Oil Price Drop May Affect Venezuela AS/COA Online 10/24/08

Lower oil prices threaten spending in Venezuela. (AP Images)

Falling commodity prices worldwide have sounded financial alarms in Latin America given the region’s heavy reliance on exports. In particular, oil’s spectacular price drop from $145 per barrel in July to less than $64 per barrel on October 24 raises concerns among analysts about Venezuela’s financial panorama, given that its economy revolves around oil revenue for approximately 50 percent of government earnings and 95 percent of its total export gains.

A broad range of financial experts forecast that Venezuela will see growth slow in 2009 but disagree on which oil price should be the bottom line before President Hugo Chávez’s government runs short on cash. The Economist Intelligence Unit says that Caracas’ 2009 budget is calculated based on a conservative estimate of $60 per barrel but foresees a public spending increase of 23 percent. It also notes Chávez’ determination to stimulate domestic growth using spending but warns that such a move will fuel the already volatile inflation rate, which surpassed 35 percent this year. El Universal reports Deutsche Bank analysis forecasting that Venezuela’s economy requires an average oil price at around $95 per barrel for the country to maintain a balanced budget. Others suggest the price must be even higher.

The New York Times emphasizes that some of Chávez’s signature policy initiatives—such as heavy domestic subsidies, modernization of the Venezuelan military through $3 billion in arms purchases from Russia; and selling cheap oil to Latin American allies—could face cuts. As an example, a well-trumpeted oil refinery announced by Chávez and his Nicaraguan counterpart Daniel Ortega more than a year ago remains at the drawing board. “Chávez’s days as the ultimate benefactor could be coming to a close,” the Christian Science Monitor explains.

Chávez has dismissed such omens, saying, “Venezuela has conditions to withstand any oil price fluctuations.” In a recent speech, he said that large international reserves stand at approximately $80 billion, represented half in cash and the other half in joint investment funds with China, Russia, and Iran. As a member of the Organization of Petroleum Exporting Countries (OPEC) and in sync with other members such as Libya and Algeria, Venezuela proposed to curb oil production by at least one million barrels per day. On October 24, OPEC members announced plans to cut oil production by at least 1.5 million barrels a day starting November 1 arguing that “oil prices have witnessed a dramatic collapse—unprecedented in speed and magnitude. Still, oil futures fell to $63 per barrel, the lowest price in 17 months.

Like oil, copper has suffered a steep price drop, declining 57 percent since July of this year. Such loss has prompted Chile to reduce its copper output by 2 percent over last year. Still, while U.S. demand has declined, China’s remain solid; current low prices may be a good opportunity to supply Chinese stockpiles.

The International Monetary Fund Regional Economic Outlook report underlines Latin America’s resilience facing the current financial slowdown. The analysis sees relief for commodity importer countries from Central America but advises caution for net exporters who might feel a pinch.

Read an AS/COA exclusive interview with the Global Head of Emerging Markets and Credit Research at JPMorgan Chase Joyce Chang on Latin America’s economic growth prospects.

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Peru’s García Fosters Consensus AS/COA Online 10/17/08

President Alan García and the new Prime Minister Yehude Simon. (AP Images)

Peruvian President Alan García governs at a time of dramatic highs and lows. According to the latest figures, Peru’s economy grew 8.9 percent in August capping off 86 consecutive months of economic expansion. On the other hand, news of a corruption scandal recently rocked his administration when leaked audio recordings provided evidence that high-level officials had solicited bribes from a Norwegian oil company in exchange for concessions. On October 10, García’s entire cabinet resigned and the Peruvian Congress ordered an investigation into oil concessions that took place since García took office in 2006. In the wake of the corruption scandal, the president’s popularity level reached a low of 19 percent.

Still, García has been credited for reacting swiftly to overcome concerns about his administration. He reappointed the defense, finance, justice, trade, and education ministers. Moreover, he chose Yehude Simon, the popular left-leaning regional governor of Lambayeque, to serve as Peru’s new prime minister. The Financial Times described the selection of Simon as an opportunity to “ help García’s administration communicate with Peru’s disenchanted leftwing parties and unions.” An editorial in El Comercio lauds García’s fast intervention and also commends the new prime minister for his ability to build consensus, a skill that could help the García’s administration get a boost in approval ratings.

Despite strong economic indicators in recent years, the president faces slumping support as opponents charge the country’s new wealth has not closed its social inequality gap. Roughly 39 percent of Peru’s population lives in poverty. The Economist points out that the lack of confidence in the president and his political party, the Alianza Popular Revolucionaria Americana (APRA), brings back “memories of his disastrous first stint in power in the 1980s,” when García governed from 1985 to 1990. But the purging of the president’s cabinet could be seen as a new commitment to stamping out corruption. In one of his first acts since taking office, Simon—a political prisoner during the Fujimori regime and known for transparency—proposed an anti-corruption plan that García will likely approve.

In an article for RGE’s Latin America EconoMonitor, Walter Molano defines Peru as “one of the most resilient economies in Latin America, and the star of the emerging markets class.” He highlights the fact that the commodities boom allowed Peru’s Central Bank to accumulate hefty international reserves, lower its foreign debt tab, and create leeway to mitigate the effects of the world’s financial slowdown. Peru plans to issue a $600 million international bond sale at a time when credit markets are frozen and wary investors have been withdrawing from emerging markets. The newly reappointed Finance Minister Luis Valdivieso commented on the decision by saying, “those of us who are confident in our economic performance don’t have to see multilateral or emergency financing as the only option.”

At the same time that Peru’s government faced a cabinet shuffle, a terrorist threat reemerged. An October 10 attack on an army convoy by members of the Shining Path claimed the lives of 19 people. Days later, an ambush in the coca-growing region of Vizcatan resulted in two more deaths in another attack linked to the Maoist group. The movement, once 10,000 strong, has remained largely dormant since authorities captured leader Abimael Guzman in 1992. Some posit that drug money has fueled the group’s resurgence but that the group only commands 600 rebels.

Read an article by COA’s Eric Farnsworth about how Peru, with García at the helm, has emerged as both an important regional player and plays a growing role in Asia-Pacific economic relations, demonstrated by the fact that it plays host to the APEC leaders summit in November.

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Financial Crisis Hits Immigrant Pockets AS/COA Online 10/09/08

Immigrants share the tough economic ride. (AP Images)

Stepped immigration law enforcement, workplace raids, and construction of a 670-mile fence have slowed the influx of undocumented migrants crossing the Mexican border in search of work in the United State. On top of those factors, the financial crisis is dealing another blow as construction and manufacturing jobs dry up, slowing the flow of money both legal and illegal immigrants send to their families back home. In the case of Mexico, where remittances represent the second largest legal source of foreign income, the cash flow serves as a vital lifeline to the economy.

The U.S. Department of Labor released September figures, showing that the unemployment rate hit 6.1 percent and roughly 9.5 million Americans find themselves jobless. The unemployment rate stands higher for Hispanics at 7.8 percent. The Financial Times reports that, as the job market shrank, remittances to Mexico dropped more than 12 percent in August, confirming fears. The analysis notes that more than 25 percent of undocumented Mexicans in the United States work in the construction trade, a sector hit hard by the subprime mortgage debacle.

Rising unemployment could trigger the exodus of more than 350,000 immigrants living in the United States, says the head of Mexico’s National Confederation of Farm Workers Cruz Lopez Aguilar, who suggests the Mexican government create a plan to generate jobs for returnees and provide education to their children. An October report by the Pew Hispanic Center makes use of U.S. census figures to confirm that fewer migrants are entering the United States. The study finds the drop could amount to as much as around 800,000 per year in 2004 down to approximately 500,000 in 2007.

In response to concerns about the global financial scare and in an effort to stem unemployment in Mexico, the government of President Felipe Calderón unveiled on Wednesday a plan to show up the economy. The president announced a new cash infusion worth $4.3 billion into several infrastructure projects in an effort to rescue investor confidence and boost job creation in the face of a lower U.S. demand for Mexican goods due to the economy’s contraction. The peso devalued more than 6 percent on October 6, experiencing its worst day since the 1994 Mexican financial crisis and causing Mexico’s Central Bank to inject almost a billion dollars into the market to stop the dive.

Guatemala and El Salvador face similar hurdles in terms of remittance drops, with declines hitting 12 and 18 percent respectively, reports the Inter American Development Bank. An increase in the number of soldiers patrolling the Mexico-Guatemala border in an attempt to slow the drug trade could also result in lowering the number of Central American immigrants crossing into Mexico with the United States as a destination.

The Economist highlights the mixed effects of the fence along the U.S.-Mexico border in terms of security and economics, saying “America is creating a barrier that is at once much too porous and rather too tight.” The article explains that tighter controls strengthen organized crime rings, which take advantage of heightened security by increasing fees for human and drug smuggling.

Read AS/COA coverage of the financial crisis’ effect on Latin America.

On October 10, AS/COA hosts a discussion on Hispanics’ economic contributions in the U.S. economy and how the private sector can benefit from the Hispanic labor force and entrepreneurship.

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Latin America Bets on Infrastructure AS/COA Online 10/02/08

Latin American integration project bridge connections in the region. (AP Images)

At a time of global financial insecurity, Latin American countries have deepened economic ties through a series of large-scale infrastructure project connecting countries and oceans. While political integration also grows through multilateral organizations such as the Union of South American Nations and Mercosur, another sign of stronger bonds rests with governments’ demonstrated willingness to pledge billions and partner with neighbors to bring major construction projects to fruition.

Brazil stands as a leader on spearheading such infrastructure projects, shown by two mega projects through which it can gain access to the Pacific Ocean. In partnership with Ecuador, Brazil launched the $2 billion Manta-Manaus project that includes highways and waterways and stands as a transportation alternative for the busy Panama Canal. At the same time, the governments of Brazilian President Luiz Inácio Lula da Silva and his Peruvian counterpart Alan García will oversee a project connecting Peru’s southern ports of Ilo, Maratani, and San Juan de Marcona with Brazil’s Rio Branco and Madeira River’s Porto Velho. As the Economist notes, these stronger ties come with another benefit for Brazilian firms: By producing sugarcane-based ethanol in Peru, the Brazilian ethanol industry can take advantage of Peru’s free-trade agreement with Washington to tap into the U.S. market, which remains elusive for Brazilians due to a hefty import tax.

A September 30 summit in the Amazonian city of Manaus brought together the leaders of Brazil, Ecuador, Venezuela, and Bolivia to discuss how to connect Caracas and La Paz via highway with the infrastructure projects underway with Peru and Brazil.

Projects are also flourishing in the Caribbean and Central America. Colombia, Panama, and Venezuela recently announced a new venture called Gran Ruta de las Américas, a road that will allow Central American visitors to drive to Cartagena and further east into Venezuela.

Energy cooperation serves as another fertile area for cooperation, with viability studies underway to lay down an underwater power distribution line that would enable Colombia to sell electricity to the Dominican Republic and Puerto Rico, reports El Listín Diario. Colombian President Álvaro Uribe underscored his commitment to the project during his visit to Santo Domingo in August, when he promised “energy of good quality at low prices.”

Further south, a pipeline plan could allow Bolivian natural gas to flow through northern Argentina, benefiting businesses and millions of families by delivering the energy source directly rather than forcing people to buy gas tanks. Controversy over who should pay for the gas lines leading from the main pipeline to the municipalities delayed some portions of the project. In response, the Argentine government pledged funds for most of the secondary distribution lines with the goal of reaching the project’s expected 2010 completion date.

Aside from growing connections between neighbors, countries also improve their competitiveness with pivotal infrastructure projects undertaken within their borders. For example, Mexico created a national fund to channel more than $240 billion into infrastructure over the next five years. Futhermore, the proposed giant port in Punta Colonet in Baja California could snatch a good portion of the cargo coming from Asia, easing the burden on strained ports of Los Angeles and Long Beach in California.

The long-held goal of expanding ties through infrastructure gained a lift in 2000 when 12 South American countries created the for Integration of Regional Infrastructure in South America, which coordinates several multinational initiatives and gained the backing of the Corporación Andina de Fomento and the Inter-American Development Bank. For more information, reports, and statistics about Latin American integration, visit the Latin American Integration Association.

On September 5, AS/COA hosted a panel on strategic infrastructure in Latin America, highlighting the opportunities to close the infrastructure gap in the region and reviewing the outlook of projects funded by the public sector and public-private partnerships.

During the week of September 22, AS/COA hosted its annual Presidents of the Americas series, when several presidents discussed deepening integration in Latin America. View summaries and access audio/visual of their remarks.

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