Note: Our clients and readers tell us the “ground truth” we present in Notice This© and Regional Focus© is what separates Latin Trade Solutions from other sites that cover Latin America. Therefore, rather than focusing on individual companies and transactions in the region, we give here brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for further information on the issues discussed here.
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We wish each of you a Safe and Happy Holiday Season and a Prosperous 2006.
A key issue will dominate the region’s political and economic landscape in 2006: presidential elections in ten countries, and congressional elections in six. Therefore, this issue of Notice This© analyzes them briefly, based on research up to this update, 19 December 2005.
All signs point to the possible continuation of the leftist leaning that began with the election of Chile’s Ricardo Lagos in 2000. The USA has expressed concerns about this trend. Official pronouncements by high-level officials in the USA credit Venezuela’s Hugo Chávez as the instigator of Latin America’s revived Left. I believe this position runs the risk of giving him political importance he might not otherwise have. Chávez’s influence is more economic than political. By focusing on his politics, the USA has overlooked the profound dissatisfaction of a majority of Latin Americans with the political and economic results of the last 10 years of economic liberalization and democratic governments; the USA has also misread the meaning of those elections. Elections have brought, and continue to bring, people to the polls thus creating participatory democracy, but Latin American elections have not resulted in representative democracies. Representative democracy, governments that work with and for the large majority of the people in the respective country, is what Latin America needs today, badly, to take the wind from the sails of leaders such as Chávez, Evo Morales, in Bolivia, and Ollanta Humala, in Peru.
Latin America’s traditional parties are in disarray and their candidates are not faring well, not because of who they are or their qualifications (or lack thereof) for office, but because people see them as a continuation of the last decade or of what has happened in Latin America for the last 300 years: the rich get richer, and the poor poorer. And perception is reality. With the exception of Colombia, Latin Americans are voting for change or, as in the case of Argentina, for governments that are not willing to “break the backs of the people to satisfy international investors,” according to President Kirchner. Latin Americans are looking for results that translate into money in their pockets no matter what their social position or place in the economic pecking order, safety of their persons and possessions, and a better future for their children. Whoever the people perceive can deliver on this promise will get elected, or thrown out of office by public uprisings if he/she fails in his/her promises.
Bolivia, 18 December 2005, President. Evo Morales Aima, the Aymara leader of the Cocalero Movement and the leader of the Movement toward Socialism (MAS by its Spanish acronym) won an absolute majority in the presidential elections. He however will not have a majority in Congress. In a stunning triumph of Bolivian democracy, Morales won 51.1% of the vote in the first round, the only presidential candidate to do so in the last 23 years. Even in the province of Santa Cruz, where he was expected to gain only 10% of the vote, Morales won 37%.
Morales faces a hard road ahead after his swearing in ceremony on 22 January 2006. Bolivia has had four presidents in the last two years, all of whom were deposed by public demonstrations led by Morales. He has promised to decriminalize coca cultivation, 10% of which is legal in Bolivia, and nationalize the country’s natural resources, which include the second largest natural gas reserves in the Western Hemisphere.
I hope Morales’s political acumen and survivorship prevails, and he is able to come to a mutually satisfactory agreement with the foreign companies that operate the oil and gas fields. Brazil’s Petrobras operations in Bolivia represent 20% of the country’s GDP, something not to fight against. A political truism is that one thing is to campaign and other to govern. Morales leads a Bolivia fragmented along racial lines and facing serious economic challenges. He will have to do this within the context of a global marketplace where autarky is likely to spell financial disaster, something the poor and ignored majority of Bolivians can no longer afford; nor are they willing to.
Let’s hope the USA understands and accepts that, although the Bush Administration might not like the results, Morales’s election is the product of the participatory democracy the USA has clamored for in Latin America for years. May the USA response to the new president be measured and informed by the current reality of Bolivia. Morales needs the time and space required to establish representative democracy in Bolivia, for which he won, fair and square, a popular mandate.
Haiti, 8 January 2006, President and Parliament. René Préval (president from 1995-2000) appears to be the likely winner. However, there are 35 candidates for president and 1,300 for the 130-seat parliament. Given the violence and unrest that predominate in Haiti, and the level of corruption that plagues the political process, these will not be orderly elections, nor do those elected have a guarantee of finishing their terms.
Chile, 15 January 2006, President. Runoff between Michelle Bachelet and Sebastián Piñera. Bachelet received 45% of the vote in the first round, trailed by Piñera with 25%. As of this writing, Bachelet seems to be the likely winner. Speculation that Ms. Bachelet will change the economic focus of the Chilean economy is off the mark. Chile has made profound structural changes which will be almost impossible to reverse.
Despite outstanding economic performance Chile still has considerable social problems which the Lagos socialist government has tackled effectively, such as decreasing overall poverty by 15%, raising the quality of public education, and expanding access to it by those at the lower rungs of the economy. Ms. Bachelet will continue to do the same.
The new president will need to contend with the Achilles Heel of the Chilean economy: its energy dependence, particularly on Argentinean gas and oil. This makes Chile vulnerable to governmental decisions in Argentina, over which Chile has little influence and no control.
Costa Rica, 5 February 2006, President. Oscar Arias (president from 1986-1990) seems likely to win. Arias’s main rival, Ottón Solís, campaigned for a fairer Central America Free Trade Agreement (CAFTA). The ratification of CAFTA by Costa Rica remains stalled in Congress. It will be up to the next president to push for its ratification by the Costa Rican congress. Arias is expected to do so. (Costa Rica is the only Central American country that has not ratified CAFTA as of this update.)
Peru, 9 April 2006, President. Coming from left field, Ollanta Humala displaced former president Alan García to place second to Lourdes Flores, the frontrunner. As of this writing, Humala trails Flores by only three points. It is highly probable the election will go into a second round given that the followers of former president Alberto Fujimori insist on running him in absentia. Fujimori, who left Japan for Chile in November, remains in detention in Chile awaiting extradition to Peru where he will be tried for human rights violations, bribery, and malfeasance. Chile’s test for extradition is extremely high. Therefore, Fujimori may be deported to apan once the extradition process ends. After all, he entered Chile illegally.
This will be a crucial election for Peru. The new president will have to deal with the maritime border dispute Peru brought against Chile in October 2005. Chile will begin the last round of negotiations for an Acuerdo de Complementación Económica (Economic Complementarity Accord) with Peru on 16-17 January 2006. Eighty percent of commerce between the countries is free of tariffs today and will reach US$2bn in 2005. Peru is the third recipient of Chilean foreign direct investment. The new president will have to gain congressional ratification of the USA-Peru Free Trade Agreement, entered into by the two countries on 12 December 2005. Peru will also need to contend with the social disruption likely to continue in the Andes, and with the energy integration of South America, sponsored and financed by Venezuela’s Hugo Chávez in cooperation with Brazil.
Dominican Republic, May 2006, Congress. The Dominican Liberation Party of President Leonel Fernández is expected to retain control of the legislature. Tensions in the relationship between Haiti and the Dominican Republic (DR) will continue and may turn violent. On 15 December 2005 the DR closed its embassy and ordered the return of all DR citizens residing in Haiti. This was in response to the violent demonstrations against President Fernández’s visit to Haiti the week before.
Colombia, April 2006, Congress; May 2006, President. As expected, President Alvaro Uribe Velez will run for reelection in May, and will win. It is unlikely the election will go into a second round. Given that President Uribe gets from Congress what he wishes, the composition of the new congress will make little difference in the agenda of the president in a second term.
The major issue the second Uribe Administration will need to confront is the peace initiative. It is encouraging that President Uribe extended an olive branch to the Revolutionary Armed Forces of Colombia (FARC, its Spanish acronym) on 14 December 2005. In a move that surprised followers and opponents, President Uribe offered to open an “area de despeje” (army-unoccupied territory) of 180/km² to begin negotiations for the humanitarian exchange of about 60 people the FARC has kidnapped and continues to hold in undisclosed locations. Some are politicians, such as Ingrid Betancourt, a citizen of France and Colombia and a former presidential candidate. President Uribe offer is in response to the “SecuritySystem for the Humanitarian Exchange in the Central Highlands,” the work of the mediating group created by France, Switzerland, and Spain.
Concurrently, preliminary negotiations to lead to peace negotiations between the Colombian government and the smaller guerrilla group, Army of National Liberation (ELN, its Spanish acronym) began at the Hotel Palco in Havana on 16 December 2005. The demobilization negotiations with the United Paramilitary Forces Colombia (AUC, its Spanish acronym) continues, although some groups appear to be reluctant to continue with the process and have decided not to surrender.
However, the generous concessions made by the government to the leaders of the AUC, which include lenient home detention, elimination of extradition to the USA under terrorist charges, and limited restitution to their victims may prove a stumbling block in the negotiations with the ELN or the FARC. I believe neither will accept any less than the guarantees and concessions the Uribe Government has given the AUC.
Negotiations for the USA-Colombia Free Trade Agreement, previously known as the USA-Andean Free Trade Agreement (AFTA), will resume in the last week in January 2006. Negotiations for AFTA came to a dead end in December 2005 when Colombia and Ecuador refused to meet the stringent demands made by the USA regarding agriculture, generics, and intellectual property protections. Peru killed AFTA by negotiating a separate agreement with the USA, which must be ratified by the legislature in each country; passage is expected in the USA. However, the potential election of Humala may make approval by the USA congress difficult if Humala holds to his “social-focused programs,” which the USA would likely view as “in the Chávez mold” and further proof that Latin America is being lost to the socialists and communists.
Mexico, 2 July 2006, President. Now that the parties have elected their candidates, the campaign will begin on 18 January 2006. As of this update, the ex-major of Mexico City, Andrés Manuel López Obrador (AMLO) of the Democratic Revolution Party (PRD, its Spanish acronym) is the leading candidate. The Labor Party (PT) and the Convergence for Democracy (PCD) also support AMLO. Given the lackluster performance of Vicente Fox’s National Action Party (PAN), its candidate, Felipe Calderón, is projected to do poorly. The Institutional Revolutionary Party (PRI) will be led by Roberto Madrazo. The ground roots, local organization of the PRI is still very strong and effective, having gained control of municipalities and governorships in the past election. The PRI is joined by the Mexico Green Party to form the Alliance for Mexico movement, which was the PRD’s slogan for the 20000 elections.
Hopefully, the new administration will continue the efforts of President Fox to integrate Central America’s infrastructure and energy markets with those of Southern Mexico, the Puebla-Panama Project (PPP). The Inter-American Development Bank (IDB) finances PPP’s projects. The integration of Central America and Mexico is an area where President Fox has been very effective.
Emigration of Mexicans, and of other nationalities through Mexico, to the USA will remain a key issue for the new administration. Possible reforms to the agricultural chapters of NAFTA (North American Free Trade Agreement) will also be part of the president’s agenda. Given the interlinking of the USA and Mexican economies, Mexico will go the way the USA goes economically and, in part, politically.
Ecuador, October 2006, President and Congress. Given that Ecuadorians have deposed three presidents in the last four years, it is difficult to predict whether whoever is elected will complete his term in office. It would be difficult for the USA and for Colombia if León Roldós Aguilera, a socialist and leading contender, is elected.
Colombia’s recent decision to stop the spraying of illegal crops in Colombia’s Putumayo Deparment was welcomed by Ecuador. Fumigations were creating an environmental catastrophe in the provinces of Sucumbíos and Carchi in Ecuador and were putting pressure on Ecuador to begin its own coca eradication program with less dangerous chemicals. Following the balloon-effect theory, coca is being planted in Ecuador, in from the Colombian border.
Ecuador will continue to be affected by the displacement of the “Colombian problem,” illegal crops and alleged guerrilla activity inside the Ecuadorian border. The new president will have to confront these two problems when dealing with President Uribe, who is not known for his openness to left-leaning leaders, although he has not been remiss to accept the mediation of Brazil’s Lula and Cuba’s Castro, when necessary. Lula and Castro mediated the tense situation with Venezuela at the beginning of 2005.
Brazil, 1 October 2006, President and Congress.
(Please see the 19 December 2005 issue of Regional Focus ©, “Brazil: Opportunities and Challenges in 2006©.”)
It is unfortunate that President Luis Inácio Lula “Lula” da Silva’s government has spent the last six months of 2005 mired in and stalled by political scandal. With reelection almost assured until mid-2005, Lula now faces a steep road ahead, if he were to get reelected. His disapproval rate is 52% as of 15 December 2005, a loss of 10 points from September 2005. His contender, Jose Serra, current major of São Paulo, moved from a 31% approval rating in September 2005 to 37% on 15 December 2005.
A recent survey by EXAME/Vox Populi (www.exame.com.br) showed that Geraldo Alckmin, governor of the State of São Paulo, is the preferred candidate of leading industrialists and private industry by 40% against Serra with 21%. 77% of those surveyed disapproved of the government’s overall performance, and only 4% approved of Lula.
A major question for Brazil’s new president will be who will be the new Finance Minister. Antônio Palocci Filho’s orthodox economic management has placed Brazil soundly on the world map and has given it an image of stability and reliability, which it lacked before Palocci went to Finance. Palocci has become the face of Brazil’s economic performance. International markets are likely to see his departure with apprehension, despite his current vulnerability to the scandal that has plagued Brazil in 2005.
Palocci’s legacy is a series of structural changes that will be difficult to change. But Brazil faces serious challenges and needs deeper structural reforms, such as pensions, taxation, public education, improvements in infrastructure, and continued industrial diversification to compete effectively with China and India, and to lessen the dependency on agricultural and mineral exports.
Nicaragua, 5 November 2006, President and Congress. Former president Arnoldo Alemán was convicted of fraud. President Jorge Bolaños Geyer of the Partido Liberal Constitucionalista (PLC) has been isolated and unable to deliver on his agenda thanks to an antagonistic Congress, which has been unable to perform even its most basic duties.
Former president Daniel Ortega, head of the Frente Sandinista de Liberación Nacional (FSLN) will make a fourth-run for the presidency; he is expected to lose, again. Other parties have yet to name their candidates. The FSLN and the PLC together gained 90% of the votes in the municipal election of November 2004 and together control congress. The new president will have to deal with the economic dislocations created by the implementation of CAFTA, which was ratified by Congress in the wee hours of the night, behind closed doors.
Venezuela, November/December 2006, President. Precluding God’s intervention or an unnatural health hazard, President Hugo Chávez is almost assured of his reelection. In addition, the withdrawal of the opposition from the National Assembly elections in December 2005 gave Chávez and his political allies full control of the 167-seat assembly. This means Chávez will have the votes to amend the Bolivarian Constitution, which is expected to abolish presidential terms, thus opening the road for Chávez’s long-term control of Venezuela’s political space.
High oil prices and strategic alliances have given Chávez what most Latin American countries do not have: plenty of money he can expend as he wishes and where he wishes, under the terms he wishes. For better or worse, Chávez has thus created a counterbalance to the International Monetary Fund (IMF). Countries in Latin America can now go to Chávez to help them finance budget deficits (Ecuador, US$400 million) or float sovereign bond issues (Argentina, US$1b).
It is unwise to believe Chávez’s rise to power is due to his socialist, leftist ideas and policies, which is what the Bush Administration seems to believe. The sad reality is that Venezuela does not have an effective opposition leader who can bridge Venezuela’s current economic, social, and political divide. Adding to this, whether the opposition and the USA like it or not, Chávez has delivered goods and services to a vast number of Venezuelans who had been ignored by previous governments and the traditional leading economic actors. These people have an experience-based antagonism toward the traditional parties represented by the opposition. Almost certainly, Chávez contender will have to come from left field.
Those who oppose Chávez need to focus not so much on his public rhetoric but on how he is spending Venezuela’s oil revenues and on his economic agenda. BP, Anglo-Dutch Royal Dutch, Exxon-Mobile, Total, and Chevron were forced to agree to new concession agreements by which they cede majority ownership of their contracts to Petróleos de Venezuela (PdVSA), the state-owned oil producer and the 5th largest world oil company. The new concession agreements, which go into effect on 1 January 2006, increase the royalties foreign oil producers that operate in Venezuela pay PdVSA. They agreed to the revised concession contracts when Chávez presented them with a sign-or-lose-your-investment proposition.
Other foreign investors in Venezuela beware; what happened in oil might very well happen in other industries. Chávez, for all intents and purposes, has nationalized the oil industry, and the cries of protest that accompanied similar proposals by Evo Morales, in Bolivia, were not heard – big money talks, and talks loudly.
Petrobillions give Chávez economic power that has, and will have, lasting impact in the region, regardless of the composition of the political space in other countries.
Presidential and congressional elections in Latin America mean change. Hopefully the changes the new governments will make will translate into increased market opening and international integration with a dedicated effort to distribute the gains equitable.
If Latin America is to prosper to compete with China and India on a level playing field, its governments will have to get busy to raise the level of education of the vast majority of their citizens, create incentives to innovation, reduce red tape in business creation, upgrade infrastructure, and begin implementing industrial diversification. If they do not do this, Latin America is destined to lag behind other regions, such as Asia, and its future will be less than promising.
Desperate people do desperate things. Latin America can’t afford increases in poverty and levels of criminality, all the direct byproduct of a lack of representative democracy.
So Long and Good Luck. Hasta Luego y Buena Suerte. Até Log e Boa Sorte.
Maria Velez de Berliner, President, latrasol@latrasol.com Tel: 001-703-212-8586
]]>Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This ©. You told us our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us at latrasol@latraso.com should you wish further information on the issues discussed here.
Scandal in Brazil. One more reshuffle of the cabinet in Perú. Continued demonstrations in Bolivia. A Justice and Peace Law in Colombia, which will ensure neither peace nor justice. Petroecuador, the Latin American company with the best return on assets, continues to lose billons. Venezuela 's president, Hugo Chávez, helps finance deficit budgets in Argentina, Ecuador, and Paraguay. Presidential elections in Perú, Ecuador, Colombia (with the almost assured reelection of President Uribe), Mexico, Argentina, Chile, Brazil, Venezuela, and Costa Rica in 2006. A Central American Free Trade Agreement (CAFTA) that might not bring the economic rewards promised to a majority of Central Americans, although it will be a bonanza for USA companies. A sense of unrest, of deja vú and uncertainty, is beginning to percolate throughout the disappearing middle class and those at the lower rungs of the economic ladder. These groups' dissatisfaction has a high probability of turning into social unrest with its deleterious consequences on investment and capital inflows.
I usually address regional conditions in Regional Focus ©. However, the current situation in Latin America merits appearing in this issue of Notice This © because political considerations should be an integral part of what, in my strategic approach to the region, I call Plan B. I believe that without a Plan B your profitability and safety in the region might be jeopardized.
In these pages and in public presentations I have said time and again that Latin America is not for the faint of heart. It requires thorough homework, fortitude, and perseverance to operate profitably and safely in the region, and a Plan A and a Plan B. While Plan A focuses on the traditional five-year plan (hasn't globalization made them obsolete?), sales volumes, and computations of ROI , Plan B focuses on the Latin America that is, not the Latin America one wishes to have. Plan B is the reality check that includes political, economic, and social predictors; it is the response to, “What is the worst that can happen to me in...?” Plan B has saved me more than once; it has done the same for my clients.
This is how my general Plan B for some selected countries looks for the remainder of 2005 and 2006, even while knowing that a year is too long to predict in Latin America.
Brazil – I continue to believe Brazil is the for-sure bellwether for South America and, to a great degree, for the rest of the region. México could be excluded due to its close ties to the USA economy, but even México would not be immune to repercussions from Brazil, were the Brazilian economy to falter under the weight of the current political scandal.
The seriousness of Brazil's political scandal can't be denied or glossed over. But let me reassure you this is not “Brazil's biggest political scandal in the country's history,” nor will it be the last. Others will come. Former President Collor's was the greatest scandal of his time. However, the credibility of the Lula Government and of Brazil's institutions is damaged. It is clear now that the issue is not who paid whom, and how much, but what did President Lula know of the corruption at the Partido Trabalhista (PT) and when did he know it. My reality check tells me that either Lula knew or, if he did not know, he was a disengaged leader. In either case, the damage has been done and, at best, he is a weakened leader. His reelection to a consecutive second term, almost assured three months ago, will be a miracle, if he runs, which many doubt. I believe he will try to run, if he can, but I don't believe he will win. As it stands today, the two contenders will be José Serra, defeated by Lula in the past election, and Anthony Garrotihno, the ex-governor of Rio de Janeiro State. Neither man has broad political support. Serra was a lackluster Minister of Health and a not-much-better mayor of São Paulo. Garrotihno has an equally less-than-stellar record as governor. As head of security for the city of Rio de Janeiro, Garrotihno has been unable to contain the gang and drug violence that riddles it today.
It is reassuring to see that the opposition realized that impeaching Lula, or forcing him from office, could have become the worst of two evils. Brazil needs political stability and Latin America needs a stable Brazil. I believe the international markets have taken a “let them sort it out” attitude because Minister Antônio Palocci remains in charge of Brazil's finances. His economic orthodoxy is a symbol of stability and good management. Were Palocci to be implicated in the scandal, which I believe he is not, or were he to resign in view of the government's weakness in Congress , Brazil 's economic program would be damaged. And the markets may not take so sanguine a response to a Palocci exit.
Therefore, my Brazilian Plan B is following Palocci more than the reading of the situation by the international markets or Lula's speeches and public appearances. If Palocci exits, I suggest putting a hold on further investment, waiting to see how a post-Palocci economic program looks. I believe investment funds will do the same. So far the capital markets continue to pour money into Latin America , including Argentina, because government bond rates of 7% are better than the USA's. However, we need to remember that the perception of changed, or changing economic conditions or programs, can cause speculative money to fly out of a given country with the same ease it flies in. In addition, there are cheap, or in trouble, telephone and Internet companies that make excellent targets for Carlos Slim's US$8 billion expansion plans in the region. And the travails of the region are familiar to Slim; he has prospered despite them and has confounded analysts of all political persuasions.
Perú – Pedro Pablo Kuzinsky, until last week Finance Minister, is now Peru's Foreign Relations Minister. As head of President Toledo's cabinet, he is the second in command of the government. No one doubts the managerial ability and competence of Dr. Kuzinsky; he will excel in this position as he excelled in Finance. But will he be elected president in the coming elections if he runs? It is possible. However, Kuzinsky will have to contend with former presidents Alan Garcia and, believe it or not, Alberto Fujimori, now a fugitive living in Japan, who plans to return to Perú in December to participate in the presidential campaign. Fujimori's return is likely to spark social demonstrations and will create a judicial conundrum. Despite high support for Fujimori in the upperclass suburbs of Lima and in some of the shantytowns, an estimated 60% of Peruvians disapprove of a third term for Fujimori, who was elected to two consecutive terms. I doubt Kuzinsky will have broad support to win in a first presidential round, again if he runs. This will mean that it is highly probably Perú will go into a second round between a disliked expresident, Alan Garcia, an expresident under indictment, Fujimori, and a solid economist and manager, Kuzinsky. May Peruvians elect the latter, if they have that option.
In the interim, my Peruvian Plan B tells me to be cautious, particularly in the area of extractive industries and energy. The extractive industry has kept Perú afloat in the last five years, despite a disastrous, corruption-ridden Toledo administration. However these are natural resources over which competing interests collide. Would Perú fall for nationalization of these industries, similar to what Bolivia has done with natural gas? I doubt it. As an Andean analyst said to me recently, “The Peruvians do not want to be the next country to veer to the left. This is why they have not gotten rid of Toledo.” He may be right, but my Plan B includes preparation for a Garcia presidency, and I know how it went when he was last in power.
Bolivia- As expected, it is not surprising that investors are shying away from the hydrocarbons sector, Bolivia's most valuable resource. Although there are companies that continue to invest in Bolivia , to the tune of US$7.5 million so far this year, total investment has fallen by 80%from an all-time high of US$600 millionwhen the sector was privatized. What we need to remember is that the demonstrations-feeding discontent with the maldistribution of hydrocarbons revenue was not the fault of the foreign oil and gas companies that invested in the sector, Spain's Repsol-YPF and Brazil's Petrobras being the largest investors. The fault lies squarely in the hands of several governments that failed in their duty to govern for the benefit of the majority rather than the few. Consequently, Bolivia is a clear lesson on the fragility of contracts in Latin America . The newest term is “judicial security.” This means the enforceability of duly executed contracts ( Please see Regional Focus © of 11 July 2005 for a complete discussion on contracts in Latin America). Despite governments' utterances about their commitment to the rule of law, I believe judicial security is a long way from being a reality in the Andes.
My Bolivian Plan B has always included a contract review by in-country counsel who specializes in the relevant industry. My standard questions of counsel are: “What could derail this contract? Where do I stand if that happens? What would you do to enforce this contract? What are the estimated costs of doing so? How long will it take? What other recourses do I have to enforce it? And the most crucial, What if I lose?" I am a strong believer in preventing problems, not in solving them, which is costlier.
Colombia – Unless God or a bullet intervenes, President Uribe will be re-elected to a second consecutive term. His solid reputation in the international community and his personal friendship with President Bush will ensure support for Uribe's policies. However, I believe the Justice and Peace Law has weakened the already weak judicial system of Colombia by letting the heads of the paramilitary Auto-Defensas de Colombia (AUC) off the hook, with a slap on the wrist, and the ability to keep their ill-gotten lands and assets. Despite the high approval rating Colombians give their president, and their sense of security, Colombia will remain an insecure country to do business in, and I will not put too much faith on its judicial system, despite official proclamations. By and large, Colombia continues to have one of the best trained labor forces in Latin America, a superior managerial class, and a diversified economy. My Colombian Plan B will continue to rely on personal relationships and mutually profitable collaboration with Colombia 's traditional economic class. It will not include travel with ease on land within the country. Let Colombians enjoy their road which, as they say, is one of President Uribe's most notable accomplishments, despite the fact that “forced disappearances” continue to plague the south and eastern regions of the country, particularly in the oil refining area of Barrancabermeja and the Pacific port of Buenaventura.
Ecuador – As we go to press, President Palacios has ordered the army to shoot to kill anyone who tampers with the oil exploration installations in Sucumbíos, Orellana, and Esmeraldas, the heart of Ecuador 's oil industry. Concurrently, President Palacios announced the suspension of oil exports to the USA. As nature had it, Orellana and Sucumbíos lie on the other side of the Colombian border. This is a high-tension area between the two countries thanks to the aerial fumigation of illicit plantings in Colombia. Ecuadorians who reside in these areas are making the same allegations those on the Colombian side have made since fumigation began: polluted rivers and fields; destruction of crops; spontaneous death of livestock; respiratory ailments; stillbirths; skin lacerations; vomiting; eye irritation and infections; chronic diarrhea; cancers; genetic mutations; and, spontaneous miscarriages. Ignoring repeated protests from Ecuador, President Uribe announced Colombia will reinitiate enhanced fumigation in Putumayo in September. Ecuador claims the fumigation flights violate Ecuadorian air space when they fly past the Mataje River, which marks the border. Ecuador 's Esmeraldas, Carchi, and Sucumbíos provinces lie below the flight paths.
Ecuadorians who are blocking roads, banging pots and pans, and disrupting oil production in the Amazonia region are demanding better treatment by the exploration companies, better services by the government, and a return to them of a portion of oil revenues. Will Ecuador go the way Bolivia did at the beginning of the year? I will not be surprised if it does. It will not surprise me either if Palacios is ousted should protesters be killed. I believe Palacios's order to shoot to kill is misguided and likely to have disastrous consequences. Large numbers of Bolivians and Colombians have shown they are willing to put their deprived lives on the line for what they see as a better future for their families. A large number of Ecuadorians seem willing to do the same. Palacios would do well to heed Voltaire's caution to the French long ago, “If there is a God, may He protect us from the power of the powerless.” And Ecuador has plenty of powerless.
With oil prices at over US$60/barrel, and going higher, Ecuador can't afford to lose, or decrease, its oil revenue; it is its major source of income.
My Ecuadorian Plan B had to be amended in view of oil disruptions and the reinitiating of fumigation. Ecuador does not have the economic and political resilience Colombia has. If Ecuador undergoes the disruption of fumigation along with the oil disruption, then “displacement of the Colombian problem” into Ecuador will make a very serious situation even worse. President Uribe's well-known intransigency and inability to negotiate outside his comfort zone do not bode well for a win-win border agreement that might ameliorate the problems faced by Ecuador and caused, in part, by Colombia .
Venezuela– No matter what you think of President Chavez, he has plenty of petrodollars. Recent reforms to the structure of Banco Central the Venezuela give Chavez an almost free hand on how to spend his oil riches. I am not as concerned about Chavez's political influence in Latin America as the USA is; I believe it is exaggerated. Latin Americans have figured Chávez out. By and large, they are more than willing to take his money, but not his politics. Latin America is not Che's or Fidel's territory; it never was. The New Left and the Populist Movements in Latin America talk about equitable distribution of income, education, housing, and personal advancement but, once in government, they enact pragmatic economic programs, focus on the creation of positive current accounts supported, mainly, by commodity exports, and collaboration with foreign governments, not necessarily unconditional support of the Bush Administration.
What worries me about Chávez is his helping countries finance deficit budgets. I am one of those who believe the International Monetary Fund's (IMF) policies have done more harm than good in Latin America . But the Fund did act as a lever of last resort that imparted some sense of fiscal responsibility to profligate countries. If Chávez money is there, countries such as Ecuador, Argentina, and Paraguay will not need to enact and enforce the structural changes they need to achieve sustainable development. Therefore, my Plan B is watching where and in what Chávez puts his money not as a reassuring signal but as one of concern.
I don't believe the Bush Administration will be able to stop a Chávez reelection. Even if Chávez were not to run, which is unlikely, the truth is that Chávez has given housing, running water, schools, distant learning, sanitary facilities, and land titles to a large number of Venezuelans who felt abandoned by the central government, while polarizing the country. As of today, there is no political figure in Venezuela who could unite the country in a post-Chavez period. Do I approve of Chavez? No. But he is a reality my Latin American Plan B must include.
As I close this section on the Andean Region, I would like to remind the governments of Colombia, Venezuela, Ecuador, Perú and Bolivia of the words of James Madison, “Justice is the end of civil society; either it is achieved by peaceful means, or liberty will be lost in its pursuit.” The large majority of their citizens are seeking justice. The governments will do well to heed Madison 's counsel.
The Central American Free Trade Agreement (CAFTA) passed the USA Congress by two votes. The forthcoming Andean Free Trade Agreement (AFTA) is likely to pass by the same margin. My Central America Plan B includes careful watching of possible demonstrations, road blockings, and strife as Guatemala, Honduras, and El Salvador find they can't deliver the goodies promised to their publics; these are the Central American countries that have ratified CAFTA. Nicaragua and the Dominican Republic are expected to ratify in October. Costa Rica is likely to be the holdout until after the presidential elections in February 2006, with ex-president Arias as the likely winner. Arias will ratify, but opposition will be stiff. Costa Rica has the strongest unions and the most advanced workers' protections in Central America. The perceived threat posed to their interests by CAFTA does not augur a peaceful implementation. My CAFTA Plan B is focused on labor activity in these countries more than on whatever CAFTA-relevant policies these governments pass. The Central American governments are weak, and their ability to govern is not strong, with the exception of Costa Rica with its long tradition of democratic, free-market institutions.
By now you might be asking whether you should do business in Latin America. My answer is yes. There are the Chileans who seem to do everything right and who just signed free trade agreements with Singapore and New Zealand. And there are outstanding global companies in Latin America that will do well because they operate in a wide arena. These companies, such as CVRD, Embraer, Petrobras, PdVSA, Grupo Techint, Cemex, Telmex, América Móvil, Bancolombia, Bavaria, Empresas Publicas de Medellín, etc., have the financial and managerial capabilities necessary to prosper no matter what happens politically in their home countries. There are also powerful economic family groups that dominate the legal sectors of the economy in each country. These groups have tremendous economic power, political clout, and international respectability and acceptance. They are as trustworthy as their counterparts in the USA, the European Union, and other countries. And as savvy, too.
What you need do is to base your Plan B on reality; identify the in-country, legal strong players; do business with them; and, keep your Plan B on hand, updating it as situations change. This approach will serve you well.
Hasta Luego y Buena Suerte. Até Logo e Boa Sorte.
Maria Velez de Berliner, President, latrasol@latrasol.com Tel: 001-703-212-8586]]>Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
The Region: Ecuador, Colombia, Guatemala, Costa Rica, Panamá, Nicaragua, and Honduras threatened to continue their claim before the World Trade Organization (WTO) against the proposed tariff of Є230/ton levied by the European Union (EU) on Latin American bananas exported to the EU. The WTO will make public the resolution of the claim in August. The seven countries, meeting at the Second Summit of Heads of State of Latin America, in San José, Costa Rica, demand an average tariff of Є75/ton and insist on taking the matter before the Ministerial Meeting of the WTO, in Hong Kong, in December 2005, if the August decision is unsatisfactory to them. In the interim, the banana exporting countries are considering joining forces by creating the Unión General de Países Exportadores de Banano (UNREBAN). It is interesting to note that Costa Rica would like a tariff of Є70 and Ecuador of Є45.
Central America: The Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) seems certain to pass approval by the U.S. House of Representatives prior to the August recess by Congress. I have no doubt it will be a bonanza for US companies. I am not so certain it will be the same for a large number of small and medium-size companies in the signatory countries. Mostly family owned, these SMEs lack the economies of scale and technology capabilities that that would enable them to compete against US imports. Regretfully, neither CAFTA nor the signatory governments have a strategy for how to mitigate the effects of the structural adjustments created by the treaty. Nor is there a comprehensive retraining program for those displaced by the economic consequences of CAFTA. Neither did Mexico when NAFTA (North American Free Trade Agreement) went into effect. We all know of the resulting bankruptcies of small business and the loss of agricultural jobs in Mexico, despite the gradual elimination of tariffs on agricultural exports from the USA.
The vaunted middle class NAFTA created in Mexico has to work two or three jobs to make ends meet. Something has gone wrong with free-trade development when a Mexican dentist with a full practice has to work as an interpreter or drive a limo after hours to supplement his family income. Or when a mother, the single head of a household with legitimate children, can’t find a work because she lost it to duty-free imports from the USA. Or when a peasant in Chiapas or Oxaca suffers from malnutrition because the benefits of NAFTA did not reach him and his family. I would not be surprised if the same happens in Central America under CAFTA.
Yes, CAFTA has protections to sensitive agricultural products that were absent in NAFTA. But the CAFTA countries have limited treasury and less political will to pass and implement the regulatory framework that will protect the lowest quintile of the population, which will be the most affected. This 20% translates into 1.5 million people in Guatemala and about 600,000 in Nicaragua. These groups have the least amount of education, the lowest skills set, the lowest-grade housing, and the most needs for protection.
Some see CAFTA as the no-other-alternative to development and growth in Central America. I don’t believe this is valid. If one of the major reasons for CAFTA is the integration of the Central American economies, it can be obtained without CAFTA by creating a version of Mercosur, the common customs union between Argentina, Brazil, Uruguay, and Paraguay, with Colombia, Perú, and Chile as associated members. The other argument is that, without CAFTA, the textile maquila industry in Guatemala will move to China. This argument is specious: Mexico lost and continues to lose maquila jobs to China because labor and production costs are cheaper in China, even if it takes three months for a shipment of Chinese goods to reach the USA, Central America’s primary export market. In reality, it is cheaper to ship several containers from China to the USA than to ship one or two loads of goods by road from Central America. In addition, CAFTA will not eliminate the powerful competitive threat posed by China to these small economies whose small producers will end up competing with China and the USA. They will need all the help they can get and, I am afraid, it will not be there.
It is unclear what the future of Costa Rica will be if the Central American signatories decide on an early date for its implementation, which is what the USA demands. Costa Rica’s President Pacheco appears to be in no hurry to submit the treaty to the Legislative Assembly (Congress) for its ratification, which seems to indicate Pacheco is inclined to leave the political hot potato CAFTA has become in Costa Rica to its successor. Representatives of Costa Rica’s Ministry of Trade, Ministry of Agriculture and Livestock, and the Ministry of Economy, Industry and Commerce are crisscrossing the country on an educational campaign to explain CAFTA’s chapters to different sectors of the business community and the public. The sticky points in Costa Rica are: the elimination of government subsidies to telecommunications; the opening of the financial and insurance industry; and, the protection of intellectual property. Otón Solís, presidential candidate for the Partido de Acción Ciudadana (PAC, Citizens Action Party) and former president Rodrigo Carazo are the main opponents of CAFTA in Costa Rica. After approval of the treaty by the US House of Representatives, Costa Rica will have two years in which to decide whether it joins. After that, it will have to negotiate a separate treaty. It is highly improbable the USA will be willing to do so then.
Argentina: Paul Blustein, the author of And the Money Kept Rolling In (And Out) about the Argentinean default, couldn’t have been more prescient. The money keeps on rolling into Argentina. It seems that investors are undaunted by the default. The third Boden 2014 placement was 11 July 2005, to the tune of 1 billion Argentinean pesos. In the absence of an agreement with the International Monetary Fund (IMF), Argentina will again go to the financial markets to finance upcoming payments to the IMF and others. The second offer, completed on 7 July 2005, was swallowed fast by the market, at 5.51% plus CER, one percentage lower than the first offer in May 2005. It may be the Kirchner Government is positioning an IMF agreement until after the provincial elections in October 2005. Given the record of the IMF in Argentina, the market is proving to be an effective political ally of Kirchner.
Perú: Argentina, Chile, Brazil, Paraguay, and Uruguay and the Inter-American Development Bank (IDB) are getting closer to the creation of the Energy Ring (Anillo Energético) that will interconnect them. The gas field of Camisea (Perú) sits at the center of the project which, according to Argentina, will get underway in 2007. The legal cooperation structure is to be finished by December 2005, with an initial meeting in Buenos Aires on 18 July 2005. Environmental-impact studies and plans for the gas pipelines (gasoductos) will follow. Therefore, this is a good opportunity for those who supply services and products to the petroleum and natural gas industries. I believe the participation of Chile and Brazil will serve to reassure foreign investors. The IDB has pledged US$150 million in startup costs and the countries expect the World Bank to do the same. Please note that although Bolivia has been mentioned as a participant in the project, it seems the unresolved claims by foreign investors against the Bolivian Government may prevent it from participating in the project.
The Energy Ring is a long-term project with profound positive consequences for South America. It is also one more example of how the countries in the region are seeking collaborative solutions to common problems.
Bolivia: With all due respect, I believe the country has enough problems of its own to meddle into issues of security of its neighbors. If, as speculated, Paraguay is negotiating with the USA for the establishment of a military base and the placement of US military personnel in the Paraguayan side of the Triple Frontier (TP), it is Paraguay’s decision to take. The reality is that the Triple Frontier does represent a potential security concern for Paraguay, Argentina, and Brazil. I doubt the US will be the party that succeeds in bringing economic legality to the TP. But Bolivia’s claim that the possible US presence in the Triple Frontier is to secure control of the natural gas in Tarija’s Vertiente Field (the largest in Bolivia) and the adjacent Independencia II in Paraguay seems off the mark. Another claim that the US is in search of potable water in the Guaraní aquifer in the Brazilian Amazonia takes credibility away from those in Bolivia who oppose expanded US presence in the Triple Frontier. The issue to worry about is if, as assumed, TP-USA troops are immune from accountability under Paraguayan law and free to roam around from country to country within the Triple Frontier. Bolivia can’t ignore that neither Triple Frontier country has been able to police and control the area from criminal elements, no matter enhanced efforts by Brazil, Argentina, and Paraguay to do so.
Regarding the political environment, I hope the Bolivians have the good sense of uniting to elect former president Jorge Quiroga in the coming presidential elections. If anyone can restore stability and credibility to Bolivia, Quiroga is the one to do it.
Bolivia’s New Hydrocarbons Law, passed in June, introduces direct supervision of levies of production by the state. The hydrocarbons law levies an additional 32% tax, above the already-established 18%, on the royalties due the Bolivian Government by the exploration and commercialization companies. The law also created the Centro Nacional de Medición y Control de la Producción y Transporte (National Center for the Measurement and Control of Production and Transportation) with authority to interfere in the day-to-day operations of the 20 foreign oil and natural gas companies that operate in Bolivia through 72 joint-venture partnership agreements executed between the Bolivian Government and the companies since 1996. In addition, if Bolivian companies feel at ease with the presence of Bolivian military deployed to “protect the safety of and access to” the exploration fields; the foreign companies might not be. They also might interpret the military presence as the first step towards full nationalization of the oil and gas industry.
As of this writing, the law will result in a net loss of US$151 million for Brazil’s Petrobras. Repsol/YPF, British Petroleum - BP, and Total will show Bolivian losses, too. The losses also affect local producers. During the stoppages, strikes, and upheaval that led to the resignation of President Meza, industrial producers in La Paz and El Alto lost US$11.2 million, or about 1.5% of total GDP.
Despite forthcoming lawsuits by the holders of contracts that were rescinded by the New Hydrocarbons Law, Paraguay’s Ministry of Mines and Energy is contracting with Bolivia’s Primo Cano Martínez, in joint venture with the UK’s CDS Energy S.A., for natural gas exploration in the Gabino Mendoza bloc in the Chaco region of Paraguay. Gabino Mendoza includes the unexplored Independencia I Field where natural gas was found at a depth of 600 meters. However, Petrobras is reconsidering budgeted investments of US$850 million for the expansion of Gasbol, the natural gas pipeline that takes natural gas from Bolivia to São Paulo, and the construction of a petrochemical part in joint-venture partnership with Braskem and Spain’s Repsol/YPF.
Argentina has also been invited to participate in future natural gas projects as Bolivia seeks to re-establish its position as the center of the energy integration of the Southern Cone; after all, it has the second largest natural gas reserves in Latin America, second only to Venezuela. But, as noted above, Camisea, in Perú, might replace Vertiente I, in Bolivia, if Bolivian uncertainties persist.
Colombia: I have been harshly criticized for my expressed disapproval of some of the policies of the Uribe Administration in its quest for peace at any cost. I have never denied that President Uribe has brought some measure of prosperity and stability to Colombia. But some of the provisions of the recently approve Justice and Peace Law and the lenient treatment it bestows upon the demobilized paramilitaries of the Auto-Defensas Unidas de Colombia (AUC) concern me. Letting brutal criminals off the hook, or with, at best, a slap on the wrist, gives the message that crime pays, and pays big, in Colombia. This is not a good sign in a country known for its legalistic streak and its notable lack of an incorruptible, impartial judiciary that supports the rule of law. Colombia needs peace and stability, but not at the price of leniency or outright pardon of high crimes, such as massacres, violations, torture, murder, drug trafficking and money laundering, no matter what spin is given to the government’s decisions and actions. These are the same crimes for which the drug cartels of Medellin and Cali were prosecuted and eliminated, without leniency, mercy, or pardon; some of their members served prison sentences or were extradited to the USA. Therefore, to prefer one group against another is an insult to the millions of law abiding Colombian citizens who have lived years under threat, terror, and violence, but have kept the country afloat with their hard, honest work, blood, sweat, and tears. They deserve better than the Justice and Peace Law.
Despite a decrease in industrial production of 1% during the first quarter of 2005, commercial and residential construction increased by 11%, followed by mining with an increase of 6%. Exports grew by 32% during the same period.
Chile: The EU will begin a review of its Free Trade Agreement with Chile in October 2005. At the center of the review are the environmentalists’ claims against the cellulose plant, Valdivia, operated by Celulosa Arauco. The EU-Chile FTA went into effect on 1 January 2003. Chilean exports to the EU have increased by 50% since; cellulose exports account for US$425 million, or 35% of all Chilean exports.
Delegates from the EU will conduct on-site evaluations of environmental and social compliance in Chile. The results will determine whether a full revision of the environmental chapters of the treaty is warranted.
Ecuador: Speaking of energy and the proposed integration of South America, Ecuador and Venezuela are discussing bilateral energy projects, not yet defined. The Consejo del Sistema Económico Latinoamericano (CONSELA, Council of the Latin American Economic System) is sponsoring the preliminary discussions. The Council is the governing body of CONSELA, which brings together 26 Latin American and Caribbean countries that seek common strategies to solve common needs or problems in the region.
Tensions between Colombia and Ecuador continue due to alleged guerrilla activities in Colombia by blocs of the FARC (Fuerzas Armadas Revolucionarias de Colombia) that moved their base of operations to the Ecuadorian border region.
I have frequently lectured and written about the displacement of the “Colombian Problem” into Colombia’s neighboring countries. Ecuador can ill afford illicit crops, drug production and commercialization, and guerrilla activity in some of its poorest areas, just across the border from Colombia. Therefore, if Colombians are required to obtain visas to travel to Ecuador, that will be a minor inconvenience, considering the risks Colombia poses to Ecuador. If Colombia is any example, it shows that fumigation of illegal plantings, military operations, and intelligence cooperation are not the solution to guerrilla warfare and political upheaval. Ecuador has a precarious political system and does not have the economic resilience of Colombia. Therefore, if Colombia does not want trouble “across de river, it needs to proposed to Ecuador a more comprehensive and feasible plan to solve border problems than to complain about the proposed visa requirement for Colombians traveling to Ecuador and insist that fumigation on its side of the border is what needs to be done. The wind is displacing the collateral damage of fumigation from Colombia to Ecuador. President Uribe is a powerful man with a solid majority approval in Colombia, and the unquestioning backing of the Bush Administration, but neither he nor his government can change the course of the wind – only Moses did that, and that was to water.
Brazil: Three hundred representatives of petrochemical, manufacturing, and agricultural companies met in Bogotá (Colombia) to strengthen commercial ties between the two countries. In 2004 Colombia exported US$137 million to Brazil and imported US$970 million. The infrastructure project of Puerto Asis-Mocoa will receive Brazilian investment of U$250 million. Petrobras is Brazil’s major investor in Colombia, followed by Grupo Sinergy, owner of Avianca, which invested US$140 million in upgrading the airline.
Here is an example of why it is difficult for Colombia to compete in markets outside the USA where 80% of Colombian products enter duty free thanks to the Andean Trade Preferences and Drug Eradication Act (ATPDEA). Palm oil from Colombia is more expensive than the one Brazil imports from Malaysia, and it costs more to ship it from Colombia to Brazil than from Malaysia to Brazil.
According to the Agência de Promoção de Exportações (APEX, Agency for the Promotion of Exports), Jordan will host Brazil’s trade and business development exhibition, Brazil in the Reconstruction of Iraq, in September 2005. Fifty-four Brazilian companies sell in Iraq through representatives, totaling US$62 million in 2004. This is volume is not much when compared to the total US$95 billion exported from Brazil in the same period. However, it is considerable given the internal destruction of Iraq and the almost monopoly the USA has in its reconstruction. Brazil imports only oil from Iraq but exports processed foods, agricultural products, medical products and generic medicines, commercial construction components and machinery, electronics, shoes, water treatment equipment, and vehicles and related equipment.
Some of you may be worried about Brazil’s political scandals which have affected Lula’s government. I am, too. But I have not lost faith either in the country or in Lula. It was therefore reassuring to see the vote of support given by the International Monetary Fund (IMF) to the country’s economic management. In one of the few occasions when I agree with the Fund, it noted that “the economy was on solid ground and had given results beyond expectations.” Brazil has been through crises before. I believe it will come out of this stronger than before. If it does not, and I doubt it, then Latin America is in for a rough ride, for Brazil has been the most decisive factor in the region’s relative stability in the last three years. Unlike previous times when local economies collapsed when a president went out, six presidents have been forced to resign in the same period, but their country’s economies have kept on functioning along open market conditions. This is a major achievement and Brazil has been the leader in this hold-the-center together approach to political turmoil and change.
Hasta Luego y Buena Suerte. Até Log e Boa Sorte.
Maria Velez de Berliner, President
]]>Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
BREAKING NEWS – INTELSAT TO LAUNCH NEW HYBRID SATELLITE (Written with the invaluable assistance of Ms. Jodi Kats, Manager, Corporate Communications, Intelsat)
We are indebted to Mr. Erwin Mercado, Vice President of Latin America Sales, for this breaking news. Intelsat Americas™- 8 ( IA-8), the company’s newest satellite, will be launched at the end of June 2005. The satellite will provide prime landmass coverage over North, Central, South America and the Caribbean. The spacecraft will begin serving customers during the third quarter of this year. A number of key Intelsat customers have already pre-booked capacity on IA-8.
The satellite is the first in Intelsat history to provide two zone beams specifically designed to provide complete and powerful Ku-band zonal coverage over Latin America. Additionally, it is the first Intelsat satellite to offer Ka-band coverage, which is ideal to support high-bandwidth applications and business growth in the Americas. IA-8 also features C-, Ku- and Ka-band transponders, allowing for increased power and flexibility for all applications, including those used by broadcasters, corporations, service providers, and government customers.
It will be positioned at 89°W and will carry C-, Ku- and Ka-band capacity. The Ku-band will have 24 x 35 MHz transponders and the C-band will have 2 x 72MHz. This powerful capacity will enhance Intelsat’s opportunity to competitively offer customers GlobalConnex Broad band and other applications.
In the view of Latin Trade Solutions, this presents a significant challenge to Brazil’s Star One and its C1 to be launched in 2006. The C1 will have 16 transponders in the Ku-band.
Because price competition in Latin America is fierce, Intelsat has also launched a well-orchestrated promotional campaign “aimed at hundreds of current and potential users.” Those interested in further information about the IA-8 may contact Ms. Ursula Salinas at 001-202-944-7025, or communicate directly with Intelsat at its general Latin America Sales email, sales.lac@intelsat.com.
Intelsat also played a significant role in helping ameliorate the effects of the chaotic situation in Bolivia during the week of June 6-10. While La Paz was shut down by strikes and communications with the outside world became difficult, “Intelsat increased capacity and its users were then able to communicate with Argentina and other countries,” according to Mercado.
The Region: For the last three years I have been cautioning our clients about the growth and gathering strength of the indigenous movements in Latin America. I want our clients to keep close watch on the activities of these groups so they can best protect themselves from drastic changes in rules and regulations and in the enforcement of contracts. What has happened in Bolivia is an example of what I have been saying. Spain’s Repsol YPF, Brazil’s Petrobras, and the UK’s BP are now faced with either the peremptory cancellation of contracts, or with contracts changed midstream to their disadvantage and, in the long-run, I am afraid, to the overall disadvantage of Bolivia.
From Argentina to Ecuador, public demonstrations and work stoppages have removed nine presidents in the last three years.
Bolivia: For the past three weeks, all eyes have been focused on Bolivia and the most recent change in government. The new Interim President, Chief Justice Eduardo Rodríguez Veltze, comes to power only 20 months after now-deposed President Mesa took over. Mesa assumed the presidency after President Sánchez de Lozada was ousted after one year in office by the same coalition of peasants and opposition leaders who paralyzed the country clamoring for the nationalization of the country’s known hydrocarbon reserves of 52 billion mt³ of natural gas and of its oil reserves.
Passed by Congress, but not signed into law by President Mesa, Hydrocarbons Law 3058, which changed Hydrocarbons Law 1689, lies at the core of the current debate. Law 3058 will certainly be the determining factor in: who gets elected president in the general elections the Interim President must call within the coming six months; who will be elected to congress and to head departmental and municipal offices; whether the richest departments will become autonomous; and, how Bolivia will regulate investment in the exploration and commercialization of its natural resource and in the provision of basic services, such as water and sewage, electricity, cooking gas, gasoline, and telephony.
Although many Bolivians and a few analysts dislike foreign investment in their natural resources, the fact is that foreign energy companies have been in large part responsible for creating the wealth that made Bolivia a model of economic development a few years back. Repsol YPF Bolivia (YPFB), Petrobras, British Petroleum and others have pumped millions of dollars into the Bolivian economy. It is not the fault of the companies if successive Bolivian governments have not distributed the revenues equitably into the development of badly needed infrastructure and human capital.
Foreign energy companies that entered the country in good faith, are now required to operate under a New Hydrocarbons Law that nullifies 30-and 40-year Contratos de Riesgo Compartido (Shared-Risk Contracts). Repsol YPF is about to file an international claim against the Bolivian State for breach of duly-executed contracts entered into with the Bolivian government under Hydrocarbons Law 1686. Let’s not forget that Bolivia was also sued by Bechtel over water-usage rate increases by its Bolivian subsidiary Aguas del Tunari.
The oil and gas companies have invested considerable capital in Bolivia, have helped create wealthy communities, such as Santa Cruz de la Sierra, and have contributed their share to Bolivia’s GDP. Petrobras alone contributes 20% of GDP.
Another contract to be tested under the current law, which still requires a Decreto Supremo (Executive Order) to go into full effect, is the 30-year contract between Repsol YPFB and Petrobras. The existing contract is for dollars for million BTUs, but the new law eliminates BTUs and bases the price of natural gas on a tax structure assigned it by the new law, which raises total taxes to 50% for foreign companies that operate in the country’s natural gas and oil industry. Any taxpayer, corporate or individual, would protest if its taxes were increased from 18% to 50% by the stroke of the pen.
The Interim Government is under pressure to clarify and implement immediately the provisions of the New Hydrocarbons Law to avert damage to the investment climate. But the damage has been done, for nationalization of the gas and oil industry seems to be around the corner. Protesters who have removed three presidents over this issue are unlikely to stop until it becomes official policy.
Bolivia’s New Hydrocarbons Law is forcing Brazil, Argentina, and Chile to put into practice Plan B to substitute Bolivian gas with other suppliers and alternative fuels. Who seems to emerge as the major possible winner? Peru! Chile is proposing to swap Chilean electricity for Peruvian gas. While Bolivians are mired trying to reverse the globalization of energy resources, Peru is negotiating with Chile, Argentina, Brazil, and Paraguay to build a 1,200 km pipeline from the Camisea natural gas fields to Chile’s Region II. Once in Chile, Peruvian gas will be shipped to the other countries that will form the Mercosur energy ring. Peru estimates it could receive up to US$1 billion a month from the project. The project will have a total investment of US$1.5 billion and will export 30 to 35 million mt³ daily. The first phase will connect Argentina and Chile. It is worth noting that Repsol YPF announced the cancellation of a US$2 billion investment in Bolivia. Financing for the Peru-Mercosur project will likely come from the Inter-American Development Bank (IDB) and might include the proposed US$300 million for a Brazilian gas pipeline between Uruguaiana (Uruguay) and Porto Alegre (Brazil). Brazil is also moving up the development of the offshore natural gas Mexilhão Field, on the Santos Basin. Mexilhão has estimated reserves of 419,000 million ft³.
Although Brazil has been more than circumspect about the Bolivian crisis, the city of São Paulo imports 24 million mt³ per day from Bolivia through a 3,200 km long pipeline. Should damage be inflicted upon the pipeline to disrupt its flow, the damage to the Brazil economy will be substantial. As it is, Brazil’s Plan B is not without significant costs. It calls for shutting down thermoelectric plants operated by Bolivian natural gas and the use of alternative sources of energy, such as combustible oil, to run refineries and large-scale industrial operations. But Brazil is a direct oil importer and does not have sufficient alternative fuels that will compensate for the absence of, or significant reduction in, gas imports from Bolivia.
The Brazilian consumer is beginning to feel the Bolivian pinch. According to Jornal do Brasil, the Agência Nacional do Petróleo (ANP) indicated that vehicular natural gas (NGV) at the pump increased by 1.56% between 5-11 June 2005 throughout Brazil, and by 3.5% in the city of São Paulo.
Significant energy costs will have a deleterious effect upon the export sector, which has been the driver of the Brazilian recovery of the last two years. This is why a recent report from the Confederação Nacional de Industrias (CNI) is cause for alarm. Should the Real remain at an exchange rate of R$2.70 to the dollar for the rest of the year, exports will lag. Despite an average increase of 13% in exports in June 2005 over June 2004, 41% of CNI’s members plan to reduce export-related investments, and 30% will reduce foreign sales, focusing instead on the internal market.
Yes, the Bolivian peasants and those with little political power until now have every right to protest against governments that have ignored them and their basic needs for years. But their push for nationalization seems to be misguided. By excluding foreign investors, or by enacting confiscatory taxes on hydrocarbons exploration and commercialization, they might just end up with the second largest reserves of natural gas under ground, or with diminished contribution to GDP, while their neighbor reaps the benefits of an investment climate opened to foreigners and Bolivian neighbors in South America.
Brazil, Argentina, Venezuela: The resignation on 16 June of Jose Dirceu from the government is not good news for Brazil’s President, Luis Inâcio Lula da Silva (Lula), although it opens the way for a much-announced, but never implemented, change in Lula’s inner circle. Dirceu, Ministry of Casa Civil was, along with Finance Minister Antônio Polocci, the architect of Lula’s political stability and economic orthodoxy. As we go to press, who will replace him and what impact the replacement will have on the general stability of Brazil remain to be seen.
In the meantime, much ink was spent on the alleged disagreements between presidents Néstor Kirchner (Argentina) and Lula (Brazil) last month. However, both countries are working on how to ameliorate the industrial and commercial disparities between them. To this effect, the creation of a South American Bank, proposed by Venezuela’s Hugo Chávez, was postponed. At a recent meeting, Argentina’s Finance Minister, Roberto Lavagna, suggested the strengthening of current financing mechanisms rather than “inventing new ones.” Given that Brazil has the world’s second largest development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), it might be useful to have BNDES, with its considerable expertise and financing capacity, fund the construction of infrastructure and large-scale industrial projects the South American Bank was intended to fund. This is particularly pressing as Brazil and Chile, direct importers of energy, must search for alternative fuels and reliable supply sources. Chile’s economic performance, which depends on Argentina’s oil and natural gas, would be weakened should Argentina require a decrease in exports to satisfy internal demand.
Central America – Costa Rica: While Central America (excluding Panama and Haiti) and the Dominican Republic wait for the ratification of the Central American Free Trade Agreement (CAFTA-DR) by the US Senate in a week or so, Costa Rica, which opposes CAFTA, is working feverishly to attract a different type of investment: The Canal Interoceánico de Nicaragua (CIN). Having gone nowhere through the Nicaraguan approval process and political infighting, CIN’s US investors are looking for more propitious territory. Costa Rica’s Ministry of Foreign Trade (COMEX) will consider the viability of the project in northern Costa Rica. CIN represents an estimated 80,000 jobs and US$2.5 billion investment.
Why Costa Rica? This lovely, small, Central American country offers a stark contrast to Bolivia and Nicaragua, which is worth noting. In this case, Costa Rica offers more than a geographic location similar to that of Nicaragua. Costa Rica has used the significant contributions made to the country by foreign investors, such as Intel, to increase the value of its human capital through education. It has a highly competent, technically trained, dedicated labor force; it enforces contracts; it has stable politics within a democratic framework; it is not saddled with the expense, corruption, and intrigues that bedevil Latin American military and police forces; and most of its population is fully bilingual, Spanish/English. In addition, it is a 2.5-hour flight away from the USA. Costa Rica’s commendable and highly successful protection of its environment and the often obscure land-ownership rights may become the only obstacles to a negotiation with CIN. But Costa Rica has demonstrated that obstacles are challenges that can be overcome through win-win relationships.
Note: On 15 June the US Senate Finance Committee informally approved CAFTA-DR by an 11-9 vote. CAFTA may still fail to garner approval in the full Senate, but I doubt it will be defeated.
Colombia: It seems the Andean Free Trade Agreement (AFTA) being negotiated by Colombia, Peru and Ecuador with the USA, is in trouble in Colombia. Again, agriculture has reared its ugly head. Under ATPDEA (Andean Trade Preferences and Drug Eradication Act), which expires on 31 December 2005, most exports from Colombia to the USA enter tariff free or at reduced rates. AFTA would replace ATPDEA. In response to the alleged unwillingness of the USA negotiators to consider reasonable proposals made by Colombia, the Sociedad de Agricultores de Colombia (SAC, Agricultural Association of Colombia) has threatened to withdraw from the talks and not participate in the next round of talks in Guayaquil, Ecuador. If Colombia fails to reach an agreement with the USA, then it is possible Ecuador and Peru will pursue negotiations for bilateral agreements with the USA. But agriculture will still be a sticking point in those negotiations, should they take place.
To put this in perspective, agriculture accounts for 14% of GDP in Colombia, 12% in Ecuador, and 16% in Peru. And while less than 1% of the population of the USA works in agriculture, most of them employed by or contracted for multinational agribusiness, agriculture employs 3.3 million in Ecuador, 11 million in Colombia, and 9.1 million in Peru. Most of them are subsistence producers and small exporters.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Tel: 001-703-212-8586
For further insight into these situations and how they affect your business opportunities, please contact us.
]]>Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
I wish to extend our sincere thanks and appreciation to our clients, associates, and friends in Latin America and in the USA for their contribution to the continued growth of Latin Trade Solutions in 2004. We could have not grown and developed the reputation we have for integrity, team work, service, and profitability without each of you and your confidence and trust in us. May we have the privilege of continuing to work with you in 2005 and beyond.
We wish each of you a Safe and Happy Holiday Season and a Prosperous 2005.
As we look to 2005, we see three issues that will have a profound effect on businesses, large and small, in Latin America:
On 1 December 2004, Colombia’s Congress approved the Constitutional Amendment that will allow President Alvaro Uribe Velez to be reelected to a continuous, four-year, second term in 2006. Barring a successful assassination attempt against President Uribe (reportedly he has survived seventeen such attempts) or God’s designs on his life, reelection means Colombia will have stable political and moral leadership until 2010.
Uribe’s reelection also means Colombia will have its Andean Free Trade Agreement (with Ecuador and Perú) with the USA by the middle of 2005. The Andean Free Trade Agreement will give pretty much a free hand to USA companies that operate, or wish to operate, in Colombia, Perú, and Ecuador. We are strong believers in free trade but, in this case, we must also recognize the unequal negotiating power of the Andean nations with the USA. In the unlikely event that Perú and Ecuador pull out of the negotiations, particularly on issues such as agricultural protections given by the USA to its farmers, protection of intellectual property, and the unrestricted opening of the service and financial sectors to USA interests, Colombia will have a bilateral free trade agreement with the USA.
Despite the best efforts of Colombian, Peruvian and Ecuadorian negotiators, the free trade agreement will usher in profound economic adjustments that have a high probability of not being well received by large groups of workers, producers, and farmers in these countries. If this is the situation, we might see increased social unrest in Perú and Ecuador. In addition, the likelihood of the continued displacement of Colombian peasants (some say guerrilla fighters) into the northern provinces of Ecuador, the Orinoco Basin in Venezuela, and the Brazilian Amazonian Basin will exacerbate border tensions among these three countries and issues of international security.
Despite President Uribe’s successes in negotiating cease fire and demobilization agreements with different irregular forces, the displacement of the “Colombian Problem” to neighboring countries will remain an area of concern to us for the political and economic instability that it is likely to cause.
However, turmoil on the borders translates into opportunities for those who wish to place security, surveillance, identification, egress and ingress, infrastructure protection, and people and cargo monitoring products and services in the region. It may not bode so well for those who need a stable and dependable environment for the conduct of their business or those who need to depend on the security of transportation routes, such as oil exploration and commercialization companies.
Those who follow a long-term investment strategy in the Andes need to ask: What will Colombia do in 2008? Amend the Constitution again so that Uribe may stay for a third term, or amend it to go back to one four-year term so a candidate with neither the moral authority nor the approval rating of President Uribe can’t be reelected? Also to consider is that second terms in Latin America have not been the most effective, which might happen to President Uribe, too.
On 8 December 2004, twelve countries (Bolivia, Brazil, Colombia, Chile, Guyana, Surinam, Venezuela, Perú, Ecuador, Argentina, Uruguay, and Paraguay, with Panamá and México as observers) signed in Cusco (Perú) the constitution that creates the CSN, fashioned after the European Union (EU). The creation of CSN is not surprising. Its precursor is the free trade agreement signed in October 2004 between Mercosur (the customs union created by Brazil, Argentina, Uruguay, and Paraguay, with Bolivia and Perú as associate members) and the Comunidad Andina de Naciones (CAN, Community of Andean Nations).
CSN’s raison d’etre is to work toward and achieve the effective political, diplomatic, and economic integration of South America. It is not clear now which legal structure, or organisms, will be created to accomplish this. Nor is it clear in the Declaración de Cusco (Cuzco Declaration) how the CSN will reinforce, or compete with, the activities of CAN, formed by Colombia, Ecuador, Perú, Bolivia, and Venezuela. Given the excellent work done by CAN in integration, trade policy, conflict resolution, and funding of infrastructure and social projects, it would be detrimental if the CSN becomes a duplicate of CAN or if it hinders CAN’s performance. The ideal situation would be for the CSN to learn from CAN, strengthen its influence, and expand on its range of activities.
The first order of business for CSN is to combat poverty, the elimination of hunger, the creation of employment above minimum wage or informality for the majority, and broad access to health care and education as necessary tools to create sustainable development. If President Lula’s faltering Zero Fome (Zero Hunger) program is a harbinger of the monumental task ahead for CNS’s governments, then CSN has a long way to go.
Here is an example of how CSN can stumble onto CAN. In October, CAN’s Consejo Asesor de Ministros de Trabajo de la Comunidad Andina de Naciones (Council of Labor Ministers of the Community of Andean Nations) agreed to enact economic policies that lead to the creation of employment in the region. The ministers seemed to be in agreement that without stable, living wages and a technically educated labor force, the Andean countries can’t be effective players in a globalized economy. How will this agenda be helped or curtailed by CSN’s similar objective? And along these lines, will CSN replace the Asociación Latinoamericana de Integración (ALADI, Latin American Integration Association) which regulates intraregional trade? And, how would the USA view the CSN? How will it influence, or not influence, the current negotiations for bilateral trade agreements of some CSN members with the USA? Will the CSN have any incidence in the free trade agreement negotiations between the USA and Colombia, Ecuador, and Perú?
We believe that cooperation between, or integration of, CAN and CSN becomes more important since CSN aspires to regional unity through infrastructure, energy, and telecommunications. Brazil’s president, Luiz Inâcio Lula da Silva, assumed the cost of the first infrastructure project under CSN: the road that will connect Brazil and Perú.
But the road ahead for CSN may not be rosy. There are substantial and substantive differences among the signatories in internal economic policy and in foreign trade. Also, these are countries at very different levels of economic development, political maturity, and social integration of large indigenous groups into the general society. Populist movements, some say obstructionist groups, with very divergent international trade interests, and with the ability to create relative high levels of political instability, are gaining considerable political clout in the region, with the exception of Chile and Brazil. For example, the capture in Bolivia of about 25% of the vote by Evo Marales’ Movement Toward Socialism (MAS) on the municipal elections on 5 December means that groups outside the traditional parties might have a greater say in the future of CSN than the countries’ presidents might have. As it is, MAS has the majority in Bolivia’s Congress and its leader, Morales, might be the next president of Bolivia.
Despite our reservations, CNS shows that South America is willing to put aside its historical intraregional antagonisms and petty fights to present what appears to be a cohesive front, albeit in its infancy, to the rest of the world.
Those doing business in Bolivia, Perú, Colombia, Ecuador, and Venezuela would be wise to follow the developments of the CSN closely. What happens in the Andes, particularly in Bolivia, might be what determines the policy direction of this agreement, despite the good intentions and work of Brazil, its major proponent.
The first meeting of the presidents of CSN will be in Brazil at the beginning of 2005 and in Bolivia in 2006.
Undoubtedly, this is the business and economic issue that will have the most significance in 2005.
Latin Americans widely believe their region, with the exception of Colombia, the region’s strongest supporter of President Bush’s war on terror, is but an afterthought in the USA political and economic establishment. Therefore, they seem to be most appreciative of and responsive to the investments China is making in key sectors in the region.
After the closing of the APEC (Asia Pacific Economic Conference) meeting in Santiago, Chile, in November, China’s president, Hu Jintao, finished a massive trade mission to Brazil, Argentina, Chile, and Cuba by pledging to invest US$30 billion in the region in the coming ten years.
China is today the largest buyer of Chilean copper, and has become Brazil’s second largest trading partner. It is the largest importer of Brazilian iron ore, bauxite, and soybeans. China will invest US$20 billion upgrading Argentina’s freight railroad system and in oil and natural gas exploration. Investments in Cuba center on nickel exploration.
It seems China is attempting to turn Latin America into a dependable and reliable contributor to its importation of 7% of world oil, 31% of iron ore, 35% of aluminum, 27% of steel, and 40% of cement. Exports from Latin America to China increased by 72% in 2003, to a total of US$11 billion. But Chinese-Latin American trade does not consist of exports only. In June 2004, Brazil’s Companhia Vale do Rio Doce (VALE), the world’s largest miner of iron ore, signed an agreement with China’s Baosteel Shangai Group Corporation to build a US$2 billion, 3.7 million ton, flat-steel plant in Brazil. VALE has been operating in China for the last 10 years. Canada’s Noranda which owns the zinc and copper reserves of Peru’s Antamina and Doña Inés de Collahuasi, a copper mine in Chile, may end up in the hands of China’s Minemetals Corporation. Executives and labor leaders of Chile’s Compañía del Cobre (CODELCO) visited with executives of Minemetals in China to explore joint venture partnerships to obtain financing for the expansion and upgrade of CODELCO’s operations in Chile and the retooling and upgrade of Chilean sea ports.
Hong Kong Dredging Corporation (HHDC), a subsidiary of China’s Harbour Engineering Company, was awarded the contract for the expansion of Panama’s Balboa Port. HHDC is also working on the expansion of Ensenada Port, in México, and in similar projects in Colombia. And Chinese companies are likely to build Paso de Agua Negra to connect the north of Argentina with Chile.
Since telecommunications is the sector with the highest projected rate of growth, with Brazil the largest market, the agreement for the supply of routers and switches by Huawey to Spain’s Telefónica is very significant, given that Telefónica will use Chinese equipment in Brazil and Chile.
Given China’s 1.3 billion people, the country’s soil erosion problems, and the relocation of 300 million Chinese from farms to the cities, China’s appetite for food supplies is voracious. And Brazil has one of the world’s most advanced agribusinesses ready to meet China’s demand. Most of Brazil agribusiness trade with China is done now through large multinational corporations that act as intermediaries, buying agricultural products in Brazil and shipping them to China. However, this trend might be changing. Chinatex Cereal & Oil Im/Ex Corporation has set up shop in Rio Grande do Sul, Brazil’s largest producer of soy, and is buying directly from the growers. It is worth noting that workers in the soy farms in Rio Grande do Sul earn more and have better benefits than those who work in the IT industry.
While Bolivia debates whether to ship its natural gas through Peru or Chile, Shengali Oilfield International Exploit has signed joint venture exploration agreements with YPFB, Bolivia’s oil company, for the construction of refineries and thermoelectric plants. Shengali will contribute 49% of financing costs.
We can’t forget that México is Latin America’s platform for entry to the USA. It is estimated that about 200 Chinese companies bought or gained a controlling interest in Mexican companies in 2003. All these companies export products to the USA or to the European Union (EU). Because the EU has placed restrictions on some products imported from China, it would be easy for China to circumvent EU import regulations by shipping product from México and Chile, which have free trade agreements with the EU.
Those already doing business in Brazil, or interested in doing business there, would be wise to follow Chinese investments in Mercosur through Brazil. A good place to begin is with the Brazilian-Chinese Chamber of Commerce and Industry in São Paulo or the foreign trade office of the Chinese Embassy in Brasilia. Trust me, if China is not already competing with you in Brazil, it will do so in the near future. The question for USA companies is not to fear China in Latin America, but figure out how they can compete with, or join, China in the region.
And if you are concerned about China’s competition in Brazil and the rest of Latin America, Russia is not far behind. During a recent visit by President Putin to Brazil, Agência Nacional de Telecomunicações (ANATEL) and Russia’ Ministry of Information Technologies and Communications signed a technology cooperation and telecommunication agreement between the two countries.
Those interested in what gives China an advantage over the USA on how to do business in Latin America may find an answer in my article “Similitudes que Unen,” published by the Harvard Business Review América Latina and the Harvard Business Review Brasil in October 2003.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
Brazil: Petróleo Brasileiro (Petrobras) is reportedly planning to establish a joint-venture partnership with Norway’s Statoil to bid on exploration and production projects to be let by Petróleos de Venezuela (PdVSA) at year’s end. Petrobras and Statoil have joint-venture exploration agreements in Brazil and in Nigeria. Statoil gained six bids at the 6th Round of Bidding of the Agência Nacional do Petróleo (ANP). It also seems Petrobras is in negotiations with Shell Chile to buy the 360 gas stations Shell operates in Chile and the assets of Shell in Argentina and Brazil. Petrobras’s major rival in the bid appears to be Spain’s Repsol/YPF.
Petrobras, which operates in Venezuela through its Argentinean subsidiary, Petrobras Energía, also signed recently an oil and gas exploration agreement with Iran. Petrobras also bid in the USA for 37 exploration blocs in the Gulf of Mexico; winners will be notified by mid-September. Petrobras is looking at joint-venture partnerships to meet its boe (oil and gas production) objective of raising its foreign production from 270,000 to 600,000b/day by 2010.
A joint venture between Petrobras, Empresa Colombiana de Petróleo (ECOPETROL), and ExxonMobil will invest US$130 million in off-shore exploration in the Tayrona Bloc in the Colombian Caribbean. This joint venture is one of the first successes of the revised hydrocarbons policies of the Uribe Government which created the Agencia Nacional de Hidrocarburos (ANH) to make the energy sector more attractive to foreign investors. Unlike joint venture agreements of the past, when Colombia’s gains were low, this agreement will leave about 72% of revenue from Tayrona in Colombia.
Petrobras participated in the International Offshore Northern Seas Meeting in Norway where it showcased its excellent deep-water exploration technology and the diverse, top-notch services it can render to all sectors of the petroleum industry.
Petrobras’s foreign expansion efforts seem to have a powerful ally in President Lula. Lula is pursuing the energy integration of South America. To this effect, Brazil and Bolivia have entered into energy agreements in which Petrobras is a major player. The agreements focus on the creation of a natural-gas based energy pole with its epicenter in Bolivia’s Santa Cruz de la Sierra. Now here comes Chile which, according to Lula’s statements during his recent trip to the country, can expect shipments of natural gas from Brazil. A Brazilian source will help Chile counter gas shortages should Argentina decide to cut natural gas exports to Chile again. Chile almost faced an energy crisis when Argentina cut shipments 50% in May 2004.
Where will Brazil get the gas to export to Chile? Brazil is a net importer of natural gas, most of it from Bolivia and Argentina, although Brazil has proven reserves of natural gas of 219 bm³. Recent natural gas discoveries in Baixada Santista (Santos Basin) will increase reserves, but Brazil needs Bolivian gas for its own needs and to re-export to Chile. How interesting it would be if Bolivia ends up selling Its natural gas to Chile, which a majority of Bolivians oppose, through re-exports from Brazil. (Please see the section on Bolivia in this issue.)
Speaking of energy integration, bids were let out in Argentina for the construction of the Gasoducto del Nordeste (Northeast Gas Pipeline) which will unite Argentina, Bolivia, and Brazil. Construction will cost US$1 billion; the gasoducto will deliver 20 mm³/day to the region. (Please see the August 2004 issue of Regional Focus© on “Managing Political Risk in Latin America.©”)
As I look into the future of the oil and natural gas industries in Latin America, I feel comfortable predicting that in less than 10 years there will be three major endogenous oil companies operating in South America: Repsol/YPF, Petrobras, and PdVSA. Foreign companies operating in the region will do so through joint-venture partnerships with these three.
As expected by the markets, Banco Central do Brazil (BC) maintained its SELIC (overnight interest rate) of 16%, the rate BC has kept for the last four months. Depending on the price of oil in world markets and the pass-through of it to Petrobras’ consumers, the BC may keep the same SELIC rate through December, or increase it if inflationary pressures rise. As in previous months, the BC’s decision met with the disapproval of powerful private industry leaders, such as the Federation of Industries of São Paulo (FISP) (in Portuguese) and labor organizations.
Companhia Vale do Rio Doce (CVRD) continues its international expansion. It signed an agreement with Corus, one of Europe’s largest steel makers, to supply 30,000 tons/year of iron ore. This type of contract marks a departure from the “spot” contracts followed by CVRD before. Corus will be served by CVRD’s European subsidiaries: France’s Rio Doce Manganèse Europe (RDME), and Norway’s Rio Doce Manganèse Norway (RDMN).
Chile: With the price of copper at over US$1.27/pound, foreign direct investment (FDI) increasing, and higher labor utilization, Chile’s economy is projected to grow between 4.1% and 5% in 2005. The only hiccup could be an energy crisis if Chile’s demand for natural gas can’t be met by dependable suppliers or if the cost of natural gas were to increase dramatically. Chile’s economic management is predicated on the government maintaining a structural surplus of 1% of GDP. FDI showed an increase of 6% in the first semester of 2004; it is projected to grow by 7-9% in 2005. Projections for productivity improvements are from .06% in 2004 to 1.3% in 2005.
Venezuela: There is a time in life when fights or disagreements need to end. The parties involved come to realize that the greater common good is more important than personalized interests. This time has arrived in Venezuela. It is difficult to deny that President Chávez used oil money shrewdly to capture some segments of the popular vote in the recent Revocatory Referendum. But it is equally difficult to ignore that Venezuela’s opposition missed a great opportunity to offer a viable alternative to Chávez. Who is right or wrong is not the issue. The issue is that Venezuela needs stability and cohesion to reestablish a sure economic footing and prepare for presidential elections in 2006. Chavistas and oppositionists need to accept that Venezuela can’t continue to depend on high prices of oil alone for its future.
The country needs education, improvements in its skills pool, and diversification of the economy. Its current growth of 11.9% is fueled by oil and supported by having come up from a massive economic decline. If Venezuela does not take care of its problems by using oil money to reinvest in a broad section of human capital, disunity, and contention will continue to the detriment of all, including PdVSA, the country’s economic engine. And Colombia may turn to be the winner.
Despite the ravages of drug trafficking and guerrilla warfare, Colombia’s economy is more diverse than Venezuela’s. Colombia is, therefore, better equipped than Venezuela is at this time to meet the rising demand created in Venezuela by oil revenues. Exports from Colombia to Venezuela (Colombia’s second largest trading partner) will increase by 81% in 2004, although a projected devaluation of 15% of the Bolívar, Venezuela’s currency, will make Colombian imports more expensive. Colombian exports to Venezuela thus far total US$1.2 billion. Textiles, apparel, steel, metal products, and autos are the major exports.
Textiles and apparel from Colombia or anywhere else will hit a big snag as textile quotas worldwide come to an end on 1 January 2005. The elimination of quotas poses a risk to incomes in many developing countries, including Colombia. Despite calls for a special session of the World Trade Organization (WTO) to address this issue, the WTO has declined. Instead, the textile question will surely be on the agenda as the WTO’s Trade in Goods Council meets on 1 October 2004. (Please see the August 2004 issue of Regional Focus© on “Managing Political Risk in Latin America.©”)
México: It seems the maquila industry (manufacture of goods to be re-exported duty free) is recovering from the downturn caused by demand decline in the USA and by the low-wage manufacturing of the same goods in China. The new, restructured maquilas have been forced to deliver efficiency, higher engineering and manufacturing skills, and faster turnaround. This is good for México as a whole because it means the skills pool is getting more sophisticated and better able to cope with foreign competition. Higher value-added maquila production and employment will certainly be a key component in Mexico’s projected growth of 4% in 2004, the highest since 2000. But if the maquila industry is to build resilience against downturns in the USA economy and Chinese competition, it will need to introduce technology advances that create product diversification.
If you have technology that can help increase productivity in the electronics and medical supplies industries, I suggest you contact the Tijuana Maquiladora Association. And don’t be thrown off by the commonly-held derogatory stereotypes of Tijuana. Tijuana’s maquiladora parks are booming and the government expects investments of about US$300 million in them this year. Be ware, Japanese multinationals will be your clients, or your competitors; they are the predominant players in Tijuana’s maquila sector.
Given the experience of México with the North American Free Trade Agreement (NAFTA), it is well positioned to suggest to Colombia, Ecuador, and Perú how to negotiate a “good” Andean Free Trade Agreement (AFTA) with the USA. Although it can’t be denied that México gained a lot, US$41 billion positive trade balance with the USA in 2004, some Mexican sectors were adversely affected by NAFTA, such as basic agriculture, small business, and research and development. NAFTA also exacerbated the economic development differences between some regions in México, favoring economic development in the areas that border the USA, but leaving behind those that do not.
At a recent meeting of the G-3 (México, Colombia, and Venezuela) in Bogotá, Mexico’s foreign minister, Luis Ernesto Derbez, advised Colombia to emphasize the need to prepare its PYMES (small and medium size companies) to compete with imports, enter export markets, or become an integral part of the value-added chain that will help larger companies benefit from the free trade agreement Colombia, Ecuador, and Perú are negotiating with the USA.
In the case of agriculture which has been a sore point between México and the USA under NAFTA, Derbez suggested a thorough evaluation of how Perú, Ecuador, and Colombia, each with large agricultural sectors, can protect this industry and its related activities against the protections the USA grants this sector at home. Neither Andean country can withstand the advantages USA agribusiness enjoys in terms of subsidies and tariff protections given it by the USA Government. México knows this well: NAFTA practically destroyed small agricultural producers and favored USA agribusiness investments in Mexico; the majority of their production is for export to the USA.
To prevent the uneven regional development that NAFTA brought to México, Perú, Ecuador, and Colombia will have to undertake massive infrastructure projects to make products from the rural areas accessible to export markets. The terrain in each country will prove a daunting challenge as many intra-country regions are better accessed by small aircraft than by roads – and air freight is very costly. This presents an excellent opportunity for Brazil’s investments in civil engineering projects in the Andes and for its continued leadership in the regional integration of South America, something President Lula is trying to achieve.
One thing Ecuador, Perú and Colombia can’t afford is to do what Mexico did under NAFTA: depend on foreign technology and supply cheap labor. The Andean countries must invest some of the projected benefits of the free trade agreement in technical education so they can supply high-quality skills that will enhance their value-added chain. Maquilas, in the Mexican style of the 1980s and 1990s, will hinder rather than advance the economic development the Andean countries seek to gain with the free trade agreement with the USA.
The free trade agreement between the G3 reached its 10th anniversary. The forthcoming meeting of the G3 FTA Administrative Commission will consider the expansion of the G3 to incorporate the Caribbean nations, the continued emphasis on the full implementation of the Puebla-Panama Project (PPP) of the Inter-American Development Bank (IDB), and the energy interconnection of the region under the South American Regional Infrastructure Integration (IIRSA) (in Spanish). PPP is the project envisioned by Mexico’s President Fox and funded by the IDB that will integrate Puebla and Panama into a common economic and energy-sufficient region. (Please see the August 2004 issue of Regional Focus© on “Managing Political Risk in Latin America.©”)
As agreed in the 1994 agreement that created the G3, the opening of the automotive sector will be gradual up to 2007. Mexico will end all automotive tariffs against Venezuelan and Colombian automotive sector products in 2007; Colombia and Venezuela will do the same in 2010. It is interesting to note that 7% of all Colombian exports to go México.
European Union: Further proof that we live an interrelated world is the quandary in which the EU finds itself today. Little did it think when it granted special tariff protections to Colombia, Ecuador, Perú, Bolivia, and Venezuela that a claim brought against it by India before the World Trade Organization (WTO) could throw into disarray the EU’s Preferential Tariffs System (PTS). The PTS grants zero-tariff status to industrial and some agricultural products from the Andes, Central America, and some African nations. Andean and Central American representatives will meet with the EU in Brussels in the second week of September to resolve the issue. A new PTS will be introduced in 1 January 2006 if there is no agreement. The EU has free trade agreements with México and Chile and is negotiating one with Mercosur (Brazil, Argentina, Paraguay, and Uruguay, with Chile, Bolivia, and Perú as associate members).
The time may have come for the Andean Region to propose negotiations for a free trade agreement with the EU to run parallel with the current negotiations by Colombia, Perú, and Ecuador for the US-Andean Free Trade Agreement (AFTA). Thinking of it, it might be possible for these countries to negotiate with the USA for a fairer agreement if negotiations with the EU could be used as a counterbalance. The significant asymmetries between the USA and the Andean countries make level playing field negotiations rather difficult.
Ecuador: Speaking of regional agreements, President Lula formally invited Ecuador to join Mercosur as a preferential member. This invitation is another step in Lula’s efforts to create a Community of South American Nations. Petrobras announced during Lula’s visit that it will invest US$ 130 million in oil exploration in Ecuador. Brazil may also finance the construction of improvements to the road that connects Quito and Guayaquil. Financing would likely be through Brazil’s Banco de Desenvolvimento Econômico e Social (BNDES) which is committed to finance a large part of the road integration of South America. BNDES is the world’s second largest development bank; the World Bank (WB) is the first.
Several times in Notice This© and Regional Focus© we have addressed the issue of graft, infringement of intellectual property rights, and the lack of fair enforcement of contracts as a major drawback to the economic growth and stability of Latin America. Those actions diminish confidence in the market and one’s partners or associates. Latin America needs Foreign Direct Investment (FDI) as well as endogenous investment to prosper, but neither locals nor foreigners can be expected to invest with confidence if “vivos” (smart alecks) can get away with dishonest conduct. El Comercio reported this week that, in Ecuador, Andinatel and Pacifictel, telephone operators, have been plagued by “bypass” lines (illegal telephone connections). El Comercio reports that Pacifictel alone has lost US$60 million through these illegal hookups in 2004.
Think of this for a moment: How about if the ingenuity and technical ability of the “bypassers” were applied to legal activities? Both the bypassers and Ecuador will be better for it. Here comes an opportunity to “go legal.” Brazil and Ecuador’s Conatel this week signed a Memorandum Cooperation on Telecommunications. The cooperation means that Brazil’s Agência Nacional de Telecomunicações (ANATEL) will help modernize Pacifictel and Andinatel and will share data with them. BNDES will finance the modernization of Pacifictel and Andinatel. .
Colombia, Ecuador and Perú: In my public presentations on how to do business internationally, profitably and safely, and in client consultations, I have often said that free trade agreements do not mean “free for all.” Here come the free trade negotiations between Colombia, Ecuador, and Peru with the US. Given the economic disparities between the parties, few would claim the Andean countries have the negotiating clout to strike a fair deal, particularly in key sectors such as services, one of the sticking points in the current negotiations. Colombia, Ecuador and Perú want to establish a limited number of visas for U.S. professionals, but the US is less than “simpático” to their request. When Chile tried to do the same in its own negotiations with the USA, the USA Congress refused the inclusion of this item in the talks, and Chile, with its stable, prosperous, and dependable economic performance, had more negotiating power than do Colombia, Ecuador, or Perú. Ecuador is a net importer of professional talent, particularly in biotechnology, health care, economics, and quality control, spending US$290 million a year in these services provided by foreigners, most of them USA nationals.
I believe the day is long in coming when the USA is going to agree by treaty to have its professional nationals submit to certification exams in Ecuador, Colombia, or Perú, as these countries would like. After all, many professionals from the Andes go to the USA or the EU to be certified, which gives them a considerable edge in employment opportunities in-country. (Please see the August 2004 issue of Regional Focus© on “Managing Political Risk in Latin America.©”)
Rules of origin will be on the table in the coming round of negotiations of the Andean Free Trade Agreement to be held on 6-10 September, possibly in the US. The fourth round will be held in Puerto Rico on 13-17 September.
The Region: One of the most interesting developments in Latin America is the efforts being made by President Lula to unite the nations in the region. Even if Lula’s efforts do not turn into his sought-after South-South (South America, India, and China) countervailing power to the USA, Lula has succeeded in helping the region accept that there might be more progress in cooperation and sharing of resources than in the straight competition and distrust that prevailed in the past.
Bolivia: Amid sentiments in Santa Cruz de la Sierra, Bolivia’s natural gas capital and the producer of 30% of GDP, to either secede or become autonomous, President Carlos Mesa signed the Executive Decree on the Execution and Fulfillment of the Referendum. The Referendum seeks to establish a fairer relationship between the people of Bolivia and the oil and natural gas companies that operate in Bolivia, most of them foreign direct investors. The referendum also prohibits the Bolivian Government from selling its natural gas to or through Chile. The Referendum places Bolivia on a tightrope: either to please a restive political opposition base, deal fairly or squarely with foreign companies that have invested heavily in the energy sector, or deal with the Referendum in such a way that it can sell its number one commodity and export to, or through, a dependable economy, Chile’s. How Bolivia does this will have an impact not only on the country but on the region. Investors, nationals or foreigners, need a stable contract environment. If political expediency can render contracts invalid, Bolivia and other countries that lack technology advances will be the losers, for they will drive investors away.
As I said in the case of Venezuela, there is a time when resentments, no matter how valid, need to be put aside. If the Peruvian port of Ilo is the one that offers the most efficient and economically profitably conditions for the export of Bolivian natural gas to México and the USA, then Ilo should be selected over Patillo in Chile. But if Chile is the one that offers the best conditions, then, it seems, Bolivians of all persuasions might be better off if they stop fighting the War of the Pacific with Chile (which took place 100 years ago) and get on with the pressing issues faced by the country in the 21st Century: roads; health care; education; housing; and development in the rural areas. All this could be financed by the export of energy and Bolivia would still have plenty of natural gas to satisfy its domestic needs. What we are talking about here is revenue for Bolivia’s energy producing regions of US$8 million per month over what they receive now. Besides, the exploration and commercialization companies are the ones that will foot the bill, estimated at US$5 billion, for the construction of the pipeline and port infrastructure needed to export gas. Don’t you think they have the right to a say in this situation?
Argentina: We have been hammering for the need in Latin America for a consistent, dependable economic policy that reassures local and foreign investors. The current economic success of Brazil is that it has held on to economic orthodoxy and has been able to restore credibility.
Therefore, it causes us concern to see Argentina postpone to the end of 2004 the third revision of a loan guarantee of US$13.3 billion granted by the International Monetary Fund (IMF) over the coming three years. I have not always approved of the policies of the IMF in the region, some of which I view as disastrous. But, be as it may, Argentina needs to resolve the default of about U$90 billion. The resolution of this issue is part of the negotiations with the IMF. Between the middle of September and the beginning of October, Economy Minister Roberto Lavagna is expected to present a proposal to repay 39% of the original value. Would bondholders be willing to accept this offer when they declined the previous one to make good on only 25%? Although I recognize that Argentina can’t pay the debt on the backs of the many Argentineans who lost all or most of their capital during the devaluation, I believe that governments must hold to their promises, for when they renege on them, the whole country suffers. The non-repayment of the full US$90 billion on which Argentina defaulted, will hang like a shadow on Argentina’s credibility for years to come, even if bondholders settle for less than they originally “loaned.”
Mercosur is planning to sign a free trade agreement with Morocco before April 2005. Mercosur signed a free trade agreement with Egypt on 7 July 2004, and is negotiating a similar agreement with the EU. The agreements with Morocco and Egypt are in advance of the first Arab-Latin American Summit to be held in Brazil in April 2005.
China: Due to China’s continued inroads into the Brazilian, Argentinean, Chilean, and Mexican economies, we will include in Notice This© and Regional Focus© developments in China that present good opportunities for and in Latin America.
According to China Daily, China has eliminated 4,800 development zones and suspended 4,150 projects to curtail speculation in landholdings. The development zones were returned to agricultural production. China is a net importer of US$14 billion in basic agricultural products. Brazil and Argentina are two of China’s biggest food suppliers.
Those intending to acquire agricultural lands for future industrial or commercial use in China would be wise to consult with the Ministry of Land and Resources, the National Development and Reform Commission, the Ministry of Construction, the Ministry of Supervision, and the Ministry of Land Use and Management about the status of the future disposition of the particular tract of land before closing the deal. The Department of Land Use and Management estimates “a cost of US$24 million to develop one square kilometer of industrial land.” Given this level of investment, it behooves one to make sure who will end up with the land.
The feasibility study for a free trade agreement between China and Chile, Australia, and New Zealand continues apace. China is finalizing trade agreements with ASEAN (Association of South East Asian Nations), SACU (Southern African Customs Unions), and GCC (Golf Countries Council). The ASEAN agreement will eliminate all tariffs in 2006.
If you have environmental technologies that help clean the steel industry, you will have excellent opportunities in China. The State Environmental Protection Administration will enforce tough antipollution laws in the Tangshan Region of Hebei Province. If you are a small company with limited resources, I suggest you consider entering China through a Hong Kong or Taiwanese representative company through which it might be easier for you to protect your intellectual property in China.
For those who still question the importance that China will have in the world economy in the future, consider this: A study by Switzerland’s UBS banking group projects that China and India will be the largest consumer markets by 2030. Their aggregate demand will be equal to five times that of the USA today. And, if you have good ear for languages, maybe it is time for you to study some Chinese – it may end up replacing English as the language of commerce in the Asia-Pacific Region some years ahead.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
The Andean Region: The two most significant economic and political issues of the last six weeks in the region were: the hydrocarbons referendum in Bolivia; and, the continued negotiations for a free trade agreement between Colombia, Perú, and Ecuador with the USA.
As negotiations continue, Ecuador, Perú and Colombia are under pressure by USA negotiators to give more than they would receive in the area of intellectual property protection and patents. The two areas in contention are: locally produced generics that would compete with imports from US companies; and, the patenting of biodiversity assets, endogenous remedies extracted from local flora and fauna also used in nontraditional, alternative medicine. Colombia, Perú, and Ecuador wish to retain full patent and copyright ownership of these local assets.
Concurrently with negotiations on issues related to the Andean countries’ access to the US market, the US is focusing on the areas most important to its companies: protection and extensions of intellectual property, treatment of foreign capital, and services. What remains to be seen is what type of agreement Colombia, Perú and Ecuador will get given that the negotiating power tilts in favor of the USA. And not to be overlooked is how this free trade agreement will affect the workings of the Comunidad Andina de Naciones (CAN, Community of Andean Nations) which includes Venezuela and Bolivia. So far there seems to be no interest in negotiating a CAN free trade agreement similar to the Central American Free Trade Agreement (CAFTA) which is up for a vote in the US Congress. Congress will likely not vote on CAFTA until after the US presidential election in November.
The summit of CAN presidents in Quito (Ecuador) in mid-July resulted in a commitment to preserve the integrity of CAN and to maintain it in negotiations with third parties. CAFTA, in effect, creates the legal integration of Central America.
Negotiation advisors have repeatedly suggested Colombia, Perú, and Ecuador learn from NAFTA – the Free Trade Area of the Americas that joined the USA, Canada, and México commercially to avoid some of NAFTA’s less-than-stellar results in some sectors, such as agriculture. The Andean countries have large agricultural sectors. Under NAFTA the employment gains in the maquila industry were offset by agriculture which lost 1.3 million jobs between 1993 and 2002. Maquilas, thanks to Mexico’s geographic proximity to the USA, created 900,000 jobs, but other manufacturing facilities lost 90,000. And since the end of 2002, the Mexican maquila industry has lost close to 600,000 jobs to cheaper operations in China. Therefore, if the Andean countries are looking in part to the maquila industry to give them the push NAFTA gave to México, they better look at China’s competition and what it is doing to Mexico, particularly when the Andes lacks Mexico’s geographic advantage with the USA.
Another concern over the trade agreement with the USA is the potential detrimental effect that it might have on the PYMES (small and medium enterprises) which, after all, form the majority of the Andean economies. Again, the experience of México under NAFTA, which saw the elimination of thousands of such companies, gives pause to those in this sector.
But, there are ways in which small companies can compete. An example is Bogotá’s Productos Alimenticios Santillana, producer of arequipe, better known as dulce de leche. According to El Tiempo, the Instituto Colombiano de Normas Técnicas (ICONTE) gave Santillana ISO 9001:2000. The certification will help Santillana in its export markets as it reaches to Venezuela, Ecuador, and other Latin American countries. Santillana is an example of how quality, a strong marketing campaign, and superior customer satisfaction can help small companies compete in foreign markets.
I believe Colombia, Perú, and Ecuador should negotiate the best agreement they possibly can with the USA. After all, the USA is their major trading partner. Despite its opponents, trade is an engine of growth; the trick is to make it as fair as the human condition permits. But how fairly can such dissimilar parties negotiate? How can the negotiating power be balanced? Here is an example of the dissimilar negotiating power between the USA and Ecuador:
The USA’s GDP is US$11.7 trillion; Ecuador’s is 26.8 billion. USA per capita income/year is US$38,000; Ecuador’s is US$2,240. The USA economy is represented by: 2% agriculture, 18% industry, and 80% services; Ecuador’s represents: 11% agriculture, 33% industry, and 56% services. (Figures taken from CIA Fact Book for each country.) Looking at this, who has the negotiating upper hand? A commonly used adage is Latin America goes like this: “El que pone la plata, pone las condiciones.” “He who contributes the capital, states the conditions of the bargain.” It is clear the USA is the one with the most money to bring to the bargaining table.
Bolivia: President Mesa secured the Hydrocarbons Referendum which vested in the Presidency the right to export Bolivia’s natural gas but in accordance with the conditions set in the irrevocable referendum, which precludes exports to Chile. This means a new Hydrocarbons Law will be presented to the new session of the Bolivian Congress that begins on 6 August 2004. The law will include revisions to the contracts executed by Bolivia with oil and natural gas multinationals that operate in the country. And the debate about which port, Chile’s Patillo or Peru’s Ilo, will Bolivia use to export its natural gas is back on the front burner.
Spain’s Repsol/YPF, one of the largest foreign investors in Bolivia’s natural gas, stated that Perú is not an option for the exportation of Bolivian LNG to Western Mexico, California, and the US Pacific Northwest. Repsol/YPF, one of the members of the consortium Pacific LNG along with British Gas and British Petroleum, has favored Chile’s Patillo. It seems Repsol/YPF’s choice has the backing of Bolivia’s Cámara de Hidrocarburos. Concurrently, based on statements made by President Mesa, he supports Peru’s Ilo.
Repsol/YPF’s case against Perú is based on these considerations: It would require the construction of a 465-kilometer gas pipeline and infrastructure upgrades at Ilo, with an estimated cost of US$750 million. And because Perú has a country-risk rating higher than Chile’s, financing for the project will demand and extra US$125 million.
While the debates go on, Bolivia and Argentina signed on 22 July 2004, the Agreement of Tarija. Tarija is but one phase in the Energy Integration Agreement formalized between the two countries in Montevideo (Uruguay) on 15 December 2003. Argentina will use public and private funds to build a gas pipeline between the natural gas fields in Santa Cruz (Bolivia) and the Argentinean Northeast. Bolivia’s exports of natural gas to Argentina will increase from 4 million m³/day to 25 m³/day by 2006.
China: Several times in Notice This© and in Regional Focus© we have highlighted the strengthening of ties between China and Latin America, but particularly between China, India, and the Southern Cone, spearheaded by Brazil. On 16 November 2004, China’s president, Hu Jintao, will visit Argentina. President Kirchner and 300 business executives visited Beijing and Shanghai recently, and much of Argentina’s recovery has been aided by agricultural exports to China. Commercialization and technology transfer agreements on energy technology, nuclear energy, and oil and natural gas will likely result from the visit. It is worth noting that Brazil’s President Inácio Lula da Silva also visited China and India recently accompanied by 400 business executives and cabinet ministers.
We could say that China is the great sucking sound for minerals, grains, agricultural products, and energy. Today China has only 100 million hectares dedicated to agriculture, or 7% of the world’s cultivable land, to feed 22% of the world’s population. What does this mean? Opportunities for those with technologies that increase yields in the three staples of China’s diet: rice, wheat, and maize. The central government has allocated US$18 billion to upgrade rural infrastructure and remedy, to the extent possible, the deleterious effects of five years of drought. (Please see the current issue of Regional Focus,© “Why Do Business in Brazil?”©)
China will have to feed a projected 1.6 billion people by 2030; it will require about 720 million tons of grains per year to do so at a minimum level of subsistence. Those interested in working with China to reach this objective should contact China’s Academy of Social Sciences.
It seems that on any given day some country or other is complaining to the World Trade Organization (WTO) on behalf of its companies or industries against China’s “dumping” goods on their markets. Many countries have levied “compensatory tariffs” against Chinese products to protect local industries. But, according to China Daily, China’s own companies are clamoring for protection against “dumping” in Chinese territory, particularly in the chemicals and steel industries. This is forcing China’s Bureau of Fair Trade for Import and Export to review its anti-dumping regulations.
Those seeking “anti-dumping” remedies in China need to take their case to the Bureau of Fair Trade for Import and Export and the Bureau of Industry Injury Investigation of the Ministry of Commerce.
For the first time, China experienced a trade deficit in the first half of 2004: US$6.8 billion, as imports rose by 42.6% against a 35.7% increase in exports. This trend is likely to continue as China, following WTO’s guidelines, reduces the average tariff on all goods from 35.5% to 10.4% by the end of 2004.
And while China gets ready to feed some of its people with local supplies and the Chinese complain against unfair foreign competition, the country is set to go “green” by establishing “circular economies,” particularly in coal mining and chemical production. Circular economies decrease or eliminate waste by reusing materials or natural resources. Therefore, if you have technologies and/or processes that eliminate emissions and recycle methane, you will find a responsive audience in China. Recycling of household appliances, energy generation and distribution, and construction and building materials are being selected for pilot projects. If you are interested, you will need to contact the National Development and Reform Commission.
Venezuela: The National Electoral Council closed voter registration, adding close to one million people who can vote on the Revocatory Referendum on the government of President Hugo Chávez. Thirteen million people are registered to vote on 15 August, but the Council will release the final number at the end of July. Recent polls show that, if the referendum were held today, there is a slight possibility Chávez would remain in power. The opposition, coalesced under the umbrella of Coordinadora Democrática, needs 3.76 million votes to recall Chávez. All we can hope for is that Venezuela resolves this impasse in a democratic manner and all parties accept the results of the referendum.
President Chávez and Argentina’s President Néstor Kirchner participated in a week-long, bi-national business development meeting on Isla Santa Margarita, off the Venezuelan coast. Argentina and Venezuela signed in early July a letter of intent to create a regional oil company, PetroSur, which might be the first salvo in the creation of a Latin-American oil block. But it remains to be seen which role, if any, Brazil’s Petrobras and Spain’s Repsol/YPF will play in this issue. (Please see the current issue of Regional Focus,© “Why Do Business in Brazil?”©)
Commerce between Venezuela and Argentina is low: US$150 million. But the commercial complementarity agreements signed at Isla Margarita on reciprocal trade on forestry, mining, fishing, energy, agricultural products, and finished goods might total US$1 billion by the end of 2005, increasing to over US$5 billion by 2010.
Increased trade with Argentina may somewhat blunt the decline in Venezuela’s personal income. According to a recent study published by Coordinadora Democrática, with cumulative inflation of 155% since Chávez took power, real personal income fell by 25%. This GDP decline is the steepest since 1950, says Coordinadora. An estimated five million people work in the informal economy.
European Union: Speaking of trade agreements, it is almost assured there will not be a Free Trade Area of the Americas Agreement by 1 January 2005, as planned, and there might not be an agreement between Mercosur and the European Union – EU by October 2004, either. Again, how agriculture would be treated under these agreements raised its head and negotiations between Mercosur and the EU ended in Brussels in mid-July. The next round will open on 9 August in Brasilia.
Mercosur is the customs union formed by Brazil, Argentina, Uruguay, and Paraguay, with Chile, Bolivia, and Perú as non-voting, associate members.
Chile: Continued US demand fueled by the free trade agreement between Chile and the USA, and increases in demand for minerals from China, led the Cámara Chilena de la Construcción (Chilean Construction Chamber) to revise GDP growth rates from 4.6% to 4.9% for 2004. Construction is the fastest growing sector, at 7%/year.
If the Andean countries intend to emulate in part Chile’s growth pattern within its free trade agreement, this is what they will need: a low interest rate, stable prices, coherent economic policy and, above all, a stable political environment. These factors underpin Chile’s success. But, like the Andean countries, Chile will need to facilitate employment creation, for without it the country may only grow by 5.2% in 2005, against a possible 6% were it to be close to or at full employment.
Given Chile’s sound economic management compared to Argentina and Perú, we need to wonder what the Bolivians are thinking about when they vote not to ship their natural gas through Chile. I understand that feelings over the results of the War of the Pacific, fought between Chile and Bolivia 100 years ago, still run deep in the Bolivian psyche. Ask Colombians today about the Panama Canal, which Colombia lost to the USA in 1903, and you are likely to find similar feelings. But, wouldn’t Bolivia’s people be better served by selling its most profitable export to a solvent and reliable customer, Chile? The revenue received from Chile would help pay for the projected natural gas infrastructure projects Bolivia and Argentina will build in Tarija.
While Bolivia is arguing with Chile about who has legal control over some parts of the Chilean coast, here comes Perú contesting its maritime border with Chile. Perú claims it never formally agreed with Chile on their maritime border, but Chile claims it has no intention of negotiating this issue. Perú is giving Chile 60 days to go back to discussing this issue. If Chile continues its stance, Peru is willing to go to judicial tribunals or international arbitration to “reach an agreement.”
And while its neighbors argue and threaten to sue, Chile exports its 200 millionth box of apples to the European Union. This apple box, which became a sensation in Valparaiso this week, is part of the harvest that began on 1 September 2003. Wouldn’t this be something constructive for Bolivia and Perú to try imitating?
México: According to the Phonographic Industry International Federation, pirated CDs, DVDs, and CD-ROMs represent a world black market of US$4.5 billion. Sadly, Brazil, despite tougher laws to prevent piracy, leads the list of the ten countries with the highest level of infringement of IP in this sector. México, Spain, and Paraguay are part of the group of 10. And if you feel that little or nothing can be done to prevent the sacking of the music industry, Poland is noted for having curtailed this activity in significant numbers.
Perú: The Andean Development Corporation (CAF) loaned Perú US$280 million to fund works of the Program for Economic Infrastructure and Social Development. Of this, US$80 million will go to agriculture, social development, education, and sanitation/health facilities. US$60 million will be allocated to improvements in the transport network and to energy generation and distribution.
Brazil: In July COPOM (the Central Bank’s Monetary Policy Committee) decided to keep its SELIC (basic interest rate) at 16%. The decision was designed to curtail inflationary pressures projected for the remainder of 2004 and in 2005. When adjusted for inflation, which is expected to reach 6.27% in July, the real interest rate is 9.16%. While banks and financial institutions responded favorably to the decision, the powerful Federação das Indústrias do Estado de São Paulo (FISP, Industrial Federation of the State of São Paulo) and the Confederação Nacional da Indústria (CNI, National Confederation of Industry) were less welcoming. Both seem to believe that in an economy well below full employment there might be room for reductions of SELIC before the end of 2004. A CNI survey of members showed that 74% of industry leaders believe the high interest rate is the major drag on industrial growth.
Petróleo Brasileiro: Petrobras is including Colombia in its Latin American expansion strategy. Petrobras claims the security measures taken by President Uribe, the creation of the National Hydrocarbons Agency, and the change in royalty and joint venture contracts, to make them for inviting to foreign investors, all combine to “put Colombia back on the global oil map.” Petrobras will expand wellhead exploration and will participate with ExxonMobil and Ecopetrol (Colombia’s National Petroleum Company) in off-shore drilling on Colombia’s Atlantic and Pacific coasts. (Please see the current issue of Regional Focus,© “Why Do Business in Brazil?”©)
]]>Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
Given the number of free trade agreements being negotiated between several Latin American countries and the USA and the coming regular meeting of the General Assembly of the Organization of American States (OAS), I am focusing this issue of Notice This© on them.
The Region: The Comisión Económica para América Latina y el Caribe (CEPAL) projects Latin America will grow 4% in 2004; just 0.5% over the estimate for Colombia’s economy and lower than Brazil’s. Growth is predicated on increased exports of agricultural commodities and minerals, as well as oil, whose prices have soared in the last year, and favorable international credit ratings. And here is the surprise: Venezuela is projected to grow 10%, Uruguay 7.5%, Argentina 6.5%, Ecuador 5% and Chile 4.7% over 2003. Brazil is expected to grow by 3.3% and Mexico by 3.4%. In the cases of Venezuela and Argentina we need to remember Venezuela owes its growth to high oil prices and Argentina to exports of agricultural commodities. Were a miracle happen to create a considerable decrease in world oil prices and were China to decrease its gobbling up of commodities, these growth figures would have to be adjusted downward. (Please see “China and Latin America: Opportunities in a Cooled Economy©.”)
The Region & the Organization of American States: The OAS regular meeting of the General Assembly will convene in Quito from June 6-8. What will the ambassadors and foreign ministers of the 32 countries that from the OAS find in the Hemisphere?
Foremost is the push spearheaded by the USA for bilateral or regional free trade agreements with it, and others among other countries in the region such as the proposed agreements between the Comunidad Andina de Naciones (CAN, Community of Andean Nations and Mercosur, the customs union between Brazil, Argentina, Uruguay, and Paraguay, with Bolivia and Chile as associate members, and the agreement being jointly negotiated by Perú, Colombia, and Ecuador with the USA.
The possibly peaceful and democratic solution to the Venezuelan standoff between President Chávez and his opposition coalesced in the Coordinadora Democrática, the umbrella opposition group that has been trying to unseat Chavez for the last three years, will certainly be discussed as will the movement to change the Colombian constitution to enable the re-election of President Alvaro Uribe Velez to a consecutive term.
The Assembly is certain to welcome the relative economic stability and growth of Argentina, the projected growth in Venezuela, and the continued stability of Brazil, despite President’s Inácio Lula da Silva recent political missteps. The recovery of the Colombian economy and the apparent willingness of President Vicente Fox of México to mediate in the peace negotiations between the Colombian government and the Ejército de Liberación Nacional (ELN) are good signs.
However, the OAS will also need to consider the general dissatisfaction of large segments of the population, from México to Argentina, because economic benefits have not spread equitably. Granted, free markets are not charitable institutions, but there is no better way yet known to distribute economic gains, provided market participants are prepared to meet the competitive challenges embedded in free markets, something the Latin American governments and private industry have failed to accomplish. Therefore, the Assembly will be wise to consider these factors and come up with realistic solutions that can be implemented to ameliorate the hardship of large numbers of people who are staying behind in economic progress in political participation. These disaffected have the potential to wreak havoc with the political structural changes that must take place if Latin America’s producers are to compete on a level playing field with their counterparts in the USA once the plethora of free trade agreements go into effect. There is the clear possibility that the opening of asymmetrical markets to USA imports and technology innovations might lead to the ruin of small producers who will be left with little or no recourse to make a legal living. This will surely lead to political discontent that might turn into dismantling of democratic protections and practices.
Witness the case of Costa Rica. The USA and the Central American countries—Costa Rica, Honduras, Guatemala, Nicaragua, and El Salvador—signed the Central America Free Trade Agreement (CAFTA) at the OAS on 28 May. CAFTA will include the Dominican Republic at a later date and will be submitted to the US Congress for ratification later in the year, probably not until after the US presidential election. Although CAFTA is the only free trade agreement to establish a Committee for Trade Capacity Building (CTCB) to ensure the Central American economies will develop over time the capacity to compete with US products, there are no clear guidelines on how this is to be accomplished or what the timeframe will be. Laudable as the CTCB is, it is clear that the asymmetries in economic size, technological development, skills set, and product composition will leave the Central American countries with little bargaining power to protect their small producers who make up the majority of their economies. This asymmetry is demonstrated by the following: CAFTA ends import duties on over 80% of all industrial and consumer goods exported from the USA to Central America while it cuts import duties on only 50% of agricultural exports from Central America to the USA.
Given this, it is not surprising there were violent demonstrations in Costa Rica against CAFTA on 31 May. Costa Rica, which had the good sense to eliminate its military decades back, thus saving itself from the ravages that some militaries have bestowed upon other Latin American countries, is known as a stable, peaceful, reliable country in which to do business. However, thousands of workers marched there against CAFTA and the privatization of the insurance and telecommunications industries it calls for. Agricultural producers did the same, fearing they will be bankrupted by imports from the USA. Adding to the protests were employees of the influential Instituto Costarricense de Electricidad (ICE, Costa Rican Electricity Institute) and the Social Security Administration, ecologists, university students, and teachers. They blocked key roads to the airport and around the capital, San José. Stoppages will continue while the Costa Rican congress debates the treaty. This will not be good for economic performance nor for Costa Rica’s reputation.
Some may see these demonstrations as part of an uninformed movement to oppose free trade, as we saw in Seattle and in Cancún, but it would be wise to think otherwise, particularly when these movements take place in Latin America. Popular movements changed presidents three times in Argentina, three times in Ecuador, once in Bolivia, and are now threatening to topple one more government in Bolivia and the Toledo Government in Perú. In Bolivia, clashes between peasants and military over lack of electricity in the Amazonian region led to deaths and destruction during the weekend of May 29-30. Add this to the protests against the proposed shipping of Bolivian gas through a Chilean port and you have an explosive mix that does not bode well for Bolivia’s President Mesa. (Please see “China and Latin America: Opportunities in a Cooled Economy©.”)
Moving north from Bolivia, we should expect more celebratory demonstrations in Venezuela during the weekend of June 5-6. On June 4, the National Electoral Council certified the opposition had collected 2,451,821 valid signatures calling for a referendum to unseat President Chávez. In an unexpected move, Chávez accepted the decision and claims to be ready to “have the referendum and move on.” The referendum must be held prior to August 19 to remove the president. If it is held after this date, the current vice president will become the president. Let’s hope Chávez sticks to his recent declaration and Venezuela can change its president by democratic means. But the opposition must field a candidate that can unite Venezuela, now sadly polarized along economic lines. If the opposition runs a candidate identified with the traditional political parties, the poor of Caracas may help Chávez sneak by and remain as president.
Free Trade Agreements: Atlanta will host the second round of the Negotiation Table of the proposed Free Trade Agreement between the USA and Colombia, Ecuador, and Perú. Central to Colombia’s interests is how the software and services sectors would be classified and handled within the treaty. Practically every major US company in these industries operates in Colombia, but there has been little transfer of technology from Colombia to the USA. How Colombia can compete with the USA and China is this sector is not clear to me, but Fedesoft (Colombia’s software association) thinks otherwise. According to Fedesoft, costs per hour in offshore operations in China is US$13 while Colombia comes in at US$25, compared to US$56 in the USA; therefore, Fedesoft believes it can compete against China not only on price but on quality of technical skills. It is not clear either how proximity to the USA market, compared to China’s, can give Colombia increased competitive advantage in services and software. It will be interesting to see how Medellin PSL will fair under the agreement. Medellin PSL has “one of the six CMM i world certifications.” CMM i is the highest application certification. I am afraid economies of scale will act against Colombia’s software creators. Colombia exports only US$5 million/year in software, commercialized internationally by Parquesoft in Cali. The future of the industry under the free trade agreement will focus on four areas: USA outsourced application development; maquila-style operations to create code; creation of brand software; and human capital transfers. Given that the world’s off shore segment represents an estimated US$125 billion/year, if Colombia were to capture 10%, which is unlikely given Chinese competition, software alone would be roughly equivalent to all current legal exports from Colombia today. The sector employs 70,000 highly qualified and trained Colombians who could participate in the projected US$60 billion outsourced market in the USA if the free trade agreement makes provisions for preferential treatment of the Colombian sector.
Another key point for Colombia in the negotiation of a fair treaty is the protection of intellectual property. Perú, Colombia, and Ecuador should look at Brazil and learn from its efforts to protect the capital that lies in its flora and fauna. The USA wants to have patent rights on flora and fauna in the Andes included in the IP chapters of the treaty. Ad it stands now, any invention or technology development in the biosciences achieved through the use of US technology and know-how would be patented in the US, even in the invention is done in Colombia by Colombians. Article 8 of the IP Chapter states that “each signatory country must allow patents on flora and fauna and traditional medicine diagnostics, therapies, and treatment of humans and animals.” We need to recall the USA patent law is based on a firs- to-invent/discover basis. This is opposite of Colombian law which is based on the first to register principle. Given the upper hand the USA will have in discovery and inventions in the Andes, the negotiators for the Andean countries need to be vigilant so their vast natural wealth does not end up in foreign hands without rights to future claims.
IP protections and the Rules of Origin go hand in hand. Central to the negotiations is the position of Colombia to classify as “Made in Colombia” products that have inputs from Mexico, Canada, Perú, Ecuador, and Chile. Rules of Origin need to take into account the flexibility needed by each country as it develops its “outsourcing” industries and/or expands into maquila-style production. Also technology advances might require flexible rules of origin as these technologies affect industrial production and the introduction of new products.
As Colombia, Ecuador and Perú negotiate their free trade agreement, attention needs to be paid to the condition of infrastructure and what provisions the treaty will make for its upgrade and updating. Countries with deficient or inadequate port, rail, and road infrastructure are at a disadvantage. This is sadly the current situation in the Andes. While Cartagena and Buenaventura, in Colombia, and La Guaira, in Venezuela, are the most competitive maritime ports in the Andean region, taking cargo to them is an expensive and time-consuming task. Although Infrastructure quality and capacity are part of an internal development agenda, it should be made an integral part of the trade agreement negotiations if the agreement is to facilitate the creation of a level playing field. (Please see “China and Latin America: Opportunities in a Cooled Economy©.”)
For those who wrongly think that Colombia is run by drug mafias and its economy is mostly illegal, here is some interesting information: Colombia ranks 41 (up from 45) among the world’s most competitive economies, compared to Brazil 53, México 56, Argentina 59 and Venezuela 60.
Guatemala: Here comes another free trade agreement, this time between Guatemala and Chile which will be signed during the week of June 6. The quantity of sugar exported from Guatemala to Chile was the wedge issue. Chile finally agreed to increase the quota to 40,000 metric tons. Chile had been negotiating a treaty with the CA-4, Guatemala, El Salvador, Honduras, and Nicaragua. Costa Rica already signed a treaty with Chile, and El Salvador signed a few months back. Nicaragua and Honduras will follow soon.
But here is another market asymmetry: Guatemala imports US$92 million in durable and consumer goods from Chile while it exports $10 million in mostly agricultural products to Chile.
To close the section on Free Trade Agreements, at a recent meeting in Quito, Brazil expressed an interest in increasing exports to Ecuador and to facilitate the localization of more Brazilian companies in this market. This is part of Brazil’s efforts to bring Mercosur, the customs union between Brazil, Argentina, Uruguay, and Paraguay, with Bolivia and Chile as associate members, and the Comunidad Andina de Naciones (CAN, Community of Andean Nations) closer economically and politically. Prior to any agreement, the CAN needs to clarify the issue of the common external tariff it will levy on goods and services that originate in third countries – those not part of the Andean region. (Please see “China and Latin America: Opportunities in a Cooled Economy©.”)
Colombia: One of the least competitive airline markets is finally getting some relief in the way of in-country low-cost fares. Spain’s Air Madrid received temporary permits to operate in the country.
Chile: If Chile has the best managed economy in Latin America and seems to do almost everything right in terms of international trade and development, why is Bolivia trying to pressure it into reopening a chapter closed almost a century ago when Bolivia lost its exit to the Pacific to Chile? Whether that war was justified or not belongs to history. With all due respect to my Bolivian friends and clients, in my view, Bolivia needs Chile more than Chile needs Bolivia. It is imperative for Bolivia’s economic future to export its natural gas through a port suitable to it and that operates under conditions of relative economic and political stability; hence Chile’s Pitillo. Yes, Perú offers another port alternative to Bolivia, but Perú, despite its recent excellent economic performance, does not offer Bolivia the stability Chile has. Rather than pressuring Chile and Perú to accept Bolivia’s demands, the OAS, at its meeting in Quito, should force Bolivia to put aside nationalistic sentiment and negotiate the best deal it can with Chile and move on to liquefy natural gas and to ship it to México and California. Why argue with needed revenue and infrastructure investments?
Brazil: While some international investors question the ability of Brazil’s president, Inácio Lula da Silva, to continue his government’s economic orthodoxy, Lula took the largest trade mission in Brazil’s history to China: 400 top level executives from a cross section of industries and cabinet members to shop for commercial opportunities, not only in China but, by using China as platform, to expand into Asia’s markets. As a result, China and Brazil signed 15 new commercial agreements, bringing the total number of agreements between the two countries to 32. The objective is to consolidate a strategic alliance that would continue the proposed integration of the Chinese and Brazilian economies and, according to Lula, “create a south-south balance in international trade.” The agreement between the Banco Nacional de Desevolvimento Econômico e Social (BNDES, Brazil’s national development bank) and Citic Group (CG), the leading foreign investment arm of China will focus on financing Sino-Brazilian joint ventures in infrastructure, such as upgrading of ports and rail transportation, and technology development with long-term return on investment. CG has US$100 billion to invest, compared to Brazil’s US$15 billion. Brazil will utilize Chinese capital to produce capital goods, and China will receive raw materials, agricultural products and technology, and communications technology, particularly in the satellite industry.
Private industry agreements signed during the mission include: between Companhia Vale do Rio Doce (VALE) and Yankuang Group to begin in 2006 for the production of 2 million tons of coke and 200 million tons of methanol per year; exporting 25% of production to Brazil. VALE also signed agreements with Baosteel, China’s largest steel mill, Yongcheng Coal & Electricity Group, and with Aluminum Corporation of China to extract bauxite and produce alumina in Brazil.
There are, however, concerns in Brazil about having Chinese goods crowd out local goods manufactured and sold by small producers, which make up a large segment of Brazil’s economy.
China’s foreign reserves of US$400 billion overshadow those of Brazil, US$17 billion, which may lead to an unbalanced relationship in the future. Lula’s government has placed such high emphasis on China, while seemingly attempting to subvert the USA in the creation of a Free Trade Area of the Americas (FTAA), Brazil’s Sino- infrastructure development model might run into trouble were China’s economy to cool down, as sought by the USA and the European Union. It would be ironic if Brazil ends up trading the cold it caught in the past when lean times arrived in the USA for the often-mentioned pneumonia that affects smaller economies when the major trading partner sneezes. (Please see “China and Latin America: Opportunities in a Cooled Economy©.”)
Argentina: Here is one more example of what we impress upon our clients: Keep your eyes on the political ball so you can prepare for government intervention either through direct fiat or through “friendly persuasion.” Argentina’s Jefe del Gabinete (roughly equivalent to the President’s Chief of Staff in the USA) asked the petroleum companies, mostly foreign multinationals lead by Spain’s Repsol/YPF, to “gain less” by not increasing local oil prices, despite rises in world crude prices. And what happens if the companies do not agree? The government is considering raising the oil export tax since the 2002 agreement between the government and the companies to hold domestic prices down has expired.
Argentina is going through an energy crisis which led back in April to the rationing of natural gas exports to Chile and to an increase in the price of gas sold to the largest users in Argentina. In late May the government began a plan that includes private and public investment in the hydrocarbons sector and the creation of a state company that “will influence prices to prevent monopoly distortions.”
China & Latin America: China continues to increase its demand for Latin American products. According to CEPAL, Latin America’s sales to China increased by 72% in 2003, or US$11 billion. Argentina, Colombia, Chile and Brazil were the largest sellers of soy, iron ore, copper, and pulp. (Please see “China and Latin America: Opportunities in a Cooled Economy©.”)
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
The Region: The Inter-American Development Bank (IDB) just finished its annual meeting in Lima, Perú. The meeting will mark a new era for the IDB as it restructures its lending policies to focus on financing more private rather than public sector projects. It seems the Bank will play a stronger role in the negotiations underway on bilateral trade agreements and on the Free Trade Area of the America (FTAA). The IDB’S annual report, presented at the meeting, shows a real increase of 1.5% in regional GDP; it projects an average real increase of 4% in 2004. It seems to us that if the IDB is to help Latin America and the Caribbean grow in 2004 and beyond, some of the private investment should be channeled into education and skills development. Much has been written about Latin America’s class differentials along income lines. These differences work as a drag on growth and need to be closed with effective, private sector initiatives that prepare the majority of Latin America’s labor force to participate in an increasingly technology-driven global economy. If as IDB’s president, Enrique Iglesias, indicated the growth of Latin America hinges on its fair access to global markets, we need to keep in mind that “75% of Latin Americans believe privatizations” and globalization have been bad for them, according to Latinobarómetro, the most respected public opinion company in Latin America.
According to the IDB and to the Inter-American Dialogue’s “All in the Family” report,” Latin Americans working in foreign countries remitted US$40 billion to their respective countries, or 3% of regional GDP, in 2003. When looking at these “export” revenues, it is useful to appreciate that remittances are equivalent to 97% of all exports from Guatemala. Keep in mind that remittances go to pay for basic living expenses, such as housing, services, health care, subsistence agriculture, and education. Should the IDB and some commercial banks succeed in turning remittances into investments, governments would then have to provide for the basic needs no longer covered, and Latin America’s governments have been notoriously poor in this respect.
Mercosur: So far the International Monetary Fund (IMF) and other multilateral lending organizations have negotiated with individual countries, many times to the detriment of the countries that agree to the Fund’s Conditionality, the economic and political measures the Fund demands of those it “helps.” But here come Argentina and Brazil, the core of Mercosur, the customs union created 13 years ago by Argentina, Brazil, Uruguay, and Paraguay, with Bolivia and Chile as associate members. Brazil, which has 79% of the population of Mercosur, and Argentina are now planning a strategy to negotiate jointly with the IMF, other financial organizations, the USA, the European Union (EU) and the Comunidad Andina de Naciones (CAN, Community of Andean Nations). If you feel this is not possible, think of this: Brazil and Argentina combined represent one-third of the IMF’s lending portfolio. There is a saying in Latin America: If you owe the bank US$1,000.00 and you can’t pay it, you have a problem; if you owe the bank US$100,000 and you can’t pay it, the bank has a problem! Therefore, it seems to me that if Brazil and Argentina indeed carry out joint negotiations, the Fund will have a problem similar to the one it has had with Argentina for the past four years: Argentina can’t or won’t pay, and the Fund has to accept Argentina’s conditions no matter how unpalatable to the Fund. This is what happened in the recent negotiations of the Fund with Argentina. (Please see Argentina below).
The Andean Region: Which Latin American country do you think has the highest per capita use of cellular telephony for the transmission of data and content? You did not guess right if you selected Colombia, the fourth largest economy in South America. Here is the surprise: Ecuador with 20%; Venezuela accounts for 15%, and Colombia for 10%. The fastest growing cell technology sectors in Latin America are: G3 and CDMA. But watch for the investments of Carlos Slim Helu’s Teléfonos de México – Telmex, the fastest growing data company in the region; it will be bigger if, as expected, it prevails in its purchase of Embratel, the largest data company in Brazil. Yet, voice represents 97% of all mobile telephony revenues in Latin America. (Please see Brazil below).
Brazil: At Satellite2004, the annual world satellite industry conference in Washington D.C. in early March, I stated my hope that Brazil would stay the course in its economic policy. The reason I gave is that, in my opinion, the future of Latin America lies in Brazil, not in México, as many believe. However, it seems there are fissures in President Lula’s economic team. This is reflected in the pessimistic statements being made recently about the stability of the Brazilian economy and its future. This week, the Central Bank continued to state projected declines. According to the Bank’s Boletim Focus, GDP will increase this week by 3.5% against 3.54% in the previous week. More worrisome is the growth prediction of 2.7% in 2005, against previous estimates of 3.71%. Inflation, based on the wholesale price index (Índice Geral de Preços - Disponibilidade Interna, IGP-DI) shows a projected increase from 7.2% to 7.6%, and retail prices, Índice Geral de Preços do Mercado, IGP-M) are expected to increase from 7.5% to 7.61%.
But there is some good news. The current account this week shows a positive balance of US$400 million. Foreign direct investment (FDI) increased from US$12.1 billion to US$12.95 billion, represented by 34 merger and acquisitions that include: Interbrew’s purchase of AmBev; Wal-Mart’s purchase of Bompreço; and, Unibanco’s purchase of Ahold’s credit card division. Given this, it is expected the basic interest rate (SELIC) will be 14% at the close of 2004, down from a current 16.25%. The Central Bank’s Comitê de Política Monetária (COPOM, Monetary Policy Committee) may decrease the SELIC to 16% at its meeting on 14 April. Planning Minister, Guido Mantega, declared his belief in a real interest rate of 3% by the end of 2006, the end of Lula’s term in office; the current real interest rate is 9%.
However, these projections do not seem to include the possibility of increases in interest rates in the USA after the presidential election, probably by mid-2005. Should this happen, volatility is likely to return to Latin America’s financial markets. This will have deleterious consequences across the region.
As we predicted, Teléfonos de México (Telmex) was accepted by MCI as the purchaser of MCI’s share of 19.26% of total capital and 51.79% of voting capital of Empresa Brasileira de Telecomunicações S.A. (Embratel) from for US$360 million. In February, Carlos Slim Helú, majority owner of Telmex, purchased AT&T Latin America for US$207 million, and on 22 March he bought 9.1% of Global Crossing, thus raising Slim’s share of GC to 5% of total capital. Slim also controls America Móvil, the largest mobile communications company in Latin America. These acquisitions and Telmex’s investment-ready US$1.7 billion, added to Slim’s own private funds, make him a leading player in wireless communications and data management in Latin America, posing a significant challenge to Spain’s Telefónica, the telecommunications leader in the region.
Brazil’s Conselho Administrativo de Defesa Econômica (CADE, the equivalent of the US Antitrust Commission), is reviewing the last-minute formation of Consortium Calais, created by the three largest fix-line operators in Brazil: Telemar; Telefônica; and, Brasil Telecom and telecommunications service provider Geodex. Consortium Calais is challenging Slim’s acquisition of Embratel, claiming Calais can pay the US$555 million initially set as the floor price for Embratel, while Slim paid only US$360 million. Beyond the issues of whether Calais creates a monopoly, CADE and Brazil’s Agência Nacional de Telecommunicações (ANATEL) will have to decide whether MCI, now in bankruptcy court in the USA, is better off with the check Slim can write on demand for Embratel, or waiting for financing of US$555 million to break up Embratel, as Calais promises. By contrast, Slim promises to keep Embratel intact and invest more money in it. It seems to me, Slim’s proposal is more attractive and potentially more profitable.
Brazil’s global reach continues to expand in the Middle East. Members of the Câmara de Comércio Árabe-Brasileira (CCAB, Brazilian-Arab Chamber of Commerce) met with 300 possible joint-venture partners at the Cairo International Fair. The “Match-Making” meetings were arranged by the Egyptian Association of Business Executives.
Ecuador: Argentina became an example not to follow when dealing with foreign debtors. The Argentinean default came close to pulling Brazil down and heightened worries about the repayment of its foreign obligations. Here comes Ecuador where the Gutiérrez government is choosing between paying public workers and paying its foreign creditors. Ecuador wants to keep its fiscal surplus to gain the approval of the IMF and reduce its country risk. But to do so it is not paying the salaries of teachers and public health workers, two sectors Ecuador needs to build a sustainable economy and an equitable future for the majority of its citizens. Therefore, those working or investing in Ecuador need to keep in mind that work stoppages will become common, thus threatening political stability and economic performance. We predict that a successful negotiation of an agreement with the IMF based on disregard of internal social needs will have a higher price in the future.
While high oil prices, US$40/b at this writing, threaten to dampen the global economic recovery, they turn out to be good for Ecuador and the IMF as they prepare to negotiate with each other in the first of week of April. Higher oil prices mean higher revenes for Ecuador, for oil is Ecuador’s leading export. It is expected the IMF will grant Ecuador the remaining US$126 million from the initial loan of US$210 million promised for 2003, of which Ecuador received US$84 million. A stumbling block in the negotiations might be the political weakness of the Gutiérrez Government as the coalition that supported it splinters further. (Please see the current issue of Regional Focus© on “Free Trade Agreements in the Andean Region: Who wins, who loses?”©)
Repsol/YPF and Brazil’s Petróleo Brasileiro (Petrobras) have come to the rescue of PetroEcuador by pumping Petropruducción’s oil through their rights on the privately-beld OCP Ecuador pipeline. It is not known when the ruptured state-owned pipeline, Oleoducto Transecuatoriano (SOTE), will be repaired. SOTE is the state-owned pipeline while OCP is owned by private oil exploration companies. Remember the impasse last year about the devolution of value added tax (VAT) to the foreign oil companies that operate in Ecuador by PetroEcuador? Despite PetroEcuador’s denial of the payment claimed by the companies, it seems that Occidental Exploration and Production Company – OXY will receive its due on 18 April 2004 when the claims arbiter will hand down his decision. Ecuador is also under pressure by the USA to settle claims presented by IBM and BellSouth as a precondition for the negotiation of a free trade agreement between the two countries.
Those working in the petroleum industry in Ecuador would be wise to pay close attention to the current illegal occupation by squatter families of lands belonging to PetroProducción in the area of Esmeraldas refinery. Several times in Notice This© and Regional Focus© we have expressed our concern about social and political destabilization in Ecuador. If the occupations continue, the Gutiérrez Government will be forced to use the army to reestablish property rights. This might ignite violence in the petroleum sector, something Ecuador does not need now or in the future.
Those interested in agribusiness might know that Ecuador is the world’s largest exporter of bananas. This industry employs 12% of the working population, accounts for 24% of GDP, and its production accounts for 33% of non-petroleum revenue. To raise competitiveness in the sector, the Department for the Modernization of Agricultural Services is evaluating the Fertilizer Alternative Plan to produce organic bananas, and use banana refuse as alternative sources of energy. This is a good opportunity for those interested in taking alternative energy sources, such as methane conversion, into Ecuador. Ecuador will host the World Banana Producers and Exporters Forum, in Machala, on 14 May 2004.
Colombia: We have frequently commented in Notice This© and Regional Focus© on the risks posed to Ecuador by the destabilization created by Plan Colombia, the U.S. financed antiguerrilla and antinarcotics strategy in Colombia. As we go to press, Colombia’s president, Alvaro Uribe Velez, is in Washington D.C. negotiating an extension of the plan to 2009. A recent analysis published in El Comercio supports our concerns. Ecuador’s northern provinces of Esmeraldas, Carchi y Sucumbíos have been affected by kidnappings, common criminality, an influx of illegal immigrants from Colombia, and defoliation caused by Roundup Ultra®, the defoliant used to kill coca and heroin poppy plantations in Colombia. Ecuador is a great and beautiful country, filled with honest and hard working people who, unfortunately, do not have the economic resilience Colombia has had over the last 50 years of guerrilla warfare. It would be wise for the Gutiérrez government to ensure that monies allocated to Plan Colombia are shared with Ecuador to help it develop internal structural strengths to meet the displacement of the “Colombian problem” to its territory.
In addition to negotiating for an extension of Plan Colombia, President Uribe was in the U.S. negotiating for a free trade agreement. Negotiations are expected to end by 31 December 2004. Given the close relationship between President Uribe and the Bush Administration, it is highly probably Uribe will get his requests. (Please see the current issue of Regional Focus© on “Free Trade Agreements in the Andean Region: Who wins, who loses?©”).
Colombia is the third largest recipient of U.S. aid, after Israel and Egypt. It is the only Latin American country in the Bush Administration’s “Coalition of the Willing.” Since 2002, the U.S. has poured US$2.6 billion into Colombia’s counterinsurgency and counternarcotics operations. The results are mixed at best and might include the U.S. negotiating with persons it has labeled as terrorists in an effort to help Colombia achieve a questionable peace with the paramilitary forces of Carlos Castaño and Salvatore Mancuso. The major claim of Plan Colombia is that, according to CIA estimates, coca cultivation declined by 20% in 2003. Ominously, it increased by 17% in Bolivia, where it had been largely eradicated. We have claimed time and again that, if Plan Colombia is to succeed, some of its resources will be best employed in education, creation of legal micro enterprises, housing, and medical care. Regretfully, the military solution funded by Plan Colombia has overlooked these critical sectors.
While other countries shun Colombia, Brazil continues to invest in it. Sinergy acquired the total 50% investment Grupo Santo Domingo and Valores Bavaria had in Avianca, Colombia’s national airline and the oldest in Latin America. Concurrently, the Colombian National Federation of Coffee Growers sold to Sinergy 25% of its 50% share of Avianca, keeping the remainder 25% with an option to sell to Sinergy in 2007.
Sinergy is controlled by Brazilian Germán Efromovich and has investments in oil exploration, naval construction, telecommunications, natural gas, hydroelectric plants, and the Brazilian commuter airline Ocean Air that serves 35 cities including Brasilia, São Paulo, Rio de Janeiro, and Porto Alegre.
Venezuela: While all eyes are focused on President Chávez and on whether he will accept the over 3.6 million signatures that call for a referendum to remove him from office, those in communications, beer making, and media should be looking carefully at the investment and expansion strategy of the Cisneros Group of Companies and reading carefully the interview given by its head, Sr. Gustavo Cisneros, to Colombia’s El Tiempo. The richest man in Venezuela and the head of a global conglomerate headquartered in New York is giving indications of his strategy for further joint-ventures in Latin America, with expansion into China. Cisneros Group of Companies owns Venvisión, Univisión, Direct TV and AOL Latin America. It is also a joint-venture partner with Colombia’s Valores Bavaria in Perú’s beer maker Backus. In the interview, Cisneros identifies the following Venezuelan governors as possible replacements to Chávez: Manuel Rosales (Zulia), Enrique Mendoza (Miranda), and Henrique Salas Romer (Carabobo).
Bolivia: It is very easy for those of us who are not Bolivians to view the country’s squabble with Chile over a direct route to the Pacific as a misapplication of political capital and economic resources. It seems to me that the continued debate on whether Chile stole the Pacific from Bolivia in 1904 represents a loss of time. Bolivia will be better served if this time and resources were used into constructive negotiations that will enable it to sel its vast supply of natural gas to México and the USA through a port on the Pacific, either in Perú or Chile. Bolivia’s economy is not performing well and the natural gas revenues will go a long way in helping its economy. It seems to me the “Bolivia hacia el Mar” (Bolivia to the Ocean) campaign has better things to do than to have the Bolivian Air Force carry the longest letter in the world, an estimated 150 kilometers long, to New York to gather international support for Bolivia’s exit to the Pacific. If the 1904 Treaty is the problem, Bolivia should submit it to international arbitration to settle the issue once and for all, or agree with Perú on a Peruvian route to the Pacific and forget the squabble with Chile. Persisting in squabbling with Chile rather than looking for effective alternatives will keep Bolivia’s immense natural gas wealth trapped in the country. As it is, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) (Bolivia’s state-owned oil company) is projecting an energy crisis in 2006 where there will be significant declines in the availability of gasoline, diesel fuel, and LPG. Condensed oil production in Bolivia declined from 17.8/mb/year in 1996 to 9.8/mb/year in 2002. Translating this decline into 2006 figures, YPFB estimates there will be a daily deficit of 1,650/b/day. YPFB recommends a solution that involves importing oil from, where else, Chile, at a cost of US$12 million/year, or exporting natural gas – but through which pipeline or port? As it is, oil imports from Chile would have to come in trucks as there is no pipeline connecting the two countries. (Please see the current issue of Regional Focus© on “Free Trade Agreements in the Andean Region: Who wins, who loses?”©)
Perú: President Toledo announced Perú will receive US$4.8 billion in foreign direct investment (FDI) in 2004, an increase of 5% over 2003. Those seeking opportunities in the natural gas industry can benefit from the US$2.0 billion that will be invested in the giant gas field of Camisea, in Cuzco. Those in gold mining will find good opportunities through the US$2.0 billion to be invested in the gold and copper mines in Apurimac. Proyecto Boyóbar will receive US$300 million to increase fertilizer production and commercialization.
Despite Toledo’s popularity of only 8%, Perú’s currency, the Sol, is considered South America’s most stable.
Argentina: We have said repeatedly that the Kirchner Government needs, sooner rather than later, to come to an acceptable resolution on the payment on bonds on which Argentina defaulted in 2002 and that total an estimated US$88 billion. Therefore, it is encouraging to see that Kirchner and the IMF have come to an agreement on how to negotiate the defaulted debt. Italy may be the first test case as Italians hold US$37 billion of Argentinean bonds, about 66% of the bonds Argentina placed in Europe.
The Argentinean government is preparing to present to the IMF a proposed repayment schedule by mid-April. However, local bondholders would be the first ones to be paid under the new proposal. An official announcement on the final settlement and its conditions is scheduled for sometime between June and August 2004.
On several occasion we have deplored the indebtedness of Argentina, frequently abetted by the IMF. Here is an example: To come to an agreement with the Fund, Argentina paid US$3.1 billion due on 9 March. Immediately, the Fund turned around and loaned back the same US$3.1 billion, making the payment a paper transaction. This may be the way the Fund sees its contribution to the sustainable growth of Argentina. But, I believe, rebuilding Argentina’s industry is the most effective way to support its growth and keep it in the future.
México: The only country in the world with 32 free trade agreements just signed a bilateral trade agreement with Japan. Negotiations lasted for over a year and stumbled several times over exports of fresh pork and orange juice from México and over exports of autos and steel from Japan. Under the agreement, México will export 5,600 tons of fresh pork and 80,000 tons of orange juice per year. Japan will eliminate tariffs on 95% of products imported from México, and México will eliminate tariffs on 44% of Japanese products. This represents about 1,600 products from México and about 800 products from Japan.
Dominican Republic: Speaking of free trade agreements, the USA and the Dominican Republic agreed to lift all trade barriers between the two countries.
Cuba: Would you be surprised if you knew that the USA is the largest food supplier to Cuba? USA food exporters are paid in cash! No other exporter to Cuba enjoys such terms. And remittances to Cuba by Cubans living in the USA total about US$1 billion/year. If you think that the USA Helms-Burton Act, which prohibits trade with Cuba, is enforced, hear this: Title II, covering properties confiscated by Castro, was suspended by both the Clinton and Bush Administrations.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
The Region: Once more, agricultural subsidies, market access, services, and investment issues sank Hemispheric trade talks on the creation of the Free Trade Area of the Americas (FTAA). There will be another meeting in less than two months. However, it seems the viceministers of the 34 countries that would comprise the FTAA (Cuba is excluded), will not reach agreement since the US continues to resist requests by Latin America to alter is agricultural subsidy policies. The Latin American negotiators should know this is unlikely, particularly since President Bush needs the electoral votes of key agricultural states for his reelection.
We believe the creation of an FTAA rests on Brazil and the US resolving these issues. However, the US is unlikely to compromise easily. In 2003, the Bush Administration granted US$3 billion in crop support to cotton growers in the US who were paid not to plant cotton to keep their world-market prices high.
During the negotiations in Puebla (México) the negotiatiors split into two blocks: one group of 14 nations led by NAFTA countries (Canada, US, and México) and the other led by Mercosur. The Mercosur group demands total elimination of tariffs and non-tariff barriers throughout the Hemisphere, without any exceptions, for all products produced within its borders. The US claims all agricultural issues must be resolved at the World Trade Organization (WTO) where the US wishes also to confront the European Union (EU) and Japan on the same issues.
Were we to have an FTAA after all, it will become the largest trading block in the world, with a total of 800 million potential consumers and an aggregate GDP of US$12 billion. But, I am convinced, there will not be an FTAA without Brazil. In this case, the US is likely to continue its divide and conquer policy of negotiating free trade agreements with individual countries. Colombia, Perú, and Ecuador, separately, are getting ready to initiate negotiations with the US. And the Comunidad Andina de Naciones (CAN, Community of Andean Nations) is also planning on negotiationg an Andean trade agreement. We doubt the negotiations will go through if they include Venezuela, unless President Chávez is out of office when the negotiations begin. The US will refuse to accept Chávez as a negotiator.
México: Repsol/YPF and Consortium LNG pulled out of Bolivia in 2003, tired of waiting for Bolivia to decide through which port, Patillo in Chile or Ilo in Perú, it would ship the natural gas that was to be sold to Western México and in California. The natural gas issue toppled the government of President Gonzalo Sánchez de Lozada and cost Bolivia an estimated investment of US$5 billion in needed infrastructure. Now here comes Rapsol/YPF with an investment of US$350 million to build an LNG terminal at México’s Lazaro Cárdenas port on the Pacific; completion is scheduled for 2008. Given the current recession in Bolivia, there is no doubt this investment by Repsol/YPF would have been welcomed.
Much has been said about México and the loss of close to 900,000 jobs in its maquila industry to China. But it is not only the maquila industry that is suffering from the consequences of the recession in the US which affected México significantly. México exports 85% of its industrial output to the US. According to the International Institute for Management Development (IIMD), the country slipped in competitiveness in a ranking against other 34 countries of 14 in 2002 to 24 in 2003. The trend is likely to cntinue in 2004. The hardest hit areas are: infrastrucuture, such as roads, port terminals, and industrial facilities; health care, technology development, and scientific research.
Concurrently, Consultores Internacionales indicated Colombia, South Korea, India, and South Africa surpassed Mexico’s competitive indicators.
Chile: In a first for South Korea, its Parliament and Chile’s approved a free trade agreement, originally signed in 2003. Approval was delayed due to strong opposition by the agricultural sector in both countries, but particularly by the Korean Agricultural Federation and the Korean Industrial Federation. Under the agreement, exports from South Korea to Chile, represented by autos, cell phones, and electronics, will increase by US$230 million; these exports reached US$457 million in 2003. In the same period, Chile exported about US$1 billion, 40% in copper, to South Korea. The agreement excludes shipments of meat and rice from Chile to South Korea.
In Notice This© and in Regional Focus© we have highlighted the inroads China and Asia are making into Latin America, posing a serious threat to U.S. companies working in the region, or planning to do so. This agreement validates our predications. More so since through Chile, South Korea can increase its participation in Mercosur, the customs union created by Brazil, Argentina, Uruguay, and Paraguay, with Bolivia and Chile as associate members.
Brazil: The largest procurement in recent Air Force history involves the bid for more than 12 fighter jets valued at an estimated US$778 million. The three major bidders are: Empresa Brasileira de Aeronáutica S.A. (Embraer) in partnership with France’s Dassault Aviation S.A. and Avibras Aeroespacial in partnership with Sikhoi, from Russia. Avibras is Latin America’s largest arms supplier. Embraer/Dassault seems to be the favorite to win; however, the Ministry of Defense might need to justify this decision to avoid speculation about political favoritism, as Embraer is Brazil’s largest exporter and the world’s fourth largest aviation company. In addition, the Air Force already uses Dassault's Mirage jets which would require investment in upgrading facilities and maintenance programs if the contract were awarded to a different supplier. If awarded the contract, Embraer/Dessault will build Mirage 2000-5 Mk2 jets for the Brazilian Air Force.
América Móvil, the largest wireless telephone company in Latin America, continues to lead the rumors it will acquire EMBRATEL when MCI decides to put its controlling interest of the company on the block sometime this year. América Móvil divested the 49% it had in CompuSA in exchange for a 30% participation in US Commercial Corporation.
We believe wireless, particularly data transmission and Internet connectivity, will remain the fastest growing sector in Latin America’s telecom markets. Given the disposable liquid capital of Grupo Carso, majority owner of América Móvil, the company will be a formidable player and competitor as telcos vie for the Brazilan and other markets in the region.
Watch out for continued ties between Brazil’s leading companies and China’s. Companhia Vale do Rio Doce (CVRD) is already the largest supplier of iron or to China. Now, speculation is rampant that China Aluminium Co. will enter into a joint venture with CVRD to participate in the future development of CVRD’s Allunorte alumina refinery.
After attending a recent briefing given by Congresswoman Melissa Hart in Pittsburgh on her recent fact-finding trip to Chile, Brazil, Argentina, and Uruguay, I came back more convinced of how little attention the US is paying to China’s and India’s inroads in Latin America. We predict this will have adverse consequences for US companies in the region. The Chinese and the Indians are making a concerted effort to speak the region’s languages and assimilate its diverse cultures. The US seems to remain locked in its efforts to make Latin America in his own image, something that history shows has not worked for the last 75 years.
European Union (EU): Despite criticism about and opposition to the decision of Colombia’s Uribe Government to give broad, sweeping police powers to the armed forces, the EU agreed to consider extending for 10 years the trade preferences it grants to Colombia, Ecuador, and Perú. The current agreement expires in December 2004.
Colombia’s Anti-Terrorist Law was approved by congress in January and went into effect immediately. It empowers the Armed Forces to tap telephones, detain people without warrants, and search private homes at commanders’ discretion. Given the tainted record of Colombia regarding human rights and arbitrary detention, the anti-terrorist law is an ominous development.
Australia: Those doing business down under have an extra benefit now: The U.S. and Australia finished the negotiations for a free trade agreement that is supposed to increase US manufacturing exports by US$2 billion, from the current US$9 billion trade surplus the U.S. has with Australia. Total trade between the two countries is US$28 billion. The agreement goes now to the US congress for approval. Directed by the Trade Promotion Authority (TPA) congress granted President Bush in 2001, Congress cannot modify the agreement; it will vote it up or down, and an up vote is expected.
The Australian agreement is on industrial goods, and excludes Australia’s agricultural sector from agricultural imports from the US, although the US opened its market to Australian beef, lamb, flowers, and milk. Milk imports from Australia may reach US$15 million in the first year after the agreement goes into effect. US tariffs on Australian wine will be totally eliminated over a period of 11 years. However, the US pharmaceutical and entertainment industries failed to get the privileges they sought under the agreement. The US excluded its sugar industry from imports from Australia, and Australia kept the protections it grants to its wheat and rice producers.
Probably seeing the disaster health care is in the US, Australia refused to modify its national health care system and its drug price-control policies. Australia also refused to lift the protections it gives to film making and TV production.
Australia also retained its right to protect domestic movie and television production despite demands from the American film industry to loosen access to the Australian market.
The world has signed 114 free trade or commercial facilitation agreements since 1994. By comparison, the US has signed only one free trade agreement with NAFTA, formed by the US, Canada and México. Agreements pending Congressional approval are with the Central American countries, CAFTA, and Singapore. Some members of congress are threatening to block CAFTA due to its weak labor and environmental protections. The US is considering negotiating agreements with Colombia, Ecuador, and Perú. Many see these negotiations as a strategy to deflect the creation of a Free Trade Area of the Americas – FTAA, should there be one by 1 January 2005, which seems unlikely.
Colombia: The third tax reform in the last two years is making its way through Congress. It may not bode well for most Colombians as some taxes will be regressive, such as the application of the Impuesto al Valor Agregado (IVA, Value Added Tax or VAT) to all goods, including the basic family basket. New taxes will be levied on dividends and retirement pension benefits, two of the line items excluded so far, plus increases in real estate taxes and the taxing, for the first time, of latifundios, large privately-held tracts of unworked land. Given that an estimated 16% of all arable land in Colombia is assumed to be held by narcotraffickers and paramilitary forces, this tax might not be such a bad idea.
The Supreme Court threw out in 2003 a proposal to increase the VAT by 2% on basic services such as health care, transportation, and unprocessed food. Congress refused to reconsider the proposal until now.
Opponents of the new taxes propose pension reforms that will bring the same revenues to the state without additional tax burdens on an already overtaxed population. Pension reform, which has been debated for the last two years, might include the elimination of fixed retirement benefits and an increase on the retirement age.
Many Colombians do not favor more tax increases. As a Colombian business associate said to me recently: “They can levy all the taxes they want, but if the people do not have work and income, what good do more taxes do?” Colombia’s effective unemployment rate is about 18%.
In looking at corporate taxes, it seems Colombia seeks to emulate Chile, where corporations pay a flat 15% tax on profits, and shareholders pay on a scale of 16%-40% on reported net income.
In past issues of Notice This© in 2003 we discussed the liquidation of Telecom, the state-owned telephone company, by President Uribe to create a new company. The closing of Telecom nullified 16 joint-venture agreements Telecom had with Germany’s Siemens, France’s Alcatel, Canada’s Nortel, and Japan’s NEC and Itochu. The government claimed the joint-venture agreements were in violation of Law 37 that regulates risks and losses in public procurement. The government claims the agreements entered into by Telecom covered only risks, leaving losses out.
Losses crippled Telecom thus giving the government the reason to shut it down. The government is now settling claims that might total US$1.6 billion for breach of the above contracts. But the foreign investors may not come out well: Ericsson settled last week for US$142 million less than what it claimed.
The Ericsson/Telecom case illustrates what we tell our clients: when signing contracts in Latin America, particularly with government agencies or state-owned companies, read the fine print carefully and have in-country lawyers interpret the termination clauses for you in view of local law. Always ask yourself, “What is the worst that can happen?” and have clauses that protect you against it, because the probability that the worst can happen is rather high.
Argentina: The negotiation for the payment to bondholders affected by the country’s deault continues. Argentina insists on paying only 25% on the bonds’ value, claiming investors should have “known the risks of investing” in an economy that was clearly headed for a train wreck. In retalation for Argentina’s refusal to make good on the total US$88 billion in defaulted bonds, foreign courts are beginning to freeze Argentinean assets. A Maryland court did so a couple of weeks ago when it froze US$3 million in assets of the Argentinean Navy and Armed Forces in the US. The court did so at the request of NML Capital Ltd, an investment fund. At their recent meeting in Boca Raton (Florida), the G-7, the group of the seven largest world economies, indicated the possibility of filing joint claims against Argentina on behalf of their bondholders
In the interim, Argentina continues negotiations with the International Monetar Fund (IMF). Argentina is requesting the bank continues the agreement signed between them in 2003 for US$13 billion.
Ecuador: We have been viewing with concern the destabilization of the northern border with Colombia. The Colombianization of the Andean Region, meaning drug trade, guerrila warefare, and political instability, along with a weak judicial systems, poses a significant international security threat in the Andean region.
May times in Notice This© and Regional Focus© we have expressed our belief in that Ecuador does not have the social and economic resiliance Colombia has and that has enabled Colombia to survive close to 50 years of polical and economic unrest. Therefore, the attempt against the life of the president of CONAIE. Sr. Leonidas Iza, and he death of Sr. Patricio Campana, an officer of PetroEcuador, in the same attempt, do not bode well. Those doing or planning to do business in Ecuador would be wise to follow these developments closely. Further attacks against CONAIE members or members of Pachakutik, the Indian political party, will create unstable condiditions. Businesses need to evaluate them carefully when planning their Ecuadorean strategy for the short and long run.
It will be shame if the leaders of CONAIE and Pachakutik persist in blaming the Gutiérrez government for the attempts. Condemnable as they are, these attempts should not cause a break with the government. Ecuador needs unity and a solid front to maintain its business and political traditions: hard-working, ethical (yes, ethical!) people who do not want their country to go the way of Colombia, Venezuela, or even Perú. Let’s hope they do so.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
Andean Region: The Comunidad Andina de Naciones (CAN, Community of Andean Nations) and the Inter-American Development Bank (IDB) are launching before April a project that will fund the activities of Colombia, Bolivia, Venezuela, Ecuador, and Perú in the negotiations for a free trade agreement with the USA, the European Union (EU), and Mercosur, the customs union between Brazil, Uruguay, Paraguay, and Argentina, with Bolivia and Chile as associate members. Concurrently, CAN plans to propose in February the postponement for six months of the imposition of the Arancel Externo Común (AEC, Common External Tariff) that was to go into effect on 1 March 2004. The objective of CAN is to create a convergence of interests and results regarding free trade agreements so the Andean economies, where one country competes with the other four in practically every industry, can benefit from free trade in such a way that an economic crisis in one country does not affect the others. Intellectual property, protection and treatment of foreign direct investment, technical standards, and government procurement are key issues the region would be better off negotiating together. Doing otherwise will create a business environment hampered by conflicting or counterproductive legislation.
Colombia: Time and again we hear about corruption in Latin America as a disincentive to do business. There is a generalized perception in the USA that you need to bend or violate the law in order to succeed in Latin America’s markets. Although cases of corruption in Latin America can’t be denied, as they can’t be denied in the USA, either, our experience shows there are thousands of people who work very hard and legally in every country. These are the people we suggest our clients contract with as distributors, agents, or joint-venture partners.
But we are looking with alarm at Colombia and the peace-promoting decisions of the Uribe Government. The Ley de Alternabilidad (Alternative Law) grants the leaders and members of the Auto-Defensas Unidas de Colombia (AUC) paramilitary house detention and little more than a slap on the wrist in exchange for demobilization. This seems to be a reward for lawlessness and atrocities. Granted, Colombia needs peace, but not at the price of making a weak judicial system weaker by letting self-acknowledged criminals and drug traffickers off the hook, particularly criminals whose extradition the Bush Administration requested because they abate terrorism.
Judging by recent discussions with Colombian friends and business associates, we may be the only ones who disagree with President Uribe. His approval rating is in the 80s and the thrust to amend the Constitution so he can be reelected for a continuous, four-year term is again gaining momentum. Concurrently, the economy grew by 5.6% in 2003 and is expected to grow by 6% in 2004. The Colombian stock exchange gained 278 aggregate points overall in 2003, the highest gain in Latin America. But we believe that, if Colombia is to reestablish its long-lost reputation as a country where the rule of law supports legal business activities, the Uribe Government needs to strengthen the judiciary and publicly declare the law will be applied evenly to all transgressors. This must be done if the country is to attract needed foreign direct investment and benefit from the free trade agreement it will soon begin negotiating with the USA. A judicial system that coddles criminals is an incentive to tax evasion, nonperformance of contracts, bribery, and abuse - hardly the basis for dependable business performance.
Regarding the soon-to-be-negotiated US/Colombia Free Trade Agreement, president Uribe and Colombia’s four major, traditional economic groups, Grupo Santo Domingo, Organizacion Ardila, Grupo Antioqueño, and Organizacion Sarmiento, need to look at México and the lessons of the North-American Free Trade Agreement (NAFTA). NAFTA’s results show the Mexican companies that survived and prospered were the ones that modernized their infrastructure and adopted globally competitive managerial practices. Mexican companies that were close to the negotiation process, companies that learned first-hand what was going to happen, had the time necessary to adjust. Those that did not perished or were acquired. This is why the free trade agreement negotiation process must be transparent, particularly now that the government is demobilizing at least 15,000 paramilitaries without even basic education. They will join the 17% unemployed, which includes professionals. A free trade agreement will need to create employment and advance the skills pool. One Mexican lesson Colombia can’t afford is the “maquilization” of large segments of the economy, a centerpiece of NAFTA. Colombia can’t compete against México or China when it comes to maquila operations. It has neither the geographic proximity of México to the USA nor the low-wage advantages of China. And Colombia does not have the Mexican unemployment release valve of sending its migrants to the USA. Therefore, along with the negotiations, Colombia’s traditional and dependable legal economic sectors need to prepare their companies and their workers, particularly those in agriculture, textiles, and basic manufactures, for a market opened to stiff global competition.
If the Colombian free trade agreement negotiations expand into negotiations for an Andean Free Trade Agreement as noted above, Colombia, México and Venezuela, the so-called G-3, do not have complementary economies; theirs are competitive economies, with similar industries and companies that pursue the same international markets. This will make negotiations much more sensitive. Until Venezuela’s economic decline under President Chávez, Venezuela followed the USA as Colombia’s second largest trading partner. A free trade agreement with the USA will certainly affect Colombia’s commercial relations with Venezuela and the rest of the Andean Region. Therefore, a commonality of interests and threats must be the guiding premise in all these negotiations.
Brazil & India: We often repeat in Notice This© and in Regional Focus© our concern about the threat China and India are posing to USA commercial and security interests in Latin America, particularly in Brazil. And let’s not overlook the threat posed to the majority of Latin American companies, most of which are family-owned small or medium size operations. While the U.S. keeps either a hands-off policy toward the region, or attempts to pressure it into marching lockstep with its global policies, Chinese and Indian companies and Latin American governments strengthen their commercial ties under an umbrella of “let’s do business, and let live.” For example, Brazil’s president Luiz Ignacio Lula da Silva, “Lula,” spent this week on a four-day trade development mission to India which highlighted a Joint Ministerial Meeting. Lula took to India 100 industrial leaders from Brazil. Despite setbacks in their mutual relationship, Brazil and India signed an Agreement on Preferential Commerce (Accord de Comerica Preferential) with special emphasis on industries key to Brazil’s growth, such military procurement, information technology, communications, pharmaceuticals, satellite development and launching of jointly-built minisatellites from bases in southern India, and film making in Brazil by Indian companies. The agreement opens the way for interchanges in technology and sharing of research results. The governments also signed agreements on tourism and cultural exchanges. Brazilian trade with India was US$1.4 billion in 2003, but the country is one of Lula’s commercial objectives.
At India’s request, Brazil will be showcased as a joint-venture partner at the India International Trade Fair in New Delhi in November 2004.
The Agreement on Preferential Commerce with Brazil is the centerpiece of the agreement between India and Mercosur. Representatives of India and Mercosur will meet in Buenos Aires in March 2004 to determine the preferential treatment granted to 1,500 products to be exported to India and vice versa. This is a precursor to negotiations for a full free trade agreement between India and Mercosur. Indian’s Prime Minister, Atal Bijari Vajpayee, will visit Brazil in June.
In the meantime, Lula’s pragmatic economic policy continues. The Comitê de Política Monetária (COPOM, Banco do Brasil’s Committee on Monetary Policy) decided at the first 2004 meeting to keep the Serviço Especial de Liquidaçao e Custódia (SELIC) rate at %16.5, the rate banks pay for borrowing money from one another. However, according to José Dirceu, Chefe da Casa Civil, it is probable that COPOM will lower interest rates between 3% and 4% during 2004. The performance of the global and Brazilian economies as well as the success of Lula’s social programs will determine how fast and how deep the reduction will be. The recent decision of the Brazilian government not to renew the stand-by loan guarantee granted last year by the International Monetary Fund (IMF) is a good sign Lula’s policies are working. In addition, his approval rating continues at an all-time high.
However, the predicted increase of 9.5% in the price of gasoline, 7.8% in utilities rates, and 6.6% in fixed telephony rates will put stress on the economy. These three sectors account for about 30% of the Consumer Price Index – CPI, or the Índice de Preços ao Consumidor Amplo (IPCA). In another move to equalize the price of domestic and imported products, the government announced a Medida Previsoria (Executive Order) to go into effect on 1 May 2004 that increases COFINS and PIS taxes; COFINS, the Social Security Funding, will be 7.6% and will not be paid at every stage of production, but it will be a lump-sum on the finished product. PIS, the Social Contribution Tax on Revenue, will be 1.65% over gross revenues.
Bolivia & Chile: We continue to be puzzled by the contentious stance the Bolivian Government is taking regarding negotiations for ocean-access by Chile. Bolivia already lost an estimated US$5 billion when Consortium LNG moved its gas contracts to Indonesia rather than waiting for the resolution of the proposed route for natural gas from Bolivia to Chile or from Bolivia to Perú. Territorial sovereignty is very important. But in the age of globalization, it requires economic clout to maintain it and Bolivia can only enhance hers if it reaches an agreement for access to the ocean through the Chilean port of Patillo. While Bolivia and other Andean countries strategize how to negotiate a free trade agreement with the USA, Chile has one and China became Chile’s second largest trading partner in 2003. Chile then presents an excellent platform for Bolivian products to enter Asia. In addition, Chilean managerial practices can only help Bolivia raise its skills pool. Witness the case of Santa Cruz de la Sierra and its growth under the influence of Brazilian and other foreign managers who work in the oil and natural gas industries in Santa Cruz. It is highly probable that without the Brazilian and Argentinean influx of highly skilled professionals and workers, Santa Cruz might have remained the capital of the coca paste industry in Bolivia.
Bolivia can hardly afford to go back to protectionist measures. Bolivia would be wise to accept the offers made by México’s Vicente Fox and Brazil’s Lula to help it negotiate a fair agreement with Chile. The Bolivian negotiations for a free trade agreement with Chile, now on hold, need to be reactivated soon. Given current global pressures, it seems unwise for Bolivia to let a 1904 agreement stand between economic growth and history. The 1904 agreement sealed the territorial dispute over which Brazil and Bolivia fought the War of the Pacific, in which Bolivia lost its Atlantic Ocean provinces to Chile. Either Bolivia acts now or technology advances in alternative fuels may entice the world to bid goodbye to Bolivian gas, as Consortium LNG already did.
If Bolivia persists with a hydrocarbons law that seems to be in disarray and based on “kicking Chile out,” it will not obtain the profits it can from its 54-trillion cubic feet in natural gas reserves. The October 2003 protests that forced a change in government had natural gas as a key issue. Therefore, it behooves the government to inform the public by whatever means so it can gain the masses’ support for the exploration and commercialization of natural gas. The government stands little chance of passing the proposed Hydrocarbons Law without broad public support. This is important information for those who wish to participate in this industry in Bolivia or those who are already working in it because royalties and how they will be paid by Bolivia are central to the new legislation scheduled to be presented to President Mesa on 30 January 2004.
Bolivia: Those interested in public works, such as roads and relevant construction, might find good opportunities in the US$159 million Brazil’s Bnbc-Proex will invest in building roads to connect Brazil and Bolivia. CAN will contribute an additional US$35 million to the project, the largest of its kind in recent times. The two roads involved in these projects are: Borja to Trinidad, and Bermejo to Guayaramerin.
Those who do business with Corporación Minera de Bolivia (Comibol), need to pay close attention. The government appointed a new Board of Directors whose objective is to focus on reactivation of production and development of mining resources. The Board will request powers that will enable it to operate independently from the Ministry of Mining, so Comibol can create a dependable and clear policy towards “production, commercialization and industrialization of mining products.” Mining accounts for 30% of Bolivia’s exports.
Chile: We repeatedly emphasize the inroads of Asia, particularly China, in South America. Witness the case of Chile. Despite the fact that a Free Trade Agreement with the USA went in effect on 1 January 2004, Asia, particularly China, is fast on the heels of the USA in Chile. Chilean exports to Asia increased by 30% in 2003, with copper and cellulose leading the trend. China and Japan are the main destinations and represent about 27% of all exports. Exports to the EU increased by 20%, while exports to the US reached only 14%, a decline of 0.5%. And Chile’s shipments to Mercosur increased by 23%.
Costa Rica: It finally gave in to pressure by the USA and joined the Central America Free Trade Agreement (CAFTA), formed by Guatemala, El Salvador, Nicaragua, and Honduras. The agreement means that Costa Rica will fully open its telephone and insurance industries to the USA and other foreign companies by 2011. This will cover wireless communications, Internet services, and network services. The Dominican Republic is expected to join before the agreement is presented to the USA Congress sometime in 2004. Under the Trade Promotion Authority (ATP) granted to President Bush by Congress, it can vote up or down, but can’t amend the treaty as agreed by the signatories. Despite opposition by labor unions and some members of Congress, Republicans and Democrats, CAFTA is certain to pass Congress to go into effect on 1 January 2005. Costa Rica represents about 30% of Central America’s trade with the USA. CAFTA nations now represent the second largest trading zone in Latin America after Mexico.
Ecuador: The IMF will go to Ecuador in February 2004 to give its seal of approval to the economic performance of the Gutiérrez Government. According to the IMF, Ecuador has three key advantages in 2004: the full operation of the Oleoducto de Crudos Pesados (OCP), the crude oil pipeline; a depreciation in the dollar against the Euro, which means a higher volume of remittances from Ecuadorians residing in Spain and Italy, Ecuador’s second largest source of foreign reserves; a projected increase of 22% in exports to the EU; and, low international interest rates. However, Ecuador has some thorny issues to resolve: the liquidation of insolvent banks; flexibility in labor union contracts; tax reform and its implementation to result in higher tax collections; independent management of the telephone companies; transparency at PetroEcuador, the state-owned petroleum company; and, the threat to its stability by the spillover of unrest in the southwest part of Colombia.
Regarding the potential new independent telephone operating company, the government will have to clarify who will be the entity ultimately responsible for rates and the outsourcing of some services. It is going to be the Consejo Nacional de Telecomunicaciones (CONATEL, The National Telecommunications Council), or the Independent Operator? Those interested in this matter need to remember that under the current Law of Telecommunications, CONATEL is the entity charged with rate setting. Those bidding on this project need to read the fine print carefully to avoid costly surprises and, as we advise our clients, have the contract interpreted by Ecuadorian attorneys who specialize in telecommunications and government procurement. So far the only bidder is EUROCOM, the consortium created by Norway’s Telecom Management Partners, and Ecuador’s Fononet S.A. It is interesting to note that Teléfonos de México (Telmex) and Telefónica de España are absent from the bidding, probably saving their resources for the battle over the privatization of Embratel in Brazil which will take place by mid-2004.
Speaking of Free Trade Agreements, here is an interesting issue: the protection of intellectual property of “traditional knowledge” based on natural plants, oral traditions, and non-vegetable organic matter. That is, a peasant who has medicine-related knowledge, passed to him or her, from generation to generation, that uses “natural medicines” that indeed cure; how are they to be treated under the IP protection chapters of the potential free trade agreement between Ecuador and the USA? Current IP law in Ecuador does not protect this type of knowledge and medicinal compounds are not patentable either unless they are the result of genetically modified plants or double-blind tested chemical processes. Two cases that ended up in USA jurisdictions shed light on this subject. In one a US citizen tried to patent the hammock; the court filed for the Peruvian plaintiff because the hammock is so standard that no one can claim to it. In the other case, again, a US citizen filed for a patent on ayahuasca, a hallucinogen considered sacred in the Amazonia. The patent was also denied and remanded to Ecuador. But there are other claims pending and this type of knowledge, which forms a vast reservoir of potential income yet untapped by their owners who certainly do not wish it to be transferred to foreign governments without fair recompense.
Argentina: Those with contracts to render services in Argentina need to pay attention to Resolution 9/2004, enacted by the Secretariat of Technical Coordination of the Ministry of Finance. The resolution will consider “abusive and unjustified” unilateral increases in rates for prepaid medical care, mobile communications, and those set by financial institutions and commercial banks. This will affect immediately those who provide prepaid medical care and planned to increase rates between 10-15% beginning 1 February 2004.
President Kirchner met this week in Spain with representatives of Telefónica and other Spanish companies that provide public services in Argentina. The companies will seek redress because they claim they have been unable to raise rates since 2001. The companies claim this is in violation of the privatization contracts they entered into with the government of President Menem. But Kirchner insists Argentina will not recover by squeezing the general population more than they already have been. A main bone of contention is the Government’s insistence on paying only 25% on the total amounts due foreign bondholders.
This does not bode well for the meetings between Argentina and the IMF this week. Argentina seeks to renegotiate loan guarantees of U$12.5 billion. It seems that somehow the IMF appears satisfied with the results of the government’s economic policies. Never mind that about 40% of Argentina’s economic activity is based on barter and credit extended by local neighborhood business, backed by a handshake. However, Argentina still needs to resolve how it will satisfy foreign obligations that total US$88 billion and upon which it defaulted in 2002.
México: It will support the efforts of the Central American and Andean Countries to negotiate a free trade agreement with the EU this year. President Fox will present a motion to initiate negotiations at the Euro-Latin American Summit Meeting, in Guadalajara. in 28-29 May 2004.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
World Economy: Our suggestion to those doing business or interested in doing business in Latin America: It is time to pay attention to APEC (Asia Pacific Economic Cooperation) and its Summit Meeting on 20-21 October 2003 in Bangkok, Thailand. The meeting will focus on strengthening regional integration and on increasing commercial ties between APEC and Latin America. Chile will host the meeting in 2004 as a showcase to facilitate such integration.
Considering the direction in which APEC moves is important because of the inroads Asia and China are making into Latin America, which translates into increased competition for the region’s markets, particularly in key sectors, such as: telecommunications, environment, information technology, agribusiness, infrastructure, and finance.
The Region: Although the countries involved are denying it, Ecuador joined six Latin American countries that, in principle, left the Group of 22 in the last two weeks, reportedly under pressure from the U.S. Trade Negotiator’s Office. This is the group that bolted against the U.S. and the European Union (EU) during the Cancún trade negotiations in September, when the U.S. and the EU refused to negotiate their agricultural subsidies while asking the Group’s countries to open their agricultural markets to U.S. and EU imports. It is interesting to note that each of the countries leaving the Group of 22 is currently negotiating a trade agreement with the U.S.: El Salvador, Costa Rica, and Guatemala are negotiators for the Central American Free Trade Agreement (CAFTA), which might be finalized by November 2003. Colombia and Perú are preparing to initiate negotiations, and so is Ecuador. These are small economies that need the U.S. markets, but they should be careful and look at México to learn how a free trade agreement with the U.S. can hinder some sectors. Negotiating for their best interests in the long run should be the key consideration for these countries given that agricultural exports to the U.S. are central to their economies. Witness what happened to basic agriculture in México under NAFTA: small producers were driven to bankruptcy by the thousands. (For more on this subject, please see the 3 October 2003 issue of Regional Focus©, “CAFTA and Costa Rica: Who Wins, Who Loses?©”)
The remaining Group of 16 is formed by: Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, Philippines, India, Indonesia, México, Pakistan, Paraguay, South Africa, Thailand, and Venezuela. Brazil and Argentina are also part of the CAIRNS Group, which includes the largest agricultural producers and exporters, excluding the U.S. Cairns members are: Argentina, Australia, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia, Malaysia, New Zealand, Paraguay, Philippines, South Africa, Thailand, and Uruguay. CAIRNS countries will play a crucial role in future world trade negotiations as agricultural issues continue to influence politics.
In the meantime, Brazil and India will lead the Group of 16 in preparation for continued negotiations within the World Trade Organization (WTO) and at the Americas Miami Summit in December 2003. (If you wish to learn why China, Brazil and India remain together, please see the Harvard Business Review America Latina, October 2003, pp 88-89, for my article “Similitude’s queue Union©” – “Similarities that Bind©”).
For those who believe the Group of 16 is following a wrong-headed foreign trade policy, here is an illuminating fact: According to Veja, the largest 20 exports from Brazil to the U.S. enter the latter under an average tariff of 39%, while Brazil’s average import tariff on U.S. goods and services is 10%. Agriculture is the make-or-break issue in the negotiations for the Free Trade Area of the Americas (FTAA), now underway and co-chaired by Brazil and the U.S. The U.S. Trade Negotiator’s Office claims Brazil levies a 37% tariff on agricultural imports from the U.S. The fact is that although Brazil’s tariff ceiling is 37%, it levies a 14% tariff against the U.S.
Before we begin the discussion on opportunities in different countries, let’s begin by focusing on the tense and dangerous situation evolving in Bolivia.
Bolivia: We continue to view the situation there with dismay and worry. The number of dead may be 30 or 60 in the current rioting, which we regret profoundly. This is very bad, but what counts is that president Gonzalo Sánchez de Lozada has a constitutional responsibility to negotiate with the diverse groups that are opposing him as the Bolivian Constitution protects all Bolivians and not those favorable to the president. Sánchez de Lozada’s government will be better served if the president initiates negotiations, or an approach, to the leaders Evo Morales, a member of Congress and the head of the Cocalero Movement, and Jaime Solares, president of the powerful Central Obrera Boliviana (COB, the largest labor union) who have greater approval ratings than the president who has only 6%. The fact is that if elections were held today, Evo Morales would win by a large majority. Let’s not forget that Sánchez de Lozada defeated Morales by a scant 1% in the last presidential election.
The reported summary executions by members of protesting peasants by the armed forces are no solution. Sánchez de Lozada’s refusal to negotiate with the protesters, claiming their open discontent and national strikes result from the influence of drug traffickers and actual or potential terrorists, is not conducive to a constitutional resolution of the conflict. What governments in Latin America need to understand is that people who previously had no voice have found one. The U.S. can threaten, as it did two days ago, to cut aid and block Bolivia financially; it has the power to do so. However, the U.S. is seen as part of the problem because, from the Bolivians perspective, it has forced the Bolivian government to eliminate the Altiplano’s major cash crop: legal coca, not cocaine, without dependable alternative sources of income.
It is critical that the region’s governments and the U.S. understand and accept that the Bolivian strikes are neither socialism nor communism, or carried out by a bunch of drug traffickers inciting the populace. It is a fact that many segments of Latin America’s publics want a voice in national issues that affect their livelihood. Either the governments give them space to do so, or they are going to take it, with deleterious consequences to all, which is what is happening in Bolivia, effectively crippling the country. At this point, it may be helpful to recall what the French philosopher Voltaire said, “If there is a God, may He protect us from the power of the powerless,” which means those who have nothing to lose, have nothing to risk, except a life on the edge.
Few would argue against the Bolivian protesters’ basic claims: the destruction of plantations dedicated to grow legal coca, a staple of the economy and way of life of the Bolivian Altiplano for centuries. And the non-trickle down of the fortunes some Bolivians and a few multinational corporations made in the heyday of tin and bauxite have kept the majority of Bolivians in poverty. It is no wonder they are fighting to get a share of the natural gas revenues, since substitution crops, such as pineapples and oranges, rot on their way to market because the country lacks appropriate road infrastructure and refrigeration facilities. Coca assuages hunger and brings cash; pineapples and oranges do neither.
The sooner Sánchez de Lozada recognizes that he can’t govern with 6% approval rating and more than half the country in an indefinite national strike, the better off Bolivia will be. The die is cast, and the government will have to negotiate with leaders it may consider unworthy, but negotiate it must. And all sides will have to give some to gain some. This is what negotiation is all about. The longer the situation lasts, the bigger the damage to Bolivia and to the region.
It is interesting to note that the Republican Administration that supported the “ousting” of the Democratic governor of California because Mr. Gray Davis was incompetent to manage the state is opposing the ousting of Sánchez de Lozada who has less support than Mr. Davis had. Looking at each man’s record in office, Sánchez de Lozada has mismanaged Bolivia worse than Mr. Davis did in California.
We can’t forget the international community’s proclivity for bunching Latin America into a cohesive whole, which it is not. I would not be surprised if pretty soon we begin hearing about the “Bolivian Effect” and predictions of similar potential instability in other countries, particularly in the Andean Region. Add to this the fact that the Lula Government in Brazil is contending with its first major strike by Banco do Brasil and Caixa Econômica Federal, to be followed by others. (Please see the section on Brazil.)
As we say in Latin America, it is silly to fight with one’s food, in this case Bolivian natural gas. Those of us who have followed the issue have learned that Perú’s offer seems better than the one presented by Chile. In the latest reports, Perú is willing to give Bolivia sovereignty over part of Ilo port, something Chile does not seem willing to do in Patillo, the port the Chileans are offering. What is at stake here is much more than whether the gas is exported through Chile or through Perú. An investment of about US$8 billion by Consortium LG of Bolivia is worth preserving for its job and wealth creation capabilities. But, strikes and people killed on the streets, even if the armed forces see them as outlaws, are some of the most effective disincentives to investment, national or otherwise. So, if Sánchez de Lozada can’t or won’t negotiate, he should have the presence of spirit to step down and leave his job to one who can and will, for if the unrest continues, his days are counted. Here is a suggested replacement: Ex-President Jorge Paz Zamora, who is the only Bolivian president to leave office with the highest approval rating in the country’s history. A brilliant, moderate, and highly convincing man, Paz Zamora seems to me the best Bolivian available to solve the crisis.
It is important to clarify that Sánchez de Lozada’s move to stop shipments of natural gas until an agreement is reached did not apply to Brazil but to the proposed shipment to the U.S. and western México, one of the reasons for the strikes. By Supreme Decree (Executive Order) 27210, the government committed to not export gas to new markets without the conclusion of a national debate which needs to occur by 31 December 2003. The national debate will focus on whether to export the natural gas through Chile or Perú, and on how the royalties should be distributed and reinvested to the benefit of all Bolivians and not of a small group of national and international investors. The Central Obrera Boliviana (COB), the Cocalero Movement, the Confederación Sindical de Trabajadores Campesinos de Bolivia (CSUTCB, Bolivian Confederation of Peasant Workers,) and other civic associations rejected 27210, stating the resignation of Sánchez de Lozada is a prerequisite to any negotiation or debate which should be ratified by a national referendum. As we indicated in the 3 October 2003 issue of Notice This©, prior to the strikes, a final decision on the port was scheduled for January 2004.
Venezuela: As if the country’s economy needed one more drawback after the strikes and layoffs that led to the reorganization of PdVSA by the Chávez Government at the beginning of 2003, the implementation of the Ley de Tierras (Land Law) is taking the conflict to the countryside. Members of peasant cooperatives in the states of Mérida and Zulia are beginning to occupy the lots assigned to them by the Instituto Nacional de Tierras (INTI, National Land Institute). The core of the conflict lies in who has legal title to the confiscated land. The government, by Decree 2294 of 31 January 2003, issued Cartas Agrícolas (Land Titles) to land it claims belongs to the state but has been held in de facto tenancy by private individuals for at least 20 years. Other lands belong to private owners with legal title over the tracts in dispute. The Chávez Government is ignoring the decision of the Tribunal Supremo de Justicia (TSJ, (National Supreme Tribunal) that annulled the expropriation paragraphs of the Land Law. In the coming months, the government plans to deliver 30,000 Cartas Agrarias to peasant cooperatives in Barinas and Anzoátegui states.
Land tenure is at the center of Latin America’s struggles between peasants, the middle class, and the rich. Witness the upheaval in Bolivia right now, and the forced occupations of private property by the Movemento dos Sem Terra (MST, Movement of the Landless) in Brazil. It is an incendiary theme in the region, and Venezuela’s finqueros (hacienda owners) will not let go easily. If the forced land tenures continue, Chavez may find himself with a countryside problem bigger than the one he has in Caracas and other major cities. Adding the land-tenure fuel to the tense situation in Venezuela only brings us closer to a potential blood bath. This is one more reason why the Coordinadora Democrática, the umbrella opposition group, has a responsibility to find and field a candidate who can replace Chávez not by further polarizing Venezuela, but by uniting it as much as the damage already done permits.
Brazil: As we go to press, President Lula will begin a two-day trip to Buenos Aires. Lula is seeking to strengthen economic and political ties among the Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay, with Chile and Bolivia as associate members). During the visit, Ministers of Finance Roberto Lavgna (Argentina) and Antônio Polocci (Brazil) will sign an agreement on technical cooperation and on sharing information on monopolistic competition and mergers and acquisitions with binational implications. Uruguay and Paraguay are negotiating similar agreements within Mercosur which will be finalized soon.
Given the Bolivian crisis, we are watching the operations of Petróleo Brasileiro (PETROBRAS) in Bolivia’s Santa Cruz de la Sierra region, Bolivia’s natural gas capital. As reported in Journal do Brasil, Petrobrás seems confident its operations will continue normally. This means that shipments of gas from Santa Cruz to São Paulo through Petrobrás’s Bolivia-Brazil natural gas pipeline continue without interruption. The pipeline carries 12 million m³/day. Petrobrás is currently negotiating with Bolivia to increase capacity to 30 million m³/day.
Politics makes strange bedfellows and, in our view, stranger opponents. The Lula Government is faced with a national strike by Banco do Brasil and Caixa Econômica Federal, the largest pension fund in the country. On 14 October, 30,000 workers from these organizations stopped work indefinitely in the states of Rio de Janeiro and São Paulo, and in Brasilia, the capital, Porto Alegre in Mato Grosso do Sul, and in the ABC Paulista, the industrial center of the country. The Confederação Nacional dos Bancários (National Confederation of Bank Employees) is part of the Central Única dos Trabalhadores (CUT), Brazil’s largest trade union and a traditional ally of the Partido Trabalhista (PT), Lula’s party. The strike is over salary increases due to 29,000 employees. Banco do Brasil is offering increases of 12.6%, up from its initial offer of 6%. In all, 145,000 employees (90,000 Banco do Brasil, and 55,000 Caixa Econômica Federal) are due for increases and/or promotions.
Next week, the Federação Única dos Petroleiros (FUP, Only Federation of Petroleum Workers) is expected to formally refuse Petrobrás’ offer of 11% increases. In the ABC Paulista, which encompasses the cities of Santo André, São Bernardo do Campo (home to Embraer), and São Caetano do Sul, the union of metal mechanics (Sindicato dos Metalúrgicos do ABC) is calling for staggered work stoppages that will affect Metal Leve, Otis, Volkswagen, DaimlerChrysler, Ford, and Scania. The workers are demanding 20% salary increases and a reduction in the work-week from 44 to 40 hours. About three months ago, Volkswagen threatened to close the plant in the ABC if it did not gain union concessions on labor contract flexibility that would permit laying off some workers.
The strikes create an unfortunate environment because international investors who have supported Lula’s economic policies so far might be spooked and put Brazil on hold at a time when foreign direct investment was returning to the country. Adding to this uncertainty, industrial production in August showed negative results compared to the same period in 2002. The lowest decline was in Rio Grande do Sul, with Bahia showing the highest drop, 11.4%, compared to the national average of 1.8%. Espírito Santo increased by 11.6% due to investments by Petrobrás in new oil exploration. Grande São Paulo grew by 1% after declining for the past four months.
The Lula Government met this week with its ministers to sketch the new Biosafety Law that will, in part, clarify the norms for the cultivation, transportation, and distribution of transgenics within Brazilian territory. Lula is close to disclosing the country’s new Industrial Policy. It is interesting to note the announcement about the industrial policy was made by Minister of Development, Industry, and Foreign Trade, Sr. Luiz Fernando Furlan, as he departed for a trade mission to China. The policy was elaborated by the other two ministers who form Lula’s economic team: Dr. Antônio Polocci (Economy) and Sr. Guido Mantega (Planning.) Among the changes is the new Modergarga Plan, which will reduce interest rates on the purchase of transportation equipment, and an increase from R$34 billion to R$47 billion in the 2004 budget of Banco Nacional de Desenvolvimento Econômico e Social (BNDES, National Bank for Economic and Social Development). It is being rumored that among the ministerial and appointment changes to be made by Lula in January is the naming of a replacement to Mr. Carlos Lessa as head of BNDES.
Bidding Time! Several people called me this week to ask if the US$700 million bid by Brazil’s Defense Ministry would be transparent. The bid calls for 12 jets and equipment. The winner will be announced in the first half of 2004. The contestants are: BAE Systems (UK), Saab AB (Sweden), a consortium between Empresa Brasileira de Aeronáutica (EMBRAER) and France’s Dessault Aviation, Lockheed Martin (US), Sikhoi (Russia) and its Brazilian joint-venture partner Avibrás Aeroespecial. Regarding transparency, I believe all signs from the Lula Government indicate Brazil is playing by international rules. This may be a test of Lula’s policy to give preferential treatment to national companies in all procurement by government agencies and state-owned enterprises. But before you jump to the conclusion that the bid will be rigged in favor of EMBRAER or Avibrás, I suggest you think it over, for it does not need to be. EMBRAER is the fourth largest airplane manufacturer in the world. Its jets are world-class and its 170 Jet Simulator was just approved by the FAA (US. Federal Aviation Authority) and the JAA (European Joint Aviation Authority) for immediate training of cockpit pilots. The 170 was also qualified by the DAC (Brazil’s Department of Civil Auronautics). It is a superbly managed company, with top-notch professionals in all key positions. Avibrás is the largest Latin American arms supplier. And don’t forget the cultural advantage of EMBRAER and Avibrás: They know how their armed forces operate and their needs in a way that foreigners would find it difficult to grasp. I believe the bid will go to the best company and it will transparent, but I can’t deny that EMBRAER and Avibras have advantages other bidders do not have. If the Brazilians win the bid, rest assured it went to the best bidder, from a Brazilian perspective.
Argentina: The saga of how and when foreign bondholders will be paid continues. Recently, the Kirchner Government indicated that Argentinean assets abroad can’t be confiscated because they are the property of a sovereign government. Argentina claims such confiscation is forbidden by international law. It seems Argentina is afraid the presidential plane, and the real estate in which its embassies and/or consulates operate may be confiscated. The Argentinean government is being sued in the U.S. and the EU for threatening to pay only 25% of the value of bonds held by foreigners. 17 November 20003 is a key date in this saga. This is the deadline for Argentina to counter the suit entered against it by CMS Gas Transmission of the U.S. before the World Bank’s International Center for the Settlement of Disputes Related to Investments (CIADI), in Washington, D.C. Twenty more U.S. companies have filed similar suits with CIADI. The Southern District Court of New York filed for Kenneth Dart and three other U.S. investors on a series of bonds that mature in 2008 but on which Argentina defaulted.
I am sure the Argentinean government was not planning to do one “in your face” to the U.S. when it decided to resume full diplomatic relations with Cuba last week. But this will certainly not sit well with the U.S., where some of its international investors have suffered heavy losses by Argentina’s default. Argentina is planning to establish bilateral commercial relations with Cuba, particularly in the area of agriculture. Argentina has advanced bioagricultural practices which would certainly be beneficial to Castro.
I am not a supporter of Castro by any means as I believe he is an anachronism. The reality is that he will not live forever, and has no one to succeed him and rule over Cuba as he has done. Therefore, those already in Cuba will be the primary beneficiaries when the island opens up after his death. U.S. companies may find they lost their market in Cuba due to a U.S. policy which has outlived its usefulness.
Perú: In his visit to Europe this week, President Alejandro Toledo will advance his government’s proposal for a free trade agreement between the EU and Perú. Toledo is seeking the support of Germany, France and Spain in this effort. Toledo is also participating in the pre-APEC Summit meetings in Thailand. Perú is the only Latin American country with projected high growth rates of 4-5% for 2003, and of 6-7% for 2004. The best investment opportunities are in mining, agribusiness, tourism, water treatment facilities, environmental remediation technologies, education, and infrastructure, particularly roads, airports, and ports. During Toledo’s visit, Perú and Germany will sign a cooperation agreement for the exchange of technology and a loan for E$21 million granted by the Kreditanstalt fuer Wiederaufbau, Germany’s development bank.
Ecuador: The Corporación Andina de Fomento (CAF, Andean Development Corporation) loaned the government US$20 million and the Inter-American Development Bank (BID) loaned US$100 million. These loans are a powerful backing to the economic policies of President Gutiérrez. It is rumored the International Monetary Fund (IMF) has approved the second review of Ecuador’s Economic Plan and will release US$42 million in the near future.
Five companies are competing for the management of Andinatel and Pacifictel, the two telcos that must be managed by outsiders to comply with requirements set by the IMF. Among them is Empresas Públicas de Medellín (EEMM) (Colombia) which many consider to be the best managed public services company in Latin America. Others are: Interestate (US), Telecom International Management Group (US), Telecom Italia Sparkle (Italy), and Telefónica Internacional (Spain). Telefónica is the largest telecommunications foreign direct investor in Latin America. Two other companies bid through their legal representatives in Ecuador, but their names were not disclosed. Speaking of transparency!
Chile: The Informe de Política Monetaria (IPOM, Monetary Policy Report) of the Central Bank lowered growth projections for 2003 from 3-4% in May to 3-3.5% for the rest of the year. However, IPOM is projecting 2004 growth of 4-5%, helped by the free trade agreement with the U.S. and the push for economic collaboration between Chile and APEC, which will be central to Chile in 2004. Chile’s government is on a concerted effort to increase educational levels, particularly in technical fields. Anyone who can help Chile do this will have a warm reception. Those interested should contact the Ministry of Education or the Corporación de Fomento de la Producción (CORFO).
On the private sector, companies will look internationally for growth and to achieve efficiencies of scale. The top-level business meeting, El nuevo mapa de negocios (The New Economic Landscape) emphasized that the free trade agreements Chile signed with the U.S. and the EU will create a two-tier business environment: companies that will succeed and those that will perish. Chilean companies are aware of the fact that Chile is a small economy, albeit very well managed, accounting for 0.02% of global GDP. This is why they focus on efficiency improvements to mitigate the shortcoming of size and low diversification of production. The focus on efficiency and a sound economy enable Chile to attract greater amounts of foreign direct investment per capita than other Latin American countries with larger and more diversified economies.
For those interested in Chilean IPOs, here are some companies rumored to go public in 2003-2004: Supermercados Jumbo; Laboratorios Andrómaco; Ripley; Ferrocarril del Pacífico; and Teleductos.
Colombia: 26 October 2003 will be a crucial date for Colombia and for the Government of Dr. Alvaro Uribe Vélez. A national referendum that will require a yes vote by 6 million plus 1 registered voters will open the way for Constitutional reforms. One of them, if passed, will allow for the president to be reelected for an immediate four-year term, or to be reelected for non-consecutive terms. Although we support some of the policies of the Uribe Government, we oppose reelection. We believe change, even in chaotic Colombia, should come from leadership and not from malleable institutions. If the Constitution is reformed now to keep Uribe, a highly moral and strong president, would it be changed again not to elect or reelect an unsavory or incompetent character, as some of those who preceded Uribe?
That there is no leader in Colombia now with the moral authority and prestige of Dr. Uribe can't be denied. But, equally true, Dr. Uribe is not irreplaceable. Dr. Enrique Peñalosa, former mayor of Bogotá, is an accomplished manager and a man of undisputed probity, He would make an excellent president worthy of following on Dr. Uribe’s footsteps. And Dr. Uribe can keep his prestige intact without being marred by the perception that he supported a Constitutional change so he could remain in power, aided by his dictatorial style.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
The Region: As some of us expected, the talks at the World Trade Organization (WTO) meeting collapsed in Cancún, México. While blame is passed around as to who was responsible and for what reasons, what is crucial is that a new Group of 22 countries, headed by China, India, and Brazil, united in what appears to be a common cause: fair access to international markets and a level playing field in multilateral trade negotiations.
The European Union (EU), the United States and Japan would be wise to listen and not dismiss the results of Cancún as a tantrum by lesser countries that know no better. The Group of 22 (China, Brazil, India, Argentina, Bolivia, Chile, Colombia, Costa Rica, Cuba, Ecuador, Egypt, Guatemala, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Peru, Philippines, South Africa, Thailand, and Venezuela) now realize that growth needs to be shared as fairly as possible within their borders. The failed promises of globalization and free trade agreements have put great pressures on these countries to come up with alternative or modified growth plans that are still based on the market model. It can’t be denied that globalization and free trade agreements raised income levels for some sectors but, at the same time, poverty has increased. And poor people are restive all over the world. If you look at the internal economic policy proposals of these countries, they are all committed to growth with justice. This is a tall order as justice can be defined in many ways, but what these countries can’t afford is to continue to enrich a minority while the majority barely ekes out a living. This is a recipe for political failure that in time will affect not only the Group of 22 but also the developed world.
Witness the case of China, whose commercial agreements and activities in Latin America should be a matter of concern to the U.S. and the EU. A recent article in The New York Times indicates the government of Wen Jiabao is moving from “growth-at-any-cost” to a model of “sustainable growth.” Sustainable growth is also the model being pursued by Brazil, Argentina, Perú, Colombia, and Bolivia. This shows there is policy complementarity between China and these countries. This will facilitate commercial relations. This is very different from the policy of divide-and-conquer the U.S. seems to be pursuing by moving to negotiate bilateral agreements with Colombia, Perú, Bolivia, and the Central American countries as a means to undercut Brazil’s negotiating position for a Free Trade Area of the Americas (FTAA). By the way, we do not believe there will be an FTAA. If there is one, it will not be by 1 January 2005 and it will so diluted by bilateral agreements that it will be, at best, a shadow of what was first proposed in Quebec.
China’s new development policy will be officially promulgated at the Party Congress in October 2003. We will be watching it closely as we are carefully following the activities of China and Asia in Latin America. We believe it is a threat to U.S. and EU companies operating in the region, or wishing to do business there. Dismissing the Chinese and Asian presence in Latin America is a failure in due diligence that will dearly cost to those who ignore it.
Ecuador: Down but not out, telecommunications continues to be vital to Latin America. No country can operate without it despite the industry’s problems worldwide. Ecuador’s Andinatel and Pacifictel, the two state-controlled telcos, need to be under the direction of an outside administrator to meet the requirements of the agreement entered into by Ecuador with the International Monetary Fund (IMF). Bids to select the administrator were let between 1-6 October, and awardees will be notified on 29-30 October. The final, 3-year contract will be signed on 18 November. Andinatel and Pacifictel serve 1.4 million users. So, here is an excellent opportunity for a company that can help Ecuador improve its telecommunications system which is notably unreliable.
Plastics manufacturers from 21 countries, including Germany, Austria, Canada, Colombia, Brazil, Taiwan, Perú, and México, are meeting this week in Guayaquil during the first Feria Internacional del Plástico (IPLAS 2003, International Plastics Exhibition). The Feria focuses on the introduction of new packaging technologies, plastics applications to agriculture, and apparel. According to the Asociación Latinoamericana de la Industria Plástica (ASIPLAST, Latin American Association of the Plastics Industry) the sector sells an estimated US$800 million a year. Those who can help the sector take advantage of new technologies and applications will be well-received.
If you do business in Ecuador but have not called in a while, you need to know how the new telephone system that uses seven digits, rather than six, will affect your calls. Make sure you know the new prefix, which varies from city to city, and in some cases within the same city. Ecuador is a great country to do business in, but its telephone system is not the most dependable and the new prefix has only added to the frequent confusion when making foreign long-distance calls.
In a previous issue of Notice This© we indicated how Chinese textile imports were adversely affecting the textile industry in Ecuador. But one thing can be said for competition: in some cases it forces companies to become more profitable and efficient producers. This is what is now happening in Ecuador. The Asociación de Industrias Textiles del Ecuador (AITE, Asociation of Textile Industries of Ecuador) indicates its members are entering into strategic alliances to reduce costs, increase production and gain economies of scale in marketing and sales. Ecuador’s textiles have been hit not only by China but by Perú and Colombia which have taken ample advantage of the free tariffs granted them by the Andean Trade Preferences and Drug Eradication Act (ATPDEA) which will expire on 1 January 2005. The free trade agreement proposed by Colombia and the one being negotiated with Perú seek to preserve the ATPDEA’s protections before their deadline.
In the meantime, Ecuador seems to be considering the enactment of a development plan similar to Colombia’s Plan Vallejo. Under this plan, producers in Colombia can import raw materials and capital goods at very low tariffs.
Restive populations continue to give investors pause in Latin America. Ecuador is no exception. The Federación de Organizaciones Campesinas, Indígenas y Negras (FENOCIN, Federation of Peasant, Indigenous, and Negro Organizations) is calling for a national stoppage on 7 October. The strike is expected to be a national rebuke to the Law of Salary Equalitation and a protest to the possible creation of the Free Trade Area of the Americas (FTAA).
Venezuela: The Consejo Nacional Electoral (CNE, National Electoral Council) finally decided on the rules for the collection, verification, and counting of the signatures required to remove President Chávez democratically. The referendum is fraught with uncertainties: it will take place over a four-day period, and the verification of signatures will take 30 days. However, there is not as yet a definite date for the referendum except that it will take place after August 2004 to meet the Constitutional requirement. Meanwhile, Chávez and the opposition, directed by the Coordinadora Democrática, are still trying to change the rules. What is clear is that Chávez needs to go, hopefully without a blood bath, if Venezuela is to stabilize and grow.
As we have said often in these pages and in Regional Focus©, the failure of Venezuela’s opposition is that it seems unable to present a candidate who offers a viable, dependable alternative to Chávez, an alternative that can heal the profound wounds and social antagonisms the Chávez Government created. Witness the case of Petróleo de Venezuela (PdVSA), the state-controlled oil company, the world’s fourth largest. PdVSA provides managers with fully-paid housing. Some of the workers terminated for participating in the work stoppages of 2002 and 2003 are being evicted from the company-paid housing without alternative shelter or compensation of any sort. Because the government declared their strike illegal and in violation of the company’s work rules, the restructured PdVSA claims those dismissed have no claim on benefits and retirement pensions because they were fired for cause and harmed the national interest and stability of the country. This disregard for the social wellbeing of an estimated 20,000 professionals only adds more people to the ranks of the discontented and the belligerent.
If the opposition wants a revocatory referendum to get rid of Chávez in a democratic way, Chávez wants his own revocatory powers to get rid of opposition members in the government by means other than by arbitrary dismissal. Those who might be affected are governors and mayors, particularly the mayor of Caracas, Alfredo Peña, and deputies to the National Assembly. The Movimiento Quinta Republica (MVR), Chávez’s party, presented the revocatory request to the Consejo Nactional Electoral – CNE (National Electoral Council.) The calling of a revocatory referendum requires 40% of the valid signatures of registered voters. According to the Constitution, the referendum to oust Chavez will be held after August 2004. If Chavez goes out, the current vice-president, Dr. José Vicente Rangel, will finish Chávez’s term which expires in 2006. The referendum to oust the opposition can be held at almost any time and the rules and regulations for the signature count are less strict than for the revocation of a presidential mandate.
We have predicted Chávez’s ousting several times and are amazed he is still in power. He is the only Venezuelan president to go head to head with PdVSA and come out the winner. If the referendum can’t be held until August of 2004, it now seems Chávez may remain in power until the end of his term in 2006. Hard to believe it, and we stand corrected in our projections.
Despite the continued political upheaval and the economic collapse, the Inter-American Development Bank (BID) predicts growth of 5-6% in 2004. This rate will be impressive by any standards giving the recession-like conditions of the world economy (only Perú had similar figures in 2002-2003.) It will be more so in Venezuela where GDP fell by 27% in the first quarter of 2003, and by 10% in the second quarter. The anti-Chávez strike by PdVSA cost the country an estimated US$7.6 billion, according to Venezuela’s Central Bank. But the IDB plans to continue with the 30 projects currently underway, with a total investment of US$1.3 billion, and an additional investment of US$400 million in new projects.
The purchasing power of Venezuelans fell by 16% in the first half of 2003, and inflation for the year stands at 19%. The few salary increases amount to a rare maximum of 3%.
Given that Venezuela was, until 2002, Colombia’s second largest trade partner after the U.S. the prime ministers of the two countries, Dra. Carolina Barco (Colombia) and Roy Chaderton (Venezuela) will meet on 14 October to iron out differences regarding border security, contraband, and political instability in both countries. These factors, coupled with the collapse of the Venezuelan economy, have hindered trade between the two.
Argentina: Whoever thought Argentina would make good on its defaulted obligations to bondholders and multilateral lenders was not looking at the state of the country’s finances and at the position of the Kirchner Government not to add further hardship to the Argentines. The agreement being negotiated with bondholders disregards interest due from the date of the default to the date in which the contract is signed. All in all, it seems Argentina will ask lenders to reduce the defaulted loans to 90% of their original value. However, this “cut” will not apply to international financial institutions and foreign banks, but only to small national and international investors and to the Administradoras de Fondos de Jubilaciones y Pensiones (AFJPs, Administrators of Pension and Retirement Funds.) Of the total public debt of US$179 billion, US$87 billion will be restructured, of which about US$39 billion is owed to small local and foreign investors and to the 9 million Argentines who invested about US$20 billion of retirement funds in the AFJPs.
The next major Argentinean crisis in the making is the debacle in the AFJPs. Privatization of retirement funds in 1994, like the rest of the “Argentina Miracle,” worked in theory, but not in practice. Many employers did not deposit the required amounts in the employees’ retirement accounts, and the state appropriated some of the funds to balance its own accounts. Many employees, particularly independent contractors and temporary workers, stopped making payments by 1996. Of the 9,300 registered members, only 3,400 contribute to the AFJPs today, most of which are products of Citibank (US), HSBC (UK), and Banco Bilbao Viscaya Argentaria (BBVA), and Banco Santander Central Hispano (BSCH) (both from Spain.) This is not surprising: after the pesofication and confiscation of deposits by Executive Order, it is no wonder Argentines do not trust banks or the government, despite the high approval rating of President Kirchner.
To add to the Argentines’ economic plight, the proposed tax reform has as its centerpiece a tax on all financial and banking transactions, which will include interest payments, dividends and retirement benefits. The reform will eliminate several categories in the basic basket of goods and services that are presently exempt from IVA (value added tax) and will expand the brackets for capital gains. The only sectors not subject to IVA will be: health, education, and transportation, but the new IVA will be computed over the total cost of the good or service plus the domestic taxes attached to it. This is bound to increase the cost of energy, a basic industrial input and we all know that increased energy costs end up paid by the consumer. To compensate for the higher IVA, the Government plans to reduce the tax on check transactions and tobacco. The current export-deposit requirements will decrease beginning on 1 January 2004. Export-deposits are the percentage of sales exporters must deposit on the Central Bank in anticipation of payment by the importer; the percentage varies according to the nature of the export. These reforms are part of the structural reforms the Kirchner Government committed to enact in the “Letter of Intent” it signed with the IMF. According to the IMF agreement, the collected taxes must equal 3% of the primary surplus.
New agreements for provincial transfers (the monies the state passes on to the provinces) will have to be signed in February 2004. Economic growth at the provincial level will be the base used to determine the transfer amount: the greater the local economic development, the lower the state contribution.
Bolivia: Since 2001 Chile and Perú have contended to be the port through which Bolivia exports natural gas to the West Coasts of México and the U.S., principally to California. The ports of Ilo in Perú, and Patillo in Chile, have carried on intensive campaigns to gain the lucrative business that will include the building of a natural gas terminal by Consortium LNG with an estimated total cost of US$8 billion, of which about US$2.7 billion will be dedicated to the expansion and upgrading of port facilities in Perú or Chile. Recent diplomatic developments in Perú and deteriorating political conditions in Bolivia seem to give Perú the upper hand. Given the continued influence of the Cocalero Movement in Bolivia and the precarious position of president Gonzalo “Goni” Sánchez de Lozada, the government will be ill-advised to vote against 80% of Bolivians who oppose the Chilean route and favor Perú’s. Chile was looking at the development of Patillo to increase the energy capacity of Chile and to bring needed development in the northern region of the country. The LNG terminal could also become an alternative source of natural gas in Chile which today imports 100% from Argentina. Having its own LNG terminal shared with Bolivia would help Chile reduce costs of production throughout the economy and mitigate the threat of a sole-source supplier.
Bolivia’s final decision will made in January 2004. However, unrest could continue in Bolivia with the possible overthrow of the Sánchez de Lozada Government. No one knows what might happen if foreign investors are spooked by an undemocratic change of presidents and by whoever might replace President Sánchez de Lozada. The indefinite national work stoppage called for this week by the Central Obrera Boliviana (COB, the country’s major labor union) which will include blocking of major roads aims to unseat the president. The government will respond by enacting its Contingency Plan, which consist of army and police deployments, to prevent bloody encounters between the armed forces and the protesters and to open roads critical to the economy, such as the highways of La Paz-Oruro and La Paz-Desaguadero.
If Bolivia ships its natural gas through Peru, it will need to do so thorough due diligence to determine the solvency of its joint-venture partners. Bolivia would not like to repeat the situation it faces today: It now seems that Ivanhoe Energy of the U.S., the company that would build the plant to convert natural gas to liquid gas (GTL) in Terija, may not have the financial stability and capacity necessary to do so. Syntroleum, Invahoe, and Rentech formed GTL Bolivia to provide the technical part of the project GTL project. Spain’s Repsol/YPF and Total agreed to jointly do the exploration work. Based on the alleged precarious situations of Ivanhoe and Syntroleum, the project is now on hold.
The situation of Sanchez de Lozada is so precarious that the U.S. decided not to make public the recent report on the increased cultivation of illegal coca, the raw material for cocaine. There is much controversy over how much illegal coca is being planted as an alternative to the alternative development policies that failed. The U.S. has for the last 10 years made Bolivia the showcase for alternative crops. The problem was that most producers could not bring them to market because the country has difficient infrastructure and transportation facilities, particularly refrigerated installations. Anything that might exacerbate the violent opposition of Felipe Quispe Huanca, Executive Secretary of the Confederación Sindical Unica de Trabajadores Campesinos de Bolivia (CSUTCB, Only Union Confederation of Peasant Workers of Bolivia) and of Evo Morales, head of the Cocalero Movement, could have deleterious consequences, particularly in Cochabamba and Yungas de La Paz regions where peasants are back to growing coca because it is the only crop they can profitably bring to market.
Chile: While Perú is busy courting Bolivia, offering it sovereignty over the natural-gas part of Ilo, Chile is busy preparing to host the 2004 meeting of the Asia-Pacific Economic Forum (APEC). APEC ‘s 21 countries represent almost 50% of the world’s GDP, or an estimated US$419 trillion, and 60% of the global population. Chile’s objective in hosting the event is to showcase its open economy and accelerate the economic liberalization and globalization of Latin America. Different from previous APEC meetings which lasted a few weeks, Chile is dedicating all of 2004 to it. The Forum is expected to bring together 7,500 delegates who will meet at 10 different pre-Summit meetings, each lasting 14 days. Viña del Mar, Valparaíso, Pucón, La Serena, Puerto Varas and Punta Arenas will host the pre-Summit meetings. The Summit will be in Santiago, between 15-21 November 2004, and will have Vladimir Putin and George W. Bush in attendance, among other heads of state. Chile joined APEC in 1994. As an interesting note, APEC is composed of member economies, not countries. Heads of state are identified as leaders, not presidents or primer ministers, and there will not be a display of national flags. (Please see “Asia in Latin America: What the Future Holds©” from the April 2003 issue of Regional Focus©.)
APEC presents an excellent opportunity for meeting planners and logistics and security experts, which represent investments of US$30 million. Chile does not plan to build new buildings or installation, and will not remodel existing locations.
If Metalpar S.A., Chile’s largest vendor of buses and microbuses for urban transport, succeeds in its arbitration against the Argentinean Government in Washington, D.C., the door will open for similar cases from other countries. The Centro Internacional de Diferencias Relativas a Inversiones (CIADI, National Center for Investment Disputes) will begin hearing the case in February 2004. Argentina’s “pesofication” (the forced exchange of dollars to pesos) decree of 6 January 2002 cancelled, without indemnification, all the contracts Metalpart had in Argentina, despite the fact that all contracts denied the buyers the right to modify the currency in which the contract was drawn, the U.S. dollar in this case. Metalpar S.A. claims the forced conversion is a violation of the International Acuerdo de Promoción y Protección Recíproca de Inversiones (APPI, International Agreement for the Reciprocal Promotion and Protection of Investments.) US$18 million is the disputed sum.
Brazil: Soybeans are the most profitable Brazilian crop, but with it comes the deforestation of large tracts of the Amazonian panhandle as the “soybean frontier” expands, displacing other crops and even cattle raising. In 2002, 25,000 Km² were cleared for soy plantations. Grupo Maggi, one of the largest producers of soybeans in Brazil, plans to triple the area it uses for soy plantings in the State of Mato Grosso do Sul. Grupo Maggi may be helped in its expansion efforts by recent changes to the land tenancy law. In general, Brazilian law permits a landowner to clear only 20% of their Amazonian land for agricultural production. But recent changes to the law permit 50% clearing in transition-designated lands (from forest to arable land) and 60% in savanna lands. Therefore, soybean growers are putting pressure on the legislatures of Mato Grosso do Sul and Pará to reclassify Amazonian land to free larger tracts for agriculture.
Soybeans lie at the center of Brazil’s controversy over genetically modified crops, but particularly soy. The Lula Government lifted the restrictions on genetically modified soy by a Medida Provisoria, or Executive Order. Consequently, the states of Santa Catarina and Paraná intend to establish a Transgenic-Free Area between the two states. Santa Catarina does not permit the cultivation, commercialization or trans-shipment of genetically modified soybeans. Paraná is considering the same. Santa Catarina and Paraná may assert what they are loosely calling “Food Sovereignty,” meaning they can establish their own rules regarding foodstuffs and agricultural production, outside national law. In our view, this is a political concept difficult to implement. Two of Lula’s objectives are: 1) set up the structures that will turn Brazil into the world’s largest exporter of agricultural commodities, and 2) eliminate hunger by the end of his term in 2007. Lula wants every Brazilian to eat three meals a day—that is 170 million people. This means Brazil has to increase agricultural yields. The most profitable and dependable means to do so is by the development and use of genetically-mofied seeds and by decreasing the use of pesticides. With the possible exception of the U.S. in some agricultural sectors, Brazil is a leader in the application of technology to agriculture which will enhance its potential as the number one supplier of food and agricultural commodities to the largest customer for the same: China.
The transgenics argument in Brazil should not be against Monsanto, the holder of the most patents on genetically modified organisms and seeds in Brazil, but against the idea that hunger and malnutrition can be combated with organic agriculture, although organics is a fast growing and highly profitable sector. However, it will not produce the sturdy, plentiful, and dependable supply that is needed to feed Brazil and the rest of the world. Many claim the hunger problem in the world is not food production but distribution. Although this may be so in some countries, there are plenty of cases where lack of food is the key issue, such as some areas of the Sertão in Brazil and the northeastern provinces of China. Would it be better to let people in these areas suffer hunger or dietary deficiencies because genetically modified crops are not permitted or would it be best to feed them with pest-free crops? I think the latter would be a more humane response to basic needs. After all, no one is dying in the U.S. because we eat genetically modified corn, nor is anyone sick in Brazil because they consume genetically modified soybeans.
Brazil produces R$300 million a year in organic food, compared to the world’s production which totals US$25 billion. Brazil’s Instituto Biodinâmico (IBD, Biodinamic Institute) certifies 3,800 organic producers who export 80% of their products. Grupo Balbo is the world’s largest producer of organic sugar which it exports to the U.S., Asia, and the EU. Balbo’s Native Line also exports organic coffee, orange juice, and soy.
Despite a reduction to 0.74% in the GDP growth projections for 2003, Banco Central do Brasil (Brazil’s Central Bank) estimates growth in 2004 will be 3-3.1%. Concurrently, Minister of Planning, Budget and Internal Performance, Sr. Guido Mantega, indicated in Jornal do Brasil the Lula Government does not foresee any problems in the negotiation of a new agreement with the International Monetary Fund (IMF). Mantega sees the new agreement not as a necessity, but as a back up in case of any eventuality. We believe that despite the low growth in 2003, Brazil is in an excellent position to negotiate from a point of strength. The economic measures of Finance Minister Antonio Palossi and Central Bank’s president Henrique Mireilles continue to be very well received by international investors and the economic community. Brazil has definitely turned the corner and the Lula Government will continue with the sustainable growth program it has planned for 2004-2007. However, if Lula does make changes to replace ministers and key-position holders who have less than stellar performances, they are rumors that Mireilles may be the new president of Banco Nacional de Desenvolvimento Econômico e Social (BNDES), the engine of economic growth in Brazil. Current BNDES president, Carlos Lessa, seems unable to translate Lula’s objectives into tangible development programs that foster exports and increase the domestic market.
One of the major consequences of the fallout in Cancún where the World Trade Organization’s (WTO) negotiations collapsed is the uncertainty regarding the negotiations for the FTAA, chaired jointly by the Brazil and the U.S. The meeting of the Committee for Commercial Negotiation of the FTAA, convened in Trinidad and Tobago on 29 September to determine the agenda for the Ministerial Meeting of the FTAA that will meet, of all places, in Cancún, in the third week of November 2003. At this writing, the U.S. and Brazil could not appear more divided over the issue that, as we have indicated several times, is the make-or-break of FTAA: the U.S. agricultural subsidies and Brazil’s demands for fair access to the U.S. market for key exports such as agricultural commodities, steel, and airplanes. Fair access, as understood by the Brazilians, means the U.S. would need to open its markets to Brazilian products if the U.S. expects Brazil to open its market to the U.S. The U.S. is unbending on agricultural issues which it insists on negotiating only in the WTO. Brazil, as the leader of Mercosur, proposed to negotiate FTAA not as a comprehensive treaty, as agreed in Miami, Quebec and Santiago, but in three stages. The U.S. did not agree to the proposal.
Colombia: President Álvaro Uribe Vélez met with President Bush on 30 September. Besides discussing the controversial project to grant immunity to Carlos Castaño and Salvatore Mancuso, the leaders fo the Auto-Defensas Unidas de Colombia (AUC) paramilitary group. President Uribe once again pressed the U.S. for a speedy negotiation of a bilateral free trade agreement between the two countries. A study by the Department of National Planning shows that Colombia’s beef producers, would be a bigger winner than if Colombia were part of the FTAA, or if Colombia were to sign a free trade agreement with Mercosur, the customs union between Brazil, Argentina, Uruguay, Paraguay, and Perú, with Bolivia and Chile as associate members. However, the losers would be producers of cotton, wheat, vegetable oils, and some cereals, for which Colombia would negotiate compensatory tariffs so they have protected access to the U.S. market. We need to keep in mind the U.S. is the largest producer of cotton in the world and cotton producers in the U.S. receive an estimated US$30 million/year not to plant cotton so the U.S. can keep prices high in the world’s markets by restricting supply! In our opinion, Colombia “le está ladrando a la luna,” which means Colombia is barking up the wrong tree as these subsidies are unlikely to disappear in an election year in the U.S.
México: While Chile prepares to host the APEC (see Chile), México is preparing to host the Special Summit of the Americas in January 2004, of all places in Cancún. Policy proposals on economic growth, social development, and democratic governance are being suggested for the preliminary meetings of the Summit Implementation Review Group (SIRG). Those interested in this issue, should contact the Inter-American Dialogue in Washington D.C.
Along the same lines, México’s Secretary of Education, Dr. Reyes Taméz, met with the European Commission in Brussels to began preparations for the meeting of the III Summit EU-Latin America and the Caribbean, which will convene in México in May 2004. The focus of Dr. Taméz’s visit is to elaborate the framework for higher education exchanges between México and the EU. As indicated in México in the 23 August 2003 issue of Notice This©, México needs to create one million jobs a year if it is to mitigate its unemployment problem and if it is going to bring value added skills to its industrial sector. Otherwise, Mexico will continue to depend on the unemployment-release valve of legal or illegal immigration to the U.S. which seems increasingly unwilling to let immigrants come into the country.
Unemployment in Mexico increased by 3.96%, the highest level since 1997. Hardest hit is the maquila industry which has eliminated close to one million jobs since March 2002 according to the Instituto Nacional de Estadísticas (INEGI, National Statistics Institute.) This is due to continued weaknesses in the U.S. economy that imports 90% of all Mexican production and on the inability of President Vicente Fox to jump start Mexico’s production.
In 2002 remittances to Mexico by Mexicans who work in the U.S. became the second largest source of foreign income, US$10 billion, after oil revenues. Bank of America disclosed remittances reached US$13 billion in the first seven months of 2003. The most used transfer method is SafeSend®, a product of Bank of America.
Perú: The second phase of the natural gas Camisea Project began on 29 September. Tractabel Electricity and Gas (Belgium) signed a contract with Perú LNG, a joint venture between Hunt Oil Company (US) and SK Corporation (South Korea) to export US$600 million/year worth of LNG to México for 18 years, beginning in 2007. This represents 400/ft³ per day. Concurrently, Perú LNG let out bids for the construction of the required liquification plant in Pampa Melchorita, in Chincha, with an investment of US$1 billion. And Tractabel will build a regasification plant in the port of Lázaro Cárdenas, in México’s Michoacán state. Tractabel will buy two-thirds of LNG from Camisea and it plans to export it to the West Coast of the U.S. This poses an interesting situation since Perú also wants to export LNG from Bolivia through the port of Ilo, if it gains the approval from Bolivia. Here is an excellent opportunity for those in this field who should begin by contacting Perú’s Ministry of Mines and Energy and Tractabel (please see Bolivia).
To get a perspective on the size of Camisea, consider that Lot 88 in Cusco Field has reserves of 13 trillion/ft³ and Lot 56, next to Camisea, has reserves of three trillion/ft³.
Canada began a campaign to emphasize its Branding Canada Export Program in Perú. Commerce between the two countries is very small, an estimated US$240 million/year, but Canada exports 43% of GDP, 85% of which goes to México and the U.S. thanks to the North American Free Trade Agreement (NAFTA). Given that mining is the fastest growing and strongest sector of the Peruvian economy, Canada is the largest foreign investor in the sector, with Barrick Gold, Techcominco and Noranda. While the Camisea project has been deviled by environmentalists’ protests, mostly from the U.S., Canada’s mining investments in Perú are marked by a high level of environmental protection and social investments, such as schools, health centers, and roads, in the communities where they operate.
It seems that along with us not many people are giving a chance to the creation of the FTAA. Canada is moving to negotiate bilateral free trade agreements with the Andean Region. Should this fail, Perú and Canada intend to negotiate their own bilateral trade agreement.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
The Region: As the Bush Administration presses for the creation of a Free Trade Area of the Americas (FTAA) by 1 January 2005, countries large and small are beginning to assess the gains and losses under such an agreement, Colombia and Venezuela among them. A recent report by the Cámara Colombo-Venezolana (Colombia-Venezuela Chamber of Commerce) indicated the FTAA and Mercosur (the customs tariff agreement between Brazil, Argentina, Paraguay, and Uruguay, with Bolivia and Chile as associate members) will likely disrupt the competitive alliances created by bilateral agreements between Venezuela and Colombia. Venezuela was, until the strikes of 2002 and 2003, the second largest export market for Colombian products after the U.S.
In 2001, Colombia exported US$510 million worth of plastics and light industrial products to Venezuela, while Venezuela exported US$420 million in petrochemicals, raw materials, and light manufactures to Colombia.
Both Venezuela and Colombia see the FTAA flooding their market with cheap imports from the U.S. while needed direct foreign investment will go to the powerhouse of Brazil. (For more on Brazil, please see “Brazil, FTAA, and the Future of Latin America”© in the 25 July 2003 issue of Regional Focus.©)
Colombia is attempting to curtail the Venezuelan shortfall by entering into a bilateral agreement with Perú to facilitate commerce and is negotiating a bilateral trade agreement with Brazil. Colombia is also attempting to mitigate the effects of FTAA (if enacted) by negotiating a bilateral agreement with the U.S. Colombia believes such an agreement could be signed at the end of 2004, just ahead of the projected signing of FTAA. We believe a bilateral agreement with the U.S. is unlikely if FTAA shows any signs of becoming a reality.
The ministers and ambassadors of the World Trade Organization (WTO) are getting ready to meet in Cancún (México) from 10-14 September to launch the final round of world trade negotiations that focus on opening financial and services markets, as well as agriculture and the availability of basic medications to the poorer countries. Let’s not sing praises for the meeting ahead of the resolutions to be adopted at Cancún. As we saw this week, the WTO let lapse the deadline to make antimalarial, antituberculosis and AIDS medications more accessible to poor countries. On the surface it appears the U.S. and the European Union (EU) have reached an agreement to relax some of the protections and subsidies they grant to their agricultural sectors, one of the make or break issues to be detbated at Cancún. But the agreement is vague at best and leaves little ground for countries such as Brazil, India, and Argentina to negotiate their own protections to similar sectors on a level playing field.
The success or failure of the Cancún meeting hinges on the treatment of agriculture by all member countries. In the same way, agriculture will hold FTAA hostage since Brazil and Argentina seem less willing to negotiate in favor of unequal treatment for their agricultural products in the world’s markets. (For more on Brazil, please see “Brazil, FTAA, and the Future of Latin America”© in the 25 July 2003 issue of Regional Focus.©)
The Doha Round, the name of the current negotiations, will have to close on 31 December 2004.
Ecuador: As indicated in Regional Focus© (22 June 2003), China and India are entering Latin America’s markets by establishing joint ventures and engaging in bilateral commercial agreements with the major countries: México, Brazil, and Argentina. These agreements are surely precursors to free trade agreements. The smaller economies are also seeking advantages in Asia’s markets. President Col (r) Lucio Gutiérrez of Ecuador began a trip to China on 24 August where he will meet with President Hu Jintao and China’s Prime Minister, Wen Jiabao. Granted, commerce between Ecuador and China is miniscule and unfavorable to Ecuador which exported US$15 million to China in 2002 and imported US$220 million. During the trip, however, President Gutiérrez will petition China to lower its tariffs on agricultural exports from Ecuador (the world’s largest exporter of bananas) and lobby for a relaxation of China’s strict fitosanitary regulations and granting of credit lines to micro enterprises in Ecuador.
It is worth noting that Ecuador will not address the threat posed to its textile industry by cheap imports from China. Ecuador does not benefit as much as it could from the tariff exclusion granted to its textile industry by the Andean Trade Preferences and Drug Eradication Act (ATPDEA) of 2002 because any gains are offset by losses caused by textile imports.
To finalize an agreement with the International Monetary Fund (IMF), Ecuador must meet the following demands by 31 August 2003:
Given this, who is governing Ecuador? And, can a country where 70% of the population lives under the poverty line meet these requirements? The agreement will be signed, for sure, but the details will be key to the implementation. We will see, but I doubt Ecuador can comply with these stringent conditions.
While the IMF focuses on squeezing the Ecuadorians, Spain’s Agencia Española de Cooperación Internacional (AECI, Spanish Agency for International Cooperation) is granting mini-credits for US$48 million to financial institutions in Ecuador, Colombia, the Dominican Republic, and Perú. The credits are in support of bilateral cooperation agreements to foster better living conditions in poor communities by supporting viable microenterprises and basic education. (For more on Colombia, please see “Colombia: The Opportunity you are Ignoring”© in this month’s issue of Regional Focus.©)
Venezuela: 19 August 2003 marked the third anniversary of the Chávez Government. This is the date after which the Bolivarian Constitution (the Constitution enacted by Chávez) permits a referendum on the performance by the president whose outcome is not mandatory on the Executive. The revocatory referendum which the government can call within a 90-day period after 20 August is the result of the agreement reached on 29 May 2003 between the Government and the Negotiating Table headed by the Organization of American States (OAS). On 21 August, the Coordinadora Democrática (the organization integrated by the majority of dissident groups) presented 3.5 million signatures to the Consejo Nacional Electoral (CNE) (National Electoral Council), more than the 2.4 million required by the Constitution to call the referendum.
This week the Tribunal Superior Judicial (TSJ, the equivalent of the Supreme Court) named a five-member Electoral Council whose members seem to be equally acceptable to the government and the opposition. However, no one knows what could trigger a challenge to the authority of the Council
What could happen? Despite the current acceptance of the Electoral Council, we believe there is a high probability that both parties (the government and the opposition) will refuse to accept the results of the referendum, if favorable to the other. The reason is that the referendum is being called by the CNE, under authorization granted by the TSJ and not the National Assembly (Congress) which, according to the Constitution, is the organization with the legal authority to call the referendum.
Another possibility is that since the government does not acknowledge the legitimacy of the CNE or the method used in the collection of signatures required for it, the government may refuse to allow the referendum. This would be a dangerous move on Chávez’s part. And it will certainly lead to more violence and unrest which might give rise to what we have feared the most: the bloody removal of Chavez. This will certainly plunge Venezuela into a civil war, aided by the fact that the opposition does not have a viable candidate capable of uniting Venezuela.
While Venezuela debated whether to have the referendum, Chávez visited Argentina where he restated his vision for the creation of PetroAmérica, a joint venture between the oil industries of Brazil, Venezuela, Argentina, Colombia, and Trinidad and Tobago. Venezuela and Argentina are negotiating a bilateral commercial agreement to share technology in oil exploration and food production. Chávez visited Argentina after attending the meeting of the Asociación Latinoamericana de Integración (ALADI, Latin American Integration Association) in Uruguay in early August. (For more on Brazil, please see “Brazil, FTAA, and the Future of Latin America”© in the 25 July 2003 issue of Regional Focus.©)
It would be encouraging if the Latin American presidents and policy makers stopped talking and began what is needed to restart economic growth: graduate and technical education accessible to a majority of people, infrastructure upgrading, public health initiatives, food distribution, and advanced-skills job creation. Words go only so far... and accomplish little if not supported by direct, measurable actions.
Colombia: President Inácio (“Lula”) Lula da Silva of Brazil gave his support to an agreement sponsored by the United Nations (UN) to find a non-military solution to the security threats along the Colombian-Brazilian border. The agreement seeks to implement economic and social solutions to trafficking of drugs and arms along their 1,644 kilometer border. As a result of the meeting in Brasilia between President Lula and Colombia’s president, Dr. Álvaro Uribe Vélez, the two countries are sharing security information collected by the Amazonian Surveillance System (SIVAM) that carries out 24-hour flying recognizance missions over the area. (For more on Colombia, please see “Colombia: the Economic Anchor of the Andean Region©” in this month’s issue of Regional Focus.©)
México: In his swearing in ceremony two years ago, President Vicente Fox promised to create one million jobs a year. So far he has been unable to deliver on his promise. The shifting of the maquila industry, heavily concentrated in the Northern Zona Fronteriza (the Northern Border), to low-wage production in China is credited as the major source of unemployment. But a recent study done at Universidad Autónoma de México indicates that lack of educational opportunities at the baccalaureate and university levels is a more dramatic cause of unemployment. It is clear that to move from maquila production (subassembly of industrial goods for re-exportation to the U.S.) to more skilled industrial activities México needs skills development in technical fields and scientific research. Granted, as we indicated in the fall of 2002, México has excellent research and scientific resources in bioagriculture, but it lags considerably in information technology, despite the fact that Instituto Tecnológico de Monterrey (Tecnológico) is one of the finest advanced-degree schools in Latin America. Rather than one million jobs, the Fox Administration needs to open one million places in secondary and university education if it is to capacitate México to compete as it could in the global economy. In all, only 140,000 places open up to new classes yearly and the Tecnológico is reserved for the best of the best, leaving millions out of access to education. So, here is a good opportunity for those in the educational field who can offer technical capacitation courses.
Petróleos Mexicanos: Pemex, México’s state-owned petroleum company, has not been privatized, and it may not be for years to come. But its joint-venture partnerships, now being debated by the Mexican Congress, continue to increase Pemex’s technology capabilities. Although Pemex is Latin America’s largest company, it lacks advances in petroleum exploration technology, a sector dominated by Petrobrás (Brazil), Repsol/YPF (Spain) and U.S. oil multinationals. As an example, Repsol/YPF announced the recent discovery of an oil field in Atwar Valley, deep water area, in the Gulf of México. The discovery was made by the consortium formed by Repsol/YPF (Spain), BHPBilliton and Woodside Petroleum (Australia), and Marathon Oil Company (United States).
Argentina: There seems to be confusion among President Kirchner and his cabinet about how to handle the increase in public service rates demanded by foreign suppliers that operate in Argentina and the International Monetary Fund (IMF). However, it is clear that rate increases will be in effect in the coming three to four months if Argentina is to conclude a successful negotiation with the IMF. But the controversy over the rate increases will not die soon. The foreign companies that won the privatization of services insist their contracts allow them to increase rates if profits are not as projected in the privatization contracts. It seems the suppliers will have to negotiate with the government for differential increases according to the market segments they serve. The ministries of Economics and Federal Planning will form a Joint Commission to consider not only the rate increases, but also a possible renegotiation of the privatization contracts. This may not set very well with the privatizing companies that paid prices below market value for the companies they bought. President Kirchner has repeated that economic recovery and stabilization will not come off the backs of the Argentines who lost big in the economic debacle. Service rates may become one of his first tests against multinational companies that have threatened to leave Argentina if the increases are not enacted.
Concurrently, Finance Minister Roberto Lavagna has presented to Congress the economic package necessary to advance negotiations with the IMF. Key to the negotiations will be mortgages being called by commercial banks and the compensation banks are claiming for losses attributable to the differential pesofication of 2002. Pesofication occurred when the Duhalde Government converted all deposits, loans, and mortgages denominated in U.S. dollars to pesos. The High Court of the Province of Buenos Aires declared unconstitutional the moratorium extension granted by the government for the repayment of mortgages on primary residences. It is estimated that about six million Argentines will lose their homes if the government lifts the moratorium.
The IMF is also demanding a restructuring of the financial sector and of the Central Bank. As we said in Notice This© (25 July 2003) the majority of Argentina’s commercial banks are technically insolvent.
Bolivia: According to the Cámara Boliviana de Hidrocarburos (CBH, Bolivia’s Hydrocarbon Chamber), Bolivia is not likely to get the projected fixed price of US$3/cubic feet of LNG to be sold to California. The volatile LNG global market precludes fixed-price contracts. Bolivia faces strong competition from suppliers who can begin shipping now, while Bolivia will have to wait until the end of the year, and will require an investment of US$100 million, already committed by the Pacific LNG Consortium. Eighty per cent of Bolivia’s natural gas is now exported to Brazil, through an agreement with Petróleo Brasileiro, Petrobrás. Bolivia is still debating whether its gas will be exported through the port of Pampilla in Chile, the most direct route, or through the port of Ilo in Perú. If Bolivia does not find new markets for its gas, it will further diminish its negotiating power with Brazil, more so now that Brazil found extensive LNG reserves in the Santos Basin in the State of São Paulo.
Concurrently, Spain’s Repsol/YPF found a new oil field with reserves of 3 million barrels in the Mamoré Block in the Chapare hydrocarbon basin in Bolivia. Repsol/YPF estimates initial production will be 1,000 barrels a day. Repsol/YPF operates in Bolivia through its fully-owned subsidiaries, Maxus and Andina. Repsol/YPF has rights to 250,000 million barrels. Bolivia’s oil industry centers are in: Cochabamba, Santa Cruz, Tarija, and Chuquisaca. In total, the country’s oil and natural gas production doubled in the last three years.
Rentench Corporation is demanding from the Bolivian government clear and stable rules throughout the duration of the contract to go ahead with the planned investment of US$400 million in the new gas-to-liquids (GTL) plant. Rentench operates in Bolivia in a joint venture with GTL Bolivia and France’s TotalfinaElf. The new plant would produce environment-friendly diesel fuel.
One of the reasons direct foreign investment has declined in Latin America is due to what happened in Argentina and Perú. Argentina reneged on key clauses of its privatization contracts for public services, and Perú cancelled privatizations in Arequipa last year. This makes Rentench’s demands understandable. Bolivia and all Latin American countries need to commit to stable rules if they expect to receive the foreign investment they need to pull out of the current economic crisis. Dependable contracts are the bedrock of economic performance in the public and private sectors.
Perú: As Perú and Mercosur (Brazil, Argentina, Paraguay, and Uruguay, with Bolivia and Chile as Associate Members) prepared to finalize a free trade agreement, the Free Trade Zone of Manaus (Brazil) was excluded from the negotiations. Perú and Mercosur expected to have the agreement finalized by 24 August when Brazil’s president, Sr. Inácio Lula (“Lula”) da Silva visited Perú. Manaus was excluded because Perú and Brazil are trying to create an agreement focused specifically on development and conservation in their respective areas of the Amazonian Panhandle. (For more on Brazil, please see “Brazil, FTAA, and the Future of Latin America”© in the 25 July 2003 issue of Regional Focus.©)
Concurrently, Perú, Argentina, and Chile continue to negotiate their Open Skies policy to increase air travel among them. A final decision on how to implement the new policies is scheduled for the end of September.
Honduras: On 19 August, U.S. Defense Secretary Ronald Rumsfeld paid a quick visit to Colombia and Honduras. The visit to Honduras was to initiate negotiations for the establishment in the country of a base to monitor drug cultivation and trafficking, and the movement of insurgent forces in Colombia. The Honduran base will be in addition to the Forward Operation Locations (FOLs) bases located in Manta, Ecuador, and in Curação, off the coast of Venezuela. The trip to Colombia was to analyze the new requests by Colombia for U.S. cooperation to share military intelligence, financing the reintegration into society of the paramilitary forces who are surrendering, and the training of battalions in jungle warfare. This means the U.S. is slowly but surely getting deeper and deeper into the Colombian quagmire, at a time when Colombia’s top constitutional expert expresses concern about the potential drift to authoritarianism by the Uribe Administration. (For more on Colombia, please see “Colombia: the Economic Anchor of the Andean Region©” in this month’s issue of Regional Focus.©)
Brazil: Lo and behold! As we predicted in these pages and in Regional Focus© (25 July 2003), President Lula used his powerful negotiating skills and the Câmara de Deputados (House of Representatives) approved the reform of the Previdência system, despite strong opposition and public destructive demonstrations. Previdência is the massive pension fund that covers all public employees in Brazil. It currently has over 800,000 retirees who, under the old system, received their full last salary as a retirement benefit, regardless of the length of service. On 28 August 2003, the reform received the second and final positive vote in the the Câmara. It now goes to two votes in the Senate, which will also be positive. After this, it will become law.
Those looking at Brazil and wondering whether Lula and his economic team can govern its economy in a rational and effective manner need only know this: By 30 September, Lula will have reformed the Previdência in five voting sessions over two months, and with only three amendments. By comparison, Dr. Fernando Henrique Cardoso, the immediate past president of Brazil, failed to reform the Previdência because his proposal was voted 97 times and was amended 200 times, all over 3 years and 9 months.
In August the influential Federação das Indústrias do Rio de Janeiro (FIRJAN, Federation of Industries of Rio de Janeiro) convened a meeting to evaluate the Desafios e Oportunidades da Integração Econômica do Mercosul e Nafta à Alca (Challenges and Opportunities in the Economic Integration of Mercosur and NAFTA into the Free Trade Area of the Americas). As we have said before, it is doubtful the FTAA will be in effect on 1 January 2005. As noted above in The Region, key issues to be negotiated include: protection of intellectual property, agricultural subsidies and tariffs, and antidumping. It is unlikely Brazil, the leading negotiator in the FTAA, will settle easily while the U.S. continues to protect its orange and cotton growers and inefficient steel producers. (For more on Brazil, please see “Brazil, FTAA, and the Future of Latin America”© in the 25 July 2003 issue of Regional Focus.©)
In an effort to maintain a competitive telecommunications system, the Agência Nacional de Telecomunicações (ANATEL, National Communications Agency) approved in early August the purchase of Vésper by Embratel (Empresa Brasileira de Telecomunicações). Embratel plans to use CDMA technology in Brazil during the coming five years. MCI (formerly WorldCom) has a controlling interest in Embratel. The Lula government is interested in attracting more investment to the sector to prevent the failure of some companies. This is a touchy issue, since Spain’s Telefónica, a major player in fixed and mobile lines, as well as Internet services, is the company with the heaviest losses in Latin America in 2002, most of it due to the Argentinean crisis.
Continuing with telecommunications, Telemar, the Brazilian company with the highest capitalization, received a capital infusion of R$56 million from the Brazilian government. By the way, Telemar is the most heavily traded stock in the Bolsa de Valores de Sâo Paulo (Sâo Paulo’s Stock Exchange) and the most heavily traded Brazilian ADR (American Drawing Rights) in the NYSE. Telemar is part of the holding company Tele Norte Leste Participações S/A (TNL). TNL brings together some of the most influential and wealthy economic groups of Brazil: Andrade Gutierrez, La Fonte, Grupo Garantia, and Opportunity, along with 25% ownership by Banco Nacional de Desenvolvimento Econômico e Social (BNDES, National Bank for Economic and Social Development).
The power of the Comissão de Valores Mobiliários (CVM) to regulate the capital markets received a big boost with the amended Lei das Sociedades Anônimas (LSA, Corporation Law). The LSA criminalizes market manipulation and the use of insider information in any business transaction. However, some claim that, as in the U.S. and the E.U., minority stockholders still lack protection. They cite the transfer of Oi of Tele Norte Leste Participações to Telemar, and the purchase of Telesp Celular by Centro Oeste Celular as examples where minority owners were presented with a final decision, denying them the opportunity to voice concerns over the future of their investment.
Chile: It seems the Chileans, who have been through a recession in the last three years, are not immune to the complaints and restiveness of many other Latin Americans: the Washington Consensus-based economic reforms of the last ten years have left many wondering where their gains are. In mid-August the Central Unitaria de Trabajadores (CUT) called the first national strike in 13 years. Chile will remain a stable economy, welcoming foreign investors, but one needs to ask: If this is happening in Chile, how long would it take for organized labor in other countries to do the same?
Those looking for distributors, agents or joint-venture partners in Chile would be wise to know that of six of every 10 companies legally incorporated in Chile fail in the first five years. This figure is not that much different from the U.S. Therefore, thorough due diligence is needed when signing up a counterpart in Chile. Do not fall for the belief that you will not have problems in Chile because it is Chile, if you do not know well who your business associate is. The firms that survive are those that bring innovation to the market and add value. But don’t worry if you are in the electrical, gas, water, and mining sectors; these are dominated by well-established multinationals. The greatest risks are in services and construction.
(For more on Brazil, please see “Brazil, FTAA, and the Future of Latin America”© in the 25 July 2003 issue of Regional Focus.©)
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President
Note: To respond to the requests of our clients and readers, we are slightly modifying the content of Notice This.© You told us that our predictions and political analyses presented the most value to you. Therefore, rather than focusing on individual companies and transactions in the region, we are now offering brief analyses of economic policies and political events that are likely to affect the performance of companies that operate in Latin America. Feel free to contact us for more in-depth information.
The Region: The Corporación Andina de Fomento, CAF (Adean Development Corporation) and Produbanco announced the establishment of a US$14 million line of credit for private sector development in Ecuador. It is part of a US$400-US$500 million credit line that will be disbursed over the coming four years to the five Andean countries: Colombia, Ecuador, Perú, Bolivia, and Venezuela. CAF contributed U$100 million to multisectional public works in 2002.
México: Not only did President Vicente Fox lose support in Congress and governorships in the July mid-term elections, but his economic troubles continue. The Centro de Estudios Económicos del Sector Privado, CEESP (Center of Economic Studies for Private Industry) does not see a recovery soon. According to La Jornada, private industry lost 20,300 jobs in the first quarter of 2003. As it has done since the implementation of NAFTA (North America Free Trade Agreement), the Mexican countryside continues to bleed. Between January and May of 2003, 46,000 part-time agricultural workers lost their agriculture-related work, and 100,000 lost their full-time employment.
Three key factors affect Mexican economic performance:
Although Mexican banks are some of the most profitable in the Hemisphere, only an estimated 10% of their portfolio is attributed to domestic, industrial lending. Most major Mexican companies borrow in the United States or Europe where interest rates can be as much as 30-40% less than at home, despite a lowering of the Mexican interest rate in the last six months.
The above factors cause an increase in the informal economy that self-finances and does not pay taxes, creating a further distortion in overall economic performance. And don’t forget that Mexicans working in the U.S., legally or illegally, are responsible for remitting home about US$12 billion a year, making remittances the third largest “export” revenue. Most remittances are used for purchases of basic goods and services. Were it not for remittances and the escape valve of employment presented by the United States to the Mexican unemployed or underemployed, the Mexican economy would be in far worse shape than it is today.
Despite the fact that no other country in Latin America has the geographic advantage Mexico has with the U.S., which shapes Mexican economic policy, we believe the future of Latin America is with Brazil, not México. To find out why, please see the current issue of Regional Focus,© “Brazil, FTAA, and the Future of Latin America.©”
Those who are participating in Pemex’s (Petróleos Mexicanos) Contratos de Servicios Múltiples (CSM, Contracts for Multiple Services) need to be aware of the possibility that Administrative Tribunals might declare them invalid. CSMs are joint-venture contracts which are forbidden by the National Constitution because they stipulate the sharing of revenues from oil exploration among the parties to the contracts. Taken at its literal meaning, the Mexican Constitution, “prohibits the exploration of hydrocarbons by private companies, reserving such activities to the State.” Most CSM’s were entered into between Pemex and foreign multinational oil companies. Pemex is to receive 18% of the revenue and the foreign contractor gets 82%. The CSMs were expected to bring US$8 billion in revenue and were to replace Pemex Exploración y Producción. The CSMs would instead become a separate division in charge of awarding and managing exploration and joint-venture contracts. This matter is before the Cámara de Diputados (the equivalent of the House of Representatives in the U.S.). We believe the CMSs will survive, but they will surely be modified to give Pemex greater control and return on investment.
For those of you who don’t know, here is an interesting aside: Pemex has the same international credit rating the Mexican Government has.
The possible modification of the CSMs is a good illustration of our advice to our clients: No matter how large or small a company is, it needs to consider the key role politics plays in international trade. When entering a foreign market, always find out what the local laws say, from the country’s legal system point of view, not from yours. If you do this, you will avoid unpleasant and unprofitable surprises, particularly in key sectors such as: energy, hydrocarbons, banking, insurance, health care, agriculture, and telecommunications.
Those looking to export consumer goods and gift items to México need to evaluate the stiff competition China’s producers are creating in this market. Despite the compensatory tariffs levied by México against some Chinese products, Chinese manufacturers are making a significant dent in the consumer sector, from furniture, to Indian artifacts, to basic electronics. Even before you do due diligence on your Mexican competitors, you will be well served if you check what the Chinese are doing in México before you head South. And remember, it is just a little jump from México to Central America. So, don’t be surprised if you find China competing with you in the Central American countries, too. (Please see “Asia and Latin America: What the Future Holds©” in the archives, June 2003 issue of Regional Focus.©”)
Colombia: Let’s hope President Álvaro Uribe Vélez does not diminish his considerable, and rightly recognized, moral and political capital by amending the Colombian Constitution to permit his re-election in 2006. This is what Carlos Menem in Argentina, Fernando Henrique Cardoso in Brazil, and Alberto Fujimori in Perú did. That no Colombian other than President Uribe could be better suited to lead Colombia in these difficult times can’t be denied. But let’s remember that Constitution-changing to ensure the continuation of a government in Latin America has not given the expected results. If the proposed Constitutional Amendment is passed, let’s hope Dr. Uribe can do what those other presidents could not: have a second term as successful as the one before.
The proposed constitutional changes would certainly give the Executive power to legislate outside the review and consent of Congress. This is a slippery slope. While governing by executive order (Medida Provisoria in Brazil) may not be abused by one president, there is always the possibility some other president might abuse it. Latin America is filled with bad examples of this.
Dr. Uribe has daunting tasks ahead of him, among them: 1) Settlement with the paramilitary forces of the Auto-Defensas Unidas de Colombia - AUC, and 2) the possible negotiation of a free trade agreement with the U.S. – remember, the local industry was almost devastated by the market opening to cheap imports from the U.S. in the early 1990s.
The renegotiation of the extradition of the leaders of the Auto Defensas Unidas de Colombia (AUC, paramilitary forces), Carlos Castaño and Salvatore Mancuso, if agreed to by the United States, would set a precedent that murder, violence, and massacres are overlooked depending on who commits them. In our opinion the U.S. and Colombia would be walking on sandy soil if they turn their heads and overlook the record of the AUC for what is being called a greater good: peace in Colombia. But peace at any cost? It is true that the “normalization” of Castaño’s forces would bring a semblance of stability to Colombia, if indeed the reinserted-into-society-former guerrillas abide by law and order.
The negotiation of a bilateral free trade agreement with the U.S. in anticipation of unsuccessful negotiations to create the Free Trade Area of the Americas (FTAA) is threatened by internal divisions in Colombia. It is possible the bilateral negotiations can become trilateral, as Colombia seems willing to bring Perú as a free trade agreement partner. And indication of Colombia’s leaning in this direction is the permanent removal of import restrictions on key products from Perú. But the negotiation of any bilateral or trilateral treaty will, like the FTAA, hinge on the treatment of agriculture. Colombia’s Sociedad de Agricultores de Colombia (SAC, Agricultural Producers Association) will pressure for a treaty that is “equitable, reciprocal, and mutually profitable.” The SAC will attempt to torpedo any agreement if the United States insists on keeping its agricultural subsidies while expecting Colombia to open its agricultural sector to cheap imports from the U.S. The devastation of México’s subsistence and basic agriculture under NAFTA is the case study all countries in Latin America are taking into account. Even Chile’s Free Trade Agreement with the United States gives Chilean agriculture 12 years to be fully opened to the U.S. (Please see “Brazil, FTAA, and the Future of Latin America,©” in the current issue of Regional Focus.©)
As a result of the reunion in Lima of 700 importers and exporters from Colombia and Perú, there will be a trade mission to Cartagena on 21-22 October, sponsored by Colombia’s ProExport. Five hundred companies from Canada and the U.S. will meet with exporters from Colombia and Perú. These activities show the increased bilateral integration of Colombia and Perú. The October trade mission seeks to establish strategic joint ventures between Colombian and Peruvian firms to achieve economies of scale that will enable them to compete on better terms in the U.S. and Canada.
Similar trade missions are planned by ProExport to Ecuador, which has replaced Venezuela as Colombia’s number two trading partner. The U.S. is the first.
Perú: In less than month it will sign a free trade agreement with Mercosur/Mercosul (Brazil, Argentina, Paraguay, and Uruguay, with Bolivia and Chile as Associate Members). (Please see “Brazil, FTAA, and the Future of Latin America,©” in the current issue of Regional Focus.©)
As we have said many times, while firms in the U.S. avoid Latin America because “there is only trouble down there,” the Latin Americans are strengthening trading ties and taking market share. By the time U.S. companies feel “comfortable doing business in Latin America,” they will have already lost markets they will need in the future.
Like México, Perú is experiencing heavy pressure from Chinese competitors in one of its key industries: textiles. The Textiles Committee of the Sociedad Nacional de Industrias (SNI, National Association of Industries) petitioned INDECOPI to levy compensatory tariffs against Chinese textile imports. Peruvian garment manufacturers claim they will have to close if cheap imports from China continue to enter the country unfettered.
This week Colombia and Perú eliminated the restrictions that existed against Colombian imports. Perú eliminated the additional 5% tariff it levied against about US$40 million worth of consumer goods imported from Colombia. The tariff on beef goes down from 18% to 12%. And Colombia opened industrial opportunities to 1,500 company representatives from Perú.
Chile: The House of Representatives of the U.S. approved by a 2-1 margin the U.S.-Chile Free Trade Agreement, by which Chile will eliminate its 6% tariff against all imports from the U.S., except agricultural products which will be scaled down to become tariff-free in 2008. Singapore also signed its trade agreement to open its financial markets to the U.S. and to strengthen its intellectual property regime to protect IP held by U.S. companies. The U.S. Senate is expected to ratify both treaties before its summer recess that beginning on 1 August.
As Colombia, Perú, Central America, and Latin America continue to negotiate free trade agreements with the U.S., the Chileans teach us a lesson that is likely to go unnoticed, but valid nonetheless. It can’t be denied that free trade agreements are very valuable in improving the lot of some companies and industries. But they are not the tide that raises all boats. The Chileans are finding that prices of products imported from Europe under the free trade agreement executed in February with the E.U. have not come down. Due to a strengthening of the Chilean Peso against the Euro, prices of some European imports have actually increased. Therefore, those engaged in the current negotiations would be wise to keep in mind there is no economic cure-all in them. (Please see “Brazil, FTAA, and the Future of Latin America,©” in the current issue of Regional Focus.©)
However, despite price increases, imports from Europe increased by 15% in the first half of 2003, with cellular phones, capital goods, raw materials, and drugs leading the increase. This is important information for the U.S. drug companies since the prices set for European drugs are lower than for those manufactured in the U.S. Whereas Chile has imported US$1.2 billion from Europe from January through May, 2003, it has exported US$2.1 billion in the same period. The Chile-E.U. Trade Agrement covers 7,200 products that enter Chile and the E.U. duty free. Note that the average Chilean import tariff of 6% is levied over the total cost of the import.
Ecuador: The insurance industry is one of the new frontiers to be conquered in Latin America. A highly profitable sector, it is practically in its infancy in Ecuador. But not for long. Given the spillover of violence and kidnappings from Colombia into Ecuador, it is estimated that companies that provide kidnapping insurance have an open field ahead of them. The insurance industry will issue an estimated US$400 million in diverse policies, a 25% increase over 2002. The World Bank estimates that in Colombia alone, US$1 billion has been lost to kidnappings in the last 20 years. The property, industrial, and vehicular insurance sectors are ripe for umbrella policy offerings by reputable, dependable companies in Ecuador and Colombia. Thirty companies service the Ecuadorian market, six of them account for about 65% of the market. The more creative these companies can be in coverage options, the more acceptance they will find in Ecuador and in the Andean Region. Fear breeds uncertainty, and uncertainty means need for protection. More so now that the Seguro Obligatorio de Accidentes de Tránsito (SOAT, Mandatory Insurance Against Traffic Accidents) is expected to become law in Ecuador in December 2003, to be effective 1 January 2004. Those interested in this sector should contact Ecuador’s Asociación Nacional de Productores de Seguros (National Association of Insurance Companies).
Venezuela: Twenty thousand employees of Petróleos de Venezuela (PdVSA), including executives, have formed Global Development Project (GDP), a group that includes some of the best trained engineers and technical personnel in the petroleum industry. In 1999, PdVSA was recognized as the best-managed petroleum company in the world. Will Venezuela be able to support two petroleum companies? Maybe not, if President Chávez’s procurement and funding policies are applied against GDP, since the President dismissed all the employees and executives of GDP from PdVSA. But other oil companies will find in GDP excellent resources, particularly if oil opportunities open up through the reconstruction of Iraq, so far reserved for U.S. companies by the Bush Administration. (Please see “Brazil, FTAA, and the Future of Latin America,©” in the current issue of Regional Focus.©)
The instability of Venezuela continues. Fedecámaras, the most influential industrial organization, and the centerpiece of the umbrella opposition group, Coordinadora Democrática, will have to elect a new president this weekend. It is expected that any change in the presidency of the organization will not eliminate the organization’s opposition to President Chávez.
Bolivia: The Bush Administration is establishing a fund for less-development countries. The fund will assist in areas such as education, the environment, and low-income housing. However, to be eligible, the receiving countries will have to have balanced budgets and flexible labor agreements. Bolivia could qualify for US$5 million/year under the fund, but it will have to bring its national accounts in order. This might be difficult for the Sánchez de Lozada Government, faced as it is with low tax collections and a revolt by the Cocalero Movement led by Evo Morales. The U.S. is currently financing Bolivia through loans that total US$150 million. US$50 million is devoted to drug eradication, US$50 million to alternative development (drug substitution crops), and the rest to programs sponsored by the USAID (U.S. Agency for International Development). An additional US$10 million was contributed by the U.S. Government to support the Sánchez de Lozada Government after the riots of 12-13 February, which almost cost him the presidency.
And this week will not be easy for Sánchez de Lozada. Sr. Felipe Quispe, a member of Congress and head of the Movimiento Indígena Pachakuti (MIP, the Indian opposition party), will block major roads throughout the country until the government implements a plan that will bring massive investment into the countryside through agricultural subsidies and builds roads to ensure safe distribution and commercialization of perishable fruits and vegetables. The MIP claims the policy of crop substitution has failed because the substitute crops can’t be brought to market.
The largest industrial show in Bolivia, Feria International de Santa Cruz, Expocruz 2003, will open in October after an investment of US$500 thousand to expand its exhibit facilities. Exhibitors and attendees will have unlimited access to Internet connections, international couriers, faxes, and telephone lines, which were deficient in the past. As of now, Brazil is the largest exhibitor among 16 countries already registered. Oil and automotive companies will have the strongest presence.
To join the international movement toward alternative medicine, Bolivia participated in this week’s LatinPharma 2003, held in Lima, the International Medicinals Show sponsored by the Comunidad Andina de Naciones (CAN, Community of Andean Nations) and the Centro de Comercio International (CCI, International Commerce Center) of Bolivia. Bolivia participated with products in health foods, organic cosmetics, medicinal herbs, and generics. Those interested in these sectors can contact the Centro de Promoción Bolivia C-PROBOL, in La Paz. (Please see “Brazil, FTAA, and the Future of Latin America,©” in the current issue of Regional Focus.©)
Argentina: President Néstor Kirchner met with President Gorge W. Bush on 23 July, and with U.S. business community on 24 July. Concurrently, Economy Minister, Dr. Roberto Lavagna met with officials of the U.S. Treasury Department and the International Monetary Fund (IMF) to continue negotiations on the rescheduling of debt due in September. Argentina defaulted on an estimated US$150 billion a year ago. As always, the IMF is demanding increased tax collections, a balanced budget, a resolution to the insolvency of the commercial banks, upward adjustment of rates for gas, electricity, telephone, and water stated in the privatization contracts, and foreclosure on defaulted mortgages. President Kirchner has stated the Argentinean recovery will not come off the backs of regular Argentines, but it seems he has little room to negotiate, despite a nascent recovery fueled by agricultural exports.
Several international banks, including Banco Río, Banco Francés, HSBC, and Banca Nazionale del Lavoro, let it be known that their operations in Argentina are not financially secured by their foreign headquarters. According to Law 25,738 all foreign banks that advertise on radio or TV had to declare what portion of their capital was guaranteed by foreign concerns. All other banks will be obligated to make the same disclosure beginning on 1 October 2003. Banco Santander Central Hispano (BSCH) is the largest stockholder of Banco Río, and Banco Bilbao Viscaya Argentaria (BBVA) is the major stockholder of Banco Francés. It is not clear how the law will apply to banks that are branches of foreign entities such as, Citibank, BankBoston, Lloyds, and BNP Paribás.
Argentina is expected to grow by 5% this year. This forecast is impressive, particularly in a region that may be heading into deflation. But we need to remember that Argentina lost about 40% of GDP in the last three years, and about 70% of Argentines live today under the poverty line. The agricultural sector has been the winner. Crops are sold on US-dollar-based contracts against a devalued peso. According to Clarin, local companies that manufacture agricultural machinery are operating at 90% capacity. Since they have backlogs of up to six months for new machinery, foreign suppliers may have a good market here if they can provide payment terms the Argentines can accept, since this is the sector that for the most part is operating on U.S. dollars. According to the Cámara de Fabricantes de Maquinaria Agrícola (CAFMA, Association of Manufacturers of Agricultural Machinery), the sector will spend about US$400 million in machinery manufactured locally, and about US$200 million on imports.
Brazil: As expected, the Comitê de Política Monetária do Banco Central (COPOM, The Monetary Policy Committee of the Central Bank) lowered the SELIC 1.5 points to 24.5%. COPOM will meet again on 19-20 August 2003 and further reductions are not unlikely, particularly if the general economy continues to weaken. (Please see “Brazil, FTAA, and the Future of Latin America,©” in the current issue of Regional Focus.©)
The decrease shows a continuation of the Lula Government’s economic policy of stability. However, the influential Confederação Nacional da Indústria (CNI, National Confederation of Industries) believes the cut was not enough to spur industrial growth, given that inflation continued to fall by 0.15% in June 2003, and unemployment reached 13%, the highest rate since 1998, according to the Instituto Brasileño de Geografía y Estadística (IBGE, Brazilian Institute of Geography and Statistics). 432,000 workers lost their jobs in the first semester of 2003, and 2,700,000 people are out of work. This does not include underemployment which is estimated at about 30% of the active labor population, or 30 million people. The average wage in the major industrial centers is US$293/month.
In the first half of July, the Índice Geral de Preços de Mercado (IGP-M, General Price Index) showed a decline of 0.35%, against a decline of 0.66% in June. In July, the Índice de Preços por Atacado (IPA, Wholesale Price Index) showed a decline of 0.59%. The IPA is based on the prices of 60% of industrial production. The Índice de Preços ao Consumidor (IPC, Consumer Price Index) showed a decline of 0.08%, against a 0.17% increase in June
Global Invest predicts Brazil will become the world’s 15th largest economy, down from 12th place last year, following Holland, Australia, and India. México, which last year displaced Brazil as the largest Latin American economy, is likely to be 10th in the world in 2003. Global Invest estimates Brazil’s GDP could be US$484 billion, compared to US$450 billion in 2002.
On 24 July, the Special Commission of the Cámara (the equivalent of the House of Representatives in the U.S.) approved the pension reform presented by
Deputado (Representative) Sr. José Pimentel, of Partido Trabalhista, the party of President Lula. The reform will go to the plenary session of the Cámara for final approval on 1 August. It is expected the government coalition will vote in one block as it did in the Commission. This is a major success for the government and it is certain to calm investors’ jitters. Despite sporadic skepticism by foreign analysts, Lula’s Government continues to demonstrate that it has the negotiating capacity and technical skills needed to continue a stable economic course.
However, the Lula Government has a huge task ahead of it: the actual implementation of its Program Zero Fome (the social program that will ensure three full meals a day for each Brazilian) and controlling the Movemento dos Sem Terra (MST, The Landless Movement). A meeting between Lula and a representative of the MST was cordial. However, due to the current violent actions by members of the MST, Lula will have to show a strong hand to reassure a concerned public. Unrestrained and unpunished violence, particularly in the major cities, may prove to be a serious blow to Lula’s government.
Zero Fome needs funding and actual implementation if President Lula is to maintain his credibility with the general population, those supposed to benefit from the program. If Zero Fome is not carried out as promised, even in a minimal way, the President may find its negotiating influence to establish social programs eroding. This does not bode well given the strikes and work stoppages called for all across the country against this former union leader and master strike organizer and his economic program.
The Sem Terra’s takeover this week of part of the Volkswagen plant in Sao Bernardo do Campo, in the ABC Paulista, can serve only to exacerbate concerns among the national business community and foreign companies that operate in São Paulo. Given that São Paulo is a harbinger for the rest of the country, a solution to the restiveness of and private property takeovers by Dos Sem Terra is imperative. In a related development, the Minister of Labor, Sr. Jaques Wagner, prevented Volkswagen from transferring 4,000 employees to its new subsidiary, Autovisão Brasil, which will employ 16% of the 24,000 who work for Volkswagen throughout Brazil. (Please see “Brazil, FTAA, and the Future of Latin America,©” in the current issue of Regional Focus.©)
The situation at Volkswagen reinforces what we tell our U.S. clients consistently: When doing business in Latin America, or in any other foreign country, an understanding of the labor implications of any contract, whether explicit or implicit, is mandatory to successful operations. This understanding must be based on the country’s legal practices, not on the perceptions formed under the legal system of the U.S., which is the complete opposite.
Até logo e boa sorte. Hasta luego y buena suerte.
Maria Velez de Berliner
President