LatinNews Consulting

Colombia's national budget proposal for 2016 could open the door to several years of austerity.

After a decade of strong government spending, Colombia faces several years of tight budgets. On 14 July the National Council for Economic and Social Policy (Conpes) approved the finance ministry’s budget proposal for 2016. Although total expenditure is set to increase by 2.3% to US$60.5bn, there will be major cuts to investment projects, especially in the areas of mining, agriculture and housing. At a press conference, Finance Minister Mauricio Cárdenas announced that the budget represented a "policy of austerity."

With global oil prices remaining depressed, the government forecasts just US$1.2bn in oil revenues in 2016, down from US$8.5bn in 2013. The imminent entry of 1.0m barrels of Iranian oil onto the global market, following the end of international sanctions, has dampened optimism for a bounce in crude prices. Cárdenas and his team have been forced to make tough decisions.

Given the ongoing peace process (and continued military confrontations) with the Fuerzas Armadas Revolucionarias de Colombia (Farc), it is no surprise that the defence and justice ministries have escaped the cuts. However, overall government investment is set to fall by 11% to US$15bn. The agriculture ministry will see its budget slashed from US$1.2bn to just US$508m. Other ministries amongst the hardest hit are mining and energy (a 30% reduction), housing (20%), transport (21%) and environment (18%).

None of these cuts can be easily absorbed. Agrarian reform is a key component of the peace process and will require significant investment in a post-conflict Colombia. The upgrading of the country's road infrastructure is crucial to boosting the competitiveness of the country's agricultural and industrial sectors, and financing for major projects is already in jeopardy as legal challenges have stalled the sale of the state energy firm Isagen, the profits from which were earmarked for so-called fourth generation projects. Likewise, the natural resources sector requires major investment to resolve the institutional and operational bottlenecks that likewise have frozen the development of new projects.

Cárdenas has pinned his hopes on an improving trade balance, with the weaker peso discouraging imports and increasing demand for local products. Importantly, the tax agency (DIAN) has seen its budget increased by US$1.5bn to ease the implementation of new tax reforms and crack down on evasion.The conservative opposition Partido Centro Democrático (PDC), the party of former president Alvaro Uribe (2002-2010), was quick to attack the cuts, accusing the government of relying too heavily on commodity prices and failing to put aside sufficient funds during the boom period to cope with the inevitable "rainy day." While this may be true, Colombia's fiscal laws have prevented major overspending based on inflated price expectations. The same cannot be said of the rest of the continent. While the IMF forecasts real annual GDP growth of 3% for Colombia in 2016, the rest of the region is set to grow at an average rate of just 0.9%. Austerity may prove painful for Colombians, who have grown used to bullish growth, but the finance ministry argues that early implementation of conservative fiscal measures will allow the economy to set the bases for more sustainable medium term growth.

  • Coca production rebounds strongly

The area under coca cultivation in Colombia soared by 44% in 2014 to 69,132 hectares (ha), according to a report released on 2 July by the United Nations Office on Drugs and Crime (UNODC), with potential cocaine production rising by 52% to 442 tonnes. The UNODC report differed from a comparable study published last May by the White House Office on National Drug Control Policy (ONDCP), which argued that the amount of land under coca cultivation in Colombia jumped 39% in 2014 to 112,000 ha and potential cocaine production soared by 32% to 245 tonnes. Despite their discrepancies, both reports captured the upward trend of coca cultivation in Colombia after six straight years of declining or steady production.

Published in Colombia
Friday, 03 July 2015 10:57

Corporate Radar

Trouble for Odebrecht and Andrade

The presidents of two of Brazil’s largest construction companies, Marcelo Odebrecht (of Construtora Odebrecht) and Otávio Azevedo (of Andrade Gutiérrez) were arrested by police on 21 June. Reports said they were held as part of the on-going investigation involving the payment of bribes to giant state oil company Petrobras. A total of 25 construction companies and Petrobras contractors are alleged to have been involved in corrupt payments totalling over US$3bn. One of four brothers, Marcelo Odebrecht took over from his father to run the family-owned group in 2008. The group now operates through 15 divisions in 21 countries, and employs an estimated 180,000 staff. It also faces allegations that during the presidency of Lula da Silva (2003-2010) it benefitted improperly from loans made by Brazil’s national development bank, BNDES, at below-market interest rates.

 

Bradesco to bid for HSBC

Brazilian bank Bradesco, the second largest in the country, has said that it will make a formal bid for the Brazilian assets of the London-based global bank HSBC in July. The news follows HSBC’s announcement that it would be cutting back its global workforce and selling its subsidiaries in Brazil and Turkey. Bradesco’s president, Luiz Carlos Trabuco, was quoted by the local press as saying, “We made an offer and now we are assessing the situation. A final offer will only be made in July, according to the seller’s timetable. The size of the cheque we’ll write won’t be known until the last minute.” Other local banks are also thought to be interested in the acquisition, including among them the local branches of Spain’s Santander and BBVA, along with Brazil’s Itaú. Santander Brasil’s president, Jesús Zabalza, said he would consider making a bid. The value of HSBC’s Brazilian assets is estimated at around US$4bn; the bank has 853 branches in the country.

 

Nissan Motor thinking big

In an interview with the Reuters news agency, José Luis Valls, director for Latin America at Nissan Motor Corp, said, “I don’t want to play in the second league any more. I want to play in first, and I want to go after the championship”. Valls was explaining Nissan’s decision to seek a bigger market share across the region. The Japanese manufacturer is already well established in Mexico, and has announced a US$600m investment in Argentina due to start next year (through the Renault-Nissan joint venture). “We want to play a role in the regional market of 7m vehicles,” Valls said. A first objective would be to increase Nissan’s market share in Argentina from 1% to 5%. Although car sales have contracted amid economic troubles in both Argentina and Brazil, Valls insisted that the market needed to be assessed over the medium and long term. “We need a foothold in Brazil and another in Argentina to compete in the region and generate revenue” he said. The new plant in Córdoba, Argentina, will produce three pick-up models, launching its NP30 Frontier model in early 2018, followed by a Renault pick up, and later, under contract with the German manufacturer, a Mercedes Benz model.

 

Venezuela turns on Procter & Gamble

In June the Venezuelan government accused the local subsidiary of US company Procter & Gamble (P&G) of taking part in the so-called ‘economic war’ against the country by selling feminine hygiene products at excessively high prices. After reports that a box of eight tampons and a pack of sanitary towels were selling for VEB1,400 each (around US$7 at the highest official exchange rate, but still representing around one week’s minimum salary), the minister for women, Gladys Requena, accused the company of carrying out “criminal acts against the Venezuelan people”. In a public statement, P&G said it had followed official guidelines on “fair pricing” set by the government. It also noted that it was selling other products such as regular sanitary towels at the much lower price of VEB19. Economists noted that the higher-priced products had probably been imported more recently and transacted at the much higher new free floating exchange rate, Simadi, which hovers at around VEB187/US$. Venezuela’s (illegal) parallel exchange rate, meanwhile was trading at about VEB481.9/US$ on 30 June, according to the (Miami-based) website dolartoday.com, which publishes its daily rate based on trade at the Venezuela-Colombia border.

“An offensive, reckless xenophobe.” This was how the president of Mexico’s ruling Partido Revolucionario Institucional (PRI), César Camacho, described the US business tycoon Donald Trump on 18 June for remarks he made during a speech to launch his presidential campaign a day earlier. Camacho was only the latest in a string of senior Mexican politicians to denounce Trump, who said that “[Mexico] is not our friend believe me; when Mexico sends its people, it is not sending its best, it is sending people that have lots of problems”. Trump also promised to “build a great, great wall on our southern border and I will have Mexico pay for that wall. Mark my words”.

“They’re bringing drugs, they’re bringing crime, they’re rapists, and some I assume are good people, but I speak to border guards and they tell us what we are getting,” Trump said in a speech delivered from ‘Trump Tower’ in New York City. Trump is only a fringe candidate for the Republican Party with no realistic chance of winning the US presidential elections or his party’s nomination, but it is exactly these sorts of comments that could do irreparable harm to the prospects of the next Republican nominee; a post mortem after President Barack Obama’s re-election demonstrated that Hispanic voters felt alienated by the party.

Trump’s address was peppered with comments that the media simply could not ignore – and neither could senior politicians in Mexico. The interior minister, Miguel Ángel Osorio Chong, dismissed Trump’s remarks as “prejudiced and absurd”, while the foreign minister, José Antonio Meade, said they reflected “profound ignorance” of the contribution migrants have made to the US and its economy. Camacho said that Trump was not much of a businessman if he could not add up that he would lose the entire Latino vote as a result of his comments, adding that many Mexicans “risk their lives contributing to the growth of the [US] economy…and for the most part are law abiding”.

But perhaps the most eye-catching reaction was from Venezuela’s President Nicolás Maduro who branded Trump a “bandit” and a “thief”, adding that “he who messes with Mexico, messes with Venezuela”. Given that just days earlier the Venezuelan national assembly had declared Mexico’s former president Felipe Calderón (2006-2012) persona non grata for a tweet about a Venezuelan football match, as ties between the two countries have grown more tense, Trump’s comments could have the unexpected result of salving diplomatic strains.

Published in Postscript
Friday, 05 June 2015 11:19

Corporate Radar

Odebrecht and FCC win Panama Metro contract

Brazil’s civil engineering giant Construtora Norberto Odebrecht, in partnership with FCC Construcciones of Spain, was declared the winner of the bidding for the Línea 2 Panama City Metro contract, with a US$1.86bn proposal. The consortium led by the two companies defeated competition from PANAMetro (led by China Harbour Engineering) and UTE PANAMÁ II (led by Dragados of Spain and ICA of Mexico). The Línea 2 contract requires the winning consortium to build 22kms of passenger railway with 16 stations, linking Tocumen in the south of Panama City up to San Miguelito, where it will connect with Línea 1. Odebrecht/FCC also built Línea 1, stretching for 16kms, at a cost of US$2.1bn. It opened to the public in April 2014. The new contract for Línea 2 includes responsibility for design and construction, auxiliary services and stations, railway tracks and equipment and rolling stock. Although Odebrecht/FCC were declared the winners, at the end of May the contracting process was officially suspended to give the authorities time to consider a formal complaint by the PANAMetro group, which alleged that two members of the technical assessment committee (including Óscar Ramírez, rector of the Universidad Tecnológica de Panamá) previously worked as consultants for companies in the winning consortium.

 

LATAM Airlines reports unexpected Q1 loss

LATAM airlines, the largest Latin American commercial airline, formed by LAN of Chile and TAM of Brazil, reported an unexpected loss of US$39.9m in the first quarter of 2015.

The airline said that the loss, similar to the US$41.3m deficit registered in Q114, reflected a weak Brazilian Real, which had offset operational gains and cost reductions. The consensus among analysts, as reported by Reuters, had been that LATAM would achieve a Q115 profit of US$42m. In a press release, the company said that its non-operational results were affected by a non-cash US$205m loss suffered mainly by TAM as a result of a 20% depreciation of the Brazilian currency during the quarter.

Operating revenues were down 12.2% to US$2.791m in Q115, while costs dropped 16.3%. Costs per available seat kilometres (ASK) were down 17% year-on-year, which the company said was largely due to lower jet fuel prices. As a result of the cost reduction, operating profits doubled to US$227m. The operating profit margin rose to 8.1%, up from 3.5% in the comparable year-earlier period. LATAM expects to take delivery of 17 new aircraft between July and March 2016, including 11 Airbus A321s and 4 Boeing 787-9s.

 

OHL hit by corruption allegations

The Spanish toll-road operator OHL has been hit by allegations of corruption and impropriety in Mexico. The share price of its local subsidiary, OHL Mexico, dropped sharply in late May, after Mexico’s federal ministry of communications and transport said it would seek an audit of the company’s contracts with the Estado de México (Edomex). This followed earlier leaks of telephone conversations apparently showing that the company improperly increased toll charges for motorists using the Viaducto Bicentenario highway in Edomex. Executives were also alleged to have discussed bribing Mexican judges and paying for a five-day holiday for the Edomex communications secretary, Apolinar Mena. Mena, along with Pablo Wallentin, OHL Mexico’s head of institutional relations, resigned in the wake of the allegations.

OHL has denied any irregularities at its Mexican subsidiary, insisting that it operates within local law and honours the terms of its contracts. OHL Mexico generates around 30% of the parent company’s global income. Earlier, the Spanish group had announced an18.7% fall in Q115 net profits to EUR49.1m, attributed in part to lower toll revenues in Mexico, caused by the effect of lower inflation on pricing mechanisms.

 

Pacific Rubiales accepts Alfa/Harbour takeover bid

The board of Pacific Rubiales, the Canada and Colombia listed private oil company, on 21 May said that it had agreed to accept a takeover bid mounted by Mexico’s Alfa Group and Harbour Energy of the US. Under the terms of the offer, Alfa and Harbour Energy will pay C$6.50 (US$5.32) a share for 81.05% of the company, valuing it at US$6.4bn. Alfa already owns a minority stakeholding in Pacific Rubiales; under the terms of the deal Alfa and Harbour Energy will each end up holding a 50% stake in Pacific Rubiales.

The offer price represents a 35% premium on the Pacific Rubiales share price on 4 May, the day it was first revealed. Despite unanimous acceptance from the Pacific Rubiales board, which said “the transaction delivers significant and immediate value to company shareholders” a group of individual shareholders led by Caracas-based Alejandro Betancourt said it was “extremely disappointed” at the terms and would vote against the deal in July.

Pacific Rubiales produces around 150,000 barrels per day (bpd), mostly from Colombian oil fields. Its share price has dropped steadily since 2014, on the back of the fall in international oil prices, the expiry of some of the company’s key production licences in Colombia, and concern over its levels of debt. The licence to operate the Piri-Rubiales field ends in June 2016.

Looking beyond the short term however, Pacific Rubiales is attractive to Alfa and Harbour as a vehicle for developing in Latin America, including bidding for new licences in Mexico. The terms of the bid also includes a debt-restructuring proposal.

 

Itaú profits beat expectations

In early May the leading Brazilian bank Itaú Unibanco Holding reported net recurring first quarter profits of BRL5.808bn (US$1.88bn), ahead of market expectations. Net recurring profits is a measure that excludes once-off items and charges. The latest results were attributed to rising interest income and improved cost control. Measures to reduce risk also had an effect, with non-performing loans falling for the 11th consecutive quarter.

However, sector analysts noted that the poor performance of the wider Brazilian economy was having an impact on the bank’s accounts. Recurring profit margins dropped to 24.5% in Q115, down from 24.7% in Q414. According to a report by Economática, a local consultancy, profitability across Brazilian listed companies slumped in Q115. The consultancy said that net profits reported by 317 listed companies slumped by 41.4% to BRL25.762bn (US$8.557bn). Itaú Unibanco was the second largest company by net profits behind state-owned Banco do Brasil and ahead of (the also state-owned) energy company Petrobras. Economática said that Itaú, along with Banco do Brasil and Bradesco, was part of a group of banks that had reported improved profits despite the country’s growing macroeconomic difficulties. The consultancy said that taken as a group, the 25 banks listed on the Bovespa (the São Paulo stock exchange) had reported a 42.8% increase in Q115 profits to BRL17.8bn. This contrasted with mining companies at the other end of the spectrum: a group of five led by Vale had reported combined losses of BRL9.83bn (US$3.28bn) in Q115, compared to profits of BRL5.81bn (US$1.94bn) in the comparable year-earlier quarter.

 

Spotify tunes in to Latin America

Spotify, the music-streaming service, says it is focusing marketing efforts on Latin America. According to Gustavo Diament, its director for the region, the company is operating in 17 countries and hopes to grow revenues from the area to 15% of its global total. Spotify launched in Mexico only two years ago, but that country now is the fifth largest market by revenue out 58 worldwide.

“Mexico is getting close to overtaking Germany in revenue terms” Diament said. According to Spotify, by the end of last year it had 15m paying subscribers and around 60m active users around the world. Diament said that the key to boosting revenues in Latin America was the ability of consumers to pay for the service via their mobile phones. Monthly subscription rates vary from COP11,499 (US$4.81) in Colombia to PEN16.90 (US$5.37) in Peru. These rates have been pitched below the US$9.99 charged in the US to premium subscribers, who get an ad-free music stream.

The company is trying to reach more deals whereby the Spotify service is “bundled” into a single subscription rate charged by the mobile phone operators for a range of services, rather than being sold as a stand-alone service that subscribers have to opt in to and pay for separately.

It also needs to work with artists who believe they are not getting adequate royalties (among them is the US singer Taylor Swift, who has withdrawn her catalogue from Spotify). Diament claims that Spotify has paid over US$2bn in royalties, but notes that this goes to music labels and rights owners, with Spotify having no direct control over what proportion goes to the artists themselves.

Thursday, 21 May 2015 11:19

BRAZIL: From China with love, and money

Petrobras, the troubled Brazilian state oil firm, was one of the big winners this week following the visit of Chinese premier Li Keqiang. While other former investors are suing Petrobras over its management’s cover-up of the massive corruption scandal at the firm, China is betting that the long-term future of the company is rosy. Various Chinese financial institutions, including the Export-Import Bank of China (Cexim) and the China State Development Bank, are investing up to US$10bn in Petrobras. Even more significant is the Chinese investment in Brazilian infrastructure which, if it ever gets off the ground, has the potential to make a huge difference to the connectivity of Latin America’s infrastructure.

The most eye-catching project is a plan to build a train line from the city of Rio de Janeiro to Lima, Peru. Li’s visit was accompanied by a commitment to a feasibility study to assess the viability of the project, which would massively increase Brazil’s capacity to export soya and other raw materials to the Asian market. In 2014, Brazil exported US$40bn worth of goods to China, of which US$16.6bn was soya, US$12.3bn was iron ore and US$3.5bn was oil. Li spoke of increasing that figure to US$100bn in the near future.

Some Brazilian economists remain unhappy that most of the agreements signed, in the areas of energy, mining and agriculture continue the trend of China purchasing raw materials, while selling back to Brazil industrialised goods. Mindful of this criticism, Li drew attention to the purchase of 40 Embraer E-195 jets by the Chinese company Hainan for US$1.3bn. The total value of the 35 deals signed between President Dilma Rousseff and Premier Li is estimated by Brazil at US$53bn (and by China at US$27bn), though Rousseff was keen to point out the payment would be made in reais, helping to shore up the value of the Brazilian currency and avoid fluctuations in the dollar/real exchange rate.

Aside from the transcontinental railway plans, the two countries announced the creation of an investment fund worth US$50bn, which will be spent on infrastructure projects, in particular the upgrade of roads, railways, power lines and telecommunications projects. For Oliver Stuenkel, a professor of international relations at Fundação Getulio Vargas, this was the most significant of all the deals. Acknowledging that some of the projects planned may never get off the ground, Stuenkel said that, “just the promise of this investment gives the South American continent a unique chance to integrate. South America is very badly integrated in terms of its infrastructure”.

  • ‘Scissorhands’ promises more cuts, more taxes

Joaquim Levy, the finance minister, struggled to get to work on 19 May. A group of protesters from the federation of workers in family agriculture surrounded Levy and prevented him from entering his office in Brasília. Though the protesters’ demands were very specific, such as incentive programmes for women in agriculture and guarantees regarding water supply, not all of which fall within Levy’s remit, it is clear the market-friendly finance minister is becoming the bogeyman for large elements of the Brazilian Left.

Over the weekend, Levy proposed further spending cuts and more tax increases to accelerate Brazil’s trajectory towards its goal of a primary budget surplus this year of 1.2% of GDP. Other ministers are urging a gentler approach to austerity. While the government plans to shave R$70bn (US$23.1bn) from its budget this year, Levy wants that figure to rise to R$80bn. In the first two weeks of May the government narrowly won two votes in congress on fiscal reform measures, but not before they had been watered down to some extent by legislators. The executive is now expected to raise some taxes in areas that cannot be vetoed by congress, such as financial operations and social security contributions.

  • Senate rejects OAS appointee

For the first time in its history, the senate has rejected the appointment of a career diplomat to an international post. By a vote of 38 to 37, the senate blocked Guilherme de Aguiar Patriota, the brother of the former foreign affairs minister, Antonio Patriota, from becoming Brazil’s ambassador to the Organization of the American States (OAS). Patriota was one of President Rousseff’s top foreign policy advisers during her first term. Brazil has now gone four years without an official representative at the OAS.

Published in Brazil & Southern Cone
Monday, 30 March 2015 13:02

Chile: Trouble comes in threes

Chile is considered one of the least corrupt countries in Latin America. Yet all of a sudden there are three major cases in the headlines, and an embarrassed government is promising new measures to strengthen ethical standards.

The first case, known as the Caval affair, was revealed by the magazine Qué Pasa on 5 February. The state-owned Banco de Chile had lent US$10m to a company called Exportadora y de Gestión Caval. The money was used to buy and then re-sell land in Machalí, generating an almost overnight profit of US$5m. On the face of it, nothing illegal took place. But Natalia Compagnon, the owner of the company, is married to Sebastián Dávalos, the son of President Michelle Bachelet (meaning that the scandal has also been dubbed ‘Nuera-gate’ [‘daughter-in-law-gate]’).

The loan was made on 16 December 2013, only one day after Bachelet won the election that was to return her to the presidency for a second term (her first was in 2006-2010). And Dávalos, later to be appointed socio-cultural director of the presidency (an unpaid position running a charity), appears to have played a key role in securing the deal. It looked suspiciously close to influence peddling. The government initially tried to shrug it off as a “private transaction”. But on 13 February, Dávalos resigned from his government role; on 23 February he and his wife Natalia also resigned from the Partido Socialista (PS), one of the five parties in the ruling centre-left coalition, Nueva Mayoría. President Bachelet, initially slow to respond to the scandal, has had to apologise and her approval rating has taken a sharp dip since.

If the first case is embarrassing for the government, the second and third ones paint the centre-right opposition in an unflattering light. The tax authorities and the courts have been investigating the large local firm Sociedad Química y Minera de Chile (SQM) and other companies for siphoning off illegal campaign contributions to the main right-wing party, Unión Democrática Independiente (UDI), historically closely linked to the 1973-1990 dictatorship led General August Pinochet. The SQM chairman is billionaire mining magnate Julio Ponce Lerou, the late Pinochet’s son-in-law. By mid-March, up to a quarter of the company’s US$6bn market capitalisation had been wiped out, as shares plummeted on news of the allegations. Three board representatives from Canada’s PotashCorp, which holds a third (32%) of SQM, resigned after the rest of the board did not agree to their demand for “an exhaustive, transparent and independent investigation”.

Linked to the SQM scandal and bigger in its ramifications is a third case, dubbed ‘Pentagate’. In early March, four executives from the financial holding company Penta Group, along with a former government official, were arrested. Penta is a major Chilean financial services group, with estimated assets of US$30bn. Along with other officials, including two in the country’s internal revenue service (Servicio de Impuestos Internos [SII]), they stand accused of tax fraud, bribery and money laundering. Those arrested include Penta’s owners, Carlos Alberto Delano and Carlos Eugenio Lavín, who also had ties to the UDI. Prosecutors said that the Penta Group had “a culture of tax evasion” and had become “a machine to defraud the state”. The UDI party president, Ernesto Silva, announced his resignation on 11 March due to his links to Penta, which came to light as part of the SII’s audit of the company last year.

Ironically perhaps, according to the latest (2014) Annual Corruption Perceptions Index (CPI) compiled by the Berlin-based NGO, Transparency International, Chile is considered the fourth least-corrupt country in the Americas (behind Canada, Barbados and the US in that order). It is seen as having much higher ethical and legal standards than some of its neighbours, such as Brazil (ranked 12th in the hemisphere), Mexico (21st), Argentina (22nd) and Venezuela (which comes bottom of the regional ranking at 31st, just behind Haiti).

So there are at least two readings of the latest revelations. The first, simply, is that all countries suffer corruption. Three high profile cases coming together do not necessarily alter Chile’s overall position in the rankings. Aldo Cassinelli, dean of the political science faculty at the Universidad Central de Chile, put forward a second interpretation. He told the (Argentine) website Infobae, “It is not that Chile is free from corruption and influence peddling. The difference is in how you react to specific cases. They can be hidden or confronted. In Chile’s case they get confronted. Society exerts pressure and the political class, whether in opposition or in government, takes decisions”.

According to this line of thinking, in Chile there is faster resolution of cases, with officials resigning or businessmen being investigated, than in many other neighbouring countries, where cases tend to drag on for much longer without resolution. For her part, President Bachelet has reacted by calling for a range of new anti-corruption measures. Henceforth, she wants officials and former presidents, including herself, to be obligated to make detailed declarations of their assets. The president has also set up a 16-strong commission (formally a ‘presidential advisory council’) under a respected local economist, Eduardo Engel, to report back with proposed anti-corruption measures within 45 days.

  • Anti-corruption measures

The new presidential advisory council comprises 16 of the country’s senior academics, economists and legal experts. It is tasked with drafting proposals to strengthen the country’s legal framework in a bid to eradicate influence-trafficking, the abuse of power and corruption. Proposals aim to tighten up existing controls, draw up a new code of practice and establish appropriate sanctions for offenders. Separately, a bill to better regulate political party financing is before congress and the executive hopes for approval by late May. President Bachelet also has suggested a constitutional reform to create new sanctions for politicians found to have broken the law in the course of securing their elected posts.

Development: On 27 March, El Salvador’s supreme electoral tribunal (TSE) finally announced the official results of the country’s legislative and municipal elections, nearly a month after they were staged on 1 March.

Significance: The painstakingly slow count was compounded by the fact that the very final deputy to be confirmed by the TSE in the 84-seat legislative assembly won by fewer than 100 votes. This meant that the ballot papers and tally sheets related to this seat, which contained irregularities, had to be recounted, not least because so much was rested on the outcome. In the event, the main right-wing opposition Alianza Republicana Nacionalista (Arena) won the final seat to finish with 35 deputies, while the ruling left-wing Frente Farabundo Martí para la Liberación Nacional (FMLN) won 31 seats. The result is a serious blow to President Salvador Sánchez Cerén, who took office just nine months ago, and will now lack the ability to muster a simple majority for the meat of his five-year term (three more years to 2018) with which to advance security, education and health reforms, and social initiatives.

  • The natural alliances that Arena and the FMLN forge with smaller parties will result in two equal blocs of 42 seats apiece in the legislative assembly, meaning that Arena will be able to stymie initiatives sent down by the Sánchez Cerén administration. The FMLN has generally managed to forge a legislative alliance with Gran Alianza por la Unidad Nacional (Gana), the moderate right-wing party composed principally of Arena dissidents, which won 11 seats. This would form a bloc of 42, just one shy of a simple majority.

  • Arena, for its part, enjoys alliances with the Partido de Concertación Nacional (PCN) and the Partido Demócrata Cristiano (PDC), which won six seats and one seat respectively, also producing a bloc of 42. Three of Arena’s seats were actually won in alliance with the PCN anyway. The final seat, which required reopening certain ballot boxes, was in the department of San Salvador, where Arena edged out Cambio Democrático (CN), a small left-leaning party that backs the FMLN.
  • Solace for the FMLN comes from its victory in the mayoralty of San Salvador, by far the most important municipal position up for grabs. San Salvador has provided a springboard to the presidency in the past, and the incoming mayor, Nayib Bukele, is being touted as a star of the future. The 34-year-old Bukele is a new breed of politician, shunning the FMLN’s traditional red, for instance, during campaign rallies.
  • The loss of San Salvador is a bitter pill to swallow for Arena, but it enjoyed the sweetness of success elsewhere – and in some unexpected places. Roberto D’Aubuisson Jr wrested Santa Tecla, the capital of the south-western department of La Libertad, from the tight grip of the FMLN. Oscar Ortiz, now Vice-President, had won five consecutive elections for the FMLN in Santa Tecla dating back to 2000.

  • Arena also ended up with a greater number of the 262 municipalities in the country’s 14 departments than the FMLN. Arena won 129 in total (10 in alliances with the PCN or PDC), to 85 for the FMLN. The FMLN won the majority of the biggest municipalities though, and will govern over the largest proportion of the population when the new officials take up their positions on 1 May.

Looking Ahead: The results are not just bad for the government of President Sánchez Cerén but also the country, as legislative stalemate is the last thing it needs when the economy faces a secular slump, which urgently requires a political consensus to redress. The president of the central bank, Doctor Oscar Cabrera, revealed on 27 March that the economy grew by 2% in 2014, the lowest in Central America.

Published in Main Briefing
Monday, 02 March 2015 15:28

Peru: Troubled times for Pluspetrol

A confrontation on 10 February between local police and the community in Pichanaki, (province of Junín), could have major implications for oil and gas production in Peru. According to the government, around 500 people invaded Peruvian army barracks temporarily leased to Pluspetrol, an Argentine oil company with a licence to explore nearby Block 108. Police used tear gas to clear the area: violent clashes broke out, leaving one student dead from bullet wounds, along with 37 civilians and 30 police officers injured. The protestors say that not one but three people were killed in the clashes.

A number of other key facts are contested. According to Carlos Echevarría of the Frente de Defensa de Pichanaki, Pluspetrol has polluted the local environment. “For us there is nothing to negotiate: it is just a question of this company leaving the area, and nothing more”, he said. In contrast, Daniel Guerra, a Pluspetrol manager in Peru said, “this is a very basic piece of exploration work, we haven’t drilled, we haven’t contaminated anything, and we can’t spill any oil because we are not producing any”.

Wider issues are involved. Some experts say Block 108 could hold gas reserves equal to, or larger than, the massive Camisea deposits (believed to total about 13.4trn cubic feet), which have given the Peruvian economy a major boost since they were discovered by Shell in 1986. Pluspetrol is one of the main partners in the Camisea operating consortium, along with Hunt Oil Co., SK Corporation, Repsol, Tecptrol and Sonatrach. And Peru’s extractive sector, including oil and gas plus mining, has been facing rising opposition from local communities. It is estimated that as much as US$60bn worth of mining and energy projects are stalled because of local opposition and environmental approval issues.

At the government’s request, Pluspetrol began to withdraw from the area later in the same week. Energy and Mining minister Eleodoro Mayorga initiated a dialogue with the local residents, saying that in view of local feelings the authorities would review the situation. Pluspetrol was awarded the licence to explore Block 108 in 2005, a rectangular piece of land of around 1.2m hectares. Local people generally make a living by from coffee and cocoa crops. The Argentine company says it has observed all the legal, environmental and social terms of its licence, and in doing so has consulted with 34 local communities, held 268 information workshops and reached individual agreements with over 2,000 local farmers. It says it has also funded a local health programme and school libraries.

Pluspetrol also faces opposition in another part of the country, in oil block 1-AB in Loreto, in the northern jungle. There at the end of January, members of the local Achuar indigenous community stopped the company’s exploration work by blocking roads and seizing riverboats in a dispute over compensation payments. Pluspetrol has been operating in 1-AB since 2001, and with production of 3,100 barrels per day, it is Peru’s largest single oil producing block currently. The protestors are demanding compensation for the use of their lands and the installation of a local sawmill; they also want a community-owned company to be given a services contract. Pluspetrol has countered that the community should not receive compensation because it is outside the area of direct influence of oil operations.

The 1-AB licence expires in August, and the government may ask for bids to continue operating it. Pluspetrol has said that depending on the terms, it might seek to stay on. According to Guerra, “we’ve definitely got a lot of experience in 1-AB, we’ve been working there for 15 years, it will depend on the government’s tender terms, but in principle we are interested”. He also noted that some of the environmental and compensation issues pre-date Pluspetrol’s arrival, going back to the 1970s, when Occidental Petroleum was active in the area. The government has declared environmental emergencies in various parts of 1-AB in recent years, because of pollution linked to past spills and leaks. Pluspetrol, Guerra said, had spent roughly US$100m on environmental amelioration measures. Other oil companies have also expressed interest in 1-AB if the government invites bids for a new operating licence.

Perupetro, the hydrocarbons regulator (not to be confused with the state oil company Petroperu) has said that under existing regulations it cannot call for new bids for 1-AB until the outstanding social issues are resolved. “Since it is already producing, it is an attractive block. You come in and already have revenue”, noted Perupetro president Luis Ortigas. Ortigas added that a call for bids for a further 25 blocks (19 in the Amazon and six offshore) might be postponed because of the current fall in oil prices. “With the drop in the price of crude we have to think again. Maybe we have to delay or reprogramme… we could reach the conclusion that it’s not convenient now to launch bidding,” Ortigas told news agency Reuters.

Peru’s business community is troubled by the implications of Pluspetrol’s difficulties. Carlos Gálvez, president of extractive industry lobby Sociedad Nacional de Minería, Petróleo y Energía (SNMPE), said that events in Pichanaki could raise questions about the rule of law and the enforceability of commercial contracts. “This could be seen as a break point, after which concession contracts signed by the state and companies are seen as not being fully respected in the future, that would be worrying” he said.

Development: On 26 February, as a Buenos Aires judge dismissed the obstruction of justice case brought against President Cristina Fernández, she announced a small ministerial reshuffle.

Significance: Yesterday was a good day for the embattled Argentine president: the decision by Judge Daniel Rafecas to dismiss the obstruction of justice case originally brought against Fernández by federal prosecutor Alberto Nisman shortly before his mysterious death in January is of particular significance. And her ministerial reshuffle may inject some greater political energy into an administration now facing its last ten months in office.

  • Judge Rafecas left no room for doubt. The accusation against the president, plus Foreign Minister Héctor Timerman and six others, that they conspired to cover up Iranian involvement in the 1994 bomb attack on the AMIA Jewish community centre in Buenos Aires, which killed 85 people, was not supported by the evidence, he ruled. Rafecas added that some of the available evidence “directly contradicts” the accusation – a reference to testimony by the former head of Interpol denying that the Argentine government had sought to get ‘Red Notices’ for the arrest of Iranian suspects withdrawn. Rafecas also dismissed intercepted telephone conversations between government associates and intelligence agents. They proved nothing, he said.  His decision goes against the views of Nisman’s successor, prosecutor Gerardo Pollicita. Pollicita can appeal the decision to dismiss the case, but it will be a lengthy process.
  • Politically, the decision is very positive for the president. If the government was not trying to obstruct justice in the AMIA case, it follows that it would also have had little to gain from Nisman’s death (if his death were to be proven to be other than suicide). So Fernández’s claim that the whole affair has been used for political reasons against her gains some credibility. Accusation of foul play made by the opposition parties look correspondently weakened. Perhaps most importantly for Fernández, the judge’s decision gives her valuable breathing space at the start of the 2015 election campaign.
  • The sense of a government regaining the initiative was supported by a mini-reshuffle. Out went Cabinet Chief Jorge Capitanich, who resumes his position as governor of Chaco province (from where he intends to run for mayor of Resistencia). He is replaced by Aníbal Fernández, one of the government’s heavy hitters (he has previously served as interior minister [2003-2007], justice minister [2007-2009], and as a federal senator [2011-2014]). Fernández, who had been serving as secretary-general to the presidency, was replaced in that role by Eduardo ‘Wado’ de Pedro, a key member of the La Cámpora youth wing of the ruling party, led by the president’s son, Máximo Kirchner. His presence indicates that in her last months in office Fernández may increasingly rely on her ‘inner circle’ made up of La Cámpora members.

Looking Ahead: This latest turn of events leaves two or three outstanding issues. First, with the Nisman case less of an immediate threat, the government could still be under serious pressure as a result of other legal challenges, including corruption charges against Vice-President Amado Boudou and money-laundering charges against President Fernández herself and her immediate family. Second, it remains to be seen how the opposition parties will react to the Nisman setback, and in the context of the election campaign. And third, to the extent that the government has regained the initiative, what will it use it for? The president is due to open a new session of congress this Sunday (1 March) and there is some speculation that she may seek to tighten controls on the judiciary.

Published in Main Briefing

Uruguay has offered Paraguay full access to its diplomatic network and infrastructure in mainland China. The announcement by Uruguay’s foreign minister, Luis Almagro, has raised hopes that this may help save a Paraguayan woman facing a death sentence in China. It has also sparked speculation that it could lead to the establishment of formal diplomatic relations between China and Paraguay, the only South American country to recognise the government of Taiwan as legitimate.

Almagro’s announcement came during a 5 February visit to Paraguay, where he met his peer, Eladio Loizaga, as well as President Horacio Cartes. In a statement, Almagro said that Uruguay had offered Paraguay the use of its diplomatic network in China, as well as in any other countries in which Paraguay lacks diplomatic representation, as part of efforts to promote international trade. Almagro noted that having access to Uruguayan embassies and consulates in China could be “beneficial” for Paraguay, which has “strong commercial interests in China”.

Paraguay, the world’s fourth largest soya producer, counts China as one of its main export markets. In recent years the Asian giant has also become one of Paraguay’s main import suppliers (with much of the bilateral trade handled by Uruguayan ports). Yet Paraguay has not had diplomatic relations with China since ties were severed by the right-wing military dictatorship led by General Alfredo Stroessner (1954-1989). In 1957, the Stroessner government cut relations with China and recognised the government of Taiwan instead. Since then, Paraguay has maintained diplomatic relations with Taipei.

Almagro also said that in offering its diplomatic network in China, Uruguay would also “do everything in its power” to assist Paraguay in the case of Rosalía Amarilla, a Paraguayan national sentenced to death in China for drug trafficking in 2012. Amarilla’s execution had been scheduled for 20 March. But following Loizaga’s participation in the inaugural summit between China and the new Community of Latin American and Caribbean States (Celac), held in Beijing on 8-9 January, China announced that Amarilla’s execution has been postponed until July, when her case is to be reviewed. While in Beijing, Loizaga held a private meeting with his Chinese counterpart, Wang Yi, and the two reportedly discussed Amarilla’s case.

  • A diplomatic dilemma

On 11 January Diógenes Martínez, a former Paraguayan senator, said that it would be “absolutely impossible” for Paraguay to establish diplomatic relations with mainland China. Martínez, who in the past has called for the establishment of relations with Beijing, pointed to the ‘non-diplomatic aggression pact inked by Taiwan and China in 2008, under which the two agreed to respect each other’s diplomatic allies. According to Martínez the two last Paraguayan governments explored the possibility of establishing diplomatic relations with Beijing, only to find that this could lead to a diplomatic confrontation in Asia. Martínez explained that if Paraguay were to “even express an interest, Taipei could interpret this as breach of its agreement with Beijing”.

Published in Postscript

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