Latin America Risk Report - 13 September 2019

Activists believe Guatemala's state of emergency is politically motivated

In this edition:

• Guatemala’s state of emergency

• AMLO invests in Pemex and short-changes the National Guard

• Argentina: Macri’s thought process on the economy

• Venezuela Update: Borders and Sanctions

• El Salvador: Bukele’s anti-corruption commission opens with controversy

Guatemala’s state of emergency

The government of Jimmy Morales declared a state of siege and sent thousands of military personnel to Guatemala’s northern and southern borders in response to attacks from criminal organizations. The 30 day state of siege applies to municipalities in six departments: Izabal, Peten, Alta y Baja Verapaz, El Progreso y Zacapa. Approved by the Guatemalan Congress, the declaration gives the military additional powers to detain suspects and restrict political protests in those areas as well as implement night time curfews.

Though criminal presence is growing in Guatemala, the Morales government’s sudden and swift overreaction to a single ambush suggests there are other issues at play. The areas that face greater military presence and political protest restrictions are also areas that have significant protests over mining and voted predominantly for Sandra Torres, the runner up in the recent presidential elections. Local activists believe Morales will use the state of siege to target political opponents and prevent protests as he offers businesses handouts in the final weeks of his administration.

President-elect Alejandro Giammattei has offered some generic comments condemning the attack on the military and supporting some form of state of exception to take on the criminal groups, but has avoided delving too far into the controversy. As someone elected on a platform of being tougher on crime, he should be concerned that he will inherit whatever policy mess Morales leaves behind.

AMLO invests in Pemex and short-changes the National Guard

Mexico will invest $5 billion into Pemex to prepay some of the company’s bonds and hopefully avoid a further downgrade. Though the government described this as a “one time” payment, it follows a pattern of investments and tax breaks the Lopez Obrador administration has offered the state oil firm in an attempt to shore it up. Mexico said this week it will not formally guarantee Pemex bonds, but many analysts assume that the company’s importance to the country as a whole as well as AMLO’s personal political agenda mean the government will not let it default. AMLO’s willingness to spend money on Pemex and energy populism goes against his austerity in other areas of his government.

For example, as Alejandro Hope has written in multiple columns this week, Mexico’s budget shows a clear shortfall for AMLO’s security efforts. The budget lacks funds for improving local police forces or expanding the National Guard. It does not even have enough funding to pay the current contingent of National Guard beyond a few thousand members, meaning that much of the personnel funding for the new service will come from their previous forces. That is a problem for budgets across the government and it goes against the regulations governing the National Guard that were passed by the Mexican Congress.

Argentina: Macri’s thought process on the economy

Argentina has spent over US$15 billion of its currency reserves since the August PASO. Even with currency controls in place, the country’s attempt to defend the peso from further decline is draining its Central Bank on a daily basis. The IMF said this week that it may delay the next tranche of assistance until after the October election. 

Having removed currency controls as one of his first major economic reforms in office, the return of currency controls immediately before the presidential election is a reputational blow to President Mauricio Macri. There are serious questions about the specific decisions Macri made in August. How urgently were the currency controls needed? Why restructure short term debt payments in pesos, making a mess of the local market, while renegotiating other longer term dollar-denominated debt without formally defaulting? The Macri government has at times said that they are acting now to avoid a bigger crisis six months from now, suggesting they could have delayed some of these measures until after the elections.

While Macri’s camp insists the president does whatever is best for the country, sources within the Peronist camp wonder whether Macri is being completely sincere with how he is handling the current crisis.

There are four ways to look at Macri’s thinking behind the emergency measures:

Survivor - Argentina’s economy is in such peril that Macri had no choice but to implement currency controls immediately or he would have been forced out of office. This view suggests that none of the measures Macri has implemented could have been delayed.

Strategist - Sources within the Fernandez campaign speculate that Macri’s emergency measures are part of a desperate strategy to blame the economic crash on his opposition and the Fernandez win in the PASO. Even for those who don’t believe Macri is accelerating the economic crash, some of his economic policy choices including price freezes and wage increases appear aimed at winning back voters who he lost during the PASO, even at the risk of scaring foreign investors and increasing short term inflation.

Saboteur - In an even darker view of the president, there are some left wing economists who believe that through incompetence or maliciousness, Macri is using the current measures to sow the seeds for disaster during the first few years of the Fernandez administration.

Savior - Opposite the saboteur, there is a view that Macri knows he is likely to lose and is making some hard choices ahead of Fernandez presidency in order to help the country out of the current crisis. Under this view, Macri’s reasons are two-fold. First, he has an opportunity to make some very unpopular decisions now and be saddled with the blame instead of his successor. Second, he believes his decisions will be better than Fernandez’s and get the country back to a sustainable path sooner.

I tend to think that of the four, Macri is the strategist. While he would much prefer to be running for reelection with a strong economy behind him, he also recognizes that crisis measures may be his only hope of changing the attitude of the electorate he is losing. Macri is implementing measures intended to give himself the best shot of winning the election. In doing so, he may have accelerated the timeline of the crisis and made life more difficult at the start of the next presidential term, no matter who wins.

Venezuela Update: Borders and Sanctions

Border clash. Nicolas Maduro ordered a series of military exercises near the border with Colombia including thousands of members of the military and equipment such as surface to air missiles. The border tensions come as Colombian President Duque pressures the international community to denounce and take action against the FARC and ELN presence in Venezuelan territory. Semana Magazine published documents suggesting Venezuela’s military command had ordered units to protect the FARC and ELN and support their efforts to build an organization with greater offensive capabilities.

Colombia’s criticisms played a role in the OAS vote to activate the Rio Treaty (TIAR) regarding Venezuela. The countries within the pact will now discuss options for countering the security challenges emanating from Venezuela. Several countries objected to the implementation of TIAR or looked to add amendments that would restrict any use of military force, but were blocked. That said, there are no indications that TIAR will lead to any military action in the short term unless Venezuela were to militarily strike Colombian territory.

Various sources reported that units within the Venezuelan military were unhappy with the increased role they have in coordinating with the FARC and ELN. Some of their objection is ideological (most militaries would not be happy to have foreign armed groups on their territory) and some of their opposition is pragmatic (being tied to these organizations makes conflict more likely).

The other border controversy. Maduro’s allies have threatened to prosecute Juan Guaido for treason over false accusations that Venezuela’s de jure president plans to withdraw territorial claims in the country’s long-running dispute with Guyana.

The third border controversy. International Crisis Group published a report and video related to the crisis along the Venezuela-Brazil border. 

Sanctions. CNPC continues to avoid Venezuelan oil. Several Chinese refineries have been told to find alternate supplies on the expectation their access to Venezuelan oil traded and transported by Rosneft will soon be cut off. Cuba is warning its population of fuel shortages due to the Venezuela sanctions. Bloomberg reported that the Bank of Spain has been providing services for PDVSA and Venezuelan government money transfers.

Corruption Corner

El Salvador - As he hit 100 days in office, President Nayib Bukele announced the creation of an anti-corruption commission in the country. However, he has no legal mandate to do so and many within Congress have announced their opposition. At the announcement of the CICES, Bukele refused to let in two top media outlets - El Faro and Factum - that have been critical to anti-corruption investigations in the country. However, as Tim Muth writes, both outlets have also been publishing articles about potential corruption by Bukele and his allies that have made the president uncomfortable. These are troubling signs that Bukele intends for the commission to be a weapon to consolidate power and target his political opponents.

The issue became more relevant on Wednesday evening when Factum published evidence that Bukele took nearly US$2 million dollars in ALBA/Petrocaribe money while he was mayor of Nuevo Cuscatlan. Salvadoran investigators found evidence of bribes from Inversiones Valiosas de El Salvador (Inverval) while investigating the firms involvement in laundering Petrocaribe and other ALBA-related funds from Venezuela. Several of Bukele’s family businesses, friends and cabinet ministers received additional funds from the same pot of money.

Reading list

Washington Post - Dangerous new hot zones are spreading around the world (focus on Uruguay)

Washington Post - Armed conflict between Venezuela and Colombia is now a real, and terrifying, possibility

Atlantic Council - Russia’s intervention in Venezuela: What’s at stake?

Animal Politico - Guadalajara, la ciudad en México donde "puedes sentir el miedo" en el ambiente

Zona Docs - El Pozo de los Horrores en Jalisco

Associated Press - The rise and fall of former Venezuelan spymaster ‘El Pollo’

Business Insider - 400 murders a day: 10 reasons why Latin America is the world's most violent place

Reuters - Death of an activist: unsolved murder exposes fraught outlook in Mexico

Science - In search of the ‘white jaguar’: Archaeologists travel deep into the jungle to find a lost Maya city

Thanks for reading!

Back in Bogota after spending the early part of this week in Texas. Thanks for all the feedback I received on last week’s newsletters. Please continue to reach out via email if you have questions or comments.