Rebuilding Ecuador

Despite the rising death toll, and humanitarian crisis, Ecuador’s earthquake, which struck on 16th April, seems to have barely registered in the public conscience.

The quake hit with a magnitude of 7.8 on the Richter Scale. Tremors and subsequent quakes were registered continuously over next few days and the country remains on a state of high alert.

As of last week, official figures account for 650 fatalities with another 58 missing and 16,600 wounded. These are, however, conservative estimates. Upwards of 22,000 people have been displaced from their homes. Provinces most affected are without access to basic necessities. The country is facing a drastic humanitarian crisis, and now more than ever it needs strong and effective leadership.

The process of rebuilding Ecuador will be long and hard, and it is made more challenging by the country’s dire financial straits. The costs will likely be crippling for an economy that is forecast by the IMF to shrink by 4.5% in 2016 and a similar figure in 2017. Ecuador will continue to suffer as long as oil prices are depressed and the Dollar remains strong. The country’s President, Rafael Correa, has suggested that the devastation caused may cost in the region of $3bn, other sources believe the figure to be closer to $5bn.

One might assume, in a nation prone to natural disasters, that some financial provision is made for just such an occasion (see Chile). You would be wrong. Correa’s government failed to save any of the excess revenues made during the oil boom. Instead, the government banned all savings funds, arguing that they benefitted international interests. What is more, Quito, the Capital city of around 3 million people, lives in the shadow of Cotopaxi, an active Volcano that has shown concerning levels of activity in recent months. It has been estimated that as many as 325,000 people could be at risk in the event of an eruption. Ecuadorians should be asking themselves what provision has been made for such an event, and should they have any confidence in their government in light of last month’s catastrophe?

While this seems criminally short sighted, an argument could be made in favour of this policy. Mr Correa would suggest that cleaning up your debt profile and relying on emergency lines of credit is a more cost effective means of responding to these crises. It’s a question of what you do with your cash. Building up any kind of cash reserve for disasters would mean generating interest income and paying the going rate on credit spreads to the bond market on outstanding debt. But disaster relief funds won’t be investing in equities or debt with significant yield, they’re looking for risk-free instruments which won’t generate significant returns. So you might rationalise that you are better off using the cash to service and pay off your outstanding debt, and improve the country’s credit profile, rather than sinking it into deposits which are potentially paying negative rates anyway. At least, that might be what Mr. Correa would argue.

While cash may not make it to disaster relief, Rafael Correa has emphasized expenditure on a broad gamut of pet projects. One example has been reforming higher education. In principle the initiative, enshrined in the 2008 constitution, is commendable. The government abolished fees for private universities and closed down poorly performing institutions. According to official sources, enrollment is outpacing population growth, but the government universities budget has increased five fold ($335m 2008 – $1.7bn 2013). What is more these institutions have very little autonomy and all subjects offered must be in line with the “national development plan.” In an egregious example of over expenditure, an article in the Economist notes, that some deans at Mr. Correa’s new universities were being paid $16,300 a month, or 32x the GNI per capita wage in Ecuador! While it is important to produce a qualified workforce, and free tertiary education is a laudable ambition, questions have been raised as to the quality of these new institutions and whether they are in fact little more than a vanity project for Mr. Correa.

So, if the government has made little provision for natural disasters, how is it going to finance rebuilding the country? In seeking to monetize his nation’s abundant natural resources, Correa’s regime has racked up an enormous amount of foreign debt, the full extent of which is murky at best.  The country now faces a chasm-like fiscal deficit. In order to stopgap the nation’s finances, the government has announced a raft of new taxes, which include a levy on millionaires, this is expected to raise about $1bn. This follows on the heels of the government’s proposed “Organic Law”, which targets higher tariffs on tobacco, liquor and sugary drinks. As ever, it is the Ecuadorian people that are forced to pay for their government’s mismanagement. This economic recklessness is unforgiveable, particularly for a man who has made much of his fiscal credentials as a US trained economist.

Well there is always the Chinese. The Chinese government and her proxy lenders are the biggest creditors in Latin America, and nowhere is that more true than Ecuador. In January, the Chinese government agreed to a series of credit lines amounting to $7.5bn, $5.3bn of which coming from their Exim Bank. Last month, the China Development Bank signed over a $2bn loan, designated towards the government “investment plan”, with no mention of Earthquake reconstruction. While her “generosity” is warming, there can be little doubt that China is unlikely to be an accommodating creditor. This is particularly true in light of the country’s massive exposure to developing world debt. For the moment, Beijing seems to be a viable credit line, but it is not one that Ecuador should rely on. The opacity, questionable market terms and murkiness surrounding dealings with Chinese lenders should prompt Ecuador to look elsewhere to fund its rebuilding project.

Any prospect of tapping the capital markets seems slim, and certainly not favourable. Although Mr. Correa has said that the country is looking at issuing bonds, coupon payments would likely be prohibitively expensive.In an effort to instil confidence in the nation’s finances, Mr. Correa’s government made history last December, when it repaid $650m of international bonds on time, a first in the nation’s history. However, According to Bloomberg analysis, Ecuador would have to pay the highest overseas borrowing costs on record for a “B” rated country. Creditors will also surely remember Ecuador’s default on $3.2bn of international bonds in 2008.

Which begs the question, what recourse is left to Mr. Correa? Concern had already been rife about the Ecuador’s ability to balance the books, but in light of the disaster in April, there can be little doubt that the country will not be able to go it alone. In the past, Rafael Correa has vaunted against the IMF as a neo-liberal, crony-capitalist institution, and blamed it for Ecuador’s previous economic woes. However, the President was forced to swallow his pride, and last Wednesday (27th April), he appealed to the Fund for assistance. News of talks with the IMF saw Ecuador’s bonds jump to their highest levels since July 2015, at 86.1 cents on the Dollar.

But Mr. Correa’s resistance to the Fund lies beyond purely ideological grounds. Like any creditor, the IMF will want to understand Ecuador’s finances. This involves exposing the country’s accounts to international scrutiny, a prospect at which Mr. Correa balks. Turning the keys over to the IMF will entail the full disclosure of Ecuador’s massive international debt obligations, including the amounts and interest payments. It seems ironic for the Ecuadorian people that in surrendering a portion of their sovereignty to the Fund, they will finally enforce a degree of accountability upon their government.

Let us not lose sight of the profound human tragedy that has occurred. Thousands of people have lost their homes, their schools, their livelihoods and their loved ones. It would be crass to make political capital out of such a human disaster, but there can be little doubt, that the inefficiencies and insufficiencies of Ecuador’s leadership have worsened the country’s prospects of rebuilding.

Posted in Earthquake, Ecuador, Oil, Politics | 1 Comment

Macri-economics: How will the Argentinian president’s figures stack up?

Argentina’s recent return to international capital markets has been enthusiastically greeted by investors and politicians alike. The $16.5bn bond issue – a mere fraction of the $70bn notional demand its announcement generated – represents the biggest ever sale from an emerging-market economy, a coup for new, pro-business president Mauricio Macri and a shot in the arm for Argentina as it begins to push on after decades of underwhelming economic performance.

Enthusiasm for all things Argentinian has been aided by the news that the proceeds from the bond sale will go towards paying holdout creditors from Argentina’s 2001 debt default, initially to the tune of $9bn.

Once branded “vultures” by the combative Kirchner government – whose refusal to negotiate with creditors lead to a further default in 2014 – the rapprochement with creditors and the fervour for Argentina’s bonds is a vote of confidence in the Macri government – in particular Finance Minister Alfonso Prat-Gay – to provide a steady hand on the tiller over the next 4 years.

Compare and contrast with any point in the last 15 years of Argentine economic history.

The crisis of December 2001 was a marked low-point in 3 consecutive years of economic depression, with the default on $93bn of Argentine sovereign debt leading inexorably to the annus horribilis of 2002 and its 11% plunge in GDP and a doubling of the national poverty rate.

The process of recovery from the disastrous early 00s has been hamstrung, in large part, by the financial and reputational damage caused by the overhanging debt repayment negotiations. The inability to bury the grim legacy of 2001 has barred the country’s access to international money markets, stifling internal economic development

Likewise, Argentina’s status as an international financial pariah has spilled over into its diplomatic affairs. The unseemly dispute in New York courts with a consortium of creditors led by US hedge fund Elliott Management, mushroomed on more than one occasion into ructions between the Casa Rosada and the White House, former president Cristina Fernández de Kirchner going so far as to accuse Washington of plotting coups against her.

Taking office at the end of 2015, Mauricio Macri faces nothing as extreme as the December 2001 crisis that saw 4 Presidents come and go in a month, nor is his negotiating stance as pugnacious and counterproductive as that of his predecessor.

However, his task is to make good the gains of recent months and in this regard, the success of the bond issue could hardly be timelier.

At present, Mr Macri and Mr Prat-Gay are staring down the barrel of a fiscal deficit running at 7% of GDP, the largest Argentina has faced in 30 years. The ability to tap international money markets will provide a useful temporary expedient while the president and his team fight to achieve their ambitious target to cut it to 1% by the end of his term in 2019. This is unlikely to be an easy task as significant cuts to public expenditure will undoubtedly be met with disapproval from the public at large and entrenched opposition in a congress in which his Cambiemos coalition has no overall control.

(Similarly, the Macri government’s aim to slice a minimum 5% off rampant inflation by the end of 2016 has sparked pleas for patience from the Argentinian Central Bank. While the target may be aspirational, the move does at least represent an attempt to tackle the problem head-on, in contrast to the Kirchner government which adopted “Ostrich Tactics” and cooked the books at national statistics agency INDEC from 2007 onwards.)

Whether it is formal government policy or not, reports suggest that significant contractions in spending are already underway at several Argentinian government departments.

At this stage in the budgetary year, the average department would be expected to have used up 30% of its allocated financial resources. Yet spending levels in several areas – most obviously at the Ministry of the Interior, Public Works & Homes – are as low as a fifth of that figure, leading some observers to wonder if the Macri government’s hard-and-fast approach to spending cuts might have a depressive short-term effect on economic growth, particularly if the axe falls on key areas of social investment and infrastructure.

The gap in infrastructure has long been seen as key inhibitor to development in Argentina.  Above all, the lack of an effective power generation and distribution network has been a bête noire for several years, with the country experiencing an energy deficit since 2011.

The Kirchner government sought to remedy this problem by expropriating the assets of Spanish oil firm Repsol, citing underinvestment as its chief motivator. By contrast, Mr Macri seems to be taking a less rapacious approach, keen to lure back the foreign investment put to flight by the actions of the previous administration in order develop the estimated 23 billion barrels of unconventional oil and gas reserves of the Vaca Muerta field.

However, hopes that the private sector will take up the slack in energy infrastructure have been struck by a double blow.

Just as choppy conditions in the global oil industry have led many oil firms to rein in investment – especially in high-cost, low-margin shale projects like Vaca Muerta – so Mr Macri has been forced to face down an opposition bill to declare a labour emergency.

Currently negotiating its way through the Lower Chamber, the bill aims to double compensation for all public and private sector workers made redundant between now and the end of 2017 and reinstate any workers laid off since March.

Not only is the proposed law a direct challenge to the new president’s authority, more importantly it has the potential to frighten the horses among the international investors upon whom Mr Macri had staked his hopes of Argentine economic development.

Perhaps in reaction to these events, the government has attempted a volte-face in recent weeks, distancing itself from private sector development of the nation’s hydrocarbon resources and instead announcing a package of state-sponsored investment in renewable energy, totalling $5bn by 2018.

Inevitably, some will see this as evidence of reality checking the ambitions of an overzealous new leader, while others will view it as the actions of an adaptive and responsive government. How Mr Macri’s policies evolve over the next 4 years remains to be seen, though it seems likely that his more hard-line policies on public finances and inflation will be tempered by political expediency and economic circumstance.

However, what can be said of the opening months of the Macri administration is that it has brought together elements rarely seen in recent Argentinian history: openness to the world – last month saw President Obama drop in for a tango – and faith in the ability of the government to meet its obligations.


Posted in Argentina, Energy, Natural Resources, Politics | Leave a comment

Back in with the old in Cuba

The Seventh Congress of the Cuban Communist Party concluded this week with the re-election of Raúl Castro, 84, as First Secretary. In another coup for the old guard, founding member of the CCP and ideological conservative José Ramón Machado Ventura, 85, was returned as Second Secretary.

If there were any lingering hopes that the visit of US President Barack Obama last month might help usher in an era of rapid political reform in Cuba, the outcome of the Congress lays them to rest. The vice-like grip of the Castro regime’s octogenarian stalwarts on Cuban politics means that, for the foreseeable future at least, economic and political change will be incremental at best.

Fresh from his wholly-predictable victory, Raúl Castro’s closing speech to the congress did strike a modernizing note, particularly on the subject of economic reform:

We all know that there are venerated comrades who still feel nostalgia for former times… However, we must overcome old habits and the psychological barriers associated with them…

Critics will inevitably point to the yawning chasm between the rhetoric of the Castro regime and its actions – before his re-election, Mr Castro had suggested that Cuban leaders should retire at 70 – but there does appear to be a growing sense in Havana of the need to wean the Cuban people off the state and encourage much-needed investment from abroad. Mr Castro’s speech made direct reference to submitting planned amendments to the Law on Foreign Investment to the National Assembly in March 2017, whilst also talking up the Mariel Special Development Zone, a port project on Cuba’s north coast focussing on sustainable economic development.

Though, as Comrade Castro was quick to stress, old habits do indeed die hard. Warning of the perils of “galloping inflation”, his speech counselled against a widely-desired rise in state sector salaries and freer labour laws.

And on foreign policy, the unifying rhetoric of the Obama visit was dispensed with, replaced by a homily on the evils of American imperialism, pointing to the supposed instigation of recent unrest in Venezuela and interventions in Ukraine, Syria and Libya. In a bizarre aside, Mr Castro referred to an “Unconventional Warfare” manual developed for US Special Forces in November 2010 – conveniently available on Amazon for any aspiring Fifth Columnists – as evidence of continued American aggression.

The link may be tenuous but the message is clear: In Havana’s eyes, Washington’s rhetoric may have moved on, but its objective of regime-change is as current as ever.

For all the Cold War sabre-rattling and glacial pace of reforms, the hand of the Cuban Communist Party could soon be forced by age, a fact surprisingly acknowledged by Father of the Revolution, Fidel Castro. In a valedictory speech to 1300 assembled congress-goers, the 89 year old former President admitted that this could be his last Congress, stressing however that “the ideals of Communism will endure”.

Yet so integral are the Castros to the political status quo in Cuba that it is difficult to see how their departure from the political arena would not be the catalyst for a governmental transformation.

Younger brother Raúl – himself no spring chicken – has pledged to step down as President in 2018 but still intends to see out his full term as First Secretary until 2021, should his health allow.

Now, working to this 5-year timeframe, appearances suggest that foundations are being laid for a gradual political reformation in Cuba. Of the 5 new members appointed to the Politburo during the recent Congress, 3 come from the telecoms and healthcare sectors, the outward-facing industries the communist state is leveraging in its early efforts to open up to international investment.

Likewise, Miguel Díaz-Canel, the current Vice-President – regarded as something of a modernizer if only by dint of not being called Castro and being born after the 1959 revolution – is widely tipped to take over the Presidency from the younger Castro in 2018. With over 30 years’ experience in the engine room of the CCP and a close personal relationship with the Castros, Mr Díaz-Canel is unlikely to be the embodiment of reformist zeal. Yet after more than half a century of semi-autocratic rule in Cuba, anything that isn’t Castro represents change.

The gradual pace of these changes is unlikely to appease those calling for reform, even less Republicans in the US Congress upholding the decades-long blockade on Cuba.

But even though the CCP Congress this week reaffirmed the existing political order, those with an appetite for modernization can comfortably wait in the wings while the timer inevitably ticks down on the Castros’ Cuba.

Posted in Cuba, Politics | 1 Comment

Panama: From the shadows, into the glare.

The deluge of papers emanating from the office of Panamanian law firm Mossack Fonseca has caused ructions across Latin America, spurring governments and supra-national bodies into action on shadowy financial practices. On Twitter, the firm has pledged to cooperate fully with multinational anti-corruption investigations that have already raided its Panama City headquarters, along with regional offices in Peru and El Salvador. What these probes will uncover remains to be seen but the resignation of Gonzalo Delaveau, the head of the Chilean branch of Transparency International revealed to have links to 5 offshore companies, does at least prove that irony is still alive and well.

For its part, the Panamanian government was quick to attempt to distance itself from the furore, insisting that an entire nation ought not to be judged on the actions of a private entity such as a law firm. This would be an entirely valid defence were it not for a couple of issues:

  • Firstly, successive Panamanian regimes have been instrumental in creating the opaque regulatory framework within which firms like Mossack Fonseca operate.
  • Secondly, the links of the present government to Mossack Fonseca itself: Ramón Fonseca Mora – the “Fonseca” in Mossack Fonseca – served as an advisor-minister in the cabinet of current president Juan Carlos Varela until March 2016, when he took a leave of absence due to allegations that his firm helped launder the proceeds of corruption at Brazilian state oil giant Petrobras.

Now, amid mounting pressure from the Organization for Economic Cooperation and Development (OECD) and a diplomatic spat with the French on the topic of economic blacklisting, Panama’s government has adopted a more accommodating stance.

In a speech on Tuesday, President Varela announced the setting-up of an 8-member commission – including Nobel Economics Laureate Joseph Stiglitz – to review the nation’s fiscal legislation and mediate changes with the OECD and other bodies. This statement comes less than a week after Mr Varela had pledged to put forward measures to “strengthen transparency in legal and financial systems” to bring Panama further into line with international standards on corruption and money-laundering.

Whether it is the result of foreign pressure, internal soul-searching or a combination of the two, the president’s reformist zeal marks a significant departure from previous Panamanian financial policy. Since the 1970s, various governments had actively fostered a culture of regulatory isolationism, refusing out-of-hand to sign tax treaties with foreign powers.  Coupled with a laissez faire approach to taxation – no levies are imposed on offshore companies operating outside Panama’s jurisdiction – and strict banking secrecy laws – unauthorised disclosure of account holders still carries fines of up to $100,000 – the country rapidly established itself as a haven for murky commercial ventures.

Deliberately lax financial regulation is just one item on a laundry list of questionable activities centred on the Central American country. As early as 1919, the Standard Oil Company was allowed to register vessels locally to avoid taxes and charges in the United States. More recently in the 1980s, the dictatorship of Manuel Noriega used Panama’s financial institutions to launder the proceeds of the Medellín Cartel’s drug trafficking, reputedly to the tune of billions of dollars.

Against this backdrop, Juan Carlos Varela was elected in May 2014, at least partially on a ticket of combating corruption and promoting openness in government. At a domestic level, progress has been slow but steady: anti-corruption “tsarina” Angélica Justiniani took a scalp in December, issuing an arrest warrant for former president Ricardo Martinelli on charges of bribery, embezzlement and espionage (Believed to be residing in Miami, the long process of securing Mr Martinelli’s extradition from the US is in its opening stages).

On the international stage, in February, mere weeks before the Mossack Fonseca leaks occurred, Panama was removed from the Financial Action Task Force’s “grey list” of nations failing to meet set targets on “money laundering, terrorist financing and other related threats to the integrity of the international financial system”.

But Mr Varela’s desire for greater transparency at Panama Plc must also be tempered by an understanding of what it is that makes his country successful. Since the 1990s, Panama has experienced some of the highest growth rates in Latin America, with GDP increasing at an annual average of 8.4% between 2004 and 2013. Certainly a dollarized currency and relative political stability have helped the country scale these heights, but it would be a mistake to ignore the role the favourable fiscal regime has played in attracting investment and promoting growth.

At present, 370,000 International Business Corporations call Panama home, placing it third behind only the British Virgin Islands and Hong Kong. Taken in combination with the positive impact of the Panama Canal, the net effect is that 77% of Panamanian GDP is derived from services, a significant chunk of this figure coming directly and indirectly from banking and financial intermediation.

These riches have not always been evenly shared; 23% of the population lives in poverty, with extreme poverty still dispiritingly prevalent among Panama’s indigenous population. However, recent years have seen changes, with social programmes like the Red de Oportunidades taking on the tasks of developing social infrastructure and bringing the whole population under the umbrella of state-backed healthcare and education.

It goes without saying that these progressive policies require significant funding commitments, commitments that can only be met with money drawn in large part from Panama’s shady financial sector. Without recourse to this capital, the country would be unable to maintain existing levels of development, much less look forward to a more prosperous future.

In short, in the wake of the Mossack Fonseca scandal, President Varela faces a dilemma: confront his country’s detractors and risk becoming a pariah in the international community or tighten up the loose financial regulations that have brought so much prosperity and jeopardise Panama’s economic future.

Posted in Panama, Politics | Leave a comment

How do you solve a problem like Correa?

To many in the Anglosphere, Ecuadorian President Rafael Correa is best known as the guardian of all things Julian Assange, the WikiLeaks founder currently spending day 1381 holed up in Ecuador’s London embassy.

This protracted saga has highlighted a remarkable flexibility in Mr Correa’s stance-taking: to the international community, he presents himself as an upholder of freedom of information, fighting the good journalistic fight whilst endearing himself to populist Latin American leaders by frustrating American intelligence at every turn. (Not the only trait they share; a penchant for anti-American rhetoric is a common feature).

In his own country, Mr Correa’s commitment to the freedom to publish is a little less forthcoming. His 2011 libel suit against the El Universo newspaper – over an article on the topic of the 2010 police revolt against Mr Correa’s government – ended in a court verdict of $40 million of damages against the newspaper and prison sentences for 4 of its editorial staff, effectively putting it out of business. Though they were magnanimously waived by the president, these “draconian” measures did little to boost his standing with Reporters Without Borders. And domestically, while accusations of authoritarianism from his detractors were indeed shrill, it is difficult to see it as anything other than a show of presidential force.

Sailing closer to the winds of authoritarianism, however, was February’s sudden sacking of the entire Ecuadorian General Staff. Nominally an effort to put-to-bed a dispute over army pensions, the shake-up does have the fortunate side-effect of allowing Mr Correa to place key allies in high positions, including his “knight in shining armour” from the 2010 uprising, Luis Ayala Castro. A cynic might view these actions as a consolidation of power, but a more indulgent interpretation of the president would see them as an effort to stabilise an Ecuador that, before Mr Correa’s election in 2007, saw 3 coups in a decade.

Stability is also the order of the day economically, though it is harder to guarantee.  Oil has been at the heart of Ecuador’s growth in recent years, annually accounting for 50% of the country’s exports by revenue and 30% of government income. But the recent collapse in prices (especially for low-grade Ecuadorian oil), coupled with high extraction costs – most of nation’s oil fields lie deep in the jungle of its eastern Sucumbios and Orellana provinces – has seen many producers pumping at a loss.

(This is to say nothing of the environmental toll. The recent sale of 500,000 acres of Amazonian rainforest to a Chinese prospecting consortium, in a region that has seen the worst of Texaco/Chevron since the 60s, has earned oil companies and national government the opprobrium of conservationists and local indigenous groups.)

In an effort to end its dependence on oil at home – and cleanse itself of environmental taint – the Correa government has looked to investment in renewables, most notably hydroelectric power. In 2014, over 50% of Ecuador’s domestic energy supply came from oil-based generation and efforts are now being made to redress the balance, with plans afoot to have 8 functioning hydroelectric plants by the end of 2016.

But in export terms, Ecuador’s attempts to wean itself off the petrodollar have been hit by a double-whammy – just as the price of oil has gone through the floor, so the dollar has appreciated in value.

The country dollarized in 2000, a measure taken by President Mahuad to call time on the rampant inflation of the Sucre, the previous currency. But now, a decade and a half on, the rising dollar is Ecuador’s Achilles heel as it fights to compete with neighbours like Colombia and Peru for non-petroleum exports.

Furthermore, the viability of those exports themselves is now under question. Largely agricultural in nature, Ecuador is famous for growing bananas, the fruit providing approximately a quarter of the global harvest and generating $2bn in revenue. But fears have been raised for the health of the sector, with heavier than usual rains from the El Niño lowering output and the steady creep of fungal diseases across Latin American plantations posing a long-term existential threat.

The government has taken steps to tackle these woes after a decade in the economic sunshine; recent negotiations between Finance Minster Fausto Herrera and his Chinese counterpart opened up a $7.5bn credit line between Beijing and Quito, despite the latter’s dubious record on debt repayment.  Yet in the context of slowing, even negative, growth – some analysts predict a 1.1% contraction in GDP in 2016 after meagre 0.6% growth in 2015 – and forecasts that the nation’s debt will reach 35% of GDP by 2017, promises of easy Chinese money look like nothing more than a sticking plaster.

All this may sound technical, but the political and social consequences are very definitely stark. This month brought the announcement of $800 million of cuts in public expenditure, bad news for a populist leader like Mr Correa who prides himself on high levels of social spending. To date, friend and foe alike must acknowledge that his Revolución Ciudadana has yielded appreciable results. But the question now becomes one of sustainability: as things stand, Ecuador is reading verbatim from the script of modern Latin American populist governments:

  1. Left-wing movement comes to power in mid-2000s promising evenly distributed wealth and opportunities, plus unprecedented social spending.
  2. Funds social programmes using revenue from high oil and commodity prices.
  3. Oil & commodities boom ends, plunging government finances into the red and blowing holes in much-vaunted social spending budgets.

Can Ecuador break the cycle? Either way, Rafael Correa won’t be there to find out. The incumbent president is constitutionally barred from seeking re-election in 2017, with legislation allowing indefinite presidential terms only coming into force in 2021. His Alianza País party will have to soldier on without him and, if polls are to be believed, they have a task on their hands: according to a recent Cidatos-Gallup survey, almost 66% of Ecuadorians believe their country is on the slide, with over 80% “hoping for change”.

What this actually means in practical terms is anyone’s guess, though it does offer a sliver of hope for Ecuador’s opposition. Until relatively recently, this was a mixed bag of regional and ethnic interest groups along with some trade unions and social conservatives but Correa’s departure, popular dissatisfaction with the current regime and economic turbulence might present an opportunity for these disparate entities to coalesce. At present, a likely figurehead for opposition to the AP in the run-up to 2017 is Guillermo Lasso and his CREO movement, but a year is an eternity in politics and, for now, putting together a successful protest on 1st May is a more manageable target.

So, swimming against a tide of oil, dollars and bananas, Rafael Correa has a year to secure his legacy. His hope will be that his rule will be remembered for bringing sustainable “21st Century Socialism” to Latin America. The risk is that he will always just be the man who bailed out Assange.

Posted in Ecuador, Energy, Natural Resources, Oil, Politics | 2 Comments

The Cold War thawing in the Caribbean sunshine

Having presumably gazed deeply into his crystal ball before a meeting with journalists in 1973, Fidel Castro acidly remarked that the United States would talk to Cuba when there was a black president in the White House and a Latin American pope in the Vatican. And what prescience! The visit of Barack Obama this week makes him the first US president to set foot on the sun-kissed shores of the Caribbean island since Coolidge in 1928. Moreover, the personal, even cordial, meeting between the US premier and his Cuban counterpart, Raúl Castro, marks progress in the normalizing of relations between the two nations and, according to the President himself, the laying to rest of the last vestiges of the Cold War

But leaving aside the lofty rhetoric and personal rapport of the leaders for one moment, actual concrete outcomes of Mr Obama’s flying visit are hard to come by.

Cuba looks barely closer to opening up to the outside world than it did before; despite the exhortations of the US President, there will be understandable reticence on the part of the government in Havana to open the floodgates of economic liberalism just yet, with suspicions abounding as to the impact of the free market not just on Cuba’s economy, but also on the top-down authority held by the Communist Party.

On the other side of the Straits of Florida, stringent travel restrictions to Cuba remain in place for US citizens, while the economic embargo imposed on the nation by the USA since 1962 still holds firm in the face of UN protest. And for all his posturing, Mr Obama will face an uphill struggle trying to push legislation lifting the embargo through Congress; the Lower House rests in the hands of a Republican Party that has considered Havana akin to Milton’s Pandæmonium for over half a century.

These, along with an assortment of other grievances on both sides – from returning the strategic US military base at Guantánamo Bay to Cuban sovereignty, to confronting the Castro regime with a track record on the treatment of dissidents that has won it few friends at Human Rights Watch – do cast something of shadow on the few slim chinks of light emerging from the Obama visit; the news that an American chain has put pen to paper on a deal to manage three Havana hotels or that  Airbnb runs a burgeoning business in the communist state. Bizarrely, Che Guevara’s favourite seaside resort is now apparently a kite-surfing mecca. A cynic may dismiss these modest developments as window-dressing, but an optimist might helpfully suggest that perhaps tourism can succeed where 50 years of political slanging matches have patently failed.

Not forgetting, of course, the power of personality politics – and that is not a reference to Mr Obama’s obvious charisma.

Dip into the pages of Granma, the official newspaper of the Cuban Communist Party, and the reader will be treated to the indispensable Reflections of Fidel and the Discourses of Raúl. It is difficult to overestimate the hold the Castro brothers – particularly the older and more-accomplished Fidel – have over Cuba and the hearts of its people. Not only have six decades of rule woven them into the fabric of Cuban political life, but they still retain the political capital of liberating the island from the brutal rule of Fulgencio Batista in 1959.

The elder Castro, despite officially retiring in 2006 and appearing increasingly mummified in public appearances, is believed to maintain huge influence over policymaking in Havana and makes no secret of his mistrust of all things American: Indeed, he turned down the opportunity to meet Mr Obama during his visit, instead opting for a pow wow with leftist Venezuelan premier (and cycling enthusiast) Nicolás Maduro.

The Castro brothers are the perennial survivors in the region, an accomplishment they achieved in spite of the best efforts of the CIA, and it is impossibly unlikely that three days of even the best Obama charm and rhetoric will undo the legacy of a lifetime of confrontation. But time marches on, and neither Fidel nor Raúl is getting any younger. With no obvious order of succession in place, a Castro-sized hole will be left at the heart of Cuban politics. The political change Obama is certainly unable to achieve in a few days, the Reaper may be able to in a few years.

In the immediate term, Cuba could be in for a touristic Perestroika without the prospect of a political Glasnost anytime soon. Looking further ahead, the hope in the US State Department must be that enough cooing overtures and nudges in the right direction will lay the foundations for a more open and liberal post-Castro Cuba.

As an added bonus, improving relations with its Caribbean arch-rival could do much to stem the flow of anti-American rhetoric that has emerged from left-of-centre governments across Latin America, above all in Venezuela and Ecuador. Havana had been instrumental in cementing a broadly anti-US bloc in the region, most notably propping up the Venezuelan healthcare system with Cuban doctors in return for cut-price oil. With his whistle-stop to the region, Mr Obama – now in Argentina – is clearly making an effort to present a new face to local leaders and begin the long process of smoothing over the somewhat chequered history of US involvement in the region.

Perhaps now the international community can feel it is getting its Nobel Peace Laureate’s worth.

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Holding out for a Hero – Venezuela’s failed political experiment and uncertain future.

It would be fair to suggest that Nicolás Maduro’s first three years of office haven’t gone quite to plan.

Snap back to 2013. On the 5th of March, after receiving treatment in Cuba, Hugo Chavez, Venezuela’s most charismatic politician this side of Simón Bolívar, dies of cancer. Brent Crude is around $100 a barrel; the IMF forecasts real GDP growth of 5% for the year. Venezuela’s largest trading partner, the U.S.A, is coming out the other side of recession and China, the nation’s second biggest, is enjoying GDP growth of 7.9%. In social terms, fewer Venezuelans are living under the poverty line than in 2000, and education, employment and literacy levels are all favourable when compared with the pre-Chavez era.

Enter Chavez’s appointed successor: Mr. Maduro.

Nicolás Maduro’s political career, like so many others in leftist politics in Latin America, started in the transport trade union movement. Maduro joined Chavez’s MBR 200 revolutionary group in the early 1990’s and rapidly gained favour within Chavista circles. After successfully running for the Chamber of Deputies (the lower house) in 1998, Maduro was elected to the National Assembly (the upper house) a year after the successful Chavista coup in 1999. In 2006, Maduro was elected Foreign Minister and shortly after Chavez’s Presidential victory in 2012, he was appointed Vice-president, and anointed heir apparent should Chavez’s health situation deteriorate.

Flash forward to 2016. The economy, like Mr. Maduro’s cycling exploits, has fallen flat on its face. The government predicts inflation will be around the 141% mark (independently, it’s expected to be in the region of 720% making Venezuela’s economy one of the most inflated worldwide); On 8th March this year, Mr. Maduro raised the price of petrol by 1300% (the first price hike in 17 years) many believe this to be too little too late, and a pinch on Venezuelans; and the Bolívar is trading around 130x the officially pegged rate (B.s.10/$1) on the black market. What is more, the IMF predicts that the economy will shrink by a whopping 10% this year.

And as you might expect, the country’s credit situation is desperate too. While Venezuela has prioritized meeting debt obligations in the past, the risk of a default on government debt is higher now than ever before. With the Bolívar in free-fall Venezuelan debt is a no go zone. The country owes around $125bn; of which $10bn is due this year. Credit Default Swaps on Venezuela’s debt are trading at all time highs (with spreads of 5860bps, vs. 19bps on German debt or even 1892bps for war-torn Ukraine), and the fiscal deficit has grown steadily over the past 5 years, and fell off a cliff in 2015. A default event would be utterly disastrous, and the only way the government has thus far met their obligations is printing more money, thereby further driving inflation. One possibility, heretofore not discussed would be to follow Ecuador and dollarise. While adopting the Dollar seems unlikely under Mr. Maduro’s leadership, it’s a move that a subsequent politician or movement might want to consider. What would be lost in fiscal autonomy would be compensated for in stability.

Equally alarmingly, Venezuela is now even less safe than it once was. Figures collected by the United Nations Office on Drugs and Crime suggest that Venezuela is one of the most dangerous countries in the Americas, with a homicide rate of 53.6 per 100,000 in 2012 (representing a 63% rise since 2000). In 2013, Mr. Maduro rolled out his “Plan Patria Segura” policy, which involved the deployment of troops in an effort to reduce crime rates. Despite government proclamations of success, the situation appears to be worse. In 2014 the Venezuelan Violence Observatory estimated that almost 25,000 people were murdered suggesting a homicide rate of 82 per 100,000. Press freedoms have also suffered. In 1998 close to 100% of Venezuela’s newspapers were independent of government control, now that figure is closer to 60%. Journalists who are critical of the government are branded traitors and American hacks, and dissenting politicians are thrown into prison and accused of trumped up corruption charges.

To be sure, Mr. Maduro can’t solely be held to account for the country’s dire straits. Venezuela’s economy is married to the caprices of the oil market, and like other OPEC countries, it has suffered enormously as a result of Brent’s collapse. But nor can he, or defenders of his predecessor point fingers at a grand global capitalist conspiracy. The glut and resultant depression of oil prices has been exacerbated in Venezuela by inefficiencies. Venezuela has one of the highest break-even prices per barrel of any OPEC country, and petroleum and petroleum products are the countries largest export.

The government’s complacent attitude towards diversifying the economy has had a stultifying effect on Venezuela. Sitting atop the worlds largest oil reserves had allowed the PSUV (Mr. Maduro’s party) to fund its ambitious social reforms. With a Dollar revenue stream all but assured, the Chavista regime has done little to encourage the growth of other industries. Protectionist and nationalist policies preventing foreign direct investment in the economy have proven disastrous. Basic necessities such as milk, eggs, cooking oil and fish are now in scarce supply. In an attempt to combat the country’s frequent power shortages, Mr. Maduro has called for an extended Easter break. The government blames the El Niño weather cycle, but it has been suggested that a lack of investment in the maintenance of Venezuela’s largest damn is largely responsible. Even in light of the “good times”, and the implementation of the government’s social amelioration agenda, recent studies have shown that prosperity did not increase consistently in Venezuela 2000-2013, but rather has fluctuated, and certainly worsened in the last 4 years.

This economic and social unrest has yielded a rare political animal in Venezuela: an effective opposition. Elections in December returned a 2/3rds majority for the MUD (Democratic Unity Roundtable), a movement that opposes Chavismo. Despite this clear democratic mandate, the PSUV controlled supreme court have blocked the appointment of a handful of delegates thus preventing the supermajority which would allow parliament to override the executive veto. Nonetheless, the MUD has pledged to force Maduro out before the end of his term in 2019, and they intend to use a three pronged attack to do so: a recall referendum; a constitutional amendment; and mass protests.

It’s not just Mr. Maduro’s political track record that’s being challenged. In a move straight out of the Donald Trump handbook, a recent investigative report by Los Informantes, a local news program has even tried to suggest that Mr. Maduro’s dual-nationality (his mother was Colombian) constitutionally prevents him from holding office! Whatever the case, the Venezuelan people have grown weary of the Chavista experiment. The onus now falls on their elected representatives to attempt to salvage the situation before it gets any worse. Sadly, until the market adjusts, and oil prices rise, progress and transformation in Venezuela will be an uphill battle.

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“In Brazil, when a poor man steals, he goes to prison – when a rich man steals, he becomes a minister”

The words of Luíz Inácio Lula da Silva in 1988. And how prophetic they now seem on a day when the former president returns to government, set to serve in current premiere Dilma Rousseff’s cabinet as her new Chief-of-Staff.

The move comes as Ms. Rousseff’s position appears increasingly beleaguered. Amidst swirling allegations of corruption, the last week has seen the country inundated by protests that took millions of ordinary Brazilians out onto the streets calling for her resignation, while rumblings of dissatisfaction emanated from the PMBD, the coalition partners of her ruling Workers’ Party (PT).

All this suggests patience is running out in the country’s corridors of power as well as the streets of its cities. And such a rare and potent mixture of popular pressure and political will, especially when splattered on a canvas of a deepening recession and tightening public budgets, might just see those much-talked-about impeachment proceedings gather critical momentum.

The hope, therefore – at least in PT circles – must be that Lula’s appointment will shore up the crumbling Rousseff administration. On the one hand, his common touch and residual popularity with the Brazilian people may well rub off on an incumbent president whose own approval ratings have struggled to limp into double figures. On the other, his political gravitas and background in the deal-breaking world of union politics may be of more tangible value to a ruling party that needs all the allies it can lay its hands on.

This is not to say that Lula’s appointment is a win-win. His arrival in cabinet is likely to herald a change of policy, with a tack to the left to match the ex-president’s political persuasions very much on the cards. And feathers have already been ruffled, with the head of the Central Bank, Alexandre Tombini, signalling his readiness to step down, news that saw the Real slide 2% against the Dollar.

However, there is one further – and not-insignificant – advantage in bringing the PT strongman to the governmental table. By happy coincidence, the appointment puts Lula beyond the reach of the federal investigation into corruption at state oil firm Petrobras, an investigation that only last week charged him with money laundering and misrepresentation of assets (as reported below). As a serving minister, Lula is now answerable only to the Supreme Court and, as luck would have it, 8 of its 11 serving members were nominated either by Lula himself or by his protégé, a certain Ms. Dilma Rousseff. While of course there is no suggestion of impending impropriety in Brazil’s highest court, it is perfectly reasonable to assume that they may be more susceptible to political persuasion than Sérgio Moro, the magistrate-cum-bloodhound leading the federal probe, who briefly detained Lula last week.

So, in an uncharacteristically shrewd move, Dilma Rousseff has endeavoured to kill two birds with one stone: bolstering her own position in government by bringing on-board a man with a wealth of political prestige and acumen, whilst simultaneously salvaging the reputation of the her party’s only truly talismanic figure.

Yet, it is difficult to observe this latest twist in Brazil’s current political troubles without appreciating the rather bitter irony in Lula’s 1988 declaration. Little can he have imagined that he might be alluding to his future self.

UPDATE  18/3/16: A twist in the twist, and how quickly things change in this tangled web of intrigue.

Mere minutes after the swearing-in ceremony in Brasilia, Lula’s appointment to the cabinet was blocked by federal judge Itagiba Catta Preta Neto on the grounds that it obstructed the “free exercise” of justice. But now, that injunction has itself been overturned by another federal court, clearing the way for Lula to take his seat at the table.

While the judiciary wages war with itself, Ms. Rousseff’s plan has been rumbled. Freshly-released transcripts of a tapped phone conversation between Lula and Dilma suggest the president brought her mentor back into government precisely to shield him from corruption charges. The revelations have prompted howls of outrage and even larger popular protests are expected over the weekend.  

By their own admission, even the House of Cards writing team couldn’t make this up.

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Lula grelhada – will the Car Wash claim another victim?

More heads look set to roll in Brazil, as former president Luíz Inácio Lula da Silva was hauled over the coals yesterday on charges of money laundering and misrepresentation of assets. The allegations, brought by public prosecutors in the state of São Paulo, relate to an apartment in the upscale, coastal municipality of Guarujá – inhabited by Mr. da Silva and his family, it is claimed that the triplex penthouse was purchased and renovated for the ex-premier by construction firm OAS, with financing for the home improvements possibly coming from funds acquired through corruption at state-owned oil giant Petrobras.

Mr. da Silva has denied the charges, suggesting they are politically motivated.

Given the venerated status of “Lula” on the Brazilian political scene and his popularity among ordinary Brazilians, few observers foresaw this turn of events before his home was raided by police last week.

Twice leader of the ruling Workers’ Party – Partido dos Trabalhadores – between 1981 and 1994, he still wields unparalleled influence on the left of the Brazilian political spectrum. Moreover, as President of Brazil from 2003 to 2011, his ministry oversaw rapid economic growth coupled with increased social spending through the Bolsa Família and Fome Zero campaigns, not to mention putting the nation in the global spotlight with successful bids for the 2014 World Cup and 2016 Olympic Games in Rio de Janeiro.

But Operation Car Wash – Operação Lava Jato – doesn’t much care for social or political legacies. The judicial probe into allegations that senior government figures and Petrobras executives accepted bribes from construction firms in return for contracts at inflated prices has already placed $22bn of deals under investigation.

And Lula is certainly not the first PT grandee to be embroiled in a scandal that has left the party’s PR team playing a game of Reputational Damage Whack-a-Mole: former presidential Chief-of-Staff José Dirceu – already under house arrest for his involvement in the earlier Mensalão scandal – was re-arrested in August on more topical corruption charges, while ex-PT Treasurer João Vaccari Neto was handed a 15 year jail term in September.

Only incumbent President Dilma Rousseff – herself on the Board of Directors of Petrobras when the alleged corruption took place – seems to be weathering the storm any success: mooted efforts to impeach her have hit the legislative rocks just as her meagre approval ratings have “bounced” to a stately 12%.

Yet set against the backdrop of the Brazil’s worst recession in 25 years and looming questions over the readiness of many Olympic venues ahead of the games in August, the timing of this latest arrest could hardly have come at a worse time for the nation’s establishment.

 As an investigation that has already resulted in the arrest and imprisonment of some of the country’s most prominent captains of industry now appears to have snared its foremost political figure of the last 30 years, one question seems increasingly apposite: Just how deep does the rot go?

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The bolivianos have spoken. And the rEVOlution takes a tumble.

The democratic machine ground into action in Bolivia on 21st February as voters went to the polls to vote to amend the constitution to allow incumbent president Evo Morales to stand for a 4th term in 2019. The result? A narrow win for the “No” campaign, scraping home with 51.3% of the popular vote. And on an 84.5% turnout, it can hardly be said that the people haven’t made themselves heard.

2016 marks 10 years of rule for Mr Morales, a former coca planter, champion of indigenous rights and now Bolivia’s longest-serving premier. He can certainly look back on his tenure with a degree of pride: the nation’s GDP has increased threefold since 2006, with poverty almost halving over the same period. And with 4 more years still on the clock, Evo is going nowhere in a hurry; as his supporters on Twitter were quick to make clear, “#LaLuchaContinúa”.

Yet the result will come as a blow to Mr Morales’ personal pride; a leader famed for his popular touch, he had yet to taste defeat in elections to public office and had even seen consistent increases in his share of the vote. It is also a setback for his all-conquering Movement Towards Socialism (MAS), which will now be forced to seek a replacement for its talisman ahead of the 2019 election,  as well as facing uncomfortable questions about the failure of the “Sí” campaign in traditional party strongholds like the mining town of Potosí.

There is plenty of time for analysis and soul-searching post-referendum, but a few reasons behind this turn of events stand out. As with so many countries in the region, the spectre of autocracy still haunts the Bolivian political scene. The military dictatorship of Hugo Banzer is still very much in living memory, naturally prejudicing voters against extending presidential terms, be it by democratic methods or otherwise.

In more current terms, the plunge in global commodity prices, particularly the natural gas on which the Morales economic miracle piggy-backed, has weakened economic growth, putting the squeeze on the country’s emerging middle class and leading some to question the president’s macroeconomic policies.

Last, and by no means least, Evo finds himself in the unusual position of being hit by scandal; recent revelations include a murky episode in 2007 involving a relationship with an executive of a Chinese engineering company, a now-deceased lovechild and $500 million of Bolivian government contracts. The Morales camp strenuously denies any wrongdoing, accusing his opponents of waging a “dirty war” on social media, but it is difficult to deny the personal damage these allegations will have done to their hitherto-unsullied leader in the run-up to the referendum.

Certainly defeat in the plebiscite is a knock-back for the revolución democrática y cultural in Bolivia and rounds off a bad few months for left-wing governments in Latin America as a whole; the triumph of the opposition MUD in Venezuelan parliamentary elections in December being swiftly accompanied by the election of the centre-right Macri government in Argentina.

However, 2019 is unlikely to see Mr Morales waltz off into the sunset; he may not be the official MAS candidate for the presidency, but given his aura on the Bolivian political stage, it seems highly probable that the nation’s most charismatic politician since its eponymous liberator will continue to wield significant influence.

Yet as ex-president, and long-term opponent, Carlos Mesa hinted in an enigmatic tweet, while the ideals and prosperity brought by the Morales government may be dear to the hearts of the Bolivian people, Evo may be more disposable than he would like to think.

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