Analysis: Entrenched populism to slow Argentine reforms, even after Fernandez

By Hugh Bronstein

BUENOS AIRES (Reuters) - Argentina's next leader will likely try to end interventionist policies that scare off investment, although any reform effort is sure to hit a wall when it comes to cutting popular subsidies that also distort the economy.

Global oil companies, eager to tap Argentina's vast Vaca Muerta shale reserves, took notice last month when allies of President Cristina Fernandez got thumped in the midterm congressional election.

The result set the stage for a market-friendly candidate to win the presidency in 2015 and raised expectations that the country might become safer for foreign capital after a decade of nationalizations and heavy-handed currency controls.

The question is whether Argentina's next leader can do enough to trigger the tens of billions of dollars in foreign investment needed to exploit Vaca Muerta (Dead Cow) and put an end to expensive energy imports.

"Any change in direction toward a more investment-friendly environment would increase interest. But the devil is in the details of which policies can be reformed," said an official at a top global oil company, who described Vaca Muerta as a "very enticing formation."

"Every oil company has a different threshold in terms of the risk they'll be willing to take," added the official, who asked not to be named.

Fernandez has not chosen a successor to run when her second term ends in two years, her coattails cut short by 25 percent inflation and an unpopular ban on buying dollars, the currency of choice for savers seeking shelter from the wobbly local peso.

The midterm threw the October 2015 presidential election wide open by slamming the door on Fernandez's chances of clinching a change in the constitution to allow her to run for a third term, as had been proposed by her allies in Congress.

The market has already caught an intoxicating whiff of change. Since the August midterm primary showed Fernandez losing influence, the Merval (.MERV) stock index has leaped 48 percent.

Yet even Fernandez's most free-market-oriented opponents shudder to think of the political consequences of ending energy subsidies that voters have come to rely on as a buffer against soaring consumer prices.

"Whoever wins will have to make a lot of populist promises. They won't have the political leeway to hike prices of things that are subsidized or price controlled. So you will have a continuation of the inefficiencies that you see now," said Karen Hooper, an analyst with the U.S.-based Stratfor consultancy.

Re-elected in 2011 on promises of deepening the government's role in the economy, Fernandez has clamped down on access to U.S. dollars in a bid to halt capital flight, erected import barriers that make it hard for businesses to get needed inputs and stopped foreign-owned businesses from repatriating profits.

Central bank reserves have sunk 24 percent to $33 billion so far in 2013. Shunned by the global bond market, Fernandez uses the bank to pay government debts, finance the Treasury and prop up an overvalued currency.

The peso's official rate is about six to the greenback while the black market rate is reaching toward 10 units per dollar.

POLITICAL SUICIDE

Sergio Massa, mayor of the Buenos Aires suburb of Tigre, is an up and coming opposition leader who says he wants to reduce inflation as well as the interventionist policies that have hurt farm profits in the world's No. 3 soybean and corn exporter.

His economic team is headed by former cabinet ministers who are strong critics of Fernandez's economic populism.

Another possible candidate is Buenos Aires governor Daniel Scioli. Officially, he is a Fernandez ally, but business sees him as far preferable to the incumbent.

Despite their pro-market stance, it would be political suicide for either to suggest cutting back popular subsidies that are partly blamed for high inflation.

Should either of them win the presidency, they would be more likely to take on unpopular currency controls and interventions in grains markets - such as corn and wheat export curbs and high soybean export taxes - that are hated by Argentina's farmers.

That could be enough to reassure foreign firms and investors that the political tide is turning away from populism.

KEEPING "DEAD COW" ALIVE

Argentina needs help to complete its five-year, $35 billion investment program in the untapped Vaca Muerta shale formation that lies under the country's windswept Patagonian plains.

Investors have been scared off after Fernandez seized oil company YPF (YPFD.BA), accusing its former parent, Spain's Repsol (REP.MC), of underproduction.

Argentina's oil and natural gas output has declined since 2006 while families continue to enjoy subsidized energy, turning the country into a net oil and gas importer.

YPF estimates Vaca Muerta contains 661 billion barrels of oil and 1,181 trillion cubic feet of natural gas, making it one of the biggest shale reserves in the Western Hemisphere.

Investment in the formation has however come very slowly.

Dow Chemical Co (DOW.N) has signed on to invest up to $120 million in 16 Vaca Muerta gas wells and oil giant Chevron Corp (CVX.N) has agreed to invest $1.24 billion in the formation.

To clinch the deals, Argentina has allowed the companies to export tax free up to 20 percent of what they produce. Export revenue of companies that invest at least $1 billion over five years are exempt from government foreign exchange controls.

Despite these signs of flexibility, Argentina remains a high risk investment. Fernandez, sidelined since early October by a cerebral hematoma, may yet find a second wind allowing her to exert more influence than expected over contest to succeed her.

"The two year transition ahead will be plagued with uncertainties," said Ignacio Labaqui, a local analyst with the Medley Global Advisors emerging markets consultancy in New York.

(Additional reporting by Alejandro Lifschitz, editing by Caroline Stauffer and Andrew Hay)