing fuel subsidies. Brazil, Argentina and Mexico join Colombia in market prices

Petroleumworld.com 01 27 2017

Latin America's major economies are phasing out expensive fuel subsidies as they shift to fiscal austerity in the aftermath of the commodities bust.

Brazil, Argentina and Mexico have recently joined Colombia in bringing pump prices to or near international levels in a move Moody's Investors Service said has a positive impact on risk perception by shoring up government budgets. So far the policies are surviving street protests in Mexico and low approval ratings in Brazil.

State-controlled producers Petrobras and YPF SA have seen stock valuations gain as they slash subsidies previous administrations used to tame inflation and placate voters. The moves are part of a wider story of many Latin American leaders reversing years of populist economic policies to reign in fiscal deficits and restore confidence in their economies.

"These countries are under enormous fiscal pressure and are reacting to it," said Samar Maziad, a sovereign analyst at Moody's.

President Mauricio Macri has made Argentina's economy more competitive since he took over in 2015, and an 8 percent gasoline price increase this month has contributed to Buenos Aires-based YPF's recent rally to the highest in more than a year. Argentina is moving to completely liberalize prices by 2018. YPF declined to comment on its stock price.

Mexico has lifted prices about 20 percent this month as it opens state-owned Petroleos Mexicanos's monopoly to foreign competition. It has pledged to completely phase out fuel subsidies over the course of the year. The so-called “gasolinazo,” or fuel-price slam, sparked protests across the country that curtailed fuel distribution and has left President Enrique Pena Nieto's approval rating at an all-time low of 12 percent. Mexico is planning another fuel price increase on Feb. 4.

Even Venezuela, the region's biggest exporter with the cheapest gasoline in the world, raised fuel prices for the first time in almost two decades last year, but it still only costs about 15 U.S. cents to fill your tank. Colombia got a head start when it began tracking international prices in 2008, a year when fuel subsidies contributed to an economic contraction.

In Brazil, where subsidies drained an estimated $40 billion from Petrobras between 2011 and 2014, Chief Executive Officer Pedro Parente has shown greater independence from the government to set fuel rates. Under Parente, the company formally known as Petroleo Brasileiro SA set a new price methodology in October and has implemented five adjustments since then.

This is helping the company rebuild a reputation tarnished by a massive graft scandal and multibillion-dollar losses from unprofitable investments in refineries that led to a downgrade of its investment-grade rating to junk. Brazil's history of heavy intervention in Petrobras has some investors wondering how long market-based prices will last, especially with the government's approval rating at 13 percent.

Petrobras lowered gasoline and diesel prices 1.4 and 5.1 percent, respectively, starting Friday in response to a stronger local currency. In an e-mailed response it said that domestic prices will remain above international levels.

“Petrobras needs to lock in its domestic fuel-pricing policy, so as to reduce market anxiety over price changes,” Bradesco BBI oil analyst Filipe Gouveia said in a Jan. 17 report.

Story by Sabrina Valle from Bloomberg News.

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