On 1 September, the Costa Rican government unveiled its proposed budget for the next fiscal year. The 2016 budget will see the smallest percentage increase in ten years: 0.5% more than the C$7.9tr (US$14.5bn) 2015 budget, the largest in the country’s history. The administration of President Luis Guillermo Solís proposes cutting spending by US$726m, with almost 99% of the cuts falling on the executive branch. But with the fiscal deficit expected to reach 6.9% of GDP during the next budget cycle – 0.5% higher than in 2015 – the government needs congress to support its earlier proposals for tax reform to start making any progress on Costa Rica’s debt, which is now close to 49% of GDP.
Ahead of the official ceremony to announce the budget, Solís assured the nation in his weekly television address that there would be no new cuts to public education, security or anti-poverty programmes. Instead, the executive will bear the burden of almost all the cuts, with a 36% drop in spending on publicity, a 30% decrease in spending on international travel and a 17% reduction in consulting expenses.
The finance minister, José Francisco Pacheco, said that the government’s hands were effectively tied when it came to tackling the fastest rising parts of the budget. Servicing the country’s debts accounts for 31% of the 2016 budget proposals, followed by 30% for education spending; pensions account for another 11% of the budget. Over the past few years, Costa Rica has been able to auction tranches of US$4bn in Eurobonds to close its budget gap but the last of that debt was issued in the first six months of 2015. To address the shortfall, Pacheco said the government “is going to have to look elsewhere”.
Both Pacheco and Solís used the occasion of the budget to reiterate their calls for congress to pass a series of tax reform proposals set out on 10 August, which they hope would raise government revenue by up to 2% of GDP. The tax bill proposes replacing the current 13% sales tax with a new value-added tax (VAT) of 14% in the first year, rising to 15% in the second year.
Income tax would become slightly more progressive, with the minimum taxable income threshold rising to salaries of over C$793,000 (US$1,468) a month; while two new tax bands will be created. Those earning between C$2.1m and C$4.2m a month will pay 20%; those earning over C$4.2m a month will pay 25%. Capital gains tax will also be increased from 8% to 15% and the government would also introduce a ‘green tax’ of C$10 on every 250ml non-recyclable plastic bottle. In total, the bills would increase government revenue by US$1.1bn.
Despite the absence of corporate tax hikes, the business community did not react positively to the government’s proposals. “This is not a good time to talk about taxes,” José Manuel Hernando, president of the Costa Rican Food Industry Chamber (CACIA), said. He noted that taxing goods and services that currently are exempt would be a blow to consumers. “The government’s proposal really alarms and concerns our sector, which was been severely affected by the country’s economic situation, a total stagnation that has lasted for several months,” he said. Business leaders also fear the proposed reform would have a negative effect on job creation.
The political challenge
Despite broad agreement across political parties of the need to reform Costa Rica’s tax take, which has been essentially flat at 14% of GDP since 2009, the government’s proposals also met broad resistance in congress. In order to secure passage of the tax reform, the ruling Partido Acción Ciudadana (PAC) will need to build alliances, as it only controls 13 of the 57 seats in the legislative assembly.
Shortly after the government put forward its plans, Juan Jiménez Succar, the leader of the Partido Liberación Nacional (PLN) – the opposition party with the highest number of seats in congress (18) – said that his party would not approve any new taxes until the government cut spending. The opposition expressed reservations about the government’s budget, in particular contesting the official claim that it represented a “low increase” on 2015, given that the previous budget marked a record high. “I regret that the government feels the need to act like a shopkeeper who doubles his prices and then announces a 50% off sale to great fanfare,” Otto Guevara, the leader of the opposition Movimento Libertario, said.
Despite similar opposition to the Solís administration’s budget last year, opposition lawmakers failed to unite in their disagreement with the government, meaning it was passed as proposed, despite the PAC’s relative weakness in congress. According to Costa Rican law, the legislature now has until 30 November to approve the budget; the president would be extremely lucky to get the same result twice.
On 31 August Alfredo Guzmán, son of the escaped Mexican drug lord, Joaquim "El Chapo" Guzmán, tweeted a picture of himself flanked by two men with their faces obscured. "Pleased to be here," he wrote alongside the image. "You already know with whom." The tweet is geotagged to a location in Costa Rica, initially prompting a flurry of excitement that Guzmán had given away his location. However, many security analysts subsequently pointed out that Guzmán was likely to be using a proxy IP address to avoid disclosing his whereabouts.
Development: On 8 September Brazil’s defence minister, Jaques Wagner, contradicted the words of a presidential decree with a statement confirming that it would remain the military’s prerogative to manage its own personnel without government interference.
Significance: President Dilma Rousseff last week signed a decree transferring from the armed forces command to the defence minister the prerogative to promote officers and control the curricula of military academies. The president apparently did so without consulting congress or the military beforehand. Wagner’s statement may raise some doubts as to the capacity of President Rousseff to communicate not only with Brazilian institutions but also with her own subordinates at a time when Brazil faces a serious economic and political crisis.
Looking Ahead: Even with additional guarantees of military independence in day-to-day affairs, the decree is unlikely to win enough support in congress to become law. This latest measure may prove a futile distraction for Rousseff, since even though the armed forces are subordinate to the President, any change to the organisation of the Brazilian military can only be done via constitutional amendment, according to legal experts.
Development: Preliminary results indicate that the main opposition People’s National Movement (PNM) led by Keith Rowley won the 7 September general election in Trinidad & Tobago, defeating the coalition People’s Partnership (PP) of Prime Minister Kamla Persad Bissessar, in office since 2010.
Significance: While final pre-electoral surveys had suggested an increasingly tight race, potentially to be determined by a single seat in the 41-seat House of Representatives, preliminary figures suggest that the PNM has won 22 or 23 seats, with the remainder going to the PP (comprising the United National Congress [UNC], the Congress of the People [COP], the Tobago Organization of the People [TOP], and the National Joint Action Committee [NJAC]). The PP took office with 29 seats in 2010. While Persad Bissessar herself has remained popular, the PP failed to fend off corruption allegations, citizen concerns about crime and the impact of the recent economic slowdown.
Looking Ahead: A political old-timer with various cabinet positions to his name (including the planning, housing and trade ministries), Rowley, who took over the PNM leadership in 2010, will make history as the second Tobago-born prime minister. Indicative of the need to address “officially sanctioned corruption”, as he describes it, Rowley is proposing as “an urgent priority” anti-corruption measures to end “the pernicious scourge of ‘political investors’”. Among these measures would be “appropriate campaign finance legislation”.
Development: The government’s account of the abduction and presumed murder of 43 students in Iguala, Guerrero, in September 2014 is inconsistent and misleading, a group of international experts said on 6 September.
Significance: The findings of the group of experts – a team put together by the Inter-American Commission on Human Rights (IACHR) – could not be more damning of the official investigation into one of the worst massacres in Mexico in recent years. The report is a deep political embarrassment for the government led by President Enrique Peña Nieto, which says it is re-opening the investigation.
Looking Ahead: The government has had to accept the experts’ report. Attorney General Arely Gómez (who took over from Murillo Karam) has said that a new forensic team will return to the area and re-open the investigation. This turn of events is a vindication for the families of the victims, who have consistently refused to accept the official version. “We’re poor, but we’re not stupid” said Mario González, the father of one of the 43. Politically, the findings will increase the pressure on the government, which is likely to face new demonstrations at the end of this month – the first anniversary of the abductions.
The constitutional chamber of the supreme court has issued a ruling which could be a game changer in El Salvador. As the government led by President Salvador Sánchez Cerén has taken the fight to the country’s mara street gangs, leading to violence spiralling out of control, the court ruled that mara members can be described as terrorists and that belonging to one of the gangs is a crime. While President Sánchez Cerén celebrated the court’s interpretation of the country’s anti-terrorism law, the ombudsman, David Morales, warned against the risk of it being used to justify “abuses of authority”.
Until this ruling, relations between the Sánchez Cerén administration and the constitutional chamber could best be described as fractious. But Sánchez Cerén hailed this particular ruling, which came in response to four legal challenges to the country’s anti-terrorism law on constitutional grounds, as did El Salvador’s entire political class. Sánchez Cerén said that judges would now have “no alternative” but to apply the anti-terrorism law to mara members “and those who collaborate with them”.
Morales, meanwhile, suggested that while the ruling might assist judges to apply the anti-terrorism law, it would not solve the problem of violence. There were more than 800 murders in El Salvador in August, according to Mauricio Ramírez Landaverde, the director general of the national police (PNC); this figure smashed the previous most violent month (last June with 677 homicides) since the civil war (1980-1992). There are more than 60,000 members of mara street gangs in El Salvador. Morales said that it was essential to persevere with “an integral strategy against violence” (providing opportunities for misled youths, for instance) and that designating maras as terrorists might give a completely free rein to the police and military, potentially leading to more abuses and more violence.
Development: On 3 September Guatemala’s presidential spokesperson, Jorge Ortega, announced that President Otto Pérez Molina had resigned.
Significance: The announcement, which was breaking news at the time of writing, came after a local judge issued an arrest warrant for Pérez Molina following the 1 August unanimous decision by the 158-member unicameral legislature to strip him of his immunity so that he could be investigated for alleged corruption. The congressional decision was in line with a request submitted by the United Nations (UN)-backed International Commission Against Impunity in Guatemala (Cicig) and the local attorney general’s office (AG), which on 21 August accused the President (along with the former vice-president, Roxana Baldetti) of heading up a criminal ring in the country’s tax agency (SAT) known as ‘La Línea’. Pérez Molina’s resignation under the weight of these corruption allegations is an unprecedented development in Guatemala and is a remarkable achievement for both the AG and the Cicig, whose mandate to investigate the infiltration of State institutions by criminal organisations was renewed for another two years in April. The resignation comes just days before the 6 September general election. While the ruling Partido Patriota (PP) already has effectively collapsed because of the corruption crisis in the government, key contenders from the main opposition parties, Libertad Democrática Renovada (Líder), and Unidad Nacional de la Esperanza (UNE), are also battling separate corruption allegations, creating a lot of uncertainty for voters.
Looking Ahead: Pérez Molina looks set to become the third Guatemalan leader to be brought before the courts in recent years. In 2011, Alfonso Portillo (2000-2004), of the now defunct Frente Republicano Guatemalteco, was acquitted of embezzlement by a local court; he was subsequently extradited to the US, where he was convicted of money laundering charges in 2014. In May 2013, Guatemala’s former dictator, Efrain Ríos Montt (1982-1983), was convicted in Guatemala of genocide and crimes against humanity committed by the State during the 1960-1996 civil war, but that ruling was overturned days later.
Development: Satellite data released on 1 September suggests a 68.7% year-on-year increase in deforestation in Brazil’s Amazon rainforest.
Significance: The new deforestation figure is the highest recorded in six years, according to the Instituto Nacional de Pesquisas Espaciais (Inpe) and signals an end to the recent downward trend.
Looking Ahead: Both Imazon and Deter data suggest that the government will have to work harder to convince environmentalists that it remains committed to lowering deforestation levels. In early August the government released preliminary data claiming deforestation had fallen by 15% in 2015, but critics doubted the veracity of the figure, particularly given recent accusations that the government has been embellishing its financial accounts, turning deficits into surpluses.
Development: On 31 August Bolivia’s rural development & land minister, Nemesia Achocollo, and Bolivia’s ambassador to Paraguay, Rosendo Alpiri, announced their resignations.
Significance: The two stepped down over the corruption allegations involving the government’s indigenous development fund (Fondioc) after Lariza Fuentes- a lawyer appointed to intervene in the agency, which sits under the rural development & land ministry - announced on 25 August the results of its probe into Fondioc. Fuentes found 30 phantom projects worth B$14.51m (US$2.1m). This brought the total economic damage to the State caused by corruption at Fondioc to B$102m (US$14.8m), B$30m more than was first reported in February when the scandal first broke. In the post for five and a half years and previously considered one of President Evo Morales’s “untouchables”, Achocollo maintains her innocence. However, her departure is widely considered as an attempt by the ruling Movimiento al Socialismo (MAS) to close the chapter on what has been a highly embarrassing episode for the government, ahead of a push to change the 2009 constitution to allow President Morales to run for a fourth consecutive term in 2020.
Looking Ahead: The local press has been quick to link Achocollo’s departure to the MAS’s efforts to change the constitution to allow President Morales to stand for election again. The 2009 constitution allows for two consecutive presidential terms and Morales, first elected in 2005 and re-elected in 2009, was permitted to run again in 2014 on the grounds that he had only served one term under the new constitution. The MAS, which has the necessary two-thirds majority in the national bicameral legislature to approve a constitutional amendment- with 89 of 120 seats in the chamber of deputies and 25 of 36 in the senate – is due to discuss the issue of re-election during a party congress scheduled for November.
Big Cola makes African move: Big Cola, the soft-drink brand controlled by Peru’s Aje Group, is initiating operations in Africa, where it has opened two bottling plants, one in Nigeria and the other in Egypt. Although less than 30 years old (the company was set-up in Ayacucho in 1988), Big Cola is now a significant player in the global market. According to the UK-based Euromonitor, it is ranked number 10 by revenue among global soft drinks producers, with a 1% market share (Coca-Cola is number 1, with a 20% global market share, while Pepsi takes 9.7%). Annual sales are reported at US$1.2bn, and Big Cola is present in 20 countries around the world, particularly in Asia: this year it became the top soft drink by sales volume in Indonesia. The company originally started as a family business run by Eduardo Añaños and Mirtha Jerí, a couple with five children, who at the height of the violence and scarcities sparked by the Sendero Luminoso guerrilla movement realised that there was a gap in the market – the big bottling companies had stopped supplying the region. As a result of some experimentation they created a new carbonated soft drink with citric overtones that was initially marketed as Kola Real. Sales grew strongly in Peru, prompting international expansion starting in Venezuela in 1999 (when the name was changed to Big Cola), Ecuador in 2000 and the fiercely competitive Mexican market in 2002.
Juan Lizariturry, a Madrid-based executive of Aje Group, told Spain’s El País that its strategy is not to seek a head-on confrontation with dominant players like Coca Cola that have spent massively on marketing but instead to focus on the price-sensitive lower middle classes in emerging markets. “People have got used to Coca Cola. No one has enough money to break the link between a customer and a brand that has been in the market for years. Our target market is the consumer who hasn’t been drinking Coca-Cola for long and doesn’t have their head full of advertising” he said. Another executive, chief marketing officer Jorge López-Dóriga, told Beverages Daily, “This is a new world. You can be global without having to be in Europe or the USA – actually, around 90% of the world population is outside USA and Europe”.
Cemex sells European assets: Mexico-based Cemex – one of the world’s largest cement and construction materials producers – announced the sale of a number of European assets, principally in Austria, Hungary and Croatia, for EUR391m (US$445.3m), with the funds to be used to reduce debt and for general corporate purposes. Operations in Austria and Hungary – a number of aggregate quarries and ready-mix plants – were sold to the Rohrdorfer Group for EUR160.1m (US$179m), while in Croatia operations were sold to Duna-Dráva Cement, and included holdings in Bosnia, Montenegro and Serbia. Cemex has been seeking a general repositioning of its business strategy to reduce debt and restore profitability. In the first half of this year the company reported a net US$32m loss, a reduction of 86% on the US$220m loss registered in the year-earlier period.
SolarReserve gets Atacama go-ahead: Chilean authorities in August approved the environmental impact study for the US$2bn Copiapó Solar project, considered one of the largest solar energy and storage projects in the world. The project, to be executed by US-based SolarReserve, is designed to add 260MW of new capacity to the country’s electricity grid. It will use concentrating solar power (CSP) tower technology and solar photovoltaic (PV) panels combined with molten salt thermal energy storage. It is envisaged that the project will supply mining companies and other industrial consumers with some 1,800-gigwatt hours (GWh) every year. In a statement SolarReserve noted: “No other proven renewable energy technology can provide this cost competitive energy solution to meet the needs of Chile’s largest and most important industries.” According to Tom Georgis, the senior vice president of development, “This technology realistically has the potential to power the entire country of Chile using two phenomenal Chilean resources, salt and sun”.
Trouble in the air: Share prices in the main Latin American airlines fell in mid-August, as investors became nervous over lower levels of demand and the effects of currency depreciation in a number of countries around the region. Latam Airlines Group SA (the carrier formed in 2012 from the merger of Chile’s LAN and Brazil’s TAM) saw its share price fall 10% to a nine-year low in the week to 14 August; Colombia-based Avianca saw a 15% fall, Copa Holdings of Panama lost 19%, and Brazil’s budget airline Gol Linhas Aéreas Inteligentes lost 3.9% on that date. Analysts said the effects of lower fuel prices – a positive for the airlines – were being more than offset by slower economic growth across Latin America.
Earlier, Latam Airlines had reported an unexpected US$49.7m Q215 loss, on a 22.2% year-on-year drop in revenue to US$2.3bn. It also modified its guidance for operating margins, down to 3.5%-5.0% from 6.0-8.0% previously, a change it attributed to “a weaker macroeconomic context in Brazil, caused by higher inflation and a steep depreciation of the Brazilian Real”. The company also said it was looking into delaying the delivery dates for new long-haul passenger aircraft. Separately, Copa said that its sales fell 20% year-on-year to US$538.4m in Q215, while its profits dropped by 44% on the same basis to US$64.1m. The airline attributed this to a “weak economic environment in South America”.
According to Daniel Guardiola of Larrain Vial, “massive depreciation of currencies and economic slowdown in the region is affecting demand” across the region.
Profits up at Itaú: Itaú Unibanco Holding – Brazil’s largest private sector bank by loan portfolio – reported record profits of BRL6.13bn (US$1.78bn) before extraordinary items in the second quarter. The results were significantly ahead of market expectations (in a survey of analysts by Reuters, the consensus was for profits of BRL5.74bn). The bank benefited from rising interest payments on loans and extra earnings from commissions, which more than compensated for the negative effects of a rise in non-performing loans (NPLs) and lower demand for credit. Tighter cost control and risk management procedures introduced by Chief Executive Roberto Setubal were also credited for the good performance.
Analysts wondering whether the Brazilian recession is eventually going to dent the sector’s strong profits have watched bank performance closely. Overall bank profits reached a four-year high in 2014. Some argue that the recession is now making its first real appearance in bank balances through the rise in NPLs. In fact, Itaú’s 90-day NPL ratio rose for the first time in 11 quarters to 3.3%. Philip Finch of UBS securities said the markets should receive Itau’s results positively, but that perceptions might be clouded by worries over asset quality and the need for bigger gross provisions.
Development: On 24 August Colombia’s President Juan Manuel Santos said that his government was prepared to “firmly” defend the rights of all its nationals that live in Venezuela.
Significance: Santos’s comments came on the back of reports that hundreds of Colombian nationals have been forcibly deported from the Venezuelan state of Táchira after President Nicolás Maduro declared a state of emergency in the area. With Maduro maintaining that there is no possibility that this will be lifted any time soon, the concern is that this is creating a humanitarian crisis, with hundreds of Colombian migrants left homeless and jobless in the wake of the Maduro government’s security crackdown. The issue is producing tensions between the two Andean neighbours, which is already drawing the attention of the Organisation of American States (OAS).
Looking Ahead: The situation was also addressed yesterday by OAS Secretary General Luis Almagro. Following a meeting he held with President Santos in Bogotá, Almagro stressed the necessity of finding a solution that “guarantees the rights of Colombians living in Venezuela”, adding that the OAS is prepared to help find such a solution.