Argentina’s New Currency Crisis: What Happened This Time?

The peso crisis in Argentina: A risk analysis. What happened this time? Is any comparison with the previous crisis (1998 – 2002) possible? What impact could we expect in the close-term for President Mauricio Macri and the country’s political stability? The article tries to give some clues on what might be going to happen in the South-American State.

A history of debt crises

Argentina is no stranger to currency and debt crises. In the 20th century, periods of economic growth often led to trade deficits, pressure on the currency and the hasty adoption of fiscal austerity to tamp down the economy, creating an impoverishing and tiresome cycle of boom and bust. After a bout of hyperinflation in the 1980s, Argentina attempted to stabilize the Argentine peso by tying it 1:1 to the dollar in 1991 (the Convertibility Plan). Though successful in the short term, convertibility went disastrously awry at the century’s turn.

Argentina’s contemporary problems are a typical currency crisis. Those who hold Argentine pesos or peso-denominated assets are selling, partly to buy US dollars and dollar-denominated assets because the US Federal Reserve is raising interest rates. Argentina also runs a fiscal deficit, which it has to finance in dollars or another hard currency. As the peso falls, that debt becomes harder to service, increasing fears of default and creating a cycle of ever-increasing pressure on the peso. As the peso falls, prices rise – inflation currently runs at about 30 percent per annum.

The Argentine central bank attempted to stem the pressure on the peso by raising interest rates to extraordinarily high levels – they reached 27.25 percent at the end of April, and 40 percent in the first week of May. However, the peso continued its decline. The International Monetary Fund (IMF) was created just for situations like this. The Argentine government in May appealed to the fund for credit to reassure investors, obtaining a credit line of $50 billion, which the state can use to ensure its debts are paid and to support the peso. In return, the Fund has mandated Argentina take steps to reduce its budget deficit through fiscal austerity, including cuts and the reintroduction of taxes on exports. Argentina announced it would speed up this fiscal tightening on September 3.

Argentinian politics: A turn to the right

During the first decade of the 21st century, Latin America was seen as undergoing a left-wing transformation, with governments of varying left-wing ideologies, identities and programs coming to power in the majority of the region’s states. Since 2015, by contrast, there has been a turn to the right.

Argentina’s initial drift to the left began after the convertibility crisis of 1998-2002, which saw extreme austerity, an explosion in poverty and unemployment and the total discrediting of the IMF and economic orthodoxy more generally. The left turn in Argentina was represented by Néstor Kirchner (1950-2010), president between 2003 and 2007, and Cristina Fernández de Kirchner, his wife and successor as president between December 2007 and December 2015. The Kirchners introduced subsidies for utilities and public services, wage increases and, under Fernández de Kirchner, the nationalization of private pension funds to support public spending. Fernández de Kirchner also introduced capital controls, limiting the ability of peso-holders to exchange or sell their pesos on the open market, and thus the peso’s depreciation.

The Kirchners kept the peso reasonably stable, but prosperity during their tenure depended in large part on high prices for Argentine commodities (most notably soybeans). They also presided over a prolonged period of high inflation and considerable levels of corruption. In the 2015 elections, when Fernández de Kirchner could not run again, her left-Peronist faction ran Daniel Scioli, who in turn lost narrowly to Mauricio Macri, the mayor of Buenos Aires and representative of a center-right coalition, Cambiemos.

Macri succeeded in reducing subsidies and returning Argentine bonds to global markets – the country had been unable to borrow openly after the 2001 default. He also deregulated the finance sector. However, his attempts to cut inflation failed, while Macri failed to attract foreign investment. The currency crisis makes it harder for him to argue that his orthodox, conservative economic policies will succeed in restoring Argentine prosperity.

Economic risks

The immediate worry would be that Argentina would again default on its obligations. How likely is that? Well, the fact that the IMF credit line hasn’t prevented increasingly extreme attempts to reassure markets is certainly a bad sign. The Argentine central bank raised interest rates to a dizzying 60 percent at the end of August. There are significant doubts that Argentina will be able to meet the inflation and budgetary targets the IMF demands in return for its help.

The IMF learned during the 2001 crisis that it does not pay to continue supporting a country that is obviously going to become insolvent, so it is certainly possible that the IMF will cut off support – perhaps up to a 50 percent chance over the next year. This means that the danger of an Argentine default in the next year is probably almost as high, as it’s unclear who else might fund Argentina’s deficits.

Political risks

The immediate concern would be the sort of political chaos that attended the 2001 default. This led to a popular uprising and the flight of President Fernando de la Rúa from the Casa Rosada. The chances of this happening over the remainder of Macri’s current term (i.e. between now and December 2019) are probably very low – under 10 percent. The main reason is that the trigger for de la Rua’s downfall was neither inflation nor a default, but his order to freeze bank accounts (which prevented people from withdrawing their pesos and buying dollars). Macri is unlikely to issue a similar order simply to avoid recalling that precedent; rather, like Fernández de Kirchner, he would probably try to limit access to dollars in other ways.

The second political risk, especially from the purview of foreign investors, is Macri’s losing the next presidential elections, due at the end of 2019. This depends on a number of factors. Will Macri continue to pursue austerity and risk a recession, or limit cuts in a bid to save voters some pain?  Will Cristina Fernández de Kirchner be able to run, or will she be barred, legally or practically, by corruption investigations?

Because many Latin American countries do not allow presidents to run for immediate consecutive terms, there are relatively few precedents to apply. Macri is not accused of epic-scale corruption; indeed, his government has been rather vigorous in pursuing graft cases. His economic record is poor, but Fernández de Kirchner’s was not emphatically better. Given that Macri won his first term by a margin of three percent and his poor economic record, the chance of a left-wing victory would probably fall between 40 and 55 percent.

How Will Dollar Appreciation Against the Real Impact Brazil’s Economic Recovery?

Internal political uncertainty and US rising interest rates have caused a two and a half year high of the dollar to real exchange rate. The dollar’s appreciation, in turn, has caused concern regarding Brazil’s economic recovery – which has been driven by its internal market – given its pressure on inflation and the possible decrease in consumption as products become more expensive.

On September 5, the dollar hit a two and a half year high against the real closing at R$ 4,14 – the highest level since January 2016. Throughout the past few months, the dollar continued to rise and exchange offices were selling the tourism dollar – dollars sold directly to consumers – at R$ 4,32. Since January 2018 the dollar has appreciated 25% against the real.

International and domestic factors

On the international front, the dollar’s appreciation was caused by higher yields on U.S. Treasury securities which rose to 2% and continuous fear of a trade war between the US and its trade partners. Additionally, the Federal Reserve may continue its interest rate increase to contain inflationary pressures due to economic growth – especially in US retail sales. The concern is that an increase in retail sales may increase inflation, and in order to contain this increase, the Federal Reserve would likely increase interest rates even further.

High interest rates in the US – deemed the safest market in the world – have the potential to attract resources from other emerging market countries, such as Brazil.

In Brazil, the appreciation of the dollar can also be explained by the continuous volatility in the presidential polls. Last week, the Superior Electoral Court (TSE) voted to deny Lula da Silva from running under the Clean Slate Law – as of the latest August poll Lula was polling first with 39%. After the TSE decision, a new poll was published on September 5 without Lula; Jair Bolsonaro is now first with 22%, followed by Marina Silva 12%, Ciro Gomes 12%, Alckmin 9%, and Haddad 6%. Doubt remains as to whether the next government will make the necessary economic reforms to reach fiscal balance.

Alongside the dollar pressure, the Brazilian economy continues to underperform with 1.1% growth so far in 2018. This indicator is far worse than what was expected, causing economists at financial institutions to revise the GDP growth to 1.44% for 2018 – earlier in the year the expectation was 2.70%.

Brazilian Central Bank

So far in order to intervene, the Central Bank has held a number of foreign exchange swaps, equivalent to the future sale of dollars. In its latest round, on August 30, the total offer was $1,5 billion.

On August 1, the Central Bank’s Monetary Policy Committee (Copom) decided to keep interest rates at 6.5%, signalling caution due to the volatility of the external scenario.

The Selic rate is used to keep inflation within its target to control prices of goods and services – when inflation is low the Central Bank lowers the Selic rate to boost economic activity, and when inflation is high they increase the Selic to encourage people to consume less to remove reais from the market (sometimes increasing unemployment). Financial analysts project inflation at 4.16% for 2018.

Despite this volatile scenario, Minister of Finance, Eduardo Guardia, and Central Bank President, Ilan Goldfajn believe that Brazil will not face the same difficulties as its neighbour, Argentina, since Brazil has low levels of foreign debt, high international reserves, opportunities to sell future dollar contracts, and stable foreign investment inflows.


The dollar’s appreciation has a direct impact on the pockets of Brazilians. Uncertainty in the presidential elections polls and a need for security has caused investors and Brazilian tourists to buy more dollars, which in turn increases the price of the dollar even more.

In addition, it causes an increase in prices of goods and service and puts pressure on inflation, as many parts of the final goods are imported using U.S. currency – especially true for the electronics industry as well as food such as bread and pasta since wheat tracks the price of the dollar. In addition, the price of oil is likely to continue to increase due to tensions between Iran and the United States. If the dollar rises too much too quickly, it creates concern of boosting inflation in Brazil – something that if relatively moderate would not be considered too negative given its low 2017 and 2018 rates.

Inflation may also be passed along to products that do not use imported parts as some goods are traded in dollars for export and Brazilian exporters will have to adjust their prices in order to make a profit.

In regards to tourism, the appreciation of the dollar comes with positive and negative effects. On the negative side, vacations for Brazilians looking to go abroad became extremely expensive. On the positive side, international travellers may be attracted to come to Brazil due to its weak real which in turn can boost the tourism industry activity and improve some parts of the economy.

Overall, an increase in the price of the dollar is set to delay economic recovery in Brazil, especially as safe countries like the United States become more attractive to investors.


Lorena Valente is an Associate at Promontory Financial Group, an IBM company.

Why Peru’s Democracy is at Stake in Vizcarra’s Anti-Corruption Crusade

As yet another corruption scandal reverberates through Peru, polling shows that citizens are disappointed with their government and doubting democracy itself. If new president Martín Vizcarra fails to lead Peru past the wrongdoing that has plagued its government for decades, Peru could fall into a democratic crisis.

On Saturday, Peruvian president Martín Vizcarra called for a national referendum on judicial and political reforms aimed at tackling the country’s widespread corruption. The week previous, he asked congress to debate the ouster of the country’s magistrates “in light of the evident acts of corruption and crimes”. These extraordinary moves come after recordings were released that chronicle widespread influence peddling between dozens of senior judicial officials and organized crime gangs. The judicial branch is only the latest Peruvian democratic institution to face a corruption crisis, after President Vizcarra himself assumed the presidency after the resignation of his predecessor due to corruption allegations. In fact, all six living Peruvian presidents have either been imprisoned, implicated, or investigated for corruption.

Governmental wrongdoing has undermined Peruvian belief in democracy

Polling shows that Peruvians are weary of these scandals, and that they have negatively affected their opinion of democracy itself. Surveys conducted in May, before the most recent round of corruption scandals, indicate that 62% of Peruvians are worried about financial and political corruption in their country, compared to 35% worldwide. This is enough to make Peruvians the most concerned among the 28 major countries surveyed. Confidence in democracy has followed a similarly troubling trend, with only 45% of Peruvians indicating that they support it, the lowest approval level in a decade. Upcoming polls will likely find that the situation has worsened, as anti-corruption protest marches have begun and there are movements to fly the Peruvian flag at half-mast during its Independence Day celebrations.

Vizcarra’s anti-corruption crusade

When he assumed office in March, president Vizcarra pledged to curb corruption “at all costs”. While this commitment may cause déjà vu among corruption-weary Peruvians, Vizcarra is one of very few Peruvian leaders that has any chance of bringing it to fruition. Most political decision makers that have the ability to reform the system have themselves been embroiled in corruption scandals. Key stakeholders in the public and private sectors have benefitted greatly from the status quo, and thus have little incentive to right the ship. Though Vizcarra faces substantial headwinds in his quest to clean Peru’s political system, there are three key indicators to watch that would suggest his attempts will be successful:

Firstly, if he pays close attention to the governmental structures that will enable his success. A clean, independent judiciary is a vital pillar of any successful anti-corruption campaign, so he should continue to enact drastic actions to clean out any wrongdoers.Firing wrongdoers and leading thorough reviews is a good start, but he should also be sure to identify and place an untainted crop of new magistrates lest a new judiciary display the same problems as the old.

Secondly, if he heavily leverages the Peruvian people’s dissatisfaction with corruption. It is clear that many politicians have an incentive to inhibit the success of his initiative, so Vizcarra must mobilize the citizens that they supposedly represent and pressure the politicians to either clean up their act or resign. Though Vizcarra’s approval rating has fallen precipitously to 37 percent from his initial figure of 57 percent, he still is far more popular than any other Peruvian politician. By calling a referendum, he has taken am first step toward uniting the Peruvian people behind him.

Thirdly, if he creates a functional relationship with the powerful politician Keiko Fujimori. While Vizcarra’s lack of political history and party affiliation makes him feasible as an anti-corruption crusader, it puts him in a weak position compared to Fujimori, who helms Fuerza Popular and controls a healthy congressional majority. Since the Peruvian constitution grants disproportionate power to the unicameral legislature, any major proposition by the Vizcarra government will require the de facto sanction of Fujimori. Fujimori herself is under investigation for corruption and money laundering and wasmentioned as a potential co-conspirator in the same recordings that revealed wrongdoing in the judiciary, so conflict between her and Vizcarra’s anti-corruption crusade may be inevitable. Nonetheless, if he is to expect any major success in his administration’s objectives he must find a way to at least maintain a temporary alliance.

Outlook: what if he fails?

Vizcarra is faced with the unenviable task of confronting corruption and reinvigorating the legitimacy of his government in the eyes of the Peruvian people. He will likely find that much of the Peruvian government is hostile to his cause. Since he is one of a very small group of Peruvian politicians that has a realistic chance of reforming the system, his failure could prove the final straw for citizens. Peru’s democracy is already lacking strong institutions and leadership, and the further exasperation and disenfranchisement of its citizenry would make it susceptible to power grabs. The end result of Vizcarra’s failure could be a state where establishment and anti-establishment strongmen compete for power.


Arthur Williams is a Consultant in the Kuala Lumpur office of Kaiser Associates, a management consulting firm.

How Costa Rica Could Become the Regional Leader in Latin America for Electric Vehicles

There is a huge untapped market for electric vehicles in Latin America. Costa Rica is a regional leader in Latin America, as far as driving much of the innovation behind the electric automotive industry.  It has introduced tax incentives for the industry, which is likely to experience exponential growth in the next two decades. Risks to investors nonetheless remain.

Carlos Alvarado became Costa Rica’s 48th president on 8 May. In his inaugural speech, Alvarado pledged to eliminate fossil fuels from all vehicles by 2021. This pledge will likely inspire automotive investor confidence, due to the country’s growing spectrum of green industries. However, those advocating for an electric vehicle (EV) revolution must appreciate that the rhetoric of an incumbent president does not always match up with the realities of a much more complicated economic and political landscape.

In the country’s “Pura Vida” tradition, Costa Rican officials are proclaiming their intent to make their country a leader in the widespread adoption of EVs over the next few years. While tax exemptions have led to some immediate EV cost reductions, government actors must introduce policies to significantly change the country’s existing infrastructure, or the EV market will struggle to attract widespread support.

In December 2017, Costa Rica’s congress passed the Electric Transportation Bill which established several tax exemptions for electric vehicles. Defined as the Law on Incentives and Promotion for Electric Transportation, the new law came into effect on 25 May 2018. For EV advocates, this spark will unlikely provide the catalyst for insurmountable change.

As there are no local EV manufacturing plants in Costa Rica, the legislation hints at increasing imports of EVs, with tax exemptions helping to offset the higher costs of shipping. One important – yet still unanswered – question is whether this reduction will make EVs more attractive to consumers. As suggested in a report by La Nacionit is estimated that final EV prices will fall only marginally, from an average of $36,720 USD to $31,750 USD.

Another essential component to encouraging greater numbers of EVs is the need for more charging stations and an electricity grid that can support the extra electricity demand. Without these, it will remain difficult to incentivize most consumers to switch from the convenience of the petrol pump. According to a report in El Pais, Costa Rica currently has only 30 charging stations throughout the country. Officials plan to install only a handful more charging stations in 2018.

Market potential

Costa Rican National Registry data reveals that twice as many cars were registered than babies born in 2016, suggestive of a rapidly growing automotive industry. Car ownership is increasing by 5 percent per year, although EVs currently account for only a tiny fraction of the 1.4 million cars on Costa Rica’s roads.  Government officials hope to see 37,000 EVs being driven by Costa Ricans by the year 2022.

While this is a substantial increase from the current number of EVs, it falls dramatically short of inspiring a complete eradication of fossil fuels. To assume greater numbers of Costa Ricans will take up EVs in the time frame proposed by the Alvarado administration, ignores current domestic consumer demand trends.

According to a study by the Estadio de la Region, the country’s public transportation system has so far proved insufficient to satisfy exponential population growth. This has partly encouraged an increase in personal vehicle purchases. While this provides an opportunity for EV ownership, it could also prove to be an Achilles heel to advocates of EV. The EV market has proved uncompetitive to consumers demanding efficient and affordable modes of transportation.

As suggested by Oscar Echeverria, president of the Association of Importers of Vehicles and Machinery (AIVEMA), the transition away from fossil fuels will likely extend beyond 2021 because the Costa Rican market is slow to attract consumers.

Nonetheless, EV growth globally is promising. This bodes well for Costa Rica’s long-term plans of EV integration into its domestic transport system. According to a May 2018 Bloomberg New Energy Finance report, EVs will account for 33 percent of the world’s vehicles and 55 percent of all new cars purchased by 2040.

Remarkably, levels of forecasted EV growth have increased substantially in each year’s report. In the 2018 outlook, analysts predicted there would be 559 million EVs on the road by 2040. This is up from the 2017 analysis which suggested a total of 530 million EVs. Analysts in the 2016 report suggested lower numbers, with 406 million operational EVs expected globally by 2040. This forecasting further adds to the sustainability of long-term investments into EV usage worldwide, and in Costa Rica.


The World Economic Forum’s Global Energy Architecture Performance Index (EAPI) monitors key trends in the energy transition of all countries towards “sustainable, affordable and secure energy systems”. Costa Rica is ranked 14th out of 127 nations in the EAPI’s 2017 report. Alvarado’s shunning of fossil fuels in transportation is a bold step towards ensuring that Costa Rica continues to rank highly.

Monica Araya, the head of the organization Costa Rica Limpia, noted the immense opportunity granted through the country’s recent legislation. She suggested that the Electric Transportation Law would be “an exercise in inspiring the people to feel part of this great agenda which will allow our country to overcome the fossil fuel transportation model.” However, this tax exemption law does too little to encourage significant changes in the transportation landscape. Introducing new charging stations and a more efficient electricity grid would greatly help to boost Costa Rica’s  EV industry.

Additionally, 22 percent of total government tax revenue in Costa Rica stems from taxes imposed on fossil fuels. Eradicating this source of revenue by eliminating fossil fuel based vehicles, without significant changes in economic policy, could inspire considerable opposition from legislators.

Costa Rica has been at the forefront of energy innovation and bold environmental pledges for several years. With impassioned rhetoric, Alvarado has planted the seed for further changes in the country’s energy infrastructure. However, an electric vehicle revolution is likely to be less explosive than Carlos Alvarado would have us believe.

Election of Ivan Duque Could Represent a Pivot Point in Post-Conflict Colombia

How effectively the Duque administration handles the ongoing implementation of the 2016 peace agreement with the FARC may presage the ultimate success or failure of his presidency.

Colombians are particularly passionate about two things: J Balvin, the popular reggaetonsinger from Medellin and football. Some 60,000 Colombian soccer fans descended on Russia to watch their team play in the 2018 World Cup. Perhaps nothing unites that country more than watching James Rodriguez run up and down the pitch for 90 minutes. President-elect Ivan Duque, the youthful protege of former president and current Senator Alvaro Uribe, surely would have loved to see his country bring home the gold trophy. Although Duque emerged victorious in a runoff election held in June, the race was marked by divisiveness: Duque, a right-wing champion of free market orthodoxy, pitted against a former leftist guerilla, Gustavo Petro. Unfortunately, Duque won’t be receiving any help from his country’s soccer squad (Colombia lost to England in a penalty shoot-out on 3 July).

Colombia swings right

Colombia has benefitted from a period of relative political stability for the last two decades. Importantly, the country has managed to steer clear of the economic populism which has visited its Latin American neighbors (the most obvious example being Venezuela). Colombia’s political establishment coalesced around the Partido Social de Unidad (Unity), which the outgoing president Juan Manuel Santos and Uribe co-founded in 2005. However, owing to certain differences of opinion over negotiations with the Revolutionary Armed Forces of Colombia (FARC), Uribe split off from Santos to found the Centro Democratico (CD), the party from which the incoming president Duque also hails.

A dominant theme from Duque’s 2018 campaign was the supposed inadequacies of the peace accord reached in 2016 between the Santos administration and leaders of the FARC. Duque, a political disciple of the Uribe school, has voiced concern over what he views as the leniency afforded to former members of a rogue militant group that cost some 200,000 lives and forced 7 million (~15% of the population) Colombians from their homes. The Uribe wing is especially repulsed by the FARC’s permission to hold political office in Congress. Despite receiving less than 2% of the popular vote in March, the FARC now holds 10 seats in Colombia’s legislature.

While still early to draw conclusions, perhaps there are parallels to be drawn from Uribe’s presidency from 2002-10. During his administration, Uribe championed law and order, furiously strived to present himself as being “tough on security” while embracing extradition of narco-traffickers to the United States as an effective anti-crime measure. Some analysts have suggested that Duque may serve as a sort of puppet president for Uribe. Yet however strong Duque’s personal opinions may be of the 2016 settlement, he will not be able to reverse the terms of the agreement by himself (nor are his political views on the matter especially black and white). Many elements of the peace agreement are enshrined in the constitution and will require more than a simple majority vote. Political observers anticipate that Duque will seek to build a coalition consisting of the right-wing Partido Conservador and the more centrist Partido Liberal.

Campesinos (de cocaina) Colombianos

Despite Colombia’s political drama, the country is in the middle of a tourism boon. In part popularized by the Netflix television series Narcos, Colombia’s Medellin of Antioquia has seen an uptick in visitors from around the world. Young people also flock to Cartagena, the Spanish colonial port on the coast, to spice up their Instagram profiles. Even allowing for this “Narco-tourism”, armed gangs tied to drug trafficking known as “bacrims” continue to roam the countryside. Colombia’s political (and economic) future thus rests heavily on the fate of campesinos Colombianos, or its small-holder farmers. While many farmers grow perfectly legal crops like coffee – itself a tourist attraction – more farmers are increasingly turning to coca production, the primary ingredient for cocaine which in turn fuels the drug trade. Worth watching of the incoming Duque administration will be its handling of the implementation of certain rural development programs started under the Santos administration and codified by the peace agreement.

As part of an an effort to bring the FARC to the negotiating table, the Santos government halted its aerial fumigation of coca crops. On the campaign trail, Duque suggested that he would restart the program immediately. It came as something of a surprise then on 26 June when the Colombian government announced the authorization of herbicide-spraying drones aimed at coca crop eradication. In just the past year, coca production in Colombia has soared. The US remains the primary market for Colombian cocaine and despite outsized media attention on the opiate scourge, cocaine use has trended up in recent years. This helps explain the Trump administration’s public rebuke of Colombia’s handling of the drug trade. As Duque seeks to deliver on his campaign promise of ramping up his country’s exports to the US, he may use coca eradication as a bargaining chip in future trade negotiations.

Many analysts wrongly conflated the outcome of the peace settlement to a corresponding drop in coca production as FARC was heavily invested in the cocaine trade. A sort of feudalistic system operated in the Colombian countryside where the FARC either threatened noncooperative farmers with violence or engaged in outright extortion. However, since the peace settlement, instead of farmers moving to substitute their coca for alternative crops, the opposite has happened in a classic case of perverse incentives. As currently constructed, the peace agreement incentivizes farmers to grow coca. This is because farmers only qualify for monetary compensation if they were growing coca in the first place. Most farmers are thus reluctant to try their luck with alternative crops if it means throwing government subsidies away.

No farms, no future

In soccer, it pays to demonstrate patience especially in the early going. A team’s ball possession is a direct byproduct of accurate passing. So goes the peace process in Colombia. However, many Colombians feel like it’s nearing halftime and their country still hasn’t scored any goals. Take one example: Ley de Victimas y Restitucion de Tierras(LVRT), a victims and land restitution law first passed in 2011. The law was formed with the expectation that the government would compensate an estimated 4-6 million victims of both right-wing paramilitaries and left-wing guerillas during the 50-year civil conflict as well as return an estimated 5-8 million hectares of land seized by illegal armed groups. However, by mid-may 2018, the LVRT had restored ownership of just 300,000 hectares of land to its original owners, merely 4-8% of the original goal. Given the law preceded the peace deal by 5 years, many Colombians are understandably frustrated by such lackluster implementation.

If Duque is serious about unifying the country, he must not forget the campesinos. Many areas of the country, especially the rural hinterlands, remain in a state of lawlessness. Despite FARC agreeing to demobilize, other armed groups including the Ejército de Liberación Nacional (ELN), a Marxist militia, and Clan del Golfo, a neo-paramilitary group, have exploited the FARC’s vacancy. In simple terms, the drug trade remains far too lucrative for Colombian criminals to abandon wholesale. It does not help matters that Colombia’s next-door neighbor, Venezuela, is heading for economic ruin. Several sources in the intelligence community have indicated the presence of robust industrial-style drug operations operating in the Venezuela borderlands. It would not be a surprise if Colombia’s outgoing president was complicit in nudging this activity across the border.

Where Santos failed to expedite certain reforms aimed at narrowing the urban-rural divide, Duque has an opportunity to start fresh. However, the political establishment is fearful that Senator Uribe is operating in the shadows and perhaps even calling the shots. Some fear a return to hard-liner policies which will only serve to further alienate the rural population and empower criminal opportunists. Failure to implement rural development programs might mean a return of violence which could lend itself to even more extremist candidates in the next presidential election. Thus, the ultimate success or failure of the historic peace agreement signed in 2016 may hinge on whether Duque lasts more than 4 years.

Steven works as a Senior Analyst for EY and holds a B.A. in economics from the University of Maryland.

Brazilian ‘Trump’ Shakes Up Election Race By Campaigning As Illberal Outsider

A right-wing, Trump-like populist, tough on law-and-order but with apparently few answers to the country’s economic ills, is leading the polls in Brazil’s presidential election race, appealing to many Brazilians tired of the ineptitude and corruption that has become synonymous with the political establishment.

In one of the most unpredictable electoral contests for years, seen by pundits as a battle between left- and right-wing candidates, Jair Bolsonaro, a former army captain-turned-congressman, is making serious strides. Long on the edge of politics on account of his controversial views, he is polling at around 20 percent – several points ahead of his nearest rival – in the run-up to the October ballot, notably receiving significant support from the country’s influential farming and evangelical Christian lobbies.

With many establishment politicians discredited by a long-running investigation into an alleged bribes-for-contracts affair involving the state oil company, Petrobras, and also blamed for the worst economic recession since the 1930s, Bolsonaro has seized the opportunity to break through into the political mainstream. His anti-corruption and tough law-and-order rhetoric – he proposes more powers for the security forces and easing gun laws to deal with soaring crime – resonates with large numbers of Brazilians.

However, Bolsonaro’s illiberal remarks have alarmed democrats. He has defended Brazil’s former military dictatorship and in April the attorney general said he promoted hate speech by attacking women, homosexuals, black people, indigenous Brazilians and foreigners. Some commentators suggest Bolsonaro could stoke social conflict if elected. The prospect of a right-wing populist, compared by some to Donald Trump, at the helm of the world’s eighth-largest economy is being taken seriously. It comes at a time when many Brazilians are losing faith in democracy. Polls have reportedly shown that over a third would support a coup to deal with crime and corruption.

Yet his chances of winning may be limited by two important factors. Though Bolsonaro has a much bigger social media profile than his rivals, he needs TV exposure in the run-up to the ballot, as political broadcasts remain a powerful campaigning tool. A member of the small Social Liberal Party, he will have to start building coalitions to be allocated sufficient airtime to reach out to Brazilians, many of whom are undecided. Moreover, he could yet be eclipsed by a left-wing rival because a sizeable proportion of floating voters will back whichever candidate is endorsed by the jailed former socialist president Luiz Inacio Lula da Silva, still very popular despite his conviction for corruption.

Bolsonaro’s emergence coincides with Brazil’s stuttering economic recovery. Beleaguered center-right president Michel Temer’s attempts to resuscitate the economy have flagged as he fights off bribery allegations. Though he denies them, the claims have contributed to his plunging opinion poll ratings, leaving him the least popular Brazilian president on record.

Temer, in power since the impeachment of Lula’s socialist successor Dilma Rousseff for manipulating government accounts two years ago, has introduced some significant reforms – including long-term caps on public spending. But he has failed to overhaul the country’s bloated pension system and his ambitious privatization programme has received a setback, with plans to sell off the state power company, Electrobras, meeting Congressional resistance.  Temer has helped to steer Brazil back to growth, yet he has struggled to close the gaping budget deficit and inflation and unemployment are stubbornly high.

The president, who is unlikely to stand for re-election, saw his stock fall even lower recently when he was forced into a climb-down over a national truckers’ strike staged in protest at rising diesel prices, resulting from subsidy cuts. The industrial action in late May, supported by Bolsonaro, paralyzed the country, prompting Temer to reinstate the fuel subsidies. While the strike, backed by many Brazilians angry about the price rises, further undermined the president’s authority, it boosted Bolsonaro’s fortunes.

Yet Bolsonaro’s intervention raises questions about his economic credibility.  So far, there is little sign of a strategy for dealing with the country’s financial problems. From what is known, he has previously opposed the privatization of state companies, backs commercial agriculture and mining on indigenous reservations, favors gradual reform of the pensions system and has expressed concern that the country’s biggest trading partner, China, is too active in the Brazilian economy.

More recently, Bolsonaro has softened his tone on China, describing Beijing as an “excellent partner”, and has appointed a free-marketeer as his main economic adviser – investment banker Paulo Guedes, an advocate of sweeping privatization to pay off some of the country’s public debt. However, the appointment is puzzling, as it is unclear whether Bolsonaro has had a change of heart on sell-offs or is just trying to soothe investor nerves. There are indications that a number have been encouraged by the enlistment of Guedes, seemingly hopeful he might encourage neo-liberal reforms. Realistically, Bolsonaro will probably have to make some accommodation with pro-business Congressmen in order to govern effectively.

With a fragmented electoral field, all the signs are that the upcoming poll will go to a run-off – and the possibility of a populist victory is fuelling uncertainty. Questions remain over the country’s economic trajectory under Bolsonaro while there are concerns a Lula-endorsed candidate may worsen the country’s stagnation. Such outcomes will worry Brazilian moderates and may galvanize them into rallying behind a centrist, establishment figure in an anticipated second round of voting. That could mean Brazil struggling along for another few years. But perhaps it is now the case of ‘better the devil you know’.

Pre-Salt Reserves Bring Energy Giants Back To Brazil Despite Lingering Risks

On October 27, 2017, new auction rounds for the eight pre-salt blocks in Brazil were launched. As the Brazilian government approved a new regulatory framework for the bidding process to allow more investors, 14 foreign companies and two Brazilian entities were qualified to participate in the auction.

As a result of the auction, The National Agency for Petroleum, Biofuels and Natural Gas (ANP) awarded six offshore blocks to Shell, Brazilian state-run Petroleo Brasileiro (Petrobras), and Statoil. This generated BRL 6.15 billion (about USD 1.9 billion) in signature bonus and BRL 760 million (about USD 234.8 million) in investments. The ANP also announced that two more auction rounds for pre-salt layer fields are planned in 2018 and in 2019. ExxonMobil (USA) took eight blocks of pre-salt reserves in the recent auction in April 2018, whereas Petrobras took six blocks.

Moreover, the new regulatory and economic changes in the Brazilian oil and gas sector have brought more transparency on future investments in the pre-salt reserves, incentivizing foreign investors such as ExxonMobil (USA) and Statoil (Norway) to invest again in Brazilian energy projects. The improved regulatory framework ended the mandatory participation of Petrobras as “the sole operator in pre-salt”, creating new opportunities for other investors.

A bright future, but risks abound

The future of the Brazilian oil and gas sector, and subsequently the Brazilian economy, is positive. In 2017, the oil and natural gas sector accounted for 11 percent of Brazil’s GDP, and keeps on growing. With a recovered economy, the Brazilian government claimed that Brazil has become the largest oil producer in Latin America, and that the pre-salt reserves has been regarded as “one of the most promising oil reserves in the world.” The Brazilian government thus expects the auction to yield investments of about USD 36 billion for the next 10 years, and would create about 500,000 direct and indirect jobs. This development in the oil and gas sector provides an optimistic outlook for many Brazilian states’ economy that depend on oil production, as “the exploration of [the pre-salt] areas should generate BRL 400 billion in royalties and taxes over the next 30 years.” This development could invite more economic and social development in Brazilian states that have suffered from the recent dire economy.

As corruption, fraud, and bribing remain pervasive and ongoing problems in Brazil, the investors will look to Brazilian President Michel Temer’s administration to reinforce new regulatory and economic laws to mitigate these risks in the oil and gas industry and in Brazil as a whole. Indeed, Reuters indicated on April 17, 2018 that President Temer launched a series of policy changes to “tempt investors to return to Latin America’s No.1 economy.” The President aimed to cut restrictions on oil and gas production by eliminating the exclusive rights of Petrobras in operating pre-salt oil fields.

However, despite the positive developments in the oil and gas sector, there are persistent political risks that investors must be wary about. These risks include judicial insecurity, high-level corruption, reputational damage, expropriation and nationalization with the involvement of Petrobras, and contract uncertainty. For instance, an October 27, 2017 Financial Times article reported that a federal judge issued an injunction to block the October 2017 auction, a political move sought by the leftist Workers’ Party. While the auction was briefly suspended, the injunction was overturned. However, this recent play provides a cautionary tale for investors, as judicial and political insecurity can undermine the progress of the auctions and pre-salt reserves investments. Along with these issues, the upcoming presidential elections could reverse Temer’s policies and new regulatory framework.

Petrobras and ongoing security crises in Brazil

In addition, according to the Brazilian government, Petrobras “now has the freedom to choose which [pre-salt auction] blocks it will participate in.” The new regulatory framework of the pre-salt reserves has thus allowed Petrobras to gain more autonomy for its strategic management and investment in the oil and gas industry. Increasing the state-owned oil and gas company’s influence and power over one of Brazil’s essential sectors for economic growth may be too early for Petrobras. As the company remains entangled in the biggest corruption probe in Brazil’s history, investors remain cautious of political and judicial development around the company.

This scandal has had a disastrous impact on Brazil’s economy, as investors strayed away from the country for a few months and stock prices dipped quickly in 2014. Overall, this issue was a staggering setback for Brazil’s political, social, and economic growth and worsened the already-existing grievances in country. It took several years for Petrobras to recover from the scandal, as it became the world’s most indebted oil company and reported revenue growth only by 2017. The ongoing investigation and its impact on the public and private sector in Brazil remain a rampant issue that investors, policy makers, and international organizations should continue to monitor.

In addition to the aforementioned political and operational risks, investors must also take into account worsening security risks. In the past five years, Brazil’s security status quo has deteriorated, as over 55,000 people were killed in 2015 due to a surge in police strikes, street crime, violent protests, and armed conflicts between the Brazilian security forces and organized criminal organizations. A vacuum of instability and violence in various cities across the country has persisted since 2015, and along with civilian unrest and excessive responses from Brazilian security forces, drug trade, arms trafficking, robbery, extortion, and kidnapping activities have soared. The rampant corruptions in the government and security forces, and endemic economic and social instability have undermined the Brazilian government’s ability to effectively tackle security crises.

Alicia Chavy graduated from Georgetown University’s School of Foreign Service with a Bachelor of Science in International Politics. As originally appears

Peru: Consequences of Infamous Christmas Pardon Of Former President Fujimori

Few political developments in Latin America’s democratic life have been as unexpected and controversial as Peru’s former president, Alberto Fujimori, receiving a presidential pardon. Having served less than half his sentence – 25 years for serious human rights violations that include killings, kidnapping, and torture, in addition to corruption and bribery – Fujimori’s infamous Christmas pardon has placed Peru’s rule of law and presidential legitimacy under intense scrutiny.

In a region where corruption is rampant and impunity the rule, Fujimori’s imprisonment was viewed as a milestone, an example of justice for the people. As a result of the rising political stability and consistent investment growth, Peru continues to enjoy prosperity and endure difficult times in the region.

The Politics of a pardon

To understand the consequences of Fujimori’s pardon, it is crucial to reflect on how the pardon came to pass. Pedro Pablo Kuczynski (PPK)’s ascent to power was a by-product of Peruvians’ deep anti-Fujimorista sentiment: the rejection of the dictatorial leadership and corruption during the 90s. It was not the recognition of PPK as fitting for the presidency, but rather the will to keep anyone with the Fujimori surname out of government at all costs.

Fuerza Popular (FP), Keiko Fujimori’s party, amassed significant popular support by the time of the 2016 elections from people who revered her father Alberto for his victory over the radical left Maoist Shining Path movement.

Hence, this polarization lays the framework for PPK’s presidential developments since the 2016 election. The antagonising endeavours from then-majority congress party FP – such as censoring ministers, blocking reforms, and attempts to vacate him – made many experts regard PPK more as an elected hostage than an executive leader.

In parallel, the bullying attitudes from FP created a feeling of sympathy among non-Fujimorista societal sectors who believed that in defending the president, they were defending the essence of democracy vis-à-vis an obstructionist opposition who wanted to forcefully seize power. For example, the private sector sympathised with the president’s finance background and the press was in large part repressed during Fujimori’s time.

PPK managed to avoid impeachment, from charges for alleged ties with Odebrecht, by a mere ten votes from Fujimorista legislators who abstained, led by Alberto Fujimori’s youngest son Kenji. Three days later,  Alberto Fujimori was issued a pardon despite many assurances from the administration that pardons were not negotiated. The was no definite proof of imminent death and it was an evidently rushed procedure.

This is not to say that a humanitarian pardon was not feasible, but rather the medical evidence was at best dubious making it invalid. The pardon could have been part of a bigger, appropriately executed reconciliation strategy.

Nevertheless, the executive’s decision to effectively trade PPK’s position in power for Fujimori’s pardon was far from the right one. 80% of Peruvians believe the pardon was negotiated, further exacerbated by revelations on just how far back these agreements went.

Governing the ungovernable

Unlike the pardon, the results have been predictable: social turmoil, massdemonstrations across the country, and political instability. In other words, a polarised country where one half celebrates the vindication of the leader that gave them peace sans terror, whilst the other half vehemently rejects the president who deceived them and pardoned a dictator.

To make matters worse, the Inter-American Court of Human Rights is a few weeks away from giving its verdict (after several human rights pressure-groups raised their voice,) andpredictions are grim.

How does the government recover from such a detrimental loss of legitimacy? The president would have been better off being impeached, going out of office with the aura of a martyr, or a victim of Keiko Fujimori’s dictatorial thirst for power than the puppet-esque figure he is viewed as today.

With PPK’s recent struggle to form a new cabinet, amidst all the post-pardon resignations, new impeachment requests, and his failure to appease the public, he’s likely counting down his days in power.

As originally appears

As Several Latin American Governments Lead Charge Against Fracking, Will Colombia Follow Suit?

With officials in Colombia grappling with the reality of dwindling oil reserves, fracking has become central to the energy conversation. A balance needs to be struck between environmental and economic needs as a path to energy self-sufficiency is drawn out.

Compared to conventional oil drilling, fracking requires greater investment and brings greater risk. This is exacerbated due to its controversial nature. Environmentalists in Colombia have campaigned heavily against the drilling practice with protests likely to only intensify in 2018.

One Yale University forum provides a global platform for multiple perspectives and analyses of the environmental and social impacts of fracking. On the pro-fracking front, many experts champion fracking for job creation and meeting energy demands. On the other side of the fence, many emphasize the negative impacts on the environment. Platforms such as these provide lessons for the motivations behind hydraulic fracturing regulation. In the context of Latin America, and in particular Colombia, which is in the exploratory stage of unconventional drilling, these lessons are extremely pertinent.

While some countries, notably Canada, China, the United States, and Argentina, have managed to produce commercial volumes of oil and gas from fracking, the practice in Colombia remains at a crossroads. Politicians have been increasingly debating fracking’s economic potential as the country’s May presidential election nears.

Many are worried that with declines in conventional oil production, Colombia could become extremely reliant on imports of oil and other fuels in the coming years. Politicians and oil executives have been seduced by fracking’s potential fix, strongly advocating for fracking with a rhetoric that champions energy self-sufficiency.

In 2014, Colombia’s Ministry of Mines and Energy gave fracking the green light, pending environmental reviews. At the end of 2017, Colombia hosted the Colombian Petroleum Association and attracted investors and oil companies from all over the world. A major topic of discussion at the convention was the final bypassing of restrictions to definitively pave the way for fracking in the country. Four major oil multinationals, ConocoPhillips, Parex Resources, ExxonMobil, and Drummond, have all won tenders for fracking in Colombia and now await the final blessing from President Juan Manuel Santos.

Juan Carlos Echeverry, former head of Colombia’s largest and primary oil company Ecopetrol, has insisted that production from fracking is essential. He suggests that Colombia’s oil production could rise from 100,000 barrels a day to as much as 400,000.

A change in leadership in Ecopetrol has not shifted this outlook. Current CEO Felipe Bayón Pardo emphasizes the fracking potential in Colombia’s Magdalena Medio region, from which oil companies could extract between 2-7 billion barrels of unconventional oil. Pardo underscores the argument of self-sustainability, suggesting that the county’s reserves will double if only 2 billion barrels of oil are extracted from this region. For Pardo, the company’s number one priority is increasing production, and this will only be made possible with fracking.

A political question

With Colombia’s legislative and presidential campaigns well under way, fracking has become a central political question. At the beginning of March, presidential candidates discussed the future of fracking in a debate hosted by the National Business Association of Colombia (ANDI) on the topic of minerals, petrol, and energy. Candidates Germán Vargas Lleras, Iván Duque, and Juan Carlos Pinzó all attended.

Duque highlighted that oil production had fallen from 1 million barrels a day to 800,000. He emphasized the need to exhaust all possible options regarding conventional oil production, and then look to focus on fracking as an alternative. Lleras was of a similar view, iterating that with adequate regulation, Colombia’s Magdalena Medio region could offer “very attractive” potential. Pinzó, meanwhile, embraced the self-sufficiency argument. “How about us depending on Venezuelan or Nicaraguan oil? It is not merely an issue which concerns development and economic opportunity, but there is also a need to evaluate the regional landscape.”

The views expressed by Lleras, Duque, and Pinzó, while only offering a snapshot of the opinions of the political class, highlight how connected the question of fracking has become to economic prosperity and national development. Fracking as a means to ensure self-sustainability in a fragile geopolitical landscape has become one of the most prominent lines of argument.

Voicing concern

All the while, environmentalists rally behind a call for restraint. Activists are continuously protesting the environmental impacts caused by fracking. A recently suspected water contamination in the Colombian Department of Cesar led to a plea for an investigation into the culpability by energy multinational ConocoPhillips, following the company’s exploratory drilling tests in the region.

In the last few years, authorities in several Latin American countries, with Brazil and Argentina leading the charge, have issued ordinances to either prohibit fracking or implement moratoriums on the practice. Many Colombian politicians are championing such policy measures. However, others consider such regulation a gross miscalculation due to its neglect of a potential economic bounty. The debate surrounding fracking in Colombia is moving rapidly, and the result of the presidential elections will most certainly mark a significant turning point in the conversation. Officials must be open to absorbing multiple lines of argument when considering regulation in order to best address the country’s trying energy needs, while also respecting very real environmental concerns.

As originally appears

Venezuela Spills Over Into Colombia: An Immigration Crisis of Global Proportions

Today Colombia is faced with one of the biggest migration crises in the world. As Venezuela continues to plummet to the depths of depression, roughly 35,000 Venezuelans cross the Colombian border daily in pursuit of survival. Fifteen months into the controversial peace treaty which ended 52 years of civil war, Colombia remains a socially and politically vulnerable nation. An immigration crisis of global proportions represents an unprecedented challenge and threatens the peace that took decades to achieve. 

One-way migration patterns changing

For decades Colombia was the source of regional instability in Latin America. Its 52-year armed conflict resulted in the deaths of over 220,000 and the displacement of 7.6 million people. Venezuela, which once enjoyed Latin America’s highest growth rates, lowest levels of inequality, and possessed the region’s healthiest democracy, received the majority of Colombian emigrants.

Today the political climate in both countries is vastly different. Since 2016, Colombia has entered a peace process with FARC (Revolutionary Armed Forces of Colombia) rebels which has seen the insurgency organization enter the political system. Simultaneously, the country has enjoyed economic growth with increases in private consumption and investment.

In stark contrast, economic and political turmoil has created a humanitarian crisis in Venezuela. Hyperinflation, food and medicine shortages, unemployment, soaring crime, political oppression, amongst other factors, have created a population exodus in the once-wealthiest country in Latin America. In order to survive, thousands cross the Simon Bolivar bridge daily to the Colombian border town of Cucuta. As Venezuelan president Nicolas Maduro aims to further consolidate his political power, there is no end in sight to Venezuela’s humanitarian crisis.

Colombia’s global challenge

Colombia’s immigration predicament resonates with developments in other countries: with 700,000 Rohingya in Bangladesh and 600,000 Syrians in Germany, the 550,000 Venezuelan refugees in Colombia underscore Venezuela’s plight and the challenges that the Colombian authorities face. According to Joel Millman, a spokesman for the United Nations’ migration agency, “by world standards Colombia is receiving migrants at a pace that now rivals what we saw in the Balkans, in Greece, in Italy in 2015, at the peak of [Europe’s] migrant emergency.” In fact, last year Colombia sent a team of officials to Turkey to examine its management of the Syrian refugee crisis.

Colombia’s lure for Venezuelan migrants is three-fold: the majority cross the border in order to obtain medicine and food and return on the same day; some remain in Colombia and head for cities such as Bogotá, Bucaramanga y Barranquilla in pursuit of long-term opportunities; and many use Columbia as a gateway to other countries.  Illustrative of the spiralling effect of Venezuela’s situation across Latin America, there are now growing Venezuelan communities in countries such as Argentina, Chile, Brazil, and Ecuador. The numbers entering Ecuador via Colombia’s southern border accelerated from 32,000 in 2016 to 231,000 in 2017.

Bogota’s reaction to the crisis has been supportive but faces increasing limits. Conscious of the humanitarian crisis across the border and the mass migration of Colombians to Venezuela during different times, President Santos acknowledged that Colombians “should also be generous to Venezuelans.”  The Colombian government has provided 1.3 million migrants with a special migrant card, which permits travelling across the border in order to acquire essentials such as food and medicine. However, as the migration crisis deepens, the Colombian president has announced migratory restrictions and is pleading for international aid and assistance.

Risk factors

Given Colombia’s recent history and the gravity of the Venezuelan situation, the migration crisis poses a diverse range of risks for Colombia’s political leadership.

Mass migration threatens to increase political instability and social conflict in Colombia only fifteen months after the signing of the peace treaty with FARC rebels. Since the agreement, social unrest in Colombia’s rural community has reflected division surrounding the controversial peace process. The government’s failure to adequately implement rural reforms for communities in previously-controlled FARC territory has curtailed support for the current peace deal and has contributed towards the depreciating approval rating of Colombian President Juan Manuel Santos.

According to The International Verification Commission on Human Rights, Colombia has only implemented 5% of its comprehensive rural reforms. As the Venezuelan migration crisis becomes a growing priority for the government, it is unlikely that much progress will occur on rural reforms before a new president is elected on May 27. Such setbacks will further alienate Colombian society that feels excluded from a peace treaty that faces ongoing scrutiny. In addition, Bogota’s attention to Venezuela’s ”humanitarian crisis” will likely question where the government’s priorities lie in the eyes of communities under previous FARC authority.

Criminal organizations operating across the sprawling border of 1370 miles with Venezuela are benefitting from mass migration. Colombia’s National Liberation Army (ELN) has succeeded in attracting desperate Venezuelans who make the journey across to Colombia. According to the Colombian Defence Minister, Luis Carlos Villegas, an increasing number of Venezuelans have joined the Marxist guerrilla and assist in carrying out attacks in Colombia. Villegas stated that ”Colombian and Venezuelan members of the ELN engaged in both terrorist activity and attacks against the [Colombian] population” and it represents an ”enormous” concern.  On January 27 the ELN blew up a police station in Barranquilla killing seven police officers.

Furthermore, the exodus of Venezuelans to Colombia has created tense diplomatic relations which will likely hinder regional cooperation in reaching a solution to the migration crisis. Speaking in Cúcuta on February 8, President Santos again blamedNicolas Maduro and his government for the migration crisis as Venezuela refuses to accept humanitarian aid. In contrast, Maduro has accused Bogota of being involved in an international conspiracy to ravage Venezuela’s economy and seek regime change. He has also accused the Colombian authorities of xenophobia towards Venezuelan migrants. As the crisis deepens, political cooperation between the two countries appears more elusive and mercurial: this will have the effect of delaying a viable solution.


Colombia faces renewed challenges as the numbers of Venezuelans heading towards the border increases. On May 27 Juan Manuel Santos’s eight years of presidency will end and Colombians will have a new president. According to a recent poll, former guerrilla and leftist candidate Gustavo Petro is leading the race as the popularity of the ruling party has dwindled. Regardless of the path Colombians chose to follow, the migration crisis and its challenges will remain unresolved as long as Venezuelans are pushed towards the Colombian border. Thus, finding a solution to the Venezuelan crisis is a vital objective for Colombia too.

Niall Walsh is a political risk analyst for GRI. As originally appears

WTO Condemns Brazil Industrial Policy: Brazilian Government Discusses New Subsidies Rules

According to the WTO, Brazil’s industrial programs are inconsistent with the international agreements signed by the country, in addition to providing prohibited subsidies.

Brazil’s industrial policy in check

The European Union’s (DS472) and Japan’s (DS497) disputes against Brazil’s industrial policy benefits are close to a conclusion. After almost four years since the beginning of the processes, the World Trade Organization (WTO) Dispute Settlement Body released the Panel’s report of the cases this past August, and argued that seven Brazilian programs that sought to promote technological innovation and boost exports do not comply with the Organization’s rules.

One of the main complaints was against the tax exemption granted to automotive companies that produced a percentage of their products locally. This would represent a disguised subsidy and distort international competition.

The Panel concluded that Brazil should withdraw all illegal subsidies within 90 days of the final text’s approval. On September 29th, the Brazilian government appealed to the WTO report on both cases. If the panel’s report is confirmed and Brazilian government does not comply with the WTO’s recommendation, parties could retaliate against the country. This could have direct impacts on companies doing business in Brazil.

The future of Brazilian industrial policy

The Brazilian government must now reassess its industrial policy during one of the country’s worst political and economic crises. For two years in a row, Brazil’s GDP has contracted by more than 3%. This in turn has helped drive the unemployment rate of to 13.7%. This economic contraction complicates Brazil’s ability to comply with the WTO’s requirements.

On the one hand, industrial policies have the objective of promoting innovation and productivity. On the other, policies aimed at alleviating the economic crisis should reduce government spending and increase public revenues.

The government will have to think of alternatives to tax breaks to spur industrial development, all with minimum intervention. The new policy will have to follow a more functional development policy, simplifying taxes and reducing the cost of doing business in Brazil, while supporting innovation and creating a proper environment for companies to invest in this kind of activity.

This is no easy task, especially given Brazil’s unstable economy and political scene. This task is further complicated by the lack of attention that the private sector has paid the WTO ruling thus far – even though it will need to be a major partner in drafting legislation, the public sector has largely remained uninterested in the rulings.

The Brazilian government’s ability to carry out these policy changes is further hampered by its entanglement in several ongoing corruption scandals. The government has spent the last 5 months focusing on defending President Michel Temer against two charges on corruption presented by the Attorney’s General Office. Temer’s refusal to resign has had a high cost for the country, and postponed the approval of highly important proposals for a faster economic recovery.

Now, for the next following months, the government will have to articulate to approve several unpopular measures, such as the pension reform, the postponement of salary readjustment for civil servants, and the end of benefits for several sectors. Additionally, the constant corruption scandals revealed by several plea bargains under negotiation by top politicians arrested and the upcoming 2018 presidential elections. Temer’s cabinet will continue to be affected by scandals, and changes might affect the continuity of the undergoing policies.

Starting in around April 2018, the runup to the October 2018 general elections, will further complicate the government’s agenda and make difficult to approve any proposal. It is important to note that any ministers that intend to run for the elections will have to leave their positions.

If the Minister of Development, Industry, and Trade, decides to run for instance, the ministry might be left without a clear leadership until 2019. Something that would reduce political influence in the draft of the new policy, however, without someone ahead of the ministry, the final decision over the policy would be postponed.

A new policy might take longer than expected

Brazil’s appeal of the WTO’s ruling will postpone the final decision against the programs at least 2018. Brazil might also benefit from the number of processes currently under analysis at the WTO and their constant delays – the WTO already broke all deadlines for the final report on the Brazilian cases.

The Trump administration’s recent attempt to block the appointment of new member to the Appellate Body exacerbates the likelihood of further delays. The Appellate Body is already operating with five members instead the normal seven, and will be down to four in December.

If the block continues and no new members are appointed, the delays might increase even more. This delay would allow Brazil to maintain the current policies while the appeal is processed, and would provide the government with more time to work on a long-term and sustainable industrial policy.

Amid major reformscorruption scandals, and elections, the industrial policy reformulation might not have the attention it needs to comply with the demands of the WTO. There is a high chance that any changes will have to be postponed to the next administration.

This exposes Brazil to a medium term risk of retaliatory sanctions from other countries. It is important to note, however, that this retaliation is not an immediate action and it has to be submitted to the WTO and takes a while to be settled. Without the possibility of counting on the government to focus on the discussion, the private sector and the civil society will have to participate actively in the draft of the new programs to promote innovation and productivity in the country.


Juliano Griebeler is an analyst at Global Risk Insights. As originally appears at:


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Regardless Of Who Wins Chile’s Elections, Codelco Likely Loses

If Chile’s year-long bull market is anything to go by, conservative candidate Sebastian Piñera is likely to become the country’s next president after the December run-offs. But neither Piñera nor his centre-left rival Alejandro Guillier seem too concerned about state-miner Codelco, whose financial well being could have a ripple effect on the global copper market.

Codelco (1006Z:CI) has consistently posted strong quarters since it began implementing austerity measures during the 2015 copper market dip. Last quarter saw a pre-tax profit of $1.6 billion, an overall improvement of more than three times against the loss posted for the same period last year. Nonetheless, it’s a trend that is hardly sustainable given Codelco’s falling ore grades and aging mines.

The state-miner’s average ore grade has fallen roughly 10% since 2013, meaning Codelco has to process 10% more ore in order to produce the same amount of copper it did five years ago. At a time when declining ore grades are prevalent across the industry, the state-miner has to invest in higher yielding mines to remain profitable.

Codelco, which accounts for around 60% of Chile’s exports, would need around $20 billion to keep output flowing and expand its operations according to internal reports. Codelco has proposed revamping operations at its traditional crown jewels, the El Teniente and Radomiro Tomic mines, as well as resuming interest in investments outside Chile in projects as far away as Mongolia. Can they get it done?

Political Priorities For Codelco

Both runoff candidates, conservative Sebastian Pinera and centre-left Alejandro Guillier have widely differing priorities for the state-mining giant. Piñera, who has shown scepticism over Codelco’s management in the past, has recently told the miner it would have to maximize performance of existing assets and draft a “realistic investment plan”.

During his first administration, Piñera turned to the bond market to finance Codelco, raising the miner’s debt 84% at a time when there were already high market prices for copper. The presidential candidate now promises to reduce public spending and lower the country’s deficit. That would leave Codelco high and dry.

In contrast, Senator Guiller has prioritized relations with the company’s unions, much like the outgoing administration of Michelle Bachelet. Labour actions have hit copper miners hard over the past few years, particularly inside Chile. Melbourne-based BHP Billiton (BHP:AU) saw a 43-day strike in its flagship Escondida mine from February to March, cutan estimated $1 billion off its yearly revenue. Codelco’s Chief Executive Nelson Pizarro freely admits the mining industry is “unpleasant” to most Chileans. Nevertheless, while improving union relations could protect the miner’s bottom line, it would do little to add to production.

Guiller’s plans, however, are likely to be heavily influenced by leftist party Frente Amplio and its strong showing in the November elections. Frente Amplio had previously called for the recapitalization of Codelco in order to finance social spending, leaving little room for mining investments.

Surprisingly, both candidates have vowed to unburden the state-miner of its constitutional mandate to fund the military. The Pinochet-era legislation transfers 10% of Codelco’s export sales (roughly $866 million last year) to the Chilean military. The widely unpopular piece of legislation could free up capital for investments. But the laws successful passage will arguably have more to do with the incumbent legislative assembly than the president.

Fractured Landscape

The success of a left-wing Frente Amplio and other non-coalition parties in the legislative elections has muddied the waters for both runoff candidates. Regardless of who wins, they are unlikely to hold a strong mandate and will be forced to balance their centrist appeal and cater to their bases’ extremes.

Chile’s fragmented congress will force the incumbent president to cross party lines in order to pass any significant legislation. This is particularly troubling for Piñera given that both congress and the senate lean towards the left. Passing his proposed tax reforms will be next to impossible without support from the centre-left. For Guiller, this will likely mean his entire agenda will be pulled to the left by Frente Amplio.

In this fragmented legislative environment, a repeal of Codelco’s 10% military burden is highly likely to stall. There is already a broad concern the export tithe will not be cut back regardless of the President’s policy initiative. They point towards the influence the Chilean military continues to wield over all branches of government, irrespective of recent corruption scandals. Mining Professor Gustavo Lagos at the Universidad Catolica is among those that sees doubts that the law will ever get overturned: “I’m not very optimistic (…) we’ve been talking about it for 25 years”.

However, if the military funding mandate were to be repealed, there is no certainty Codelco will keep the 10%. It may very well be distributed to any other policy priority outside the miner’s coffers. So far Piñera has been the only candidate to insinuate he might return the money back to Codelco.

Emerging Risks

It’s a mistake to dismiss Chile’s influence in the world’s copper markets or the outcome of the upcoming election. Asian markets are continuing to demand copper due to higher-than-expected GDP growth and forecasts already seeing a bump in the copper market as high as 2% in 2018. Burgeoning industries, in particular green-products, will also rely heavily on the red metals to go into production.

Copper miners are now branching out into previously untapped mineral sources and investing in mines inside politically volatile areas such as the Central African copper belt. Chile’s copper industry is tantamount to an insurance policy against market dips caused by political instability elsewhere.

Chile has been the world’s top copper producer for the last quarter century and will remain a leading player for the near future. Thus, government policy regulating the state-miner will have a tremendous impact on the overall mining environment in the country, and the wider market.