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This year Brazil President Jair Bolsonaro continued to upset investors, while his economy minister Paolo Guedes lost credibility in the market. (Photo: Clauber Cleber Caetano/Brazil President's Office)
Mexico’s president Andres Manuel Lopez Obrador with then deputy finance minister Victoria Rodriguez on November 4, 2021. He subsequently named her the new Governor of Mexico's Central Bank, effective January 1, 2022. (Photo: Mexican President's Office)
Mexican state oil company Pemex continues to lose billions of dollars. During the first nine months it lost $4.1 billion, with $3 billion alone in the third quarter. (Photo: Mexico Government)
Since assuming Peru's presidency in July, Pedro Castillo has gone from one crisis to another, with investor confidence at new lows. (Photo: Peru Government)
Wednesday, December 15, 2021
Analysis

Latin America Business: Worst in 2021


The worst news in Latin America business in 2021.

BY LATINVEX EDITORS

The worst events in Latin American business this year, according to Latinvex editors.

#1 Bolsonaronomics

Brazil’s incompetent president has done it again. Instead of helping Brazil improve its economy and investment climate, Jair Bolsonaro decided to do the opposite. His crowning achievement: Lifting the spending cap, considered vital to keep fiscal balances and a minimum of investor confidence.

Brazil’s economy fell into recession in the third quarter after falling 0.1 percent quarter to quarter.

“There’s a feeling of paralysis,” Sergio Vale, chief economist at MB Associados consultancy told Bloomberg, adding that policy makers are likely to be more cautious when raising interest rates in coming months. “The economy reached a high level in the second quarter and stopped there, and some sectors, such as agriculture, suffered a great deal.”

The market outlook for 2022 economic growth has fallen from 2.3% in June to less than 0.5% in the latest central bank poll of economists, released on December 6.

After the government abandoned its pledge to respect the spending cap, analysts now see a continued and protracted period of rising inflation, rising interest rates, credit contraction and a slowdown of economic growth, Valor Economico reports.

For investors it was bad enough that Bolsonaro decided to lift the spending cap in an apparent move to boost government spending ahead of next year’s presidential elections where he is seeking re-election.

But making matters worse, was that his economy minister Paolo Guedes – considered a fiscal hawk and austerity proponent – went along, leading to resignations among his top staff. Guedes continued to lose credibility by playing down the dangers. Even when the third quarter GDP declined, he downplayed that as well.

“Governance in Brazil is being tested and has been loosened,” André Lion, partner and equity manager at Ibiuna Investimentos, told Valor Economico. “This impacts the stock market.”

The Brazilian stock exchange B3 has suffered. The Ibovespa index of the Brazilian stock exchange B3 had the world's second-worst performance this year, according to Austin Rating data quoted by G1. Only Venezuela fared worse. Brazil's poor performance is driven by the loss of confidence in the future of the economy, with investors worried about the fiscal environment, says the chief economist at Austin Rating, Alex Agostini, author of the survey.

Among the victims: Brazil’s incredible IPO boom that started last year and went on through this year, but started to taper off in August.

Abandoning the spending cap was the latest example of Bolsonaro failing to deliver on his pledges of business-friendly policies.

In February he shocked investors when he fired the well-respected CEO of Petrobras, Roberto Castello Branco over a dispute about fuel prices. Petrobras’s shares plunged 19 percent, while the real fell 2.4 percent, Bloomberg reported at the time.

The following month, Andre Brandao
  -- the head of Banco do Brasil, Brazil’s largest state bank -- quit after clashing with Bolsonaro over an austerity drive. Brandao spearheaded a plan to shutter some 200 branches and let go more than 5,000 employees to streamline operations and generate millions of dollars worth of savings by 2025. The move, announced in January, was cheered by investors but quickly drew the far-right president’s ire, who publicly criticized the bank, Bloomberg reports.

#2 AMLONOMICS

Just like when he cancelled the $13 billion international airport
three years ago despite dire warnings, Mexico’s president Andres Manuel Lopez Obrador (popularly known as AMLO) this year went ahead and presented a power bill that was opposed by the US, Canada and local and foreign investors and which, if implemented, puts $22 billion in solar, wind and other renewable-energy contracts at risk, according to Bloomberg.

The proposed reform is worrying European firms and governments, as well as crimping investment, the European Union's ambassador to Mexico announced.

A vote on the bill has been delayed until next year, but officials say they still plan to get it passed and implemented.

Meanwhile, in a break with recent tradition, AMLO refused to extend the mandate of Central Bank Governor Alejandro Diaz de Leon. Since Mexico opposition candidates gained office in 2000, two of AMLO’s predecessors kept on Central Bank governors appointed by their respective predecessors.

Vicente Fox kept on
Guillermo Ortiz, who had been named by Ernesto Zedillo.  Enrique Pena Nieto kept on Agustin Carstens, who had been named by Felipe Calderon.

The decision to not extend Diaz de Leon’s mandate came after AMLO had repeatedly attacked him for doing his job, namely fighting to detain inflation. AMLO has insisted that the Central Bank also needs to have a “social dimension”.

AMLO instead nominated his finance minister, Arturo Herrera. But then -- in a surprise move just before the change -- he pulled his nominee without explanation. After days of uncertainty, AMLO nominated Victoria Rodriguez, a little-known economist with scant monetary policy experience. The news sent the peso tumbling and fueled concern about possible government interference in the bank’s independence as inflation hits a 20-year high, Bloomberg reported.

After suffering the worst economic crisis in Latin America last year, Mexico was starting to recover this year thanks to the strong US recovery which helped boost imports from Mexico, remittances to Mexico and US travel to Mexico.

However, AMLO decided to ban labor outsourcing in an effort to combat tax evasion and ensure employers cover benefits. While the measure helped to boost formal hiring, it hit the string of service companies dedicated to labor outsourcing and was a key factor (apart from a COVID surge) that caused a 0.2 percent decline in third quarter GDP, according to  Bloomberg

Meanwhile, despite the weak economic recovery, AMLO continued full speed ahead with his pet projects – the $15 billion Santa Lucia airport, the $12.4 billion Dos Bocas oil refinery and the $11.4 billion Maya Train.

The Santa Lucia airport is $877 million more expensive than planned, while Mexican state oil company Pemex announced in May that the cost of Dos Bocas could end up costing $12.4 billion, or 40 percent more than originally planned, Argus Media reported. The cost of the Maya Train is now 47 percent more expensive  than originally announced and so far five months behind schedule, El Financiero reports.

In November AMLO declared the three pet projects vital for national security, which will likely lead to cost overruns, the construction chamber warns. Legal experts and transparency activists have said the decree casts a shroud over government actions, hindering oversight, cutting through legal protections and potentially endangering the environment and human rights, Bloomberg reports.

#3 Pemex Losses and Losses and Losses

Mexico’s state oil company Pemex is costing the country a lot of money. After losing a whopping $24.5 billion last year (wiping out Latinvex 500 profits) the company continued to lose money this year. During the first nine months it lost $4.1 billion, with $3 billion alone in the third quarter.

Pemex has consistently posted losses since 2013 to a combined tune of $139.3 billion, according to Latinvex calculations.

Meanwhile, Pemex remains the world’s most indebted oil company. The company’s debt reached $113 billion in the third quarter, according to Expansion.

Earlier this month, the government announced that Pemex will get a $3.5 billion cash injection as President Andres Manuel Lopez Obrador orders a new business plan for the struggling company, Bloomberg reports.

Lopez Obrador has made Pemex a key priority and has reduced its competition in the domestic fuel market.

#4 Peru Uncertainty Worsens

After a terrible 2020 (which saw three different presidents), it was hard to imagine that Peru would get any worse, but that’s what happened this year after its elections resulted in a teacher union leader becoming president with the support of a Marxist party.  

Since assuming office in July, Pedro Castillo has gone from one crisis to another, firing his first prime minister and several ministers and repeatedly making contradictory statements about business.

The sol has fallen to record lows compared to the US dollar as investors have grown increasingly worried over both policies and the chaos surrounding Castillo.

Even finance minister Pedro Francke – who had been seen as a moderate in Castillo’s cabinet – is losing credibility among investors after proposing a mining tax reform that the sector says would put more than $50 billion in future investments at risk in the world's second largest copper producer, Reuters reports.

Peru's economy is likely to have lost steam in October, estimating it would have grown between 4 percent and 6 percent in the period, the lowest rate since March, when the economy started rebounding from the pandemic, according to central bank data quoted by Reuters.

Economic expectations from the business sector have also deteriorated, the bank's head of economic studies, Adrian Armas, said in a conference call.

 

#5 Colombia Loses Investment Grade

In a setback for Colombia, the country lost its coveted investment grade exactly a decade after it gained it.

In July Fitch downgraded Colombia after Standard & Poor’s had done so in May, both on the weak fiscal situation.

“While the decision was largely expected due to the country’s financial difficulties and the impact of the coronavirus pandemic, it will still come as a blow to a nation that has prided itself on its fiscal rectitude. Colombia has not defaulted since the 1930s, a sharp contrast to most Latin American countries,” the Financial Times wrote. “The Fitch decision is also a blow to Iván Duque, Colombia’s rightwing president, who had hoped he could stave off a downgrade by passing a revenue-raising tax reform package this year.”

But the tax reform had faced a backlash from business, congressional allies of Duque and the public at large.

Massive protests broke out throughout Colombia and in the end Duque withdrew the reform. His finance minister Alberto Carrasquilla – the chief architect of the tax reform – resigned.

Carrasquilla had hoped to become the new head of the Andean development bank CAF, but the government pulled his nomination and instead proposed former trade minister Sergio Diaz-Granados, who took over the bank in September.

In the end, Duque presented another tax reform, which was passed by Congress in September.

 

 


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