Turmoil in Latin America

By Robert Elliott

Political Shifts
Chavez, described by Mexican novelist Carlos Fuentes as a “tropical Mussolini,” is a critic of the United States who counts Cuban President Fidel Castro as a mentor. Wielding Venezuela’s oil and gas riches, he has exerted power throughout the continent since taking office in 1998. “Hugo Chavez is the conductor of the orchestra that is playing in the whole region,” says the Venezuelan security expert who has moved to Miami.

Chavez and other leftists have been aided by a general disillusionment with social and economic progress. Left-wing parties have strengthened their position by offering their poor populations alternatives to free-market policies that are not seen as benefiting them.

Their pitch has worked. Ecuador voted in populist Lucio Gutierrez in 2002. In January 2003, Luiz Inacio Lula da Silva, famed for being a radical populist, became president of Brazil. Argentina followed suit with left-leaning Nestor Kirchner, who entered office at the end of a deep economic crisis in May 2003. Chileans stayed their moderate socialist course, voting in Michelle Bachelet in January.

The leftists have broken new ground on their way to regional dominance. Uruguay elected its first socialist president, Tabare Vazquez, in October 2004, while at the end of last year Bolivia elected its first indigenous president, Evo Morales, a coca-farmers’ leader who helped to topple two governments in the last two years.

Leftist candidates are also front-runners in upcoming elections in Mexico, where the former mayor of Mexico City, Andres López Obrador, is promising crowds he will give priority to millions of poor Mexicans if he wins this month; and in Peru, where radical nationalist Ollanta Humala won the first round of the presidential ballot in April (the second round of elections was occurring as this issue went to press).

Humala, Kirchner, and Morales have either received political backing from, or forged economic and political ties with, Venezuela’s Hugo Chavez.

Business Implications
For businesses, the niggling question is how the move to the political left might affect their ability to operate in the region. It’s important to note that not all leftist regimes are the same, nor do all of them take actions that correlate with their rhetoric.

In fact, there have been some pleasant surprises amidst persistent investor hesitancy regarding the left in Latin America. When Brazil’s Lula came to power three years ago, the international market braced for the worst. Benchmark Brazil 40s—government dollar-denominated bonds that mature in 2040—sank to trade at 50 percent of their face value. Now they have rebounded to trade at around 130 percent of their face value.

In proving cynics wrong, Lula has been financially prudent and has presided over fundamentally sound economic growth. At the same time, the Brazilian leader has managed to ease problems that are often progenitors of security concerns: economic and political instability, and poverty.

“Here’s this leftist leader who was head of the workers’ party, a union guy, very much a populist, who came in and did all the right things,” says James Harper, director of corporate research at BCP Securities and a specialist in Latin American debt.

Other nations fall into the benign left-wing rubric exemplified by Lula. Chile’s Bachelet is the fourth consecutive president from the nation’s center-left alliance, and she is expected to do little to upset a stable political and economic process that has seen the conservative country’s gross domestic product regularly grow about six percent annually.

“We’ve seen very little concern from businesses with Bachelet coming in, maybe because Chile is a little more advanced,” says Anne Milne, director of Deutsche Bank Securities’ emerging market research. “Most people think there will not be a change to the economic model.”

Not all of the leftist movements are viewed with the same equanimity, however, as evidenced by the concerns over Chavez. Current leftist politics in Latin America are often boiled down to the contrast between the Venezuelan leader and Lula. “Chavez is quite different,” says Harper. “He’s not this left-wing guy who saw the light. Since taking office he has done many things that have led investors and companies to believe he may not respect contracts and the like.”

Lending credence to investor fears, Venezuela’s tax authority in March temporarily closed the administrative offices of French oil company Total SA and the Italian oil company Eni SpA, citing accounting irregularities in the companies’ tax filings. Venezuela then took over oil fields operated by both companies after they failed to reach an agreement to form joint ventures with state company PDVSA. The firms parried, saying that in order to avoid a legal battle they would pay off a combined $126.6 million in back taxes to the Venezuelan government.

Not surprisingly, Venezuela has seen a drop-off in foreign direct investment. Other Latin American countries present similar concerns.

Bolivia rocked international investors and neighboring countries alike when it nationalized its natural gas industry in May. On his 100th day in office, President Morales ordered foreign energy companies including Brazil’s Petrobras and Spain’s Repsol YPF SA to relinquish their gas fields, sending in army troops to ensure compliance. Morales said he planned to raise the price of gas exports bought by top clients Brazil and Argentina to generate more revenue for the state. Planning Minister Carlos Villegas said Argentina’s tab could rise by as much as 65 percent.

Before that, Bolivian authorities in March detained two executives of the Spanish-Argentine energy company Repsol YPF as part of an ongoing oil smuggling investigation. The country’s attorney general is also seeking 30-year prison sentences for three former Bolivian presidents on charges of irregularities in contracts signed with foreign investors in the gas sector, including Exxon, Petrobras, Total, Repsol, and British Gas.

“Those sorts of things are no good for the country, because it indicates they [Bolivian authorities] could do worse things to foreign companies in the future,” says Eddy Quiroga, general manager of Xentrax Security, a consulting firm based in Bolivian capital La Paz. “There is a lot of instability right now. A lot of people who want to invest in the country for future business are waiting.”

“Bolivia and Venezuela are the two countries we’ve had the greatest queries over,” says Dave Cameron, vice president of the Americas security services at International SOS, which provides security and medical assistance to travelers around the world. “It is the threat of land reform, the disposition of assets, expropriation, and lack of government support in things like labor disputes. Whereas, in the past, companies have been able to depend on the security infrastructure, perhaps now they are not so certain that will be the case.”

In mid-May, Ecuador spooked investors when it cancelled a key contract with U.S. oil giant Occidental Petroleum Corp. and seized the company’s local assets. Ecuador accused Occidental—the nation’s largest investor and responsible for 20 percent of its crude production—of transferring part of an oilfield without authorization. Government officials said the takeover was not part of a nationalization of the nation’s oil industry, but it deepened the uncertainty gripping the South American mining and energy sector.

Investors are also worried about Argentina, whose president “is very much to the left,” says Fajardo-Guerrero.

Argentina’s anti-U.S. sentiment was clear during the 2005 Summit of the Americas in the Argentine seaside resort of Mar del Plata, where local and regional protesters railed against U.S. President George W. Bush.

Kirchner has triggered investor concerns by ousting Economy Minister Robert Lavagna, considered a steady, moderating force behind Argentina’s recovery.

The Argentine leader has also indicated that his country won’t adhere to International Monetary Fund (IMF) debt payment obligations, leaving his administration free from IMF policies such as spending caps and higher utility rates. “One of the things that had been holding Kirchner back from more nationalistic policies had been the IMF agreement,” says Robin King, professor of political economy, risk analysis, and international banking at Georgetown University’s Center for Latin American Studies.

“Now, without that, and with Lavagna gone, there is less of a constraint towards things like expropriations. There is nothing left to moderate Kirchner,” says King.

In March, Argentina revoked French utility Suez SA’s 30-year contract to supply water and sewage treatment to people in the Buenos Aires area. Kirchner’s planning minister, Julio De Vido, accused Suez of not investing enough in services for 10 million customers, and management of the operation was placed under the Argentine government’s control. Argentine bonds fell on concerns that Kirchner is tightening the state’s grip on private industry.

Suez had served Buenos Aires water customers since 1993. The French firm and more than 20 international utility companies have taken Argentina to the World Bank court over breach of contract, claiming they had an agreement allowing them to hike prices if there was a currency devaluation. The government refused to allow a hike after it devalued the peso in January 2002.

End of midnight tango. Accompanying the political and economic turmoil has been an upsurge in crime in various trouble spots. Perhaps the most precipitous security downfall has been in Argentina. Buenos Aires (BA)—where a third of the country’s people live—long held the reputation as the safest city on the continent. Despite being the world’s eighth largest urban center, it was not uncommon for women to walk alone safely through BA’s downtown in the wee hours.

That serene state began to change in the late 1990s as the country slid into a devastating four-year recession. Nearly every colleague of mine working at a BA news agency was robbed, often in taxis, where they would be sandwiched by two men brandishing weapons.

The economic and political turmoil hit a nadir in 2001 with the largest sovereign debt default in history. The taxi mafia intensified, muggings became common, and a freeze on bank accounts produced looting and violence.

Argentina has since enjoyed a surprisingly strong economic rebound built on a leap in the price of commodities, and the crime rate has decreased, but the previous security enjoyed by its citizens and visitors has not completely returned.



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