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Monday, February 23, 2015
Sunday, February 22, 2015
Loan Scandal Clouds Chile President Michelle Bachelet's Reforms
February 22, 2015 12:42 pm
Michelle Bachelet, Chile’s president, swept back to power in 2013 on the back of pledges to fight inequality and put an end to the deeply entrenched privileges enjoyed by the country’s traditional elite.
So her government’s credibility took a serious blow when the single mother’s eldest son, Sebastián Dávalos, was earlier this month accused of using his influence to secure a bank loan. The ensuing uproar was such that he was forced to resign last week as head of a charitable foundation normally run by Chile’s first lady.
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Lamenting this “bitter moment”, Mr Dávalos admitted the scandal could “damage” not just the government, but also the president herself, whose popularity has already sunk to record lows amid an economic slowdown driven by lower prices of copper, Chile’s main export.
At stake is Ms Bachelet’s ambitious reform agendaaimed at tackling inequality, which has remained high despite exceptional economic growth in recent decades. Her agenda’s more controversial elements, especially in education, have already been watered down by the moderate faction of her centre-left coalition, whose support is required to push new laws through congress.
“With this scandal, the moderates will probably acquire more strength, as Bachelet is not going to be able to legitimately drive the coalition further to the left,” says Patricio Navia, a political scientist at New York University.
“Bachelet’s family was using the same type of privileged access that she was campaigning against,” he explains.
For many Chileans, Mr Dávalos’s ability to secure a $10.4m loan for his wife’s small business from the Banco de Chile after meeting its vice-president Andrónico Luksic — who is one of Chile’s richest men and whose family controls the bank — is an eloquent example of the extent of privilege in the country. The loan was approved the day after Ms Bachelet won the presidential elections.
The scandal is a boon for Chile’s rightwing opposition alliance, which has pounced on what has been dubbed “nueragate” (nuera is Spanish for daughter-in-law). Not only is the opposition still reeling after being crushed by Ms Bachelet’s coalition in the 2013 presidential elections, but it has also been hit by a hugely damaging scandal of its own, over campaign finance.
But Mr Navia adds: “The real opposition to Bachelet is not the rightwing alliance, but the Christian Democrats in the senate.”
He says the most moderate group of the ruling coalition has succeeded in ensuring that Ms Bachelet’s reforms have been “far less radical than promised”.
Indeed, with its comfortable congressional majority, the opposition has been helpless to prevent the governing New Majority coalition from steamrollering important reforms through congress. Last year, a tax reform was passed that will allow the state to collect an extra $8bn a year, mainly from businesses, while education reforms at the core of Ms Bachelet’s agenda are close to approval.
Now, businesses in particular have their eye on controversial labour reforms, which are due to be debated in congress later this year. Critics say the proposed reforms will simply enhance the power of trade unions, which only represent about 15 per cent of workers. Far from improving broader employment and productivity, the reforms risk increasing unemployment and labour conflicts, they say.
“It would be very difficult to do the reforms the government is attempting without running into problems and generating some uncertainty,” says José de Gregorio, a former central bank governor. But although the government has struggled to calm investor fears, especially over the tax reform, “today many of those doubts are dissipating”, he insists.
Mr de Gregorio’s optimism is shared by Wall Street institutions such as Standard & Poor’s and JPMorgan, who have argued recently that the economy is turning a corner. JPMorgan bumped up its growth forecast for 2015 from 2.3 per cent to 2.7 per cent, as lower oil prices help to offset the fall in copper prices, after growing 1.8 per cent last year.
Nevertheless, Felipe Larraín, finance minister in the previous government of Sebastián Piñera, points out that the economy has suffered a “hard landing” after averaging 5.3 per cent growth from 2010-13.
“In this complicated scenario, the labour reform is just one thing more. With the tax reform, it’s all going in same direction,” he says, arguing that the increasing cost of employment and production is acting as a disincentive for investment, which has fallen for the past six consecutive quarters.
“I think Chile can do much better,” he said.
Friday, February 13, 2015
Cafayate's Crystal Ball
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Wednesday, February 11, 2015
Sao Paulo Drought Compounds Brasil's Problems
Last updated: February 11, 2015 1:53 pm
With Brazil’s economy in a slump, there are few companies in São Paulo that can boast they are doing a roaring trade.
But water tanker operator Gota de Cristal Água Potável, or Crystal Drop Drinking Water, cannot keep up with orders thanks to the worst drought on record to have hit South America’s largest metropolis.
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“We are working nonstop,” said Gota de Cristal driver Emerson Prado, whose water truck is supplying a laundry near Vila Sônia in São Paulo’s west.
“The way things are going, the water will run out altogether,” said the driver, who says the company draws its water from its own wells.
Mr Prado’s apocalyptic prognosis is not far-fetched. With a population of more than 20m people in the greater metropolitan region, parts of São Paulo — Brazil’s economic powerhouse — are running out of water.
São Paulo’s troubles are part of a wider drought afflicting the country’s south and central states that is drying up hydropower dams. In a country that depends on hydropower for about 70 per cent of its electricity, this is threatening to create an even bigger problem for Brazil’s economy — energy rationing.
While São Paulo’s water shortage is a headache for powerful state governor Geraldo Alckmin of the opposition PSDB party, energy rationing would hurt the federal government of President Dilma Rousseffand her left-leaning Workers’ Party.
“If we continue with these low levels of water in the reservoirs, it will be really difficult to avoid rationing in Brazil,” said Mauro Storino, senior director at Fitch Ratings.
The worst hit São Paulo reservoir system is Cantareira. Set in hills near the city’s international airport, this serves 6.2m people in the metropolis’s central and surrounding areas. But it is operating at just 6.1 per cent of its capacity — including reserves that usually are not tapped.
Poor rainy seasons, which traditionally run between November and April, over the past couple of years have meant inflows into Cantareira in January were less than one-sixth of historical averages, Vicente Andreu Guillo, president of the ANA, the government’s national water regulator, wrote in an article on the body’s website.
“The operation of Cantareira is continuing on the expectation that there will be abundant rains,” Mr Guillo wrote. He said that efforts to economise had so far been inadequate “in the face of a drought that continues to surprise”.
José Carlos Mierzwa, associate professor at the University of São Paulo, said that unless it rained heavily during the second half of the wet season, severe rationing would be unavoidable.
He said that although São Paulo’s population growth had slowed, the rise of a new middle class meant that water consumption was still increasing.
To meet this demand, the city was importing water through subterranean tunnels from regions ever farther away. But while finding new sources was important, the city was missing opportunities to recycle existing water supplies. São Paulo treated only 30 per cent of its sewage, turning its rivers into open sewers that in turn limited the water available to regions downstream.
“This pollution stretches a distance of about 100 kilometres,” said Prof Mierzwa.
More worrying for policy makers in Brasília is that the drought will spark an energy crisis. In Brazil’s southeast and central economic heartlands, the principal hydropower reservoirs are at just 17 per cent capacity.
Brazil’s last drought in 2001 forced energy rationing and helped end the rule of the centrist PSDB party. Since then the government has doubled the participation of thermal plants in power generation to compensate for any lack of hydroelectricity during droughts.
Fitch’s Mr Storino said in a note that the increased thermal power and a better electricity transmission grid “partially mitigate the rationing risk”. But even this safeguard would reach its limits if it did not rain.
Rationing would be a disaster for President Rousseff, a former energy minister whose approval ratings fell sharply this month on a weak economy and a corruption scandal at state-owned oil producer Petrobras.
“We expect negative gross domestic product growth in 2015,” Ilan Goldfajn, economist at Itaú-Unibanco, wrote in a research note. He said that the degree of decline would depend partly on rationing and the corruption investigation.
Business is worried. Santiago Chamorro, president of General Motors do Brasil, said that the carmaker had studied bringing water in by truck for its plants in São Paulo.
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“We are preparing for the worst and hoping for the best,” Mr Chamorro said.
The public, meanwhile, is stocking up on water. Leroy Merlin, a home-improvement store, said that demand for new water tanks for residential use rose 352 per cent last year.
Some fear that the crisis could degenerate into street warfare in São Paulo once the scarcity starts to bite later this year.
“In a little while it will be dangerous for us,” predicted Gota de Cristal driver Mr Prado. He said he feared that people would start randomly stopping water trucks and “ordering us to go to their houses”.
Additional reporting by Samantha Pearson
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