Brazil More Competitive Than Mexico

Latin America competitiveness, Venezuela FX outlook and Ecuador’s new anti-business laws.

BY LATINVEX STAFF

Brazil has again passed Mexico in terms of overall competitiveness, according to the latest Global Competitiveness Report from the Swiss-based World Economic Forum.

Brazil now ranks in 57^th place globally, ahead of Mexico at 61^st place. In Latin America, Brazil now ranks in 4^th place versus 5^th place for Mexico. Brazil’s score increased slightly – from 4.33 to 4.34 points – while Mexico’s score fell slightly – from 4.34 to 4.27 points.

Experts expect Mexico to significantly improve its competitiveness after the enactment of new laws that open the country's energy and telecommunications sectors to more competition.

Meanwhile, Colombia improved its competitiveness the most in Latin America. It now ranks only slightly behind Peru in competitiveness. Its score is 4.23 points (up from 4.19 last year), while Peru’s score is 4.24 points (down from 4.25).  Peru ranks 6^th and Colombia 7^th in Latin America.

Overall, Latin America improved slightly – with its average score going from 3.98 points to 3.99 points, according to a Latinvex analysis of the WEF data.

Eight countries improved their competitiveness score, while 10 saw declines. The worst declines were seen in Bolivia, Mexico and Panama, while the best improvements were seen in Colombia, El Salvador and Honduras.

Chile and Panama remain the most competitive countries in Latin America despite seeing declines in their scores.

VENEZUELA FX DELAY ERODES GAINS

Venezuela's policy adjustments to resolve foreign exchange (FX) constraints and address macroeconomic and fiscal distortions have been limited and slow, leading to continued FX scarcity, deteriorating growth prospects and high inflation, according to a report by Fitch Ratings.

Foreign investors are concerned that the removal of Rafael Ramirez on Tuesday as oil minister and economic vice president will further delay any necessary reforms. Ramirez – who had been seen as the most pragmatic of the cabinet members in Venezuela – was named foreign minister.

The scarcity of US dollars has led to shortages of everything from consumer goods to car parts essential for the auto manufacturing sector. Meanwhile, international flights have fallen to a minimum after airlines are owed more than $4.1 billion.   

“The prospects for policy adjustments to reduce in macroeconomic instability and strengthen the sovereign's balance sheet do not appear promising in spite of the introduction of a three-tier FX system and the de-facto devaluation of the VEF earlier in 2014,”  Erich Arispe, Director in Fitch's Latin America Sovereign Group, said in a statement. “In addition, Venezuela's economic policies tend to be hard to predict, with the timing and type of future adjustments depending on the electoral calendar as well as political and social pressures.”

The lack of sustained and coherent policy adjustments could lead to further erosion in external buffers, macroeconomic and financial instability, and heightened risk of social unrest given the country's political polarization, he adds. These dynamics continue to undermine the sovereign's credit profile, as reflected in Fitch's downgrade of Venezuela to 'B' in March, as well as the sovereign's continued Negative Outlook.

Expansionary fiscal policies continue to fuel inflation and reduce FX policy credibility, Fitch argues. “While the devaluation is likely to benefit Venezuela's fiscal revenues, expenditure pressures and high inflation threaten to erode any gains on the revenue side,” the ratings agency warns. “In addition, high inflation has led to continued exchange rate overvaluation, flattering Venezuela's debt metrics and providing limited growth benefits from the exchange rate adjustments.”

Venezuela has not only the highest inflation in Latin America, but also in the world. Venezuela is expected to see an inflation rate of 50.7 percent this year, the International Monetary Fund estimates. That will be an 18-year high, according to a Latinvex analysis  of IMF data

“While Venezuela's government-control of oil-derived FX inflows have provided the authorities with some policy flexibility in the past, softer oil prices, weakening external liquidity, a fast-contracting economy and increased domestic political tensions have reduced Venezuela's ability to manage rising external and macroeconomic pressures,” Fitch says.

ECUADOR: WHEN BUSINESS IS A CRIME

Ecuador’s new Integral Organic Criminal Code (Código Orgánico Integral Penal: COIP) increases the risk of company executives, including board members, facing criminal charges for the actions of their employees,  international consultancy IHS warns.

The new code, which came into force last month, establishes a number of new business-relevant crimes punishable by prison sentences. These include professional negligence, the promotion of financial panic, and the diffusion of sensitive information. The law also makes legal entities (companies) criminally responsible for illegal actions that benefit a company or its shareholders. This arrangement means that board members could be held accountable or criminally responsible automatically, even if they have no direct involvement in the decision-making process that led to the criminal activity. The COIP has been criticized by the business community, healthcare workers, and freedom-of-speech campaigners for its potential impact on working practices and free speech. Further criticism has been directed at the language of the law, which allows judges significant room for interpretation.

“Media outlets, and banking and financial service companies are likely to face additional legal risks, given the potential for loose interpretation of the "financial panic" and "sensitive" information aspects of the COIP,” IHS says. “These risks are amplified by ongoing questions relating to the impartiality and transparency of the judiciary, which on several occasions have applied significant, multimillion dollar fines to media outlets and individual journalists for libel against the president. The wording of the new penal laws increases the risk that President Correa will use it to single out political opponents associated with the banking sector and the media. Both sectors are perceived by Correa as sworn enemies of his 'Citizens Revolution'.” 

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