Latin America Risk Report - 19 July 2019
Regional trade agreements show signs of renewed integration
In this edition:
Regional trade agreements show signs of renewed integration
AMLO’s faux austerity
Subscribers-only: Bukele’s security strategy - One month after its announcement, President Bukele’s approach appears to be a repeat of previous strategies in El Salvador. Late last evening, Bukele lifted his state of emergency on the country’s prisons and said they would allow visits again. However, he once again threatened to crack down on prisons if homicides rose.
Regional trade agreements show signs of renewed integration
While Latin America’s political tensions have grown, particularly around the issue of Venezuela, two pieces of trade news in the past month suggest stronger integration occurring on the economic front.
After many years of negotiations, the European Union and Mercosur agreed to a free trade deal. Beyond the economic benefits that additional trade between Europe and the Southern Cone, this deal is also a sign of renewed economic integration at the regional level.
Under the Kirchners in Argentina and the PT in Brazil, Mercosur became more focused on political questions while economic integration issues stagnated. The low point occurred as Hugo Chavez’s Venezuela joined the organization as a full member but failed to meet any of the economic requirements of the organization that would have guaranteed market access. Many businesses in Argentina, Brazil and Uruguay received delayed payments or even no payments at all from Venezuela for goods and services. Institutions within Mercosur that were supposed to protect businesses doing cross-border trade failed.
Mercosur has at least partially returned to its roots under Macri in Argentina and the Temer and Bolsonaro governments in Brazil. While Argentina and Brazil still have their differences on various economic issues as well as some protectionist instincts, they are doing far better and leading Mercosur back in the direction of real integration.
Meanwhile, President Lenin Moreno submitted a request to join the Pacific Alliance. If accepted, Ecuador would become the fifth full member of the organization that also includes Mexico, Colombia, Peru, and Chile. Entering the Pacific Alliance would require Ecuador to commit to a fairly robust form of free trade with the other countries that includes relatively free movement of people and capital. The pro-Correa politicians in the country view the move as yet another political attack on the former president’s legacy. Moreno is probably thinking in more practical terms, wanting to expand Ecuador’s economy through trade with neighbors rather than dependency on the US or China.
Five years ago, the conventional wisdom was a clash of ideologies narrative between the economically liberal Pacific Alliance and a populist and politicized Mercosur. These days both countries appear to be moving towards similar integration goals. In a hypothetical world in which the politics of the region remained relatively stable, the unification of these two groups would be the likely outcome. However, the political pendulum will shift again in the coming years, making that a very unlikely outcome. Still, the countries and their leaders should hope they can build sustainable agreements and institutions to survive the next populist wave.
AMLO’s faux austerity
The Washington Post suggests AMLO is penny-pinching, cutting the state budget on many issues, while he is also spending on various “whims” of his populist agenda. As one example, Bloomberg reports that AMLO is spending $3.5 billion on his new refinery, half of his planned capital injection into Pemex. The WSJ covers AMLO’s rollback of Peña Nieto’s reforms that allowed foreign oil companies to partner with Pemex. This means Pemex will have fewer resources for expanding its oil exploration, which will lead to less tax revenue for government spending.
AMLO’s symbolic austerity won’t make up for his spending “whims” nor his agenda of oil nationalism. The real economic impact is years down the road, but it will be felt sooner due to likely ratings cuts of Pemex and Mexican sovereign debt.
AMLO’s approval rating is at 70% according to a recent Reforma poll. That is down from its previous peak but still relatively high.
Corruption Corner
Guatemala - Former Minister of Health Jorge Villavicencio led a group of over 50 corrupt public officials in embezzling US$65 million that should have gone to the reconstruction of hospitals and other health infrastructure following a 2012 earthquake. The accusations came from a lengthy report issued by the UN-backed CICIG. At least 19 people have been arrested and investigators recommended removing immunity from at least ten members of Congress.
Mexico, Venezuela - Mexico announced it had broken up a corruption networks dedicated to siphoning Venezuelan public money and selling CLAP boxes at overpriced levels.
Mexico - Spain’s El Pais reports that Alfredo del Mazo, the governor of Estado de Mexico, has a bank account in Andorra containing 1.5 billion Euros.
Reading List
Reuters - Iran grain ships stuck in Brazil without fuel due to U.S. sanctions
AP - Rio governor: rising police killings ‘normal,’ will continue
Bloomberg - The Man Holding Brazil Together Is Not Jair Bolsonaro (Article on Rodrigo Maia)
NYT - Machu Picchu Is in Unnecessary Danger
WSJ - Venezuela Gives Colombian Rebels Free Rein
International Crisis Group - A Glimmer of Light in Venezuela’s Gloom
Houston Chronicle - Two Venezuelan governments, two boards battle for control over Citgo Petroleum
LA Times - A whole generation of migrant kids is languishing at the U.S.-Mexico border
Migration Policy Institute - Strategic Solutions for the United States and Mexico to Manage the Migration Crisis
Washington Post - Colombia can’t beat coca production from the air. It needs rural investment and reform.
Foreign Policy - Alarmed by Venezuela, U.S. Military Seeks to Sell Arms to Colombia
Thanks for reading
Hello from Chicago, where I’m finishing up week three of the six week road trip. Next week’s report will be published from Philly.
Have a great weekend!