Latin America Risk Report - 25 April 2019
Brazil's security improves; Argentina's economy outlook worsens
In this edition
Reasons for caution over Brazil security improvements.
Macri faces a new economic/political crisis spiral.
Venezuela update.
This week, paying subscribers received a preview of Bolivia’s presidential elections.
Reasons for caution over Brazil security improvements
Homicides declined 25% in Brazil during the first quarter of 2019 compared to Q1 2018. As Robert Muggah explains in Foreign Policy, the security improvement began with a 13% drop in 2018 compared to 2017, but that will not stop President Bolsonaro and other recently elected officials from taking credit.
One large reason for future concern is that Bolsonaro’s policies include a higher tolerance for militias and extrajudicial executions of criminals by police officers. While this activity looks tough and can disrupt criminal system in the short term, that sort of disrespect for the institutional security measures almost always leads to increased homicides and other indicators of declining security.
Some localized improvements in homicide rates may reflect shifts in the criminal environment or types of crime. In Rio de Janeiro, according to Brazil analyst Rafael Saliés, the near elimination of the Amigos dos Amigos (ADA) criminal group since 2017 has allowed militias to consolidate control in some violent favelas. In Ceara, a truce among the CV, PCC and local criminal groups while they target infrastructure and state police for attacks led to less criminal on criminal violence. Neither of those narratives is positive for the country’s long term security, even if homicide indicators dropped.
Macri faces a new economic/political crisis spiral
The markets this week decided President Macri’s chances of winning reelection were falling. This market pessimism hit Argentina’s bond prices and devalued the peso. A market crisis right now would weaken Macri’s chances of winning reelection. The expectation of an economic crisis and a bond default makes it more likely that there will be an economic crisis and a bond default.
Macri now finds himself trapped in a downward spiral in which his poll numbers hit the economy and the economy hits his poll numbers. A similar crisis around this time last year forced Macri to go to the IMF to halt the rapid decline of the peso. Having accepted billions in loans from the unpopular IMF, Macri’s options for dealing with this year’s crisis are even more limited than last year.
That downward spiral is a worst case scenario for both Macri and for Argentina. As I wrote last week, Macri implemented one short term solution with his price freezes. With the country six months out from the election, Macri will be looking for other short term solutions that can save his reelection chances. Unfortunately, those short term solutions will come at a cost, meaning anything Macri does to save his reelection may harm the ability of any future president to rebuild the economy in the coming years.
Venezuela Update
Protests - Juan Guaido announced a large protest will take place on 1 May and that protest will be a critical part of “ending the usurpation.” Guaido and his team have organized the country into decentralized units that are communicating about protest organization and logistics. Those decentralized citizens can coordinate even if Maduro and his security forces make efforts to disrupt the top levels of the Guaido team.
Electrical grid - An article in El Espectador suggested only one transformer remains operational at Venezuela’s Guri hydropower plant and when that transformer fails, much of the country will lose power for weeks. Analysts interviews by El Pitazo and other media outlets said the El Espectador report was exaggerated. Whether or not the worst case scenario described in El Espectador comes to pass, the power grid remains fragile and many of Venezuela’s states remain without power for hours or days at a time. Russia warned that the US was planning more attacks against the electrical grid, which probably signals Russia’s concern the grid will fail and their desire to preemptively place the blame. Security forces controlled by Maduro detained five individuals they claim were involved with the blackouts in March.
Oil sanctions - The news that the Trump administration will not grant additional waivers to countries that purchase Iranian oil will definitely impact the sanctions on Venezuela, but analysts are divided as to how. A large number of analysts believe that the tightening of sanctions on Iran signals weaker implementation of sanctions on Venezuela. A smaller number of analysts (which include me) believe the tightening of sanctions on Iran and Venezuela will happen at the same time in spite of the consequences to oil markets. The expected price increase and the full impact of the sanctions would hit hardest the countries who were receiving waivers to purchase oil from Iran are also countries (China, India, Turkey) still purchasing oil and engaging in other business with Venezuela.
Corruption Corner
Guatemala - The arrest of Mario Estrada, a presidential candidate who took money from the Sinaloa Cartel, has hit President Morales. The president has attempted to distance himself from Estrada and claims he had no idea there were ties between the candidate and drug traffickers. Those denials are weak given previously published reports about the UCN political party receiving drug money. Morales admits to having met privately with Estrada in recent weeks and having several of his allies work with the UCN in recent months. Given the opaque and corrupt campaign finance system in Guatemala, one big question that the Estrada arrest has raised is whether other candidates have taken similar offers.
Nicaragua - Bancorp sent a letter to regulators requesting to be dissolved. The bank was recently sanctioned by the Trump administration in large part because Ortega had laundered a significant amount of cash from Venezuela through it. The bank was in the process of being acquired by the government; though, by declaring the bank insolvent, much of the money trail from the bank is likely to disappear.
Paraguay - The NYT covered growing anti-corruption protests in Paraguay. Physical protests against corrupt politicians are being organized on social media.
Reading List
Americas Quarterly - New edition with lots of articles on China-LatAm
NYT - Made in China, Exported to the World: The Surveillance State [with a focus on Ecuador]
Reuters - On South America's largest solar farm, Chinese power radiates
Bloomberg - Venezuela’s Trade Scheme With Turkey Is Enriching a Mysterious Maduro Crony
Inter-American Dialogue, Venezuela Working Group - Transition Interrupted?
Carlos Chamorro - La rebelión de abril, a mitad del camino
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