#hotLatinAmericatakes from a busy weekend

It was a busy weekend in Latin America and I have a few quick takes on some of the biggest things that happened.

  1. Last week, as poll after poll showed Daniel Scioli, the presidential candidate for Argentina’s ruling Frente para la Victoria (FPV, Victory Front) coalition within striking distance of winning the 40 percent plus a ten percent margin of victory necessary for a first round victory, I wondered on Twitter what structural factors would be required for a Peronist candidate to not be favored in a nationwide election. Essentially, if 30 percent inflation, rising unemployment and poverty and stagnant growth weren’t enough to prevent the FPV from coasting to victory, what would be? To some degree, Sunday’s results, with Scioli winning less than 37 percent of the vote with only a 2.5 percent margin over his closest competitor, Buenos Aires mayor Mauricio Macri of the center-right PRO party, indicated that the built-in pro-Peronist margin isn’t nearly as significant as the polls seemed to indicated.

    Of course, all of this needs to be taken with a grain of salt. Scioli is still very likely to win, for reasons both above board and not. For one, the Peronist advantage is still significant, and third place finisher, dissident Peronist Sergio Massa’s 22 percent of the electorate is likely to break more than 50 percent toward Scioli, meaning Marcri would need to dominate the swing voters from the other first round candidates to overcome that margin. Additionally, Scioli, who is the outgoing governor, will probably improve his position in the massive province of Buenos Aires in the second round. In the first round, he was probably pulled down a bit by the FPV candidate for governor, Aníbal Fernández, who is among the most unpopular politicians in the country. Fernández lost to PRO candidate María Eugenia Vidal, taking the governorship out of Peronist hands for the first time in 30 years. Without Fernández’s toxic brand on the ballot, Scioli will improve his position at least slightly, pushing his margin even closer to 50 percent. Beyond that, Scioli will benefit from Cristina Kirchner’s willingness to use the full resources of the state to push his candidacy. If she was willing to use a cadena nacional to transparently campaign for her sister-in-law’s gubernatorial campaign in Santa Cruz, there is little reason to imagine that Scioli won’t benefit from a similar treatment.

  2. In Venezuela, Franklin Nieves, one of the prosecutors who led the trial against Leopoldo López that culiminated in a nearly 14 year prison sentence, has fled Venezuela and, in an interview with the Wall Street Journal, denounced the entire proceeding as a sham trial, claiming he was pressured by his superiors. To anyone even vaguely aware of the case, this was obvious from the start. López was convicted of using subliminal messages to incite his followers to commit acts of violence during nationwide protests in February, 2014. Beyond the laughably ridiculous charges, López was not allowed to present evidence in his favor or even call witnesses. Moreover, one of the key prosecution witnesses, a linguist who was supposed to “prove” how his speech calling for peaceful protest actually was inciting violence, testified that was not the case.

    The upshot of this is that it casts into further relief what most anyone paying attention to Venezuela already knew; the Venezuelan judiciary is subservient to the executive and Leopoldo López is a political prisoner convicted in a show trial. That said, it is unlikely to change anything on the ground in Venezuela. The Venezuelan government has already branded Nieves as under the influence of “foreign factors” and it’s unlikely anyone who didn’t already know the López trial was a sham suddenly cares about that more than the economic crisis currently afflicting the country. The more likely effect of this is that it will continue to erode Venezuela’s support abroad. Every time someone from within the government flees the country and confirms the worst things about what’s going on, it becomes harder for Venezuela’s democratic enablers like Brazil to continue backing them and covering for them in organizations like the OAS and Unasur.

  3. For their story on Guatemala’s presidential runoff on Sunday, The Washington Post has a suitably click-baity headline: “The ‘Donald Trump of Guatemala’ was just elected president”. This isn’t the worst thing you’ll see on Latin America in a US newspaper, but it’s incredibly facile. Jimmy Morales shares some superficial similarities to Trump; a celebrity-cum-politician who has never been elected to office and represents an anti-establishment option. However, while Trump has run on a platform that focus on white resentment politics (anti-immigrant, pro-welfare state for the “right” people, nationalist economic policy), Morales’s appeal comes from his anti-corruption platform and an appeal among Guatemala’s indigenous majority. He certainly has his red flags, especially since the party he represents is closely linked with military officers who fought in Guatemala’s long and bloody civil war, which is considered by many experts to have been a genocide. What he is not is a Donald Trump-like figure and it’s annoying that they’d misrepresent him so badly simply for the “Donald Trump” clicks.

Never let a good crisis go to waste


That other time she blamed Clarín. No, that other, other time.

Two weeks ago, Argentine prosecutor Alberto Nisman dropped a bomb on the political landscape, accusing President Cristina Fernández de Kirchner and members of her cabinet of criminally covering up the culpability of multiple Iranian officials for the 1994 attack against the AMIA Jewish Center in Buenos Aires that left 85 people dead. In a criminal complaint, Nisman alleged that Cristina Kirchner and members of her government negotiated a deal with Iran that would establish a–presumably biased–joint truth commission in exchange for various commercial engagements.

The scandal exploded into an international story last Monday when Nisman was discovered dead in his apartment from a gunshot wound to the head just hours before he was to testify to Congress about the case. Investigators originally called his death a suicide and the government quickly mobilized around that conclusion. After a day of protests, testimonies from friends and colleagues and the revelation that Nisman did not have gunpowder residue on his hands, Cristina Kirchner walked her position and declared in a statement on her website that even she did not believe it was a suicide. Instead, she claimed that Nisman had been the victim of a conspiracy within the intelligence services intended to impute her government for whitewashing the AMIA prosecution, and that the same people who had fed him fake evidence eventually killed him to pin the death on her.

Last night, Kirchner addressed the nation via a mandatory nationwide broadcast lasting over an hour; her first comments about the case not through social media. In it, she accused Nisman of lying about the facts when he called the memorandum signed with Iran unconstitutional and argued that various Iranian officials named in the case had been made available to testify had they been called. Then she the capitalized on her previous theories and announced that she would be calling an extraordinary congressional session to debate a new law to dissolve the Servicio Intelligencia to replace it with a new Federal Intelligence Agency that, according to her, would be isolated from forces within the judicial system and media that she claims had corrupted it.

Like so often with these types of situations in Latin America, there are some very good reasons to overhaul the Argentine security apparatus. By many accounts, it’s plagued by internal factions and is not terribly effective for its costs (although that can be said of many intelligence services). However, looking at the specific denunciations Kirchner made, they read very much like the usual accusations she makes. Namely that they are part of a medial and judicial plot to undermine her rule. As such, it seems less like a genuine attempt to reform the intelligence services because they need to be reformed so much as a pretext to bring them more firmly under executive control. This was what happened with the media reform from 2009. She used the legitimate need to reform and update Argentina’s outdated media laws as a means to target Clarín, Argentina’s largest media group and a former ally turned arch nemesis of her government.

It remains to be seen, of course, whether this effort will be successful. Kirchner’s party and it’s allies control a majority in both houses of the Argentine congress, but as relatively unstable coalitions. It also remains to be seen exactly how the reform would look. The early indications presented in her speech are that the new agency would be subject to both executive and senate oversight. However, the executive branch is particularly powerful in Argentina, so nominal control by both often turns out to mean little legislative oversight.*

If it is passed, and does give the executive significant control, this would be a truly impressive political maneuver on Kirchner’s part. Right now, she stands accused of having used her power to cover up the culpability of Iranian terrorists in order to gain commercial concessions with Iran, a grave abuse of her power. Moreover, many believe that she is directly responsible for the death of the man who accused her (to say nothing of the heavy-handed response of the government to journalist Damián Patcher leaving the country). Yet, if she is successful in reforming the intelligence services, she could turn a potentailly disatrous scandal about her abuse of power into a new law that accumulates even more power within the executive branch, and by extension, her own personal control.

* Of course, legislative oversight of intelligence agencies is often ineffective, even in countries with much stronger institutions than Argentina.

Only as far as you can throw ’em

Yesterday, Argentina announced a partial rollback of natural gas and water subsidies in a continuation of what increasingly looks like the same ajuste neoliberal Cristina Kirchner and her government have been swearing for years would never happen while they held power. The rollback itself only affects certain parts of the country and doesn’t affect subsidies for industrial users at all. That, at first glance, is curious; why would the government raise prices on households (read: voters) instead of industry? That answer came in Julio de Vido’s comments during the press conference announcing the reforms. He explained that the industrial subsidies were responsible for the creation of 6 million jobs relative to 2001 and went on to laud the growth in natural gas demand resulting from those subsidies. Clearly the government thinks (probably correctly) that reduced real wages via subsidy cuts to households are less unpopular than subsidy cuts that lead directly to unemployment.

Beyond that, de Vido’s comments are telling more for what they don’t say. Creating 6 million jobs, for one, is truly astonishing in a country with 40 million people, especially if they’re the result of industrial subsidies. However comparing net jobs gained from 2001 to now is misleading; Argentina’s economic crisis was so profound that virtually any policy that wasn’t a Khmer Rouge-style return to the countryside would have created a lot of jobs just simply by utilizing the huge slack in the economy. Worse though, is his discussion of the effect on natural gas demand, when he completely ignored the comparatively slower growth in supply that has turned Argentina from a net exporter of gas to a net importer of one–the importation of which is a significant contributor to the fiscal deficits driving the galloping inflation.

The lesson in this is to be wary of statistics politicians cite, espcially when those statistics purport to prove the utility of a policy they are in the process of eliminating.

A hotel room too far?

Throughout the last decade, during the presidencies of the late Néstor Kirchner, and his wife and successor Cristina Fernández de Kirchner, accusations of corruption have abounded, but none have managed to stick, either as a political liability or as a legal threat. However, that has changed in recent months as two long-term corruption investigations continue to gain steam, threatening the president, the vice president and other high-ranking government officials. Corruption in Argentina is not a new phenomenon and neither scandal is as bad as the weapons trafficking scandal that engulfed multiple members of Carlos Menem’s cabinet in the 1990s. Nonetheless, it could prove more damaging simply because the Kirchner government is increasingly unpopular as the economy weakens and tolerance wanes for politicians with their hands in the cookie jar.

Both investigations deal with alleged improprieties by either the president or members of her cabinet in business dealings involving third parties and the government. The first, known locally as the Lázaro Báez case—named after the Kirchner’s business partner in Néstor’s home province of Santa Cruz—involves the president in what appears to be a money laundering scheme. Formal legal investigations and investigative reporting by La Nación—a Buenos Aires newspaper—have unearthed arrangements between companies owned by Báez and hotels belonging to the Kirchners whereby Báez’s companies paid more than 14.5 million pesos to reserve hundreds of rooms in those hotels, few of which were ever used. This ties circumstantially to the fact that Báez has already been formally accused of money laundering in a different investigation, and that his companies received more than 80 percent of the government contracts awarded in the past decade in Santa Cruz. Moreover, the amount paid to the hotels represents 20 percent of the Kirchner’s declared assets—which have increased tenfold in the past decade and have been the source of significant controversy.

The second investigation involves Vice President Amado Boudou and Ricardo Echegaray, the head of Argentina’s federal tax agency, the Administración Federal de Ingresos Publicos (AFIP), and their role in lifting Ciccone Calcográfica out of bankruptcy in 2010-11 before it eventually won a contract to print peso notes. The details of the case are complex, but Boudou—then the Minster of the Economy—and Echegaray are accused of using their office to maneuver new capital toward the company and manipulating the regulatory framework in favor of their desired outcome. According to a petition for an indagatoria—a formal inquiry by a presiding judge—filed on February 6, Echegaray allegedly acted directly through his role at the AFIP while Boudou was involved through Alejandro Vandenbroele, the head of The Old Fund, SA, the company that took control of Ciccone. Boudou has stridently denied ever having met Vandenbroele, even as evidence continues to accumulate about their relationship. Boudou and Echegaray are both accused of felonies in the indagatoria petition, but it remains to be seen what legal action will be taken against them. The case, however, will remain in the public consciousness as the investigations and trials continue.

The persistence of serious corruption allegations against the presidential couple and prominent cabinet members come at a delicate time for Cristina Kirchner. While the Kirchners were able to shrug off corruption allegations in the past, thanks in large part to torrid economic growth, the situation now is much different. Growth has slowed and inflation continues to grow, leaving Argentina susceptible to a period of stagflation during the last two years of her presidential term. During the fat years, many Argentines were willing to look the other way at high level corruption in way they will not during a period of falling real wages.

On February 13, the government unveiled a new, apparently credible method for calculating inflation after years of rigging its statistics. The announcement came just weeks after the peso was allowed to depreciate more than 20 percent in a few days after months of “micro-devaluations” of a few cents per day. To many, this indicates that the government is serious about correcting some of the imbalances that afflict the Argentine economy. Minister of the Economy Axel Kicillof and Cristina Kirchner have even hinted at a rollback in subsidies that are estimated to cost 4.9 percent of GDP. Undoubtedly, most of these measures are ones the government would have to take sooner or later. However, they are also politically difficult since they virtually guarantee an initial decline in lower- and middle-class living standards and may also cause a short-term burst of inflation above the current rate that is already is above 25 percent.

The fallout from these types of adjustments would challenge even the most popular governments, not least one whose popularity sits below 40 percent. Moreover, economic crises have forced two of Argentina’s past five elected presidents to relinquish office early, including Néstor Kirchner’s elected predecessor Fernando de la Rúa. Argentina is not yet on the brink of a crisis, but discontent with the economic situation is growing. As these cases proceed, the major players in the government will increasingly be perceived as having profited from an economic model that, in the end, hurts average Argentines. What is more, the government’s decision to attack the judiciary and media for investigating corruption will divert resources away from dealing with the economy while doing little to convince the public that the allegations lack credibility.

The real danger for Cristina Kirchner, therefore, is not that a corruption scandal brings down her government, but rather that, amid significant economic problems, her and her cabinet’s corruption becomes the proverbial “straw that breaks the camel’s back.”

A devaluation by any other name would smell as… sweet?

Earlier this week, the Argentine Central Bank (BCRA) unexpectedly allowed the official dollar exchange rate of the peso to depreciate dramatically. On Tuesday, the peso depreciated by 3.4 percent and on Wednesday it fell by a further 12 percent, closing the day at 8 pesos/dollar compared to 6.84 on Monday, a 16.96 percent fall in just two days. Yesterday the peso fell to as low as 8.5 pesos/dollar before the BCRA intervened and brought its value back up to 8.2 pesos/dollar. This morning, Cabinet Chief Jorge Capitanich and Minister of the Economy Axel Kicillof announced that the government would lower the tax for obtaining dollars from 35 percent to 20 percent beginning Monday, a significant loosening of the capital controls that have choked off legal access to dollars to many Argentines and fueled a black market whose exchange rate is nearly 60 percent higher than the official rate.

There are a number of reasons why this happened when it did, but it essentially boils down to the fact that the government could no longer afford to maintain its previous policies. Specifically, Argentina’s currency reserves dropped below $30 billion this month for the first time since 2006 while a $15 billion debt payment looms and, because of a convoluted web of subsidies and frozen prices in the energy sector, the energy deficit could be around $10 billion this year. There is little expectation that there will be any influx of new reserves this year, leaving the Central Bank unable to continue depleting the reserves in an attempt to engineer a series of microdevaluations until the gap between the official dollar and the “blue” dollar was closed, or at least tolerably narrow.

The problem for Argentina is that, while a devaluation was necessary and unavoidable, without accompanying measures to address the forces weakening the peso, it will just be the first of many. The fundamental problem is that the Argentine government is monetizing its fiscal deficit, injecting billions of pesos into the economy when there is no demand for them since the government can’t borrow to cover its deficit. This creates enormous downward pressure on the value of the peso which the government has combatted through a combination of capital controls—limiting access to dollars—and aggressive interventions in foreign exchange markets to prop up the value of the peso by selling its international reserves. It is also highly inflationary, which puts further pressure on the peso as Argentines try to protect the value of their money by converting their pesos to dollars as quickly as possible.  Since the currency controls limit the legal options for Argentines to obtain dollars, the blue, or black market, dollar emerged and, in recent months, has been trading at a value between 50 and 75 percent above the official dollar.

Argentine officials are likely hoping that this week’s devaluation and the loosening of the currency controls next week will bring the official dollar more in line with the blue dollar. Moreover, they also are hoping that a series of price control agreements with the major supermarket chains and the early and quick negotiations over salary increases for the major unions will act as a brake on inflation for the rest of the year. However, as Lucas Llach points out, this is very unlikely as the salary negotiations will likely be in the range of 30 percent—exacerbating a wage/price spiral already in effect—and become the monetary emission shows no sign of slowing. So long as monetary policy remains so expansionary the inflation pressures will remain and the pressure on the peso will remain. This is why, despite the devaluation, the gap between the official and blue dollar remains in the same range it has for the last several months; no one sees this as addressing the root problems and therefore expect further devaluations.

What happens going forward is highly speculative. Some of this speculation is that the suddenness of the measures and the dearth of explanation by the government indicates that the government is planning major changes. This is certainly possible, though what those changes would be is difficult to guess as Kicillof and other prominent policy makers continue to essentially deny the facts on the ground in their public statements, meaning any serious changes would be a major about-face. In the more likely event that these were measures taken in desperation and not as part of a broader economic strategy, things look fairly bleak. The inflationary spiral will continue unabated with the ever-lurking possibility that it will spiral completely out of control as further ad hoc heterodox measures to contain it fail.

At the end of November, I was able to attend at the Inter-American Dialogue a meeting of the Latin America Economies Roundtable (LAER). The general consensus at the meeting, by a number of very intelligent and well-informed people was that Cristina Kirchner’s government could probably muddle through the last two years of her term without a crisis so long as inflation stayed below 25 percent, the deficit didn’t exceed 3 percent of GDP and commodity prices didn’t fall dramatically. According to the Billion Prices Project, year-on-year inflation is above 24 percent so far this year and the budget deficit last year was right at 3 percent. Commodity prices—particularly soy—appear unlikely to fall in the coming year, but the potential for further devaluations could encourage farmers to delay selling their product, putting a severe strain on government revenues, widening the fiscal deficit and feeding into the inflationary loop. In other words, while these are relatively arbitrary conditions, they are useful as rough benchmarks for the stability of the Argentine economy and Argentina is already pushing the upper bounds on them with plenty of factors there to push the country well beyond them.

Argentina may not be on the verge of a crisis yet, but low growth and high inflation seems like a relatively optimistic scenario for the rest of the Kirchner presidency.

Crónica de un fracaso anunciado

The Argentine government announced yesterday that CEDIN (Certificados de Depósito para Inversión), the most prominent of the government’s attempts to stall the rapid capital flight affecting the country, had only repatriated US$11 million in its first month compared to the US$400 million the government hoped it would bring in over its three months. This is obviously a huge failure on the part of Cristina Fernández de Kirchner’s economic team, which had designed the program as a means of bringing “blue” dollars—undeclared dollars possessed by Argentines—back into the formal system and burnishing the country’s dollar reserves. However, looking at the basic design of the program, it’s hardly surprising that few Argentines have been willing to hand over their dollars to the same government responsible for the economic conditions that have driven them to convert their savings away from pesos in the first place.

My understanding is that the CEDIN function this way: a person in possession of undeclared dollars can declare them without facing any tax or fine in exchange for a CEDIN certificate, which Axel Kicilof, the Secretary of Economic Policy and Development Planning, compared to a traveler’s check. The CEDIN certificate can then be used in any commercial transaction, but can only be exchanged back for dollars if it is used to buy property or for materials for construction. The government hoped that this would allow it to simultaneously shore up its faltering dollar reserves while channeling investment into the construction sector, which has been in decline for more than a year as a result of strict capital controls (called the cepo cambiario in Argentina).

In practice, however, this has not proved a sufficient carrot to draw people back into the peso economy. This is hardly surprising. For one, the exchange rate for the CEDIN while higher than the official rate, is still well below the black market rate. Intially, the CEDIN used for construction and property purchases (CEDIN aplicados) was $7.45 pesos, and those for other purposes (nuevos) at $7.15 pesos. With a 57 percent difference between the official exchange rate and the black market (dólar blue) it’s understandable that a person might not want to trade in dollars worth more than 8 pesos when they can only get back dollars worth a bit more than 7 pesos and potentially worth less than 6 pesos. Moreover, nearly nothing has been done to address the reasons why the peso is depreciating so rapidly, so any program would have to make holding pesos extremely lucrative, something the CEDIN do not do. Finally, while there is no punishment for declaring dollars during this blanqueo, the mere act of doing so is an admission of having broken the law previously. With several parts of the Argentine still tightly restricted—such as access to dollars and import licenses—and control over those mechanisms highly arbitrary, there is a major risk to admitting possession of undeclared dollars that is not counterbalanced by the benefits of the CEDIN.

In short, it was not difficult to imagine how the CEDIN program was likely to fail; it provided far too little incentive relative to the risks it incurred. As I’ve argued before, with an economic as distorted as the Argentine, no single measure is likely to dramatically improve the situation. Yet, at the same time, the big, dramatic measures that are becoming increasingly necessary will also be more disruptive in the short run and therefore less politically feasible all the time.

Merco-sucks, continued

Today I attended an event put on by the Americas Program at CSIS that was very provocatively called “Paraguay- Leaving Mercosur?” where the Paraguayan ambassador the United States Fernando Pfannl Caballero spoke. The short answer, is that, no Paraguay is not going to abandon Mercosur. However, the underlying subtext of his comments is that while Paraguay isn’t eager to leave, it also isn’t all that committed to the project and is deeply frustrated with its co-member states.

Paraguayan ambiguity regarding its membership is threefold. Legally, Paraguay feels—justifiably—that it never should have been suspended in the first place. Ambassador Pfannl complained that, notwithstanding the fact that Fernando Lugo’s impeachment was carried out within the constitutional framework and therefore not a constitutional breach, Paraguay was not given a chance to defend itself in the process whereby it was suspended from Mercosur. Moreover, while Paraguay was suspended for violating the democratic clause, a far more egregiously undemocratic regime in Venezuela was allowed in as a result of removing Paraguay and thereby negating its two-year refusal to ratify Venezuela’s entrance. The Paraguayan government feels that the whole process was illegal under international law, and feels that, as a small country in a club of big countries, it needs assurance that there are legal processes that will protect it in the future before it rejoins.

Economically, Paraguay perceives Mercosur as not providing enough economic benefit to justify the restrictions it puts on its ability to conduct bilateral and multilateral economic policy outside of the organization. Since Mercosur’s bylaws technically restrict member states from negotiating trade agreements outside of Mercosur, Paraguay is hamstrung in its ability to expand its trading options. In theory, this shouldn’t matter, as Mercosur would be actively perusing these types of agreements as a unit. However, in practice, Brazil and Argentina have been intransigent in these processes, particularly as protectionist impulses have gained prominence within each government. In this light, Paraguay sees its suspension as a way to explore other avenues economically and perhaps gain leverage to carve out exceptions for itself upon returning, in a similar way to Uruguay being allowed to negotiate a free trade agreement with Mexico. So far, this has manifested in trade talks with Mexico and observer status in the Pacific Alliance.

Finally, there is a large degree of nationalism at play in Paraguay’s behavior. Though largely unknown outside Latin America, the War of the Triple Alliance, which devastated Paraguay, remains salient to this day and Paraguayans are extremely sensitive to any perception that Brazil, Argentina and Uruguay might be ganging up on them. On top of that, Paraguayan relations with Venezuela are extremely tense. Paraguay has accused Venezuela of supporting terrorist groups in Paraguay’s northern departments through its connections with the FARC and Nicolás Maduro was declared persona non grata by both houses of the Paraguayan Congress following the Lugo impeachment, when he was filmed speaking with Paraguayan generals and accused of encouraging the military to step in on Lugo’s behalf. In effect, Paraguay feels deeply wronged by Brazil, Uruguay and Argentina, in a way that evoked painful memories of the War of the Triple Alliance and also allowed a country that Paraguay has accused on meddling in its internal affairs into the group.

All of this reinforces the points I already made about Mercosur last week. Namely, it is an organization with a clear goal—to establish a customs union on the path toward creating a common market—whose most important members are ambivalent or worse toward that idea. There are tremendous economic gains from liberalizing within the bloc—something that Paraguay in particular, and Uruguay to a lesser extent seem eager to pursue—yet the trend is away from liberalization, with an institutional framework that prevents member states from striking out on their own. The fact that the poorest member of the bloc—who presumably had a lot to gain from access to Brazil and Argentina’s giant markets—is dragging its feet on returning to Mercosur says a lot about how effective it has been.