May 26, 2020

LATAM PULSE

BY Mario Marconini, Nicholas Watson

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( 6 mins)

This week, Argentina’s debt negotiations will continue even after default, while a separate wealth tax initiative could be unveiled. Brazil will continue to see an accelerating Covid-19 count, while noise around President Jair Bolsonaro is likely to rise. A state government decision in Mexico highlights how the reactivation of international supply chains can be set back at the local level. The specter of protests and social unrest has risen in Chile and Ecuador, while Peru is heading for one of the world’s longest Covid-19 quarantines even as its effectiveness is in doubt.

Argentina

The Finance Ministry has been working on a counter proposal to submit to bondholders as soon as tomorrow, 27 May, after the failure to make an interest payment on 22 May pushed Argentina into yet another default. The government has set 2 June as a new deadline for an agreement, though in practice this could be extended, perhaps to 12 June, as the positive recent direction of talks keeps the litigation threat at bay; if talks extend much further, the chances of a settlement risk unraveling. There is still distance between the two sides on recovery values and the length of any grace period.

Separately, this week could see a wealth tax proposal finally unveiled. The wealth tax, one of whose principal backers is Maximo Kirchner, would supposedly raise around USD 3-4bn by taxing individuals worth more than USD 3mn (apparently around 12,000 people) in what it is claimed would be a one-off charge to boost fiscal resources. The main Peronist grouping in Congress is short of the numbers needed to approve the bill, so some compromise and dilution may become necessary; opposition parties have already questioned whether the initiative would result in double taxation and therefore would be unconstitutional.

Brazil

This week will see the worsening of the Covid-19 crisis as Brazil is now the second-ranking country in number of cases and sixth in number of deaths in the world – and still a few weeks away from peaking on the infection curve. Several medical associations should now jointly resort to judicial measures against the new health minister’s first decision in the post to permit the use of chloroquine or hydroxychloroquine preventively or in early stages of a coronavirus infection. This will be the third week when it is expected that President Jair Bolsonaro will sanction a bill that will free BRL 60bn in assistance to states and municipalities. He should do so now that he has been able to share with state governors the responsibility for vetoing increases to public employees’ salaries until 2021.

In parallel, Supreme Court-mandated investigations into Bolsonaro’s alleged undue influence over the Federal Police will continue this week. Tensions between the government and the country’s highest court may reach a high point following the release on 22 May of a video of a ministerial meeting on 22 April that could serve as evidence against the president. The rapporteur of the case at the Supreme Court did not deny a petition by opposition parties for the president to deliver his cellphone as well – and forwarded a request to do so to the Federal Prosecutor’s Office. This was perceived as an affront by the government and should also permeate much of politics this week in Brazil.

Mexico

The auto (and construction) sectors in Puebla state will not be allowed to re-open from 1 June after state governor Miguel Barbosa issued a directive on 22 May saying that the conditions were not yet right for an easing of restrictions. There are around 90 auto-parts manufacturers in Puebla, which mainly supply to Volkswagen and Audi. Local auto business groups have appealed to Barbosa, though he has so far refused to budge. In most other states with an auto manufacturing presence, companies have either re-opened – following new health and safety protocols – or have been preparing for reactivation.

Chile

The government will be ramping up distribution and delivery of its food handouts in the coming days. In the past week, there have been at least three small but vociferous protests in low-income communities (El Bosque, La Pintana, and Puente Alto) in southern areas of the Santiago Metropolitan Region (RM) in which residents have complained of food shortages and hunger. Most of the RM remains under a strict quarantine that is likely to last for at least another fortnight; over the past week, the number of Covid-19 cases in the RM doubled to reach over 58,000. ICU occupancy rates in the RM are close to capacity.

Ecuador

Unions and student groups have pledged to carry out more protests following demonstrations in Quito and several other cities yesterday, 25 May. The government puts the number of people who participated in the demonstrations at no more than 4,000. There are several issues motivating the protests, including corruption in health sector procurement, recent labor reforms, university budget cuts, and the closure of some public companies. While the relatively small size of these demonstrations will not trouble government officials too much, there is obvious concern about a resurgence in the kind of unrest seen in late-2019 as restrictions loosen. According to the Interior Ministry, 38 out of 221 cantons have moved from “red” to “yellow” in the Covid-19 traffic light system, though these cantons account for around one third of the population.

Peru

As the number of new daily Covid-19 cases remains steady at over 4,000, President Martin Vizcarra announced on 22 May an extension to the national quarantine to 30 June. However, Vizcarra also announced what he called “modifications and flexibilities”, including a shorter night curfew for most regions, and the re-opening of some services and businesses. However, Finance Minister Maria Antonieta Alva’s assertion that the economy would be operating at 84% of capacity by the end of June looks optimistic. The Confiep private sector chamber criticized the quarantine extension, saying it would have been better to review and extend it on a weekly basis. Public incompliance is likely to remain a problem. As of last night, 25 May, there were 123,979 reported cases, with 3,629 deaths. High testing rates partly explain Peru’s case count, though the death rate is considered to be at least double – and possibly quadruple – the official count.

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