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June 1, 2020

LATAM PULSE

BY Mario Marconini, Nicholas Watson

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( 5 mins)

The scale of the region’s unemployment crisis is coming into clearer focus this week. Meanwhile, Brazil remains the region’s Covid-19 epicenter as polls show public rejection of President Jair Bolsonaro far outweighing his support. In Venezuela, President Nicolas Maduro has broken one of the great domestic political taboos of recent years – raising fuel prices. Mexico begins relaxing lockdown restrictions as President Andres Manuel Lopez Obrador (AMLO) will again come under criticism for minimizing the threat posed by Covid-19. Finally, in Ecuador, the government has gained some extra breathing space with new Chinese credits, even if political uncertainty could hamper other debt negotiations.

Region

Cautious re-openings following economically disruptive lockdowns are unlikely to have a significant impact on hiring after regional economies have shed jobs at an unprecedented rate since March. Last week, Colombia’s unemployment rate for April was revealed to have increased to 19.8%, up from 10.3% a year earlier; this equates to 5.3mn people losing their jobs. In Brazil, 4.9mn people lost their jobs in the three months to April, for an overall unemployment rate of 12.6%. Chile’s rate has moved up to 9%, similar to Peru, where 1.2mn people lost their jobs in Lima alone in the three months to April. The UN’s Economic Commission for Latin America and the Caribbean predicts that 11.5mn people will have lost their jobs by the end of 2020. Urban areas and the young are likely to be hardest hit.

Brazil

Brazil is now only behind the US in its number of confirmed Covid-19 cases, and fourth in the world in number of deaths. The week will be a major test for the state of Sao Paulo as it starts a five-phase exit strategy from today, 1 June. The decision by state Governor Joao Doria comes one week after he admitted to the possibility of instituting a full lockdown in the state, which has met with strong opposition from research groups at the University of Sao Paulo. Also, polls show that 76% of the population is in favor of social isolation and that 57% would like it to last until contagion risk is minimal.

The week should also serve to gauge the existing support level for new civil-society pro-democracy movements that have emerged in the last few days as a reaction to President Jair Bolsonaro’s continued aggressive rhetoric against democratic institutions. Also this week, Prosecutor-General Augusto Aras, a perceived ally of the president, may decide whether to place charges against him for having interfered in the Federal Police (PF) and thus put in motion a process that may result in his trial at the Supreme Court if and when authorized by Congress. Aras may also move forward with charges against politicians and persons close to the president who are suspected of involvement in a fake news ring run out of the presidency and potentially involving his son and Rio alderman Carlos Bolsonaro. Polls show that support for the Bolsonaro government is now half of its rejection level – 25% against 50%.

Venezuela

A new fuel pricing system takes effect from today, 1 June. The system – whose details are still vague – involves a dual pricing arrangement in which an initial quota will continue to be heavily subsidized before more realistic market-based prices kick in. Around 200 service stations will supply fuel at the more expensive market rate. Chavismo has long avoided tinkering with the costly fuel subsidy because of fears of the reaction from the street. However, the regime must now recoup some of its outlay on Iranian fuel imports, while the price differential in the new system will enable lucrative arbitrage opportunities that President Nicolas Maduro can use to keep military factions onside. Whether Iranian supplies prove sustainable is unclear; the poor state of the domestic refining network makes a swift return to fuel self-sufficiency highly unlikely.

Mexico

The relaxing of the lockdown that starts today, 1 June, is controversial given that a) the number of daily new cases remains high, b) testing levels remain very low, and c) almost the entire country remains at “red” under the government’s traffic light system. As of yesterday, 31 May, health authorities were reporting just over 90,000 Covid-19 cases with 9,930 deaths; 3,152 new cases were tallied in the previous 24 hours. These numbers are likely to significantly understate the true scale of the outbreak. Moreover, without adequate testing, the basis of the traffic light system is not clear.

The resumption of President Andres Manuel Lopez Obrador (AMLO)’s domestic tours will likely arouse further political acrimony amid signs of rising political contestation. There were several demonstrations (mostly in slow-moving vehicles) in various cities over the weekend against the government, which some members of the governing National Regeneration Movement (Morena) party said amounted to “coup-mongering”. AMLO will be in Quintana Roo state today to inspect how construction of the 1,525km Mayan Train (Tren Maya) is progressing. Opposition parties say that AMLO’s tours undermine official shelter-at-home guidance and will do little to resolve problems faced by the health system or by ordinary people facing economic hardship. Economic data out early this week will likely confirm the bleak state of the economy.

Ecuador

The government will present bondholders with an initial reprofiling offer this week following an earlier agreement to defer debt interest payments until August. In total, the deferral move is designed to free up USD 811mn. While Finance Minister Richard Martinez has pursued an amicable policy towards bondholders, political uncertainty makes even the medium-term horizon difficult to predict; elections are due in February 2021. This same uncertainty is likely to hamper separate negotiations with the International Monetary Fund (IMF) over the broadening of the existing USD 4.2bn loan arrangement. However, Martinez late last week confirmed a USD 2.4bn deal with two Chinese state banks, which are partially based on future crude sales; USD 1.2bn is expected to be disbursed this month.

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