South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
It’s a painful dilemma: to prioritise the fiscal deficit, or inflation?
The government of Mauricio Macri sent a strong signal that it is serious about controlling Argentina’s fiscal deficit when it announced hikes in electricity tariffs from 61 to 148 per cent for consumers in Buenos Aires on Tuesday.
The move represents another step in reining in Argentina’s bulging fiscal deficit, the Achilles heel of its crisis-prone economy, and the phasing out of distorting and populist subsidies implemented by the previous Kirchner administration.
Nevertheless, it will also complicate the year-old government’s battle against inflation, which it has succeeded in reducing from a monthly rate of almost 4.5 per cent a year ago to around 1.5 per cent this month.
Until inflation is properly under control, the government will struggle to reactivate economic growth, which it depends on to keep voters onside ahead of crucial mid-term legislative elections in October. Those elections could determine the future of Mr Macri’s market-friendly economic reform programme.
Indeed, the first round of unpopular tariff hikes last year met with serious pushback, although the increases this year are less severe.
Ecolatina, an economic consultancy in Buenos Aires, estimates that the electricity tariff hikes will push inflation in February up to around 2.2 per cent, from around 1.7 per cent in January.
The consultancy expects tariff rises across all sectors to contribute around 7 percentage points to inflation in 2017, which they estimate at 24 per cent.
That is well above the central bank’s target of below 17 per cent, but a significant reduction from about 40 per cent inflation in 2016.
After two straight years of recession, Brazil's economy is on track to start growing again in 2017. But new twists in the country's sweeping corruption investigation, Operation Car Wash, could keep the economy in the doldrums.(YASUYOSHI CHIBA/AFP/Getty Images)
Summary
The past few years have been difficult for Brazil's economy. But after two straight years of recession, things are looking up. By mid-January, the country's inflation rate had fallen to just below 6 percent, its lowest level since March 2014. Reduced inflation prompted the central bank to start cutting interest rates, which now stand at 13 percent. (Economists expect the rate to be under 10 percent by the end of the year.) Confidence in Brazil's manufacturing sector is on the rise, meanwhile, and its current account deficit dropped to $23 billion in 2016, down from $104 billion two years earlier. The Brazilian economy could even start growing again this year — so long as its domestic political affairs don't get in the way.
Analysis
Brazil badly needs its economy to start growing again. A crash in commodity prices in 2014 diminished the country's export revenues and caused its real gross domestic product to contract by 3.8 percent in 2015 and by 3.5 percent in 2016, according to the International Monetary Fund. At the same time, rising fuel and electricity costs following years of government price controls sent inflation into the double digits over the past two years. The central bank also bumped interest rates up to 14.25 percent in early 2015.
To make matters worse, a corruption investigation dubbed Operation Car Wash plunged the country into turmoil when it was launched in 2014, ensnaring many of Brazil's top corporations, along with some of its most prominent politicians. Many of Brazil's biggest companies have had to pay billions of dollars in penalties over bribery cases uncovered in the investigation. The corporations have suffered other hardships as well, losing government contracts and access to credit. This has brought work on major construction projects, including refineries, nuclear power plants and roads, crashing to a halt. Adding to the upheaval, the investigation has brought down several political officials, such as former President Dilma Rousseff.
Turning a Corner?
But now, projections suggest that Brazil's economy will grow this year — for the first time since 2014 — by 0.2 percent. Acting President Michel Temer has been instrumental in turning the economy around. Despite his low public approval ratings, Temer has managed to pass critical economic measures, including a bill to cap spending and a regulation on pre-salt oil. In addition, the legislature is reviewing proposals for labor and pension reforms. Though the initiatives are unpopular with Brazilian voters, lawmakers have rallied behind them for fear that the necessary reforms would fall by the wayside once the next administration takes over in January 2019. Other factors bode well for Brazil's economy, too. For instance, Brazil will probably experience less fallout from the new U.S. administration's potential protectionist policies than Mexico will. Brazil has much lower trade and immigration exposure to the United States than does Mexico, and trade accounts for a lower portion of its GDP.
Still, a recovery is far from guaranteed, and new twists in the Operation Car Wash scandal could cloud Brazil's economic and political outlook this year. Construction firm Odebrecht — one of the largest enterprises not just in Brazil but in all of Latin America — was among the companies swept up in the investigation. After Brazilian, U.S. and Swiss authorities sued the firm for making illegal political donations and manipulating government contracts, the company agreed Jan. 21 to pay more than $2.5 billion in damages, the largest anti-corruption settlement in history.
Odebrecht's massive settlement is the least of the Brazilian government's worries, though. A plea bargain related to the case could implicate Temer, along with roughly 25 percent of Brazil's congress members, in accepting illegal donations from the firm. Testimony from the company's executives may well lead the Superior Electoral Court to rule that Temer received illegal funds for his vice presidential campaign and could take down essentially all of Brazil's mainstream politicians. If the court rules against Temer, he will have no choice but to resign, which would plunge Brazil back into political uncertainty and delay the economic measures that his administration has pursued. The decision would also change the playing field for Brazil's 2018 presidential election.
The recent death of Supreme Court Justice Teori Zavascki, who was overseeing the investigation, gave the government some hope that the court would delay its plans to make the Odebrecht testimony public in mid-February. In the meantime, Temer and Chief Justice Carmen Lucia began the process of replacing Zavascki on Jan. 23. (Presidential aides have said Temer will wait for a new rapporteur to be appointed before picking someone to fill the vacant seat.) On Jan. 30, Lucia ratified the plea bargain deal, though she ruled to keep the testimonies involved secret. Now the general prosecutor will review the testimonies to decide whether to open new cases.
Whatever the court decides, Brazil's political order and economic prospects hang in the balance. If Temer emerges unscathed, the resulting political stability would bode well for a return to growth. If, on the other hand, the acting president is implicated and forced to resign, the country will probably spend another year in recession.
Brazilian Tycoon Eike Batista Is Arrested After Returning Home
Photo
Eike Batista in Rio de Janeiro on Monday after he gave himself up to the Federal Police.CreditAntonio Lacerda/European Pressphoto Agency
RIO DE JANEIRO — Eike Batista, the fugitive oil-and-mining tycoon wanted in connection with Brazil’s far-reaching corruption investigation, flew home from New York on Monday and surrendered to the police, who placed him temporarily in a notoriously overcrowded prison.
Mr. Batista’s case has generated intense interest in Brazil, where he was once the richest man and is still a household name. TV Globo interrupted programming to show the arrival of his plane and the police placing him in a squad car, part of the convoy of vehicles that accompanied him to the prison as a news helicopter followed.
Mr. Batista was photographed looking tired and wan on the plane by the Rio newspaper O Globo, which reported he did not dine and just drank two glasses of milk. He took photographs with admirers and slept.
He had been considered a fugitive since Jan. 26, when the police went to arrest him at his Rio de Janeiro mansion as part of the national corruption investigation, which has entangled dozens of politicians and business leaders. Officers found he had left the country on Jan. 24 on a flight to New York.
Interviewed at Kennedy Airport in New York on Sunday night, Mr. Batista said he believed he had done nothing wrong, telling TV Globo that he was coming home to “help clean things up.”
“I am coming back to respond to the justice system, as is my duty,” Mr. Batista said. “I’m coming back because sincerely I am going to show what things are like. As simple as that.”
Mr. Batista’s flight to New York two days before the police sought to arrest him has raised questions over why he was even allowed to leave the country, given that the legal order for his arrest had been issued on Jan. 13.
The Federal Police spokeswoman, speaking on condition of anonymity in accordance with government policy, said officers had received the order the day before they sought his arrest.
The spokeswoman said Mr. Batista was taken to Ary Franco, one of the country’s most overcrowded and filthy prisons.
Gutembergue de Oliveira, president of the Rio penal system workers union, said that Ary Franco currently holds more than 2,000 prisoners, more than double its capacity of around 970.
“It’s like a dungeon. The light is bad, it’s old,” he said.
With his head shaved, Mr. Batista was then moved to another prison, the Bandeira Stampa Public Prison, also known as Bangu 9. “The conditions are better there,” said Mr. de Oliveira, adding that the prison does not suffer the same level of overcrowding and is not dominated by any one prison gang.
Fernando Martins, a lawyer acting for Mr. Batista, told the G1 news site that he had not yet been given access to his client.
Mr. Batista’s arrest punctuated a comedown for the billionaire, once seen as a shining example of a confident, booming Brazil. His ascent symbolized a developing country that had seemed to successfully combine private enterprise with social justice and was riding high on surging commodities prices.
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The 2008 public offering of stock in Mr. Batista’s oil company, OGX, raised more than $3.6 billion. He assembled an empire that included mines, oil fields, electricity generating plants and even Rio’s landmark Hotel GlĆ³ria.
Mr. Batista was feted by the former presidents Luiz InĆ”cio Lula da Silva and Dilma Rousseff from the leftist Workers’ Party, as well as celebrities and sports stars. He received more than $4 billion in loans and investments from the national development bank, and his wealth reached $34.5 billion in 2012.
But Mr. Batista’s empire began to unravel when his oil fields delivered a fraction of the production promised and investor confidence in his network of companies nose-dived. His oil company went into bankruptcy protection proceedings in 2013.
Brazil’s fortunes have suffered along with Mr. Batista’s — the country has been mired in a recession for nearly three years, and the Workers’ Party and its former allies are entangled in the corruption scandal, which centers on the state-run oil company, Petrobras. Ms. Rousseff was impeached last August, accused of breaking budget laws.
Since the Petrobras investigation, known as Operation Car Wash, began in 2014, it has led to scores of arrests — including politicians, middlemen and business executives.
The investigation expanded to ensnare Mr. Cabral, the former governor, and his wife, Adriana Ancelmo, a lawyer, and both were imprisoned. Investigators say Mr. Cabral and his conspirators accepted bribes from some of the companies involved in the Petrobras scandal.
He and his wife are alleged to have spent millions of dollars on jewelry, luxury travel and clothes. The state of Rio is nearly insolvent, struggling to pay salaries and mollify enraged employees.
Mr. Batista was close to Mr. Cabral and came under scrutiny for permitting the former governor and his family to use his private jet in 2011.
This is not the first time Mr. Batista has faced legal problems. He was tried in 2014 on charges of insider trading and stock market manipulation, but the case was suspended in February 2015 after the presiding judge was filmed driving Mr. Batista’s seized Porsche.
The judge was removed from the case. In November 2015, regulators barred Mr. Batista from serving as a corporate officer for five years.
In another interview with Brazilian reporters from TV Globo and the O Globo newspaper at Kennedy Airport, Mr. Batista praised Operation Car Wash, which he said was “full of young, competent Brazilians.”
“What is happening will make Brazil a country that everyone wants to invest in. For this, once this difficult phase is past, in the future everyone will give a different note to Brazil in terms of transparency,” he said.
He added: “If mistakes were made you have to pay for the mistakes that you did. It’s like that.” But asked if he had made mistakes, Mr. Batista replied: “I don’t think so.”
It could hardly be clearer: Donald Trump is threatening to pull the trigger on a trade war with Mexico that could blow apart a relationship worth $1m a minute. The far-fetched prospect of better-than-ever bilateral ties, which the president invoked hours before torpedoing a summit with his counterpart Enrique PeƱa Nieto, now looks like a mirage.
Mr Trump’s gambits include floating a unilateral 20 per cent tax on Mexican imports, humiliating Mexico by signing an executive order to start construction of a border wallwhile its ministers were in Washington and telling Mr PeƱa Nieto it was pointless to hold the summit unless he agreed to pay for the barrier.
Despite an hour-long call between the presidents on Friday, which seemed to have eased some of the acrimony, relations between the neighbours are more fraught than at any time in the past four decades. Nobel economics laureate Paul Krugman tweetedlast week that team Trump were acting like “spoiled children playing with loaded guns” amid fears that the dispute threatened the collapse of the North American Free Trade Agreement between the US, Mexico and Canada.
The tax move has an echo from the early 1970s when the Nixon administration imposed a 10 per cent import duty on Mexico. But the stakes are far higher today. A $580bn bilateral relationship and millions of jobs are on the line on both sides of the border, the product of nearly a quarter of a century of free trade that has made the US and Mexico “not just neighbours, but roommates” as former Mexican congressman AgustĆn Barrios GĆ³mez puts it.
“All assumptions about the relationship are in play,” says Duncan Wood, head of the Mexico Institute at the Wilson Center in Washington. “We can no longer assume things will stay the same or integration will continue to deepen. There is a very real risk that things will deteriorate very rapidly.”
It is hard to quantify the damage to Mexico that killing Nafta would cause. Michael CamuƱez, a former assistant US commerce secretary, calls it “the most dangerous moment of uncertainty in the bilateral relationship in the past 100 years”.
More than the millions of cars rolling off production lines every year — the motor industry has been one of Nafta’s big beneficiaries — the pact’s greatest gift to Mexico has been security for companies to do business. US inflows to its southern neighbour, Mexico’s biggest source of foreign direct investment, have increased by more than six times to $100bn since Nafta entered into force in 1994.
Nafta’s first year was one of escalating crisis for Mexico. The day it went into force, armed Zapatista rebels marched out of the jungles of the southern state of Chiapas and declared war on the state. Two prominent Mexican politicians were assassinated in the following months. By Christmas, a devastating currency crisis had erupted that threatened to push Mexico into default.
It might have been only a Mexican meltdown had the countries not just hitched their wagons to a deep and sweeping trade integration. “This is an American challenge,” declared President Bill Clinton, who rushed through a $20bn bailout in early 1995. “The livelihoods of thousands and thousands of our workers depend upon continued strong export growth to Mexico.”
Two decades on, trade has soared. Commercial flows between the three partners hit $1.1tn in the year to November 2016, according to data compiled by analytics company Panjiva. The value of the US trade in goods with Canada and Mexico is worth almost twice as much as its trade with China, even after the flood of cheap Chinese imports in recent years. It is worth almost 10 times as much as the US trade with the UK.
But Mr Trump seized on Nafta during the election campaign, blaming it for the death of US manufacturing jobs. He exploited that to full effect in the rust-belt states and blue-collar communities that paid him back with their vote.
Wilbur Ross, the president’s nominee for commerce secretary, told a Senate confirmation hearing this month that Mexico’s low minimum wage would be “a very serious topic for conversation”. He added: “One of the original intents [of Nafta] was . . . frankly [to] reduce the gap in productivity-adjusted wages between the two countries. It hasn’t worked that way.”
Salaries in the car industry are as much as six times lower south of the Rio Grande, something that has enabled a division of labour among the Nafta partners within the integrated supply chains that the trade pact has spawned. Components like seat belts and airbags cross the world’s busiest border multiple times as they are transformed into finished goods, scrambling notions of what is Made in USA, Hecho en Mexico or Made in Canada. Mexico exports 80 per cent of its goods to the US, but those exports contain 40 per cent US content.
Mexican nylon for seat belts is exported to Canada to be woven and dyed and returned to Mexico for cutting, stitching and installing into vehicles that are then exported. Airbags are stitched in Mexico but tested in the US. Mr Trump has put pressure on US manufacturers since his election, via tweets and tax threats, not to shift production south. Ford scrapped a $1.6bn plant in San Luis PotosĆ, Fiat Chrysler says it may move pick-up truck production north and General Motors and Hyundai have announced big US investments.
Time running out
Despite the 5m US jobs that depend on commerce with Mexico in industries ranging from car parts to dairy products, the bilateral relationship goes well beyond trade. That is why Mr PeƱa Nieto is threatening to put everything on the table, especially if Mr Trump decides to pull the US out of Nafta or seek a renegotiation that Mexico deems unacceptable.
Mexico watches America’s back on security, including via intelligence sharing. It is also a bulwark against Central American migrants. More than 43,000 families and 18,000 unaccompanied children from El Salvador, Guatemala and Honduras, were detained on the US-Mexican border in the last quarter of 2016 alone. Central Americans make up the second-biggest population of undocumented migrants in the US after Mexicans, according to Pew Research Center.
A complicated supply chain
To create a seatbelt for a modern car: The nylon fibres are manufactured in Mexico [1], but they are woven and dyed in Canada because the process requires a lot of water [2]. The cloth is cut and sewn in Mexico where labour is cheaper [3]. It is then fitted with other components such as buckles (also made in Mexico) and installed in either Mexico or the US [4]
It is, however, the $60bn US trade deficit with Mexico that Mr Trump appears to see as an unbearable injustice and the reason for his vow to either negotiate a Nafta that is better for American workers, or walk away. “They’ve [Mexico] made us look foolish,” Mr Trump said last week.
“The US deficit is $700bn. Mexico is 8 per cent of that,” says Sergio GĆ³mez Lora, a former member of Mexico’s Nafta negotiating team. “This deficit allows the US to be more competitive.”
No one has more riding on the outcome than Mr PeƱa Nieto. His approval ratings have been in freefall for two years amid corruption scandals, a slowing economy and mounting violence. The peso has sunk 13.5 per cent against the dollar since the US election. A 20 per cent increase in petrol prices on New Year’s Day that helped propel inflation to an 18-year high this month saw his ratings slide to just 12 per cent amid a wave of protests.
“I think Trump can win political points and not do economic damage by blustering and tweeting. But for Mexico, the economic pressures and the political realities are much more acute,” says Antonio Ortiz Mena, a former Mexican diplomat and part of the Nafta negotiating team. “[Mr PeƱa Nieto] basically has a year.”
Mr PeƱa Nieto is as non-confrontational as the US president is provocative, and his decision to scrap the White House trip in the face of the attacks from his US counterpart has galvanised support around him. But he cannot simply wrap himself in the flag and say Mexico will walk away rather than accept a bad deal — he needs a credible threat. That could take the form of halting anti-narcotic, security and immigration co-operation or even revoking the visas of federal US employees in Mexico.
“It’s not as if Mexico goes away if we wall it off,” says Beto O’Rourke, a Democratic congressman from the Texan border town of El Paso, where one in four jobs relies on trade with Mexico. “At best, we push it into the arms of some other trading partners. At worst, we trigger a destabilising crisis. We really will have a problem if Mexico’s economy collapses.”
That would risk reviving the flow of Mexican migrants that dwindled to less than 900,000 in 2009-14 from nearly 3m in 1995-2000 and fuel crime and insecurity on the US’s doorstep. But playing nasty could prompt Mr Trump to target the annual $26bn flow of remittances to Mexico.
Presidential gambit
Mr Trump has yet to put Nafta on the negotiating table formally, though he has vowed to renegotiate America’s trade deals and made clear they are one of his first targets. Among his incoming administration’s complaints have been the rules that govern how much of a product has to be made within Nafta borders to qualify as duty-free.
The so-called rules of origin were a bone of contention for Mexico and parts of the US auto industry in negotiations for the 12-nation Trans-Pacific Partnership, from which Mr Trump has already withdrawn the US. But since Mexico was browbeaten by the US and Japan into accepting a weaker threshold, the issue is familiar to negotiators on both sides.
Some in Mexico and the US also see a shortcut to renegotiating Nafta in other aspects of the TPP, such as its chapters on ecommerce, labour and the environment. Rather than crippling Nafta, that actually could make it better, Mexico’s government argues.
One possible spanner in the works is the Republican plan for tax reform, from which the idea for a levy of 20 per cent on imports is drawn. During the campaign, Mr Trump threatened to impose a 35 per cent tariff on companies that put factories in Mexico. But Republicans in Congress have been urging him to adopt their plan for broad tax reform, which targets imports and offers tax incentives to exporters.
Mr Trump is not the first US president to call for a renegotiation of Nafta — Barack Obama and Bill Clinton both did. Nor does Nafta guarantee harmony. Yet few in Mexico and Canada want to walk away. Nor do many in the US business community, where executives are hoping the dealmaker president will turn out to be a pragmatic businessman.
And Mexico may hold a trump card. “Mexico shouldn’t worry too much,” says Larry Rubin, head of the American Society of Mexico. “As Trump admits, Mexican negotiators are very good.”
