<?xml version="1.0" encoding="UTF-8"?><rss version="2.0" xmlns:content="http://purl.org/rss/1.0/modules/content/" xmlns:wfw="http://wellformedweb.org/CommentAPI/" xmlns:dc="http://purl.org/dc/elements/1.1/" xmlns:atom="http://www.w3.org/2005/Atom" xmlns:sy="http://purl.org/rss/1.0/modules/syndication/" xmlns:slash="http://purl.org/rss/1.0/modules/slash/" > <channel> <title>Latin America – The Musings Of A Politics Junkie & Closet Economist</title> <atom:link href="https://kurtdavisjr.com/tag/latin-america/feed/" rel="self" type="application/rss+xml" /> <link>https://kurtdavisjr.com</link> <description></description> <lastBuildDate>Wed, 20 Nov 2024 13:29:25 +0000</lastBuildDate> <language>en-US</language> <sy:updatePeriod> hourly </sy:updatePeriod> <sy:updateFrequency> 1 </sy:updateFrequency> <generator>https://wordpress.org/?v=6.7.2</generator> <item> <title>Americas First?’ A Second Trump Term Could Be A Renaissance For Latin America</title> <link>https://kurtdavisjr.com/the-hill-americas-first-a-second-trump-term-could-be-a-renaissance-for-latin-america/?utm_source=rss&utm_medium=rss&utm_campaign=the-hill-americas-first-a-second-trump-term-could-be-a-renaissance-for-latin-america</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Wed, 30 Oct 2024 19:33:00 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[United States]]></category> <category><![CDATA[America First]]></category> <category><![CDATA[Central America]]></category> <category><![CDATA[China]]></category> <category><![CDATA[Donald Trump]]></category> <category><![CDATA[Immigration]]></category> <category><![CDATA[Monroe Doctrine]]></category> <category><![CDATA[Trade]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=858</guid> <description><![CDATA[The prospect of Donald Trump returning to the White House in 2025 has sparked intense discussion about the future of U.S.-Latin American relations. While critics focus on potential tensions, a closer examination reveals how Trump’s “America First” approach could catalyze a long-overdue transformation in hemispheric relations, ultimately benefiting both the U.S. and its southern neighbors...]]></description> <content:encoded><![CDATA[<div class="wp-block-image"> <figure class="aligncenter size-full"><img fetchpriority="high" decoding="async" width="960" height="540" src="http://kurtdavisjr.com/wp-content/uploads/2024/10/Trump.webp" alt="" class="wp-image-859" srcset="https://kurtdavisjr.com/wp-content/uploads/2024/10/Trump.webp 960w, https://kurtdavisjr.com/wp-content/uploads/2024/10/Trump-300x169.webp 300w, https://kurtdavisjr.com/wp-content/uploads/2024/10/Trump-768x432.webp 768w, https://kurtdavisjr.com/wp-content/uploads/2024/10/Trump-750x422.webp 750w" sizes="(max-width: 960px) 100vw, 960px" /><figcaption class="wp-element-caption">Republican presidential nominee former President Donald Trump speaks during a roundtable at the Drexelbrook Catering & Event Center, Tuesday, Oct. 29, 2024, in Drexel Hill, Pa. (Photo Credit: AP Photo / Julia Demaree Nikhinson)</figcaption></figure></div> <p><strong><em>This was originally published by <a href="https://thehill.com/opinion/4960690-trump-latin-america-relations/" data-type="link" data-id="https://thehill.com/opinion/international/4306629-saudi-arabia-wants-the-indian-premier-league-why-is-there-no-discussion-of-sportswashing/">The Hill.</a></em></strong></p> <p>The prospect of Donald Trump returning to the White House in 2025 has sparked intense discussion about the <a href="https://globalamericans.org/how-will-the-u-s-election-impact-latin-america-and-the-caribbean/" target="_blank" rel="noreferrer noopener">future of U.S.-Latin American relations</a>. While critics focus on potential tensions, a closer examination reveals how Trump’s “America First” approach could catalyze a long-overdue transformation in hemispheric relations, ultimately benefiting both the U.S. and its southern neighbors.</p> <p>At the heart of Trump’s Latin America strategy lies a refreshingly clear-eyed view of regional dynamics. Rather than perpetuate decades of well-intentioned but ultimately ineffective policies, Trump’s transactional approach could forge more authentic and sustainable partnerships based on mutual economic interests rather than abstract diplomatic ideals.</p> <p>Take immigration, for instance. Trump’s emphasis on border security, while controversial, could finally force a serious regional dialogue about sustainable migration policies. By pressuring Central American nations to strengthen their domestic institutions and economies, his policies could address the root causes of migration more effectively than traditional aid programs that have shown limited results.</p> <p>On trade, Trump’s bilateral deal-making strategy might actually advantage Latin American nations. Even though his critics decry the departure from multilateralism, the reality is that personalized trade agreements could better address each country’s unique economic circumstances. Trump’s business background and focus on bottom-line results could lead to more practical, targeted trade arrangements that deliver concrete benefits to both sides.</p> <p>Perhaps most significantly, Trump’s pushback against <a href="https://www.economist.com/the-americas/2024/07/04/chinas-presence-in-latin-america-has-expanded-dramatically" target="_blank" rel="noreferrer noopener">China’s growing influence in the region</a> might provide Latin American nations with unexpected leverage. Rather than simply forcing countries to choose sides, Trump’s competitive approach could spark a bidding war for Latin American partnerships, potentially resulting in better terms for regional economies. His administration would likely offer attractive alternatives to Chinese investment, creating genuine competition that benefits Latin American nations.</p> <p>Trump’s “America First” policy, contrary to conventional wisdom, could accelerate Latin America’s march toward greater autonomy. By challenging traditional diplomatic assumptions, he could push regional leaders to develop more balanced international relationships and stronger domestic institutions. This tough-love approach might be exactly what the region needs to break free from historical patterns of dependency.</p> <p>The much-discussed <a href="https://www.aljazeera.com/news/2019/6/19/trump-revives-monroe-doctrine-as-warning-to-china-and-russia" target="_blank" rel="noreferrer noopener">revival of the Monroe Doctrine under Trump</a> need not be seen as a return to paternalism. Instead, it could evolve into a more equitable partnership based on shared economic interests and regional security concerns. Trump’s focus on tangible results over diplomatic niceties could lead to more honest, productive relationships throughout the hemisphere.</p> <p>Critics who dismiss Trump’s approach as simplistic miss its potential to reshape regional dynamics in positive ways. His emphasis on clear expectations and measurable outcomes could replace decades of diplomatic ambiguity with more transparent, results-oriented partnerships. This clarity, though sometimes uncomfortable, might be precisely what U.S.-Latin American relations need to move forward productively.</p> <p>Latin American leaders who approach Trump pragmatically might find unexpected opportunities to advance their national interests. Rather than resisting change, they could leverage Trump’s deal-making instincts to negotiate better terms for their countries while maintaining their strategic autonomy.</p> <p>A second Trump presidency could indeed mark a turning point in U.S.-Latin American relations. While it would certainly bring significant changes, these changes might ultimately strengthen rather than weaken regional ties. By forcing both sides to reassess long-held assumptions and negotiate more practical arrangements, Trump’s approach could pave the way for a more mature, mutually beneficial relationship between the United States and its Latin American partners.</p> <p>In the end, Trump’s unorthodox style might accomplish what decades of traditional diplomacy could not — a genuine recalibration of hemispheric relations that better serves the interests of all parties involved. Sometimes, the most promising paths forward are the ones that initially appear most disruptive.</p> <hr class="wp-block-separator has-css-opacity"/> <p></p> ]]></content:encoded> </item> <item> <title>The Return of Lula, Brazil’s Economic Volatility, and Opportunistic Investment</title> <link>https://kurtdavisjr.com/the-return-of-lula-brazils-economic-volatility-and-opportunistic-investment-elections-2022-bolsonaro/?utm_source=rss&utm_medium=rss&utm_campaign=the-return-of-lula-brazils-economic-volatility-and-opportunistic-investment-elections-2022-bolsonaro</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 14 Jun 2021 18:24:38 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[2022 Elections]]></category> <category><![CDATA[Brazil]]></category> <category><![CDATA[Brazil Elections]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Distressed Investing]]></category> <category><![CDATA[Jair Bolsonaro]]></category> <category><![CDATA[Luiz Inacio Lula da Silva]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=457</guid> <description><![CDATA[Brazil is full of opportunities…if you ignore the populist rhetoric that will accompany the October 2022 elections. ]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img decoding="async" width="600" height="375" src="https://kurtdavisjr.com/wp-content/uploads/2021/06/lula-back-in-the-game.png" alt="" class="wp-image-458" srcset="https://kurtdavisjr.com/wp-content/uploads/2021/06/lula-back-in-the-game.png 600w, https://kurtdavisjr.com/wp-content/uploads/2021/06/lula-back-in-the-game-300x188.png 300w" sizes="(max-width: 600px) 100vw, 600px" /><figcaption>(Photo Credit: Paresh Nath, Cagle Cartoons)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading"><strong><em><em><em><em><em><em><em>Brazil is full of opportunities…if you ignore the populist rhetoric that will accompany the October 2022 elections</em></em></em></em></em></em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>Mark the calendar for 2 October 2022. Brazilians are already focusing on the date because general elections to elect the President, Vice President, and National Congress will take place then.</p> <p>The date could either mark the return of former Brazilian President Luiz Inacio Lula da Silva or a validation of Brazil’s shift away from his leftist politics under current President Jair Bolsonaro.</p> <p>The return of Lula to the political scene is both surprising and expected after a Supreme Court judge annulled Lula’s past convictions and restored his right to run for office – a surprise because it was these convictions that prevented Lula’s return in the last election and expected because Lula has been running for president (as a candidate or with a proxy) since 1989 with his own victories in 2002 and 2006.</p> <p class="has-medium-font-size"><strong>Why Does This Matter to Investors?</strong></p> <p>Brazil is in economic (and social) turmoil today. The Brazilian economy contracted more than 4% in 2020. And nearly half-million Brazilians have lost their lives to covid-19.</p> <p>Lula’s political resurrection all but ensures both a polarizing presidential campaign cycle and an elevation of the populist rhetoric and policy agenda. Local economists and businesses are already preparing for Bolsonaro to abandon his conservative campaign pledges slowly and strategically, in particular his economic promises, in order to win more votes.</p> <p>When the news of Lula’s political return was revealed back in March, the Brazilian real plummeted to within 10 cents of its all-time low against the dollar, signifying the market’s concern over a potential shift in policy. The currency sadly remains one of the world’s worst-performing currency, only trailing the Libyan dinar and the Sudanese pound.</p> <p>Further fueling the anticipation for a populist political battle, a survey by pollster Datafolha published last month showed Lula handily defeating Bolsonaro with 55% in a run-off vote if the 2022 elections were held today.</p> <p class="has-normal-font-size"><em>Volatility Creates Opportunity…</em></p> <p>The takeaway of the story is Brazilians can prepare for more volatility in the near term (likely right until election day). Do not be surprised if the unwinding of fiscal support from last year is slowed or replaced with similar support but dressed in different clothes. Though inflation is likely to be the counterbalance to any ambitious populist agenda, the precarious (and potentially flippant) nature of policymaking in the short term will remain.</p> <p>Following the election of any candidate, Brazil will have to outline a robust path towards fiscal sanity, including clear guidelines for fiscal spending (including a debt ceiling) and the conditions for the gradual expiry of temporary fiscal measures. An improved covid-19 outlook in the country (<em>it has to happen despite all the leadership blunders</em>) and strong commodity markets should translate into the restoration of fiscal credibility for the country. Despite the contentious politics, the government has passed a covid-19 emergency package twice and the pro-reform Minister of Economy Paulo Guedes continues to push rather rational orthodox macroeconomic policies (despite having his suite of objectors and naysayers).</p> <p>The underlying factors of the Brazilian economy remain strong. The central bank forecasts 3.6% GDP growth for 2021 while Minister Guedes suggests 4% is possible. A lack of lockdowns is underwriting those numbers. And, although many have died during the pandemic due to the lack of lockdowns, it is not clear more than a year later that those lockdowns could have necessarily stopped the deaths (India’s situation demonstrates the challenges of timing the right lockdown measures).</p> <p>The volatility in the system is creating investment opportunities with asset prices still low. For example, real estate prices remain distressed with commercial real estate prices in Sao Paulo rising less than 1% (according to analysts) compared to inflation north of 5% as the timing for the return of in-office work and international business remains uncertain. Rents are low today, which is bad for yield, but these opportunities are pure valuation plays which involve taking a view on Brazil’s natural ability to survive and revive. The currency devaluation also underwrites the upside for real estate (and many other sectors) with a square meter costing more than 50% less at $1300 to $1400 today compared to $3000 or so in 2014.</p> <p>Investors should be prepared to ride the upsurge of news and polarizing rhetoric. But after the 2022 election and the acknowledgement of a winner, Brazil’s economy and policy will normalize. There are concerns with Brazil’s large public-debt up from around 70% in 2019 to 90%+ today. But externally, the country’s balance sheet remains strong, with large reserves and low public external debt.</p> <p>Accordingly, the sovereign and sovereign-like institutions (i.e., infrastructure-related sectors) are basically seeking funding to bridge to a post-2022 election and a post-covid world and are willing to pay a healthy price for that funding (see Oi S.A. in Brazil). Also helping investors is the reality that downside risks and sovereign risks are generally already priced into the system. </p> <p>A Lula win or Bolsonaro re-election will not change the ultimate reality: the next Brazilian president will have to steer this economic ship to safe grounds. That reality creates opportunity for the right capital ready to take the risk today and ride that wave to stable ground.</p> <p>.</p> <hr class="wp-block-separator"/> <p></p> ]]></content:encoded> </item> <item> <title>Coronavirus is Opportunity (for Investors) in Latin America</title> <link>https://kurtdavisjr.com/coronavirus-is-opportunity-for-investors-in-latin-america-brazil-mexico-argentina/?utm_source=rss&utm_medium=rss&utm_campaign=coronavirus-is-opportunity-for-investors-in-latin-america-brazil-mexico-argentina</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Tue, 16 Mar 2021 13:00:44 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Brazil]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Distressed Investing]]></category> <category><![CDATA[Mexico]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=438</guid> <description><![CDATA[Latin America remains significantly impacted by the pandemic with three of its largest economies—Brazil, Mexico, and Argentina—among the world’s biggest covid-19 hotspots. And, as these country’s leaders struggle to stave off economic and health catastrophe one after another, (distressed) investors will find additional opportunity to allocate capital...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img decoding="async" width="620" height="372" src="https://kurtdavisjr.com/wp-content/uploads/2021/03/Covid-19-Latin-America.jpg" alt="" class="wp-image-440" srcset="https://kurtdavisjr.com/wp-content/uploads/2021/03/Covid-19-Latin-America.jpg 620w, https://kurtdavisjr.com/wp-content/uploads/2021/03/Covid-19-Latin-America-300x180.jpg 300w" sizes="(max-width: 620px) 100vw, 620px" /><figcaption>(Photo Credit: Shutterstock.com)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading"><strong><em><em><em><em><em><em>A Volatile Mix of Opportunity and Risk</em></em>..</em></em></em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>First, the world was crashing. Then it was the world recovering with stimulus cash galore.</p> <p>The unimagined market dislocation during the initial months of covid-19 in 2020 was a boon to the distressed asset class. Companies and governments both borrowed at unprecedented levels to combat demand slumps and fight off complete collapse. Everyone was writing the comparison stories to 2008/2009.</p> <p>Then boom…credit spreads decreased, and equity markets rocketed back. By the end of 2020, it was clear that many distressed shops thought they had missed the boat with some shops also closing doors…if you missed that opportunity, then you did not deserve to be in the business.</p> <p>The storyline can sound factitious at some level. The decline was not as long-lasting as many economists predicted. And the rebound was too quick to match the horror stories permeating global news. To be fair, many individuals remain unemployed and countries have not seen job numbers return to pre-covid levels.</p> <p>Regardless, distressed investing should not be solely predicated on allocating capital to ride the synchronized dislocation and recovery in the global market. Furthermore, some markets continue to face dislocation and the covid-19 headwinds.</p> <p>Latin America, in particular, remains significantly impacted by the pandemic with three of its largest economies—Brazil, Mexico, and Argentina—among the world’s biggest covid-19 hotspots. And, as these country’s leaders struggle to stave off economic and health catastrophe one after another, (distressed) investors will find additional opportunity to allocate capital.</p> <p class="has-medium-font-size"><strong>Brazil, Mexico…and Argentina?</strong></p> <p class="has-normal-font-size"><em>Brazil</em></p> <p>Brazil has long been on the radar of investors. Sovereign investors, principally those close to the government, liked the Lula da Silva and Dilma Rousseff years while some private investors were excited for the administration of President Jair Bolsonaro. Now, with Lula largely cleared to run in the 2022 general election, 2021 will be a critical year with fixing the “covid-19 situation” in the country as priority #1.</p> <p>All the major sectors—retail, aviation, and hospitality—look in the doldrums today but will improve over time. The country’s good economic fundamentals will underwrite a strong recovery when covid-19 is under control. An impending political contest like no other in 2022 should ensure some progress on shortening that timeline to controlling the virus. Then investors should remember that Brazil is one of the world’s largest economies with a big population and its sizable consumption appetite. The bigger question is valuation in Brazil where asset prices are not exactly low or in the vicinity where some investors would expect them based on today’s demand.</p> <p class="has-normal-font-size"><em>Mexico</em></p> <p>Mexico reached record levels for capital outflow in 2020 mainly due to the pandemic. Most emerging markets faced a similar outflow, but Mexico also saw its situation exacerbated by its antagonistic relationship with the U.S. government and former President Donald Trump. This reality is underpinned by the recovery in capital flows after the U.S. presidential election, in which President Joe Biden won, with 145.2 billion pesos ($7.28 billion) entering the sovereign bond market in November and December, according to the Bank of Mexico.</p> <p>The Mexican economy will provide attractive opportunities with the Mexican manufacturing sector starved for both cash and consolidation. Most sector data show that suppliers and smaller-scale producers suffered during the pandemic across industries. Capital intensive industries, such as oil & gas, will remain vulnerable to commodity price movements despite all the current excitement with rising commodity prices. State-owned Pemex is a perfect example of a company that may be helped by higher oil prices but still cannot escape its bloated balance sheet. These opportunities may become plentiful in Mexico in 2021as covid-19 continues to batter the country.</p> <p class="has-normal-font-size"><em>And Argentina?</em></p> <p>The Argentine bonds, which were restructured last year, continue to fall with some bonds pricing less than 30 cents on the dollar. Bond traders and investors both express concerns that President Alberto Fernández may balk at key economic reforms originally supported as part of the sovereign debt restructuring process, especially with mid-term elections in October.</p> <p>The Fernández administration is very keen to avoid spending cuts, most notably to social programs, before that election. Thus, investors buying Argentine sovereign debt today will have to take a view on the current leadership’s ability to curb spending post-October elections and / or whether the country will head for yet another restructuring in the near-term. Corporate bond investors will make a similar assessment albeit with an additional evaluation of the relative beta of corporate’s ability to pay to the country’s ability to perform. Plus, there is this entire IMF discussion with Argentina that seems on-track then off-track depending on the week.</p> <p class="has-medium-font-size"><strong>Hidden Risks and Fool’s Gold</strong></p> <p>The learning curve is short for many investors… foreign investors have long dabbled in these countries. Also, the calamity in the markets continue to help capital allocators investing in foreign currencies—most obvious being the U.S. dollar—though this can be negated by companies collecting revenues in dollars in these countries or the growing inflation concerns with the U.S. dollar.</p> <p>That said, there are already a lot of eyes on Latin America. Capital inflows ticked up at the end of 2020 and asset and debt prices have accordingly priced up in recent months. Be careful not to follow a herd mentality into the region as the risks are plenty from economic to health to political. </p> <p>A third wave of covid-19 is always possible with limited vaccine in the short term, which could suggest there may be another dip before the uptick. Still, the lack of clarity on the pandemic’s trajectory in the region due to the strategic unknown in combating the virus should not equate to sitting on your hands. The key is to avoid the fool’s gold by constantly re-evaluating your risk assessment because taking advantage of the dislocation in Latin America by riding the synchronized downturn then uptick in recovery is not a strategy (despite its success in 2020 in other regions) as the markets are likely to be somewhat volatile with abrupt disruptions (…like the politics in the region).</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Joe Biden and South America: What to Expect in Key Countries?</title> <link>https://kurtdavisjr.com/joe-biden-and-south-america-what-to-expect-in-certain-key-countries/?utm_source=rss&utm_medium=rss&utm_campaign=joe-biden-and-south-america-what-to-expect-in-certain-key-countries</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 23 Nov 2020 07:31:01 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[United States]]></category> <category><![CDATA[Alberto Fernández]]></category> <category><![CDATA[America First]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Brazil]]></category> <category><![CDATA[Colombia]]></category> <category><![CDATA[Donald Trump]]></category> <category><![CDATA[Economic cooperation]]></category> <category><![CDATA[Iván Duque Márquez]]></category> <category><![CDATA[Jair Bolsonaro]]></category> <category><![CDATA[Joe Biden]]></category> <category><![CDATA[Nicolás Maduro]]></category> <category><![CDATA[South America]]></category> <category><![CDATA[U.S.]]></category> <category><![CDATA[Venezuela]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=354</guid> <description><![CDATA[A Biden administration should be expected to be a partner to Latin America due to Biden’s prior enthusiasm and interest in the region. That said, increased diplomatic communication and engagement does not necessarily suggest a major shift in policy...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image is-style-default"><figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" src="https://kurtdavisjr.com/wp-content/uploads/2020/11/South-America-map.jpg" alt="" class="wp-image-355" width="512" height="747" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/11/South-America-map.jpg 592w, https://kurtdavisjr.com/wp-content/uploads/2020/11/South-America-map-205x300.jpg 205w" sizes="auto, (max-width: 512px) 100vw, 512px" /></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="trade-commerce-and-economic-growth-why-discuss-other-things-at-least-for-now"><strong><em><em><em><em><em>Trade, commerce, and economic growth…why discuss other things, at least, for now?</em></em></em></em></em></strong></h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>We are less than 60 days away from inauguration day for president-elect Joe Biden. Some South American politicians and activists, including Argentinian President Alberto Fernández and Uruguayan President Luis Lacalle Pou, seemingly cannot wait for that day. Others, such as Brazilian President Jair Bolsonaro, may be more hesitant. Both sides should be excited and cautious. </p> <p>A Biden administration should be expected to be a partner to South America due to Biden’s prior enthusiasm and interest in the region. Still, increased diplomatic communication and engagement does not necessarily suggest a major shift in policy. For example, President Donald Trump’s Growth in the Americas initiative, which promotes collaboration with private industry to fund infrastructure projects across Latin America and the Caribbean should continue. This conspicuous response to China’s expansion into the region will likely have support within a Biden administration and Congress, especially with countries such as Brazil, Argentina, Chile, and Ecuador in South America already signed onto the initiative. </p> <p>Similar economic initiatives in the region could be low-hanging fruit for continuity. Yet, the Biden administration will also have to confront the language of (or change the tone on) tariffs and economic threats when engaging South America as well as steer a pathway to engaging on democracy and the drug trade in the region. Democracy as a policy does not always go well…despots and autocrats can win elections too. And the drug trade is, as we all know, an incessantly ongoing touchy subject that has cost many real (and political) lives in its path. Thus, when looking at the key countries in the region (i.e., Brazil, Argentina Colombia, and Venezuela) for a Biden administration, plotting a strategy that is focused on economic growth and trade and layered with <em>capitalistic</em> market-friendly policies may be the winning mix for change in the region (and at home).</p> <p>A deeper exploration of U.S. engagement with these key countries largely suggests that there may be a change in tone but not exactly a change in policy thinking.</p> <p style="font-size:26px"><strong>Brazil</strong></p> <p class="has-medium-font-size"><em>The “Trump of Tropics” meets the anti-Trump president…</em></p> <p>It is not hard to imagine how the relationship between Joe Biden and Brazilian President Jair Bolsonaro could get off to a rocky start. Joe Biden has publicly criticized the environmental policies of Bolsonaro with poignant attacks on the response to the Amazon fires by the Bolsonaro administration. Biden went as far as telling the <em>Americas Quarterly</em> earlier this year that “If Brazil fails to be a responsible custodian of the Amazon rainforest, then my administration will rally the world to ensure the environment is protected.” It is expected that Biden will bring the U.S. back to the Paris climate deal thus it is easy to think he will not back down on protecting the Amazon. Also, during the campaign, he proposed a $20 billion global initiative to protect the Amazon to which Bolsonaro classically responded that he “does not accept bribes.” Trump, at the time, tweeted his support for Bolsonaro…it is best to assume the Amazon and climate change may not be the best topics for dinner conservation for Biden and Bolsonaro.</p> <p>A Biden administration may find more alignment with Bolsonaro by pursuing a stronger economic partnership. At some level, Trump elevated Brazil above Argentina when he voiced support for Brazil to join the Organisation for Economic Co-operation and Development (OECD) before Argentina. The Trump administration followed up the support with a limited trade agreement to facilitate commerce between the countries, strengthen regulatory practices and cooperation, and fight corruption. A Biden administration could fare well to follow the path that Trump’s administration was, in practice, outlining for engagement with Brazil. </p> <p>Brazil’s desire to join the OECD, which currently only has four Latin American members (i.e., Chile, Colombia, Costa Rica, ad Mexico) amongst its 38 member states, will force the country to adopt some economic reforms it would not pursue in ordinary due course. In other words, the desire to join the OECD can be similar to the desire of some European countries to join the European Union (EU)…some countries will truly change the laws and rules of its country to align with the greater body for admission. Though, the EU also shows how some countries adopt rules for admission then backtrack once admitted (but let us ignore that for now). Maybe walking down the OECD aisle with Brazil could be very beneficial for the United States. Brazil is the ninth largest economy in the world and the largest trading partner in South America for the U.S. Simply put, a Brazil with more market-friendly policies and regulation, increased governance, and more economic alignment with the U.S. surely cannot be a bad thing.</p> <p style="font-size:26px"><strong>Argentina</strong></p> <p class="has-medium-font-size"><em>The marriage of a leftist and a liberal…probably not</em></p> <p>Argentinian President Alberto Fernández took some relief in watching Biden win this presidential election. After Fernández won his election in October 2019, Trump was quick to warn Fernández that his administration should not be friendly with other leftist leaders in the region, including Venezuelan President Nicolás Maduro and former Bolivian President Evo Morales. Furthermore, Trump appointee Mauricio Claver-Carone, then-senior director for Western Hemisphere affairs at the National Security Council and now President of the Inter-American Development Bank (IDB), did not attend Fernández’s inauguration ceremony reportedly after learning that a Maduro official would be attending the inauguration. Biden has long critiqued the nomination of Claver-Carone to the IDB as being “ideological” more than anything else, especially as Claver-Carone is the first U.S. head of the bank. Normal tradition is to nominate a Latin American to the post. </p> <p>Be that as it may, Biden’s critique of the IDB nomination has little to do with Argentina…that reality underscores the probable storyline for a Biden administration with Argentina. There will be some dialogue between the countries to facilitate increased commerce and trade. That dialogue may include discussing the International Monetary Fund’s (IMF) $44 billion credit line to Argentina. Beyond that, Argentina will potentially be an afterthought with the Biden administration offering kind words and support but hesitant to get its hands dirty in the country’s politics and economics. Maybe there is a little discussion on clean energy and oil drilling but that will be a side show to the larger internal discussion in Argentina on Argentina fixing Argentina’s economy…i.e., the next couple years will not be about the U.S. or Biden when it comes to Argentinian politics.</p> <p style="font-size:26px"><strong>Colombia</strong></p> <p class="has-medium-font-size"><em>President Iván Duque Márquez is not President Juan Manuel Santos…time to make a new friend</em></p> <p>Colombia has long been a part of the Biden foreign policy or, better yet, the “keystone” of U.S. policy in Latin America, as Biden notably described it early this year in an op-ed. Cynics will say the words were patent pandering for Hispanic votes in a tight presidential election. But that critique would be unfair to Biden, who spent significant time as senator (and then-ranking member on the Senate Foreign Relations Committee) securing funding for Plan Colombia, an initiative which provided money to combat the drug trade in country.</p> <p>Biden also supported Colombia’s efforts to negotiate a peace deal under then-President Juan Manuel Santos with members of the Fuerzas Armadas Revolucionarias de Colombia (FARC). Now, the administration of President Iván Duque Márquez, if not actively undercutting the peace deal as suggested by some critics, is not precisely helping that peace deal to be successful. Duque has many Colombian politicians who oppose the peace deal and the concessions to the FARC…some of those politicians were happy to openly show support for Trump’s re-election campaign. Also, lockdowns, shutdowns and economic suffering are also a major hinderance to a successful peace process. All this makes for a lot of work on day 1 for a Biden administration.</p> <p>If Biden wants to be active in re-engaging Colombia on the peace deal and beyond, he may want to start with facilitating stronger commerce, trade, and economic growth and working with the country to fight covid-19. Helping everyday Colombian pockets is a better first step to peace than anything else in the country. If anything, Biden may want to sidestep discussions on coca cultivation and drugs in Colombia in the initial days…it will have to be a topic of discussion at some point. A Biden administration will not want to appear soft on the drug trade nor as aggressive as Trump, who favored resuming aerial eradication of coca crops. That is not an easy policy balance to maintain (nor broach in the early days) versus simply talking covid-19 and economic recovery…the latter of which proved successful, at least, in the U.S. election.</p> <p style="font-size:26px"><strong>Venezuela</strong></p> <p class="has-medium-font-size"><em>Time to negotiate for a transitional government?</em></p> <p>Venezuela is always part of the Latin American discussion. But observers may notice that there is not much to say here. Biden is not a socialist (as if that really needs to be stated) and will remain a formidable opposition to Venezuelan socialist President Nicolás Maduro. Still, it is not clear how a Biden administration will approach Venezuelan opposition politician Juan Guaido, who declared himself the country’s interim president in January 2019 with some international recognition but failed to push Maduro from power. Trump ardently backed Guaido and refused to concede anything to Maduro. A Biden administration, on the other hand, may try to negotiate a deal with Maduro if the opportunity presents itself. It is hard to say a potential deal is outright wrong, but many Venezuelans and outsiders will be skeptical of any deal for a transition of power in the country. Venezuelans also are not looking for symbolic political change. Regardless of political leanings, the paradoxical reality of an oil rich country with staggering inflation and poverty requires economic solutions to the everyday Venezuelan life. It is not clear that a transition government or split government can deliver that change…but then again, it is also clear that the current stalemate is essentially a Maduro presidency which is obviously not helping the situation. A true step to getting Maduro out of power would be the equivalent of winning the presidential lottery for approval ratings for the Biden administration. Misplaying your leverage and strengthening Maduro’s position, however, could be an outright catastrophe for a Biden administration. </p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Bolivia’s Left Will Win But Hopefully With a Different Economic Strategy</title> <link>https://kurtdavisjr.com/bolivias-left-will-win-but-hopefully-with-a-different-economic-strategy/?utm_source=rss&utm_medium=rss&utm_campaign=bolivias-left-will-win-but-hopefully-with-a-different-economic-strategy</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Thu, 24 Sep 2020 10:28:50 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[Bolivia]]></category> <category><![CDATA[Bonds]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Evo Morales]]></category> <category><![CDATA[Jeanine Añez]]></category> <category><![CDATA[Luis Arce]]></category> <category><![CDATA[Restructuring]]></category> <guid isPermaLink="false">https://kurtdavisjr.com/?p=298</guid> <description><![CDATA[Bolivia’s left will win but hopefully with a different economic strategy. It is not clear who will fund the socialist agenda in the short-term...]]></description> <content:encoded><![CDATA[ <figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="614" src="https://kurtdavisjr.com/wp-content/uploads/2020/09/Bolivia-President-withdraws-1024x614.jpg" alt="" class="wp-image-299" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/09/Bolivia-President-withdraws-1024x614.jpg 1024w, https://kurtdavisjr.com/wp-content/uploads/2020/09/Bolivia-President-withdraws-300x180.jpg 300w, https://kurtdavisjr.com/wp-content/uploads/2020/09/Bolivia-President-withdraws-768x461.jpg 768w, https://kurtdavisjr.com/wp-content/uploads/2020/09/Bolivia-President-withdraws-1130x678.jpg 1130w, https://kurtdavisjr.com/wp-content/uploads/2020/09/Bolivia-President-withdraws-750x450.jpg 750w, https://kurtdavisjr.com/wp-content/uploads/2020/09/Bolivia-President-withdraws.jpg 1240w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>Jeanine Añez announcing her withdrawal from the October general election. She said: ‘If we don’t unite, Morales will return. If we don’t unite, democracy loses.’ <br>(Photo Credit: Presidencia / AFP / Getty Images) </figcaption></figure> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="it-is-not-clear-who-will-fund-the-socialist-agenda-in-the-short-term"><em><strong><em>It is not clear who will fund the socialist agenda in the short-term</em></strong></em>…</h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <div style="height:28px" aria-hidden="true" class="wp-block-spacer"></div> <p>As the covid-19 pandemic continues to unfold, its implications for democracy across the globe are of growing concern. The lack of clarity in election processes creates public mistrust. And the conspicuous ambitions of some leaders amid troubling times suggests the pandemic, at least for now, will not force good governance and cooperation. If anything, the pandemic provides an opportunity to test the boundaries of a country’s political and economic system.</p> <p>The presidential campaign by Bolivia’s interim president, Jeanine Añez, was an opportunistic attempt by a leader to retrack on her promise to not run for president and take advantage of the uncertainty in the country caused by the covid-19 pandemic. Yet, unable to build momentum, she abandoned her election campaign last week with the hope of uniting the conservative base against the current front-runner, the leftist Luis Arce from Evo Morale’s Movimiento al Socialismo–Instrumento Político por la Soberanía de los Pueblos party (MAS). </p> <p>The large-scale Jubileo Foundation poll, administered by universities and media organizations, shows the former economy minister Arce leading with 40% of the vote going into this year’s general election. To avoid a second round of voting, the election winner requires at least 40% of the vote in the first round and a ten-point advantage over the closest competitor. In the Jubileo Foundation poll, former president Carlos Mesa polled second with 26% of the vote. </p> <p class="has-normal-font-size"><strong>Why are the polls relevant?</strong></p> <p>The recent polls are forcing President Añez to retreat to her original promises. When she assumed the interim presidency in November 2019, President Añez promised to hold presidential elections within ninety days. Provided no additional delays, the election is scheduled for 18<sup>th</sup> October which will be 11 months after Añez began her interim presidency. Her administration postponed the election twice, citing the risks of the covid-19 pandemic and an inability to safely hold in-person voting. Protests, street blockades by citizens, and the public’s vocal disdain for the power structure in the country, however, have forced an election to happen this year as well as stopped Añez’s potential candidacy to remain president.</p> <p>Añez assumed power after the controversial Bolivian presidential election in 2019, where Evo Morales ran against Carlos Mesa for an unprecedented fourth term. Critics claim Morales leveraged political connections to gain approval from the constitutional court. Following Morales’ narrow margin of victory and the subsequent rumors of election fraud, an election audit was conducted by the Organization of American States (OAS)—with the approval of Morales—which found irregularities and declared the election results to be fraudulent. Although Morales accepted the findings in the report and called for a new election, threats of violence and public pressure forced Morales and his government officials to resign. Añez, as the second vice president of the Senate, was fifth in the line of succession. But with everyone ahead of her resigning, she declared herself interim president, which Morales’s supporters continue to view as “coup.”</p> <p class="has-normal-font-size"><strong>How to think about Arce considering Morale’s record?</strong></p> <p>Morales reduced poverty from 60% in 2005 to 36% in 2017, relying on redistribution policies coupled with high economic growth. According to the World Bank, Bolivian GDP growth averaged 4.9% from 2006 through 2018, underwritten by an export boom particularly of natural gas and minerals. But, as prices have moderated, the success of redistributive policies have become limited, which is why the 30% poverty level in 2012 increased to 36% in 2017 and, amid the covid-19 pandemic, may be pushing 40% today.</p> <p>Fiscal prudence has also struggled in a slower growth environment, with the expenses of 29 of 32 state-owned companies exceeding revenues in 2018. Under Morales’s administration, the size of the state increased astronomically with the budget allocated to state entities up nearly 40% in 2019 alone. As revenues from natural gas fell, Morales tried to increase revenue from agribusiness, biodiesel, and bioethanol but to little success. Covid-19 has not been nice to commodity prices with demand lagging below 2019 levels for the obvious economic reasons. Thus, while a new government will have to find a way to revitalize gas exports and investigate the potential exploration of new minerals such as lithium, such efforts to diversify the economy will remain at the mercy of the new administration’s ability to find the right buyers and contract prices. </p> <p>Absent new money into the system, Arce will have to turn to managing expenses. Thus, it is little surprise that Arce previously said he would seek to renegotiate the nation’s $2 billion in international debt, while still avoiding a default on the country’s debt. Bolivia owes more than $7 billion to multilateral lenders as well as has outstanding bilateral debt facilities with countries such as China. Arce also believes he can engage the Corporacion Andina de Fomento (CAF), the Inter-American Development Bank, and the World Bank for additional funding. </p> <p>But Arce’s perspective on engaging creditors remains incomplete. A deal to cut debt payments would initially help the currency peg – a mechanism introduced by Arce as Morale’s finance minister. That said, the strategy cannot fix a long-term problem. The central bank is already burning cash at a rate of $8 billion over the last five years to prop up its currency and underwrite the country’s socialist programs. Asking for debt relief sadly only feels like a request to shift monies from repaying debt to propping up the currency and providing greater welfare payments to the public despite the greater system’s inability to afford it. The more feasible scenario is an adjustment to the exchange rate, especially considering the weakening currency of Argentina and Brazil and potentially taking some of the hard economic decisions seen in Brazil (by Brazilian President Jair Bolsonaro). But Arce (and any other Bolivian politician) knows that devaluing the currency and shrinking the welfare state is not a winning campaign strategy in Bolivia.</p> <p class="has-normal-font-size"><strong>What happens to Bolivia in the short term?</strong></p> <p>Bolivian debt is currently rated as junk by market analysts (and political analysts). Changing that storyline will be hard. The next leader must find a way to control government spending…turning the clock back on expansionary economic policy, however, may be a tough ask despite it being a necessity. Although the commercial dollar-denominated debt for Bolivia is small, there are not many people lining up to provide additional debt. Thus, the question for the new leader—Arce or the field—sadly becomes whether anyone is willing to fund Bolivia’s house of cards or should we expect another financial system in Latin American come tumbling down in the short term.</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Ecuador and Argentina: An Unfair Comparison for the Nicer Ecuador</title> <link>https://kurtdavisjr.com/ecuador-and-argentina-an-unfair-comparison-for-the-nicer-ecuador/?utm_source=rss&utm_medium=rss&utm_campaign=ecuador-and-argentina-an-unfair-comparison-for-the-nicer-ecuador</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Mon, 27 Jul 2020 10:00:00 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[Argentina]]></category> <category><![CDATA[Bonds]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Ecuador]]></category> <category><![CDATA[Restructuring]]></category> <guid isPermaLink="false">http://kurtdavisjr.com/?p=8</guid> <description><![CDATA[Ecuador is not a jaded lover when it comes to the international markets. It is doing all it can to reach a quick restructuring deal with its creditors...]]></description> <content:encoded><![CDATA[ <figure class="wp-block-image size-large is-resized"><img loading="lazy" decoding="async" src="https://kurtdavisjr.com/wp-content/uploads/2020/07/Ecuador.jpeg" alt="" class="wp-image-9" width="839" height="411" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/07/Ecuador.jpeg 625w, https://kurtdavisjr.com/wp-content/uploads/2020/07/Ecuador-300x147.jpeg 300w" sizes="auto, (max-width: 839px) 100vw, 839px" /><figcaption>President of Ecuador Lenín Moreno (Photo Credit: Reuters)</figcaption></figure> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="ecuador-is-earning-more-goodwill-with-bondholders"><em><strong>Ecuador is earning more goodwill with bondholders</strong></em>…</h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <div style="height:28px" aria-hidden="true" class="wp-block-spacer"></div> <p>Ecuador is not a jaded lover when it comes to the international markets. It is doing all it can to reach a quick restructuring deal with its creditors.</p> <p>Earlier this month, President Lenin Moreno’s administration ignored public criticism from political adversaries and offered more acceptable terms and conditions on its first proposal to investors — more acceptable as opposed to terms proposed by Argentina to its creditors. One group of bondholders, which included Ashmore Group, BlackRock, BlueBay Asset Management, AllianceBernstein, and Wellington Management, supported the proposal while two other groups holding more than 25% of the Ecuadorian bonds in total and more than 35% in certain series (i.e., having the power to block a deal) rejected the offer. Although the Ecuadorian proposal did not get the necessary support, the Ecuadorian strategy must be appreciated when read in context of the restructuring process in Argentina and the greater emerging markets.</p> <p class="has-normal-font-size"><em><strong>Let us not forget 2008…</strong></em></p> <p>Ecuador launched a successful yet peculiar debt restructuring process in late 2008 during the global financial crash. Ecuador has a history of defaults and challenges. In 1999, it was the first country to default on its Brady Bonds, which were dollar-denominated bonds created in 1989 to standardize emerging market sovereign debt and reduce the concentration of risk on commercial banking balance sheets. Named after United States Treasury Secretary Nicholas Brady, the bonds were a novel idea that became very prevalent in Latin America and started the movement towards tradeable debt in emerging markets. Ecuador later restructured debt in 1995 and 2000 thus when former President Rafael Correa ran for president in 2006 with a promise to not repay the country’s debt if elected, it did not necessarily shock investors that he won.</p> <p>Following his election, Correa created a national debt audit commission to examine the country’s debts contracted between 1976 and 2006 on a legal, political, and social scale. At the time, Ecuador’s Economy and Finance Minister Ricardo Patiño stated “[The audit] will consider all relevant legal, political, and economic factors, which have led to the accumulation of illegitimate debt in this country. The audit commission must also consider social and environmental damages to the local populations caused by debt. Debts which are found to be illegitimate must not be paid.”</p> <p>The report ultimately detailed a series of lending irregularities and then determined some of the loans to be exploitative thereafter permitting the Ecuadorian government to default on two bonds simply because the bonds were deemed ‘illegitimate’ by the government. Following the defaults and a precipitous fall in the bond prices, the Ecuadorian government conducted a bond repurchasing program with a participation rate over 90 percent at 35 cents on the dollar. The remaining bonds were purchased by the government over several years and Ecuador returned to the market with new bonds in 2014.</p> <p class="has-normal-font-size"><em><strong>Putting Ecuador and Argentina restructurings in context…</strong></em></p> <p>Like Ecuador, this is not Argentina’s first rodeo. When Argentina missed the deadline to pay $503 million on 22nd May this year, it marked the ninth default for the country since its independence in 1816. Creditors expected this default, but the missed payment finally set the stage and turned on the music for the creditors next show — i.e., bondholders created their committee and prepared to judge the best ‘dance’ or restructuring proposal. The most storied restructuring in Argentinian history was in 2001, which was the country’s seventh default. The legal cases associated with this default lasted 15 years and included a well-documented seizure of an Argentine naval vessel that was docked in the Ghanaian port of Tema.</p> <p>Both countries could choose the same fight strategy with today’s creditors. But the cat and mouse game with assets seen in 2001 coupled with disputatious public messaging does not necessarily play well with long-term investors. There remain hedge funds in the bondholder group, but most analysts do not see the same vulture funds from the old days. Furthermore, although the causes for this default may be over-spending and bad economics, covid-19 creates the right backdrop (and ideal timing) for a debt restructuring. Covid-19 has wrecked developed and emerging markets alike, wiping out earnings at corporates, decimating economies, and stripping government coffers of cash. Thus, the argument for liquidity is clear…plus the story is more palatable with the IMF apparently keen to support. The IMF already approved $643 Million in emergency assistance to Ecuador. Lastly, Ecuador and Argentina can establish some precedent for the various ongoing restructurings (i.e., Lebanon and Zambia) and the other restructurings in the pipeline.</p> <p class="has-normal-font-size"><em><strong>Ecuador’s different strategy and more pleasant attitude…</strong></em></p> <p>With all the similarities, Ecuador and Argentina are different and their strategies manifest those differences. First, Ecuador is restructuring significantly less debt, i.e., about $17 billion in bonds for Ecuador compared to $65 billion for Argentina. The smaller amount automatically reduces the complexity of the situation. Secondly, Ecuador’s government has a true liquidity story with its currency reserves around its lowest levels in the last two decades. As of June, Ecuador was holding about $1.2 billion in net foreign currency reserves at its central bank.</p> <p>Third, toss in the reality of Moreno’s presidency. He was Vice President under Rafael Correa from 2007 to 2013 and very much part of the 2008 restructuring process in Ecuador. Moreno won a narrow victory in the 2017 presidential election as leader of Correa’s PAIS Alliance, the center-left political party, but then changed policy positions shortly after his victory. He has abandoned significant parts of the legacy of Correa by stripping Julian Assange of his Ecuadorian citizenship, allowing social movements and protests, and permitting investigations into Correa’s administration.</p> <p>Now Julian Assange is incarcerated. Protests undid Moreno’s efforts to raise fuel prices. And Correa was convicted in April in absentia on corruption charges and sentence to eight years in prison. Altogether Moreno’s government trends right (with political analysts speculating if this is an actual shift away from the leftist populism and spending that has controlled the country for years). His Finance Minister Richard Martinez is also facing criticism for his quick engagement with private creditors and making previous bond payments.</p> <p>Moreno’s change in policy at home with Correa’s legacy underpins his ability to be quick and different in his approach to negotiations with creditors. Sovereign debt restructurings are expected (or assumed) to be arduous and acrimonious. Yet Moreno’s administration wants to engage bondholders with a clear story on the country’s economic rebound potential coupled with a true picture of liquidity and negotiate terms within those realistic parameters. Basing discussions on liquidity is very differentiating, especially when compared to other restructurings, because it eliminates the discordant nature of other negotiations and relegates the discussion to a more detailed discussion around numbers and economic performance (and less about past public spending and a country’s ability to be good stewards of foreign capital). Yes…economic and social policies remain a debate. But, with Correa’s conviction and the internal political clean-up by Moreno’s administration, Moreno’s team has well-earned goodwill with bondholders and is building upon such goodwill with a friendly stance toward the bondholders.</p> <p class="has-normal-font-size"><em><strong>Does this make a deal easier…</strong></em></p> <p>A sovereign debt restructuring negotiation is a sovereign debt restructuring negotiation…you cannot dress it up as anything else. It has politics, economists, (social) policy advisors, and emotions, which is a dangerous concoction for any country, yet alone a country going into an election year. That said, Ecuador’s approach and strategy makes you believe the solution is closer each day. Some political and market analysts believe a debt restructuring deal is possible by the end of August. Let us be clear…there is not the same optimism for a quick deal with other ongoing restructurings (i.e., Zambia and Lebanon). This optimism coupled with honest engagement is a success story by itself. In other words, the downturn may remind us of 2008 but Ecuador’s response surely does not. Now, let us hope that there is an agreement for the country’s situation that gets across the line with the bondholders and is palatable for any president trying to implement it (beyond Moreno’s time in office).</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> <item> <title>Brazil and Covid-19: Don’t Necessarily Vote Against Bolsonaro</title> <link>https://kurtdavisjr.com/brazil-and-covid-19-dont-necessarily-vote-against-bolsonaro/?utm_source=rss&utm_medium=rss&utm_campaign=brazil-and-covid-19-dont-necessarily-vote-against-bolsonaro</link> <dc:creator><![CDATA[Kurt L. Davis Jr.]]></dc:creator> <pubDate>Wed, 15 Jul 2020 11:00:00 +0000</pubDate> <category><![CDATA[Latin America]]></category> <category><![CDATA[Bolsonaro]]></category> <category><![CDATA[Brazil]]></category> <category><![CDATA[Covid-19]]></category> <category><![CDATA[Economy]]></category> <category><![CDATA[Finance]]></category> <guid isPermaLink="false">http://kurtdavisjr.com/?p=33</guid> <description><![CDATA[Understanding President Bolsonaro’s response to covid-19 within the greater scheme of Brazil’s economy...]]></description> <content:encoded><![CDATA[ <div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="625" height="347" src="https://kurtdavisjr.com/wp-content/uploads/2020/07/brazil.jpeg" alt="" class="wp-image-34" srcset="https://kurtdavisjr.com/wp-content/uploads/2020/07/brazil.jpeg 625w, https://kurtdavisjr.com/wp-content/uploads/2020/07/brazil-300x167.jpeg 300w" sizes="auto, (max-width: 625px) 100vw, 625px" /><figcaption>A supporter of Brazil’s President Jair Bolsonaro wearing a protective mask at a protest against quarantine measures in Sao Paulo, Brazil. (Photo Credit: Reuters)</figcaption></figure></div> <hr class="wp-block-separator"/> <h4 class="has-text-align-center wp-block-heading" id="understanding-president-bolsonaro-s-response-to-covid-19-within-the-greater-scheme-of-brazil-s-economy"><strong>Understanding President Bolsonaro’s response to covid-19 within the greater scheme of Brazil’s economy</strong>…</h4> <hr class="wp-block-separator"/> <div style="height:20px" aria-hidden="true" class="wp-block-spacer"></div> <p>You may view being Minister of Finance as this emotionless act of calculating available resources (capital) and necessary spending. It is like family budgeting but with more resources and a greater list of expenses (and a few more mouths to feed). Market makers and investors take that budget data like a grocery store clerk and stock the shelves with the goods consumers have statistically shown a higher inclination to purchase and offer a few extra services that will draw them in.</p> <p>But the reality of the role (along with that of the President) is an act of psychology and confidence building. The therapist (or president as one economist described it) needs her patients to buy into a certain view of the world and adapt their behavior to that view: “Don’t have fear of failure…rather view the task as an opportunity for learning and potential success”…Or, more so, believe the world is back to normal and you should pursue business as normal. This line of thinking may be the silver lining in a bad game of prisoner’s dilemma with covid-19 in Brazil.</p> <p class="has-normal-font-size"><em><strong>Bold and different in many ways…</strong></em></p> <p>Shortly after the first confirmed covid-19 cases in Latin America in February, equity and debt prices plummeted across the region. The Brazilian stock exchange index IBOVESPA provided the largest freefall in the month of March with equities falling 16% in one day on the 12th of March. Most analysts interpreted Brazilian President Jair Bolsonaro’s response to the virus and the market freefall as apathetic with a general ‘keep calm and carry on’ mentality. Now, having tested positive, the public (cough patients!) are awaiting to see if Bolsonaro’s demeanor and approach change (yes, he is wearing a mask but a court ordered him to do that).</p> <p>It is may be too late for Bolsonaro to go from “let’s have a bbq” mantra to “let’s protect ourselves against covid-19.” He also may not feel compelled to make that change. His boldness and unorthodox approach to changing Brazil’s political system in his presidential campaign two years ago can be appreciated. His government quickly (in Brazilian terms) pushed through pension reform in October 2019 and coupled it with a more sustainable path forward with changes in public finances and the budget for the country. Led by Minister of Economy Paulo Guedes, the Bolsonaro administration sold more than $23 billion in state-owned assets in 2019, implemented deregulation measures, and eased monetary policy (including installing some of the lowest interest rates seen in recent history in the country). As Bolsonaro emphasized in 2019, the focus was on economic growth.</p> <p class="has-normal-font-size"><em><strong>Covid-19 and the most vulnerable (economies)</strong></em></p> <p>As 2019 was the year of change, 2020 was expected to be the return to growth. Yet covid-19 is exposing the existing macroeconomic vulnerabilities of the country (that we already knew was there based on the last five years). The policy direction and efforts that underpinned a relatively successful 2019 for the “outsider” president now will not have the time and space to create the changed envisioned by the Bolsonaro administration.</p> <p>Bolsonaro’s great effort to get the Brazilian public to pretend the virus is not coming for them had some economic reasoning behind it. First, lockdowns have generally bumped up unemployment in other economies, frustrated locals across the globe, and thrown economies into chaos. For any Brazilian president, choosing an option that CLEARLY increases unemployment is hard. The number of unemployed persons in the country almost doubled between 2012 and 2019 (going from roughly 7.6 million to nearly 13 million-plus during early 2019). The number declined by the end of 2019 but the employment nightmare in Brazil is hard to forget. Secondly, Brazil remains saddled with debt. The uncontrolled spending that plagued previous administrations cannot be easily wiped away with economic reforms. Policy changes altered the path for the future not the actual amount to be paid today.</p> <p>Appreciating the storylines of unemployment and public debt in Brazil, the Bolsonaro administration thus seemingly worried about shutting down Latin America’s biggest economy in the midst of the current pandemic. Such lockdown actions would exacerbate the fragility of Brazil’s economic turnaround plan by creating the need for a stimulus package (similar to those seen across the globe), which would only expand the current account deficit and drive down the currency. Both are likely to happen regardless as the pandemic continues to decimate different parts of the globe and disrupt every aspect of life and business</p> <p>Bolsonaro is also stuck in the reality of campaigning for validity. In other words, he still must prove his presidency is legit to the public that supported leftist administrations for some years. Although his administration reduced the country’s debt in 2019, that story partially can be added to the trend line that began in 2017 (yes, the country was trending positive on reducing its deficit since 2016!). Furthermore, the majority of Brazilian debt is in local currency thus the currency plunge is not exactly raising the cost of debt, which has been seen in other countries (i.e., Argentina, Lebanon, etc), but it is being felt by some Brazilians in their pockets. Bolsonaro’s administration sadly will have this backdrop juxtaposed with a likely bump in the deficit this year and he sadly cannot say a covid-19 lockdown caused it (though the reality of covid-19 globally surely underpins his troubles at home).</p> <p class="has-normal-font-size"><em><strong>Still betting on Brazil…</strong></em></p> <p>If Bolsonaro continues on the same path with covid-19, he must face the reality that his refusal to impose a lockdown will consume any storyline of 2020. Two health ministers previously departed over Bolsonaro’s response to handling covid-19 and other members of the cabinet have (quietly) showed their frustration. That said, he has contained any political fallout…no one expects the Bolsonaro administration to cave anytime soon or walk off stage. Furthermore, the currency is cheap and domestic investors are starting to come back to the market. Exports are likely to perform well in the near term post-covid-19 with local costs of production and returns both done in local currency. The biggest concern for Brazil may be whether foreign capital will come back to the country. Cheap does not necessarily mean good and thus does not always entice investors…a few Latin American countries can give a history lesson on this reality.</p> <p>There are many uncertainties to the Brazil model…but these uncertainties are not exactly a product of the Bolsonaro administration. The reality is that the only true certainty with covid-19 is that there will be a lot of uncertainty. Thus Bolsonaro’s ‘let’s sit still and see what happens’ approach may simply boil down to the ‘outsider’ president saying let’s try something different when he knows the other options may ultimately cripple his presidency, the economy, and his country.</p> <hr class="wp-block-separator"/> ]]></content:encoded> </item> </channel> </rss>