Latin America’s veins are wide open

. Oct 28, 2019
More than a million protested in Santiago. Photo: Tomo Carbajo/Fotovimiento More than a million protested in Santiago. Photo: Tomo Carbajo/Fotovimiento

Good morning! This week, we are covering the “Latin America Spring.” Argentina has a new president-elect: what does it mean for Brazil. How Brazilian markets performed. Also, what you should be looking out for this week—and the most important facts of the previous seven days. (This newsletter is for platinum and gold subscribers only. Become one now!)

Latin America’s veins are wide open

One million people protesting

in Chile. A contested election in Bolivia. Violent protests in Ecuador. Venezuela continues to crumble. Argentina has just finished a highly polarized election. In Peru, the president and Congress are at war. In Brazil and Mexico, stagnant economies pose a risk for the near future. And rampant violence has plagued Central America. It is certainly a time of tension for Latin America.</p> <p><strong>Why it matters.</strong> With most countries in the region facing turmoil, we should expect more political fragmentation and less cooperation between governments—which could reduce their capacity to tackle common problems.</p> <p>A sample of the lack of dialogue between the left and the right in Latin America is the Brazilian government&#8217;s decision not to recognize the electoral result in Bolivia, calling the re-election of left-wing Evo Morales &#8220;suspicious.&#8221;</p> <p><strong>Big expectations; even bigger frustrations.</strong> While there are several reasons for this wave of protest, many experts have identified the end of the commodities boom as the trigger. In the early 2000s, Latin America experienced an economic blossoming thanks to a once-in-a-lifetime explosion in demand for basic products from countries such as India and, more importantly, China. Poverty levels in the region dropped by 60 percent. Peripheral populations had more access to basic services and enjoyed political inclusion. But most countries failed to prepare themselves for an inevitable slowdown of that demand. Investments in infrastructure, education, and innovation were subpar (notably in Brazil), and as Chinese growth slowed down, Latin America has stumbled into this next phase with a severe hangover. Millions who were lifted out of poverty have been thrown back in recent years—crushing expectations of a sustained improvement in living conditions.</p> <div class="flourish-embed" data-src="visualisation/831362"></div><script src=""></script> <p><strong>Inequality.</strong> By all accounts, no region is as unequal as Latin America. According to <em>Forbes</em> magazine, 12 Chilean billionaires concentrated 25 percent of the country&#8217;s GDP. In Brazil, six white men are as wealthy as 100 million Brazilians, per NGO Oxfam. In a region where economies are highly dependent on domestic consumption, fighting inequality should be seen not as a left-wing fight, but as a pro-market revolution.</p> <p><strong>Even Chile.</strong> Posting the highest levels of development in Latin America, Chile is seen as a blueprint of how a nation should be run. But there is more to that claim than meets the eye. Reporter Lucas Berti <a href="">wrote on <strong>The Brazilian Report</strong></a><strong>: &#8220;</strong>The Chilean economic system, rooted in the ultra-liberal ideas of University of Chicago scholars Milton Friedman and George Stigler (both of whom would later go on to win the Nobel Prize in Economics), has produced stellar indicators. But it has also deepened inequality levels that progressively fractured the country’s social fabric.&#8221;</p> <hr class="wp-block-separator"/> <h2>A new tango in Buenos Aires</h2> <figure class="wp-block-image"><img src="" alt="Alberto Fernández and Cristina Kirchner. Photo: FrenteDeTodos/media" class="wp-image-26564" srcset=" 1024w, 300w, 768w, 610w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Alberto Fernández and Cristina Kirchner. Photo: FrenteDeTodos/media</figcaption></figure> <p>In what was hardly a shocker, opposition candidate Alberto Fernández won the Argentinian presidential race without the need for a runoff election. His lead was decidedly smaller than polls suggested, however.</p> <div class="flourish-embed" data-src="visualisation/831289"></div><script src=""></script> <p><strong>Recall. </strong>The result brings Kirchnerism back to power in Argentina, and former President Cristina Fernández de Kirchner will serve as vice president. The Kirchnerists occupied the Casa Rosada between 2003 and 2015—leaving a controversial legacy: it considerably reduced poverty, but was overly reliant on subsidies and price controls that ate up the country&#8217;s reserves. More than vindication, yesterday&#8217;s win is a statement to incumbent Mauricio Macri&#8217;s failures in managing an economy which is in turmoil for more than 20 years.</p> <p><strong>Macri. </strong>Upon taking office, Mr. Macri wanted to present Argentina as the vanguard of liberal reforms. But his political achievements were minimal—which also impacted the economy. In 2019, unemployment reached double digits and the economy should shrink by 3 percent. Over the past 12 months, accumulated inflation is over 54 percent.</p> <p><strong>Why it matters.</strong> Argentina is Brazil&#8217;s third-largest trading partner—and nothing indicates that the two countries will enjoy positive relations in the near future. President Jair Bolsonaro lamented the result, saying he had no intention of congratulating Mr. Fernández.</p> <p><strong>Prevention.</strong> Mr. Fernández is considered a liability by markets. To prevent a massive flee of capitals, the Argentinian Central Bank announced citizens will not be allowed to withdraw more than USD 200 per month.</p> <p><strong>Who is Alberto Fernández? </strong>At 60, Argentina&#8217;s president-elect is a political veteran, having been a part of multiple administrations. He was chief of staff to former President Néstor Kirchner, who oversaw the glory days of Kirchnerism. Considered a moderate, Mr. Fernández has nonetheless worried markets with his left-wing rhetoric.</p> <ul><li><strong>Trade. </strong>The Kirchnerists have called the Mercosur-EU deal a &#8220;death blow&#8221; to Argentina&#8217;s industry. It remains uncertain, though, if Mr. Fernández will try to pull out of the agreement. He also argued for (without getting into specifics) a model of import substitution—which would make Argentina an even more insular economy.</li><li><strong>Debt.</strong> Argentina owes USD 56 billion to the International Monetary Fund, and the president-elect says he wants to renegotiate terms.</li><li><strong>Subsidies.</strong> Mr. Fernández criticized Mr. Macri for slashing energy and transportation subsidies—which directly impacted Argentinians&#8217; revenue. In four years, these subsidies went from 5 to 1.6 percent of the GDP. They could now go up again, which would deteriorate the federal budget.</li></ul> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>The Brazilian branch of European fast-fashion retailer C&amp;A holds its initial public offering today. At BRL 16.50, stock prices just reached the bottom of their pricing range. Some investing firms recommending against buying C&amp;A (<a href="">CEAB3</a>), despite it being the second-most recognized fashion brand in Brazil. For analyst Eduardo Guimarães, C&amp;A&#8217;s biggest issue is that 90 percent of the BRL 1.6 billion raised in the IPO should be used for debt payments instead of investments.</p> <p style="text-align:center"><strong><em>Natália Scalzaretto</em></strong></p> <hr class="wp-block-separator"/> <h2>Bolsonaro&#8217;s strategy in the Northeast</h2> <p>President Jair Bolsonaro is trying to break into the Workers&#8217; Party stronghold: Brazil&#8217;s Northeast. He announced a 13th payment of the cash transfer program Bolsa Família, which should have a positive impact on poorer families. The program was implemented by former President Lula in the early 2000s. Since then, the Workers&#8217; Party electoral map has coincided with the map of beneficiaries of the program. But winning over the Northeast won&#8217;t be easy, according to political scientist Carlos Alberto de Almeida, who has researched the correlation between Bolsa Família and electoral behavior. &#8220;Lula remains a strong symbol there. If he leaves jail, he could further tighten the grip over the region.&#8221;</p> <div class="flourish-embed" data-src="visualisation/830180"></div><script src=""></script> <div class="flourish-embed" data-src="visualisation/830129"></div><script src=""></script> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <p><strong>Interest rates. </strong>On Wednesday, the Central Bank&#8217;s Monetary Policy Committee will announce Brazil&#8217;s new benchmark interest rate. There is a consensus among economists that the bank will further cut the level by 0.5 percent—taking it to 5 percent a year (a record low in the country). That would take Brazil&#8217;s real interest rates (after discounting for inflation) to 2 percent—something unimaginable just a few years ago. In a stumbling economy with low inflation, markets believe that by 2020 the Selic benchmark rate should reach just 4 percent a year.&nbsp;</p> <p><strong>Unemployment.</strong> On Thursday, the Brazilian Institute of Geography and Statistics publishes the newest edition of its monthly household survey—which brings detailed information on employment. The rate of workers out of a job has consistently improved, but at a very slow pace and mainly driven by informal work, which pays less and is more precarious. With the construction sector still way below pre-recession levels and large idle capacity in industry, it will take time for quicker improvement.</p> <p><strong>Post-pension reform agenda.</strong> With the pension reform finally passing in Congress, the government is set to announce its next short-term priorities. Economy Minister Paulo Guedes is set to present his agenda on Tuesday. Mr. Guedes wants to champion three major, complex reforms: changing public service rules (cutting down many of the perks enjoyed by civil servants), a tax reform (though it remains unknown which of three different proposals in Congress the administration will back), and an overhaul of the so-called federative pact (how tax revenue and attributions are split up between federal-, state-, and municipal-level administrations).</p> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <p><strong>Asia trip. </strong>President Jair Bolsonaro visited Japan, China, and the Middle East last week. In Beijing, the president adopted a conciliatory tone towards the country, announcing visa exemptions for Chinese tourists. Mr. Bolsonaro&#8217;s pragmatic tone is an attempt to lure even more Chinese investments in infrastructure and energy projects. He dodged controversial topics, such as a possible ban on China&#8217;s telecom giant Huawei from the upcoming auction of 5G frequencies in Brazil, which was a request of Donald Trump&#8217;s White House).&nbsp;</p> <p><strong>Supreme Court. </strong>The Brazilian Supreme Court has interrupted what has been called Brazil&#8217;s &#8220;trial of the year.&#8221; The 11 justices will decide whether or not convicted felons may start serving their prison sentences after losing their first appeal (the current practice)—or if sentences can only be enforced after all appeal routes are exhausted. Chief Justice Dias Toffoli is expected to be the swing vote, and he has indicated he will opt between allowing defendants to lodge all appeals at liberty, or proposing a middle-ground solution—defending arrests after two failed appeals.</p> <p><strong>Oil spill. </strong>The Brazilian Navy has said the presence of crude oil has diminished on the Northeast shore. Since September 2, over 250 locations have seen stains—which has threatened marine life and at least 14 conservation areas. The government is focused on finding the perpetrators, but Petrobras officials compared the task to &#8220;finding a needle in a haystack.&#8221; Analysts say the oil comes from Venezuela—although it has not been determined how—or where—it was spilled.</p> <p><strong>Pension reform. </strong>The pension reform bill has passed in Congress, assuring BRL 800 billion in savings for the federal government over the next decade. The vote fueled markets, and the São Paulo stock exchange benchmark index broke records for three consecutive days.

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