Archive for the ‘Venezuela’ Category

Latin America: Economist Special Report

September 19, 2010
Latin America: anti-inflation consensus and strong fx reserves  Source: vivirlatinamerica.com
Latin America: anti-inflation consensus and strong fx reserves Source: vivirlatino.com

The Economist’s lengthy Special Report on Latin America last week is worth a read (see leader below), even though it failed to emphasize and adequately explain two critical causes of the region’s recent success — 1) the consensus among Latin American politicians that conquering inflation has benefitted the poor and strengthened democracy; and 2) the massive build-up in fx reserves that has insulated the region from the global crisis, driven in part by healthy macro policies.  These issues were mentioned in passing by The Economist, but not given the focus deserved.  On the other hand, the longer articles in the Report on education, the informal economy and productivity were rich in detail and deserve a read. 

Latin America’s performance during the global economic crisis that began in 2008 was notable for the fact that the recession there was mild and the subsequent rebound robust.  One used to say that when the United States sneezed, Latin America caught the flu, but this time, the region has been inoculated against the contagion that has spread throughout the advanced economies.  In the 1980s, 90s and early 2000s, when economic shocks occurred in the advanced economies — including rising interest rates and lower prices for commodities and financial assets, this led to fiscal and balance of payments crises in Latin America, and often near or outright sovereign defaults (a la Greece).  This time, the Latins were ready.  The reason — strong fx reserves immunizing them from shifts in international capital flows.  How did they achieve this Gibraltar of reserves?  Through higher demand for their commodities from China and others, to be sure, but also through sound macro policies — floating exchange rates, an inflation-targeting monetary policy, and at least some fiscal restraint.  These policies have ensured that the balance of payments (the supply and demand of foreign exchange) adjusts to shocks, thereby bolstering investor confidence, which in turn limits capital flight during a crisis.  It’s a completely new ball game for most Latin countries.  Let’s hope they don’t let the weakest of these pillars — the commitment to fiscal prudence — slip, or they risk a return to the bad old days of boom and bust, especially when commodity prices inevitably weaken.

The Economist likewise points to Latin America’s strengthening democratic institutions as providing the political stability required to promote growth.  No argument there, but I would give a lot of credit for this to the taming of the inflation monster in the region.  After years of hyperinflation, driven by fiscal deficits and monetary accommodation, Latins broke the cycle in the nineties.  When leftists subsequently came to power, the fear of a fiscally-induced return to inflation rocked the capital markets.  President Lula was a case in point (see my post on the matter).  During his election to a first term in 2002, the bond markets sold off to default spreads, but recovered early in his tenure when they realized that this leftist, former union leader, imprisoned by Brazil’s military regime in the 1970s, retained much of his predecessor’s macro policies.  He did so because he understood that his constituency, the poor, had been hurt by inflation more than any other segment in society.  You see, the poor cannot index to inflation.  The understanding of this dynamic has led to a broad consensus in Latin society on economic policy, even when political institutions are weak and ineffectual, as in Peru and Mexico and to some extent in Brazil.  Deeper reforms that would underpin improvements in productivity, education, and the state bureaucracy remain elusive.  However, the three key pillars to macroeconomic stability (and to the political consensus) — again, flexible exchange rates, inflation targeting and fiscal prudence — remain largely in place.  With GDP growth averaging 5.5% per year in the five years to 2008, the impetus to reform is currently lacking.  See my in-depth analysis of Latin democracy here in Scherblog, written during the region’s last major election cycle (2005-07), when I discussed the delicate balance between populism and reform.   

As  a long-time Latam hand (I managed Fitch’s Latin American Sovereign Ratings group for seven years), I believe more emphasis than you will find in The Economist Special Report should be paid to the region’s 1) anti-inflation consensus, and 2) victory over the rollercoaster of balance of payments crises.   Have a read in any case…

Leader on Latin America from The Economist (Sept. 11-17):

The United States and Latin America

Nobody’s backyard

Latin America’s new promise—and the need for a new attitude north of the Rio Grande

Sep 9th 2010

THIS year marks the 200th anniversary of the start of Latin America’s struggle for political independence against the Spanish crown. Outsiders might be forgiven for concluding that there is not much to celebrate. In Mexico, which marks its bicentennial next week, drug gangs have met a government crackdown with mayhem on a scale not seen since the country’s revolution of a century ago. The recent discovery of the corpses of 72 would-be migrants, some from as far south as Brazil, in a barn in northern Mexico not only marked a new low in the violence. It was also a reminder that some Latin Americans are still so frustrated by the lack of opportunity in their own countries that they run terrible risks in search of that elusive American dream north of the border.

Democracy may have replaced the dictators of old—everywhere except in the Castros’ Cuba—but other Latin American vices such as corruption and injustice seem as entrenched as ever. And so do caudillos: in Venezuela Hugo Chávez, having squandered a vast oil windfall, is trying to bully his way to an ugly victory in a legislative election later this month.

Yet look beyond the headlines, and, as our special report shows, something remarkable is happening in Latin America. In the five years to 2008 the region’s economies grew at an annual average rate of 5.5%, while inflation was in single digits. The financial crisis briefly interrupted this growth, but it was the first in living memory in which Latin America was an innocent bystander, not a protagonist. This year the region’s economy will again expand by more than 5%. Economic growth is going hand in hand with social progress. Tens of millions of Latin Americans have climbed out of poverty and joined a swelling lower-middle class. Although income distribution remains more unequal than anywhere else in the world, it is at least getting less so in most countries. While Latin American squabbling politicians blather on about integration, the region’s businesses are quietly getting on with the job—witness the emerging cohort of multilatinas.

As they face difficulties in an increasingly truculent China, no wonder multinationals from the rich world are starting to look at Latin America with fresh interest. Sir Martin Sorrell, a British adman, talks of the dawn of a “Latin American decade”. Brazil, the region’s powerhouse, is the cause of much of the excitement. But Chile, Colombia and Peru are growing as handsomely and even Mexican society is forging ahead, despite the drug violence and the deeper recession visited on it by its ties to the more sickly economy in the United States.

Two things lie behind Latin America’s renaissance. The first is the appetite of China and India for the raw materials with which the continent is richly endowed. But the second is the improvement in economic management that has brought stability to a region long hobbled by inflation and has fostered a rapid, and so far sustainable, expansion of credit from well-regulated banking systems. Between them, these two things have created a virtuous circle in which rising exports are balanced by a growing domestic market. Because they were more fiscally responsible during the past boom than in previous ones, governments were able to afford stimulus measures during the recession. There is a lesson here for southern Europe: Latin America reacted to its sovereign-debt crisis of the 1980s with radical reform, which eventually paid off.


The danger of complacency

Much has been done; but there is much still to do. Building on this success demands new thinking, both within Latin America and north of the Rio Grande.

The danger for Latin America is complacency. Compared with much of Asia, Latin America continues to suffer from self-inflicted handicaps: except in farming, productivity is growing more slowly than elsewhere. The region neither saves and invests sufficiently, nor educates and innovates enough. Thanks largely to baroque regulation, half the labour force toils in the informal economy, unable to reap the productivity gains that come from technology and greater scale.

Fixing these problems requires Latin America’s political leaders to rediscover an appetite for reform. Democracy has brought a welcome improvement in social policy: governments are spending on the previously neglected poor, partly through conditional cash-transfer schemes, a pioneering Latin American initiative. But more needs to be done, especially to improve schools and health care, if everyone is to have the chance to get ahead. Also needed is a grand bargain to tackle the informal economy, in which labour-market reform is linked to a stronger social safety-net. And, even if some things like infrastructure and research and development plainly need more government spending, the worry is that triumphalism over escaping the financial crisis may prompt a return to a bigger, more old-fashioned state role in the economy—despite the failure of these policies in the region in the past.

Getting these things right will be easier if relations with the United States improve. Latin America needs to shed its old chippiness, manifest in Mr Chávez’s obsession with being in the hated yanqui’s “backyard”. More sensible powers, notably Brazil, should be much louder opponents of this nonsense. As they start to pull their weight on the world stage, working with the United States will become ever more important.

The attitude of the United States needs to change too. Worries about crime and migration—symbolised by the wall it is building across its southern border—are leading it to focus on the risks in its relationship with the neighbours more than on the opportunities. This is both odd, given that Latinos are already the second-largest ethnic group north of the border (see article), and self-defeating: the more open the United States is towards Latin America, the greater the chances of creating the prosperity which in the end is the best protection against conflict and disorder. After two centuries of lagging behind, the southern and central parts of the Americas are at last fulfilling their potential. To help cement that success, their northern cousins should build bridges, not walls.

Colombia/Venezuela: What would Simon Bolivar say?

November 10, 2009
Colombian President Uribe and Venezuelan President Chavez hug, as Latin American Independence hero, Simon Bolivar, looks on.  Source: Google Images
Colombian President Uribe and Venezuelan President Chavez hug, as Latin American Independence hero, Simon Bolivar, looks on. Source: Google Images

Latin America is not usually high on the list of hotspots for geopolitical analysts.  Yet Hugo Chavez is threatening war against neighboring Colombia.  (See the note below from a JPMorgan publication today.)  Venezuelan President Chavez is America’s nemesis in the hemisphere, and Venezuela shares a long border with Colombia in the north of South America, facing the Caribbean.  The word is that Chavez is on friendly (financial) terms with the FARC, the murderous, drug-dealing insurgency that has plagued Colombian society for decades.  Yet Venezuela and Colombia are also important trading partners, though this trade has suffered amid recent tensions.  Chavez doesn’t like the close military ties Colombia has fostered with the United States, quietly intensified by the Obama administration earlier this year.  Meanwhile Chavez buys arms from US global competitor, Russia.  Conflict in Latin America has been rare in recent years, though there was a cross-border flare-up in early 2008 between Colombia and Ecuador, currently led by Chavez’s nationalistic ally, Rafael Correa, who won a second term earlier this year.  Apparently Correa allowed the FARC to operate across the border from Colombia, prompting the government of Alvaro Uribe to launch a raid against a FARC camp in Ecuador. 

Like Iran in the Persian Gulf, Venezuela wishes to be a regional power countering local U.S. allies, wielding its oil wealth to make arms purchases.  The best the U.S. could do to counter Venezuela’s threats is to move ahead with the Colombian free trade agreement, pushed aggressively by George W. Bush and scuttled by Democrats in Congress, including then Senator Barack Obama.  See a note on this I penned a year and a half ago.  President Bush openly talked about America’s strong alliance with Colombia.  It might be worthwhile for President Obama to do the same.

From JPMorgan’s Emerging Markets Today, 11/10/09

Colombia/Venezuela: Escalating political noise

Julio CallegariAC (55-11) 3048-3369 julio.c.callegari@jpmorgan.com

Ben RamseyAC (1-212) 834-4308 benjamin.h.ramsey@jpmorgan.com

Over the weekend, Venezuelan President Hugo Chavez told

his military and civil militias to prepare for a possible war

with Colombia, saying that “the best way to avoid a war is

to be prepared for one.” Chavez has been saying that the

military co-operation pact signed in October between

Bogota and Washington could set the stage for a US

invasion of Venezuela. The Colombian government, in turn,

has been highlighting that the agreement with the US is

intended to fight drug trafficking and insurgents within

Colombia, and responded to Chavez’s threats in a statement

saying “Considering the threats of war enunciated by the

government of Venezuela, the government of Colombia

proposes going to the Organization of American States and

the Security Council of the United Nations.” We remain of

the view that an actual armed conflict will not ensue,

particularly because the Venezuelan military would be

reluctant to actually fight Colombia (indeed, Chavez

would be entering dangerous territory if he sought to force

them). However, the threat of further deterioration of the

bilateral trade relationship is real. Indeed, we highlighted

last week that total Colombian exports decreased 11%oya in

September (the latest official figure available) while exports

to Venezuela dropped 50%. Moreover, partial data from

Customs, suggest that while total exports fell about 15%oya

in the first three weeks of October, exports to Venezuela

plunged 80%oya. The ongoing deterioration in Colombia’s

relationship with Venezuela should hurt bilateral trade even

more in the coming months.

China, Latin America and the US

August 17, 2009

China: Learning to enjoy the Brazilian bear hug.  Presidents Lula and Hu.  Source: Xinjuanet

What would President Monroe say?

An Economist article discusses the growing presence of Great Powers, especially China, in Latin America, flouting nearly two centuries of U.S. dominance in the region, since the articulation of the Monroe Doctrine in the early 1820s.  In the near term, this worry is overdone.  Longer-term, if the U.S. continues to damage its sovereign creditworthiness, i.e. by not putting in place a medium-term fiscal consolidation program (that is, to reduce America’s rising government debt) — a program that should include putting health care reform on hold, then America’s relative decline will accelerate and this will affect its projection of power in the Western Hemisphere. 

In the 1820s, as revolution in Spain led to unrest in its colonies in the Western Hemisphere, the Holy Alliance of autocratic east European courts — Russia, Austria and Prussia, threatened to intervene in these colonies.  President Monroe in 1823, backed by the British Navy, warned Europe that any extension of European power to the Western Hemisphere would be “dangerous to our [U.S.] peace and safety.”

Nowadays, as the world moves increasingly toward a multipolar system, power projection in Latin America is largely in the form of commerce.  China, India and others seek, above all, the region’s raw materials to fuel their rising economies.  True, with economic influence comes political influence.  True as well, such powers as Russia and Iran seek direct political influence through arms sales and energy deals with the likes of Chavez’s Venezuela, Cuba, and Evo Morales’s Bolivia.  But these countries are on the fringe.  More of interest to U.S. policymakers are China’s economic relations with the major economies of the region, notably Brazil.  China’s economic relations with Brazil have been hand in glove — raw materials fueling a manufacturing juggernaut, while with Mexico, they have been competitive.  Brazil is also a manufacturing nation and will one day find China an unwelcome competitor. 

So, the thrust of the foreign “intervention” is commercial and good for Latin America.  This is good for the United States as well, insofar as China supports growth in the region and the U.S. no longer has to be relied on so heavily as the source of demand and investment for the hemisphere.  In previous U.S. downturns, Latin countries hovered on the brink of default (or in fact defaulted), whereas this crisis they have weathered, due in part to demand from China and elsewhere. 

China, for its part, is “intervening” in Latin America as a rule-abiding member of the global capitalist system, wrought by the U.S. and its allies.  This should not worry American policymakers.  Sure, they should keep an eye on the mischief-making of countries like Iran and Russia that seek to upset the U.S. in its own backyard, much as Krushchev did with Cuba in the middle of the last century (however less dramatic and threatening the current mischief-making is).  Again, the smartest thing U.S. policymakers can do is get America’s fiscal house in order — by first of all, postponing health care reform — and revive the formidable U.S. economy — upon which the country’s power projection is based — not least through continued banking overhaul, workout of real estate loans, policies to increase household savings, and a reform of monetary policy (by discarding Greenspan’s discredited approach).

The Russians are Coming…

August 4, 2009

Russian subs off East Coast echo 1960s Hollywood comedy...  Source:  Google Images

The NYTimes reported today that Russian subs were spotted nearly 200 miles off the East Coast of the United States, echoing the 1960s comedy, The Russians are Coming, The Russians are Coming, in which a Russian sub accidentally runs ashore off the coast of Massachusetts, causing an international incident and not a few laughs.  By the mid-1960s, lampooning the Cold War was acceptable and probably a good release for Americans, who only a few years before endured the war scare of the Cuban missile crisis.  The phrase — the Russians are coming, the Russians are coming — first attributed to Truman’s Secretary of Defense Forrestal in 1949, came into common U.S. usage to reflect the anxiety about the rise of the Soviet Union since WWII.

Now, the Russians are really coming, if not rising.  The Times article suggests that these Russian naval maneuvers could signal irritation with U.S. policy — U.S. duplicity, from the Russian point of view, speaking out of both sides of the mouth, with good cop Obama flying to Moscow to press the “reset” button, and bad cop Joe Biden running off his mouth in the Ukraine and Georgia.  Not only did the Vice Mouth compliment the beauty of Ukrainian women (who does he think he is, the Beatles?), he gave verbal support to these countries’ claims to joining Western institutions, including NATO.  This mischief-making in Russia’s near-abroad is no reset, especially in Russian eyes, even though Biden, with his gleaming pearly whites, is a more acceptable Cheney than Cheney.

Worries about Russia’s tightening relations with Venezuela, with arms and energy deals and Chavez due for a visit to Moscow in the near future, are well-founded and smack of the chess moves of the Cold War.