By Eliana Raszewski
BUENOS AIRES (Reuters) - Argentina has a $12 billion energy conundrum: what to do about state subsidies that keep prices at a minimum for two-thirds of consumers, a popular measure that is straining state coffers and a deal with the International Monetary Fund (IMF).
Those subsidies, that keep energy bills at under 15% of normal, will play a key role in a run-off presidential election on Sunday between Economy Minister Sergio Massa and libertarian outsider Javier Milei, who wants to "chainsaw" state spending.
Milei has said he will cut all subsidies, but admitted it would have to be done slowly. Massa, meanwhile, claims he would keep energy bills down, though needs to trim state spending to meet a target he has set to erase a deep fiscal deficit.
It is a tricky balancing act.
On one hand inflation is headed towards 185% by the end of the year, the latest central bank poll estimated, which has left voters angry at constantly rising prices and dragged two-fifths of the population into poverty. Subsidies help ease the pain.
Argentina, however, has a deep fiscal deficit, negative net dollar reserves and is playing a risky game of whack-a-mole with its debts to the IMF, bondholders, and more recently China. It badly needs to cut spending to get its finances in order.
"It is a challenge for whoever wins to reverse this situation," said Emilio Apud, ex-energy secretary and a former director of state oil firm YPF , who added that the issue was a remnant of decades of costly state intervention.
He admitted hiking energy bills was tough medicine in a society already hurting, but argued it needed to be done.
"If you increase energy prices today, there is an inflationary peak and it's over. If you don't, inflation continues its upward curve without limit," he said.
Economists and energy analysts generally agree that the country, which has the world's second largest shale gas reserves and fourth for shale oil in the huge Vaca Muerta formation, needs to cut back subsidies that were near 2% of GDP last year.
Data from consulting firm Aleph Energy show they were $12.4 billion in 2022 and already over $8 billion up till September this year.
Daniel Dreizzen, director of Aleph and a former secretary of energy planning, said ironically the subsidies fanned inflation as they were often funded by the central bank printing money.
"All these subsidies - last year 1.9% of GDP - are financed with monetary emission. That ends up being paid in some way by the entire population via inflation," said Dreizzen.