Tuesday, 30 December 2008

Cuba and the 50th Anniversary of the Revolution (Part1)

There was a subject I wanted to talk about days ago: Cuba. I recommend you, dear reader, to check this blog: Generacion Y, by Yoani Sanchez.

On Jan. 1, the Revolution has its 50th anniversary. The celebrations come at a critical point of inflexion for the island nation, where a process of political transition is taking place. Economy Minister Jose Rodriguez last week trimmed the official 2008 growth estimates to 4 percent from 7 percent, alleging the impact of hurricanes in Sept., the surge of oil and commodities and the global crisis. Growth, nonetheless, will be propelled by reforms undertaken in agriculture and wage policy by President Raul Castro since taking office in February.

Raul has boosted prices paid for agricultural products and redistributed idle state lands to private farmers and cooperatives to trim food imports. A few weeks after taking office, the younger Castro established a policy that scrapped caps on earnings, tying wages to individual performance. According to Reuters, more wage reforms are planned.

However, I read the news coming from the Cuban state, what´s reported by the independent media (the best economic reporter in Havana is with no doubt Marc Frank, the veteran Reuters correspondent) and I check Yoani´s blog and the difference between versions of the news are amazing. Frank has been quite right in pointing out the rapid deterioration of economic indicators (especially the external sector and commodity production) and the necessity by the regime to implement radical, credible changes in Cubans´way of life. On the other hand, Yoani´s blog tells us day by day the slow progress made by Raul in terms of implementing institutional and social reforms. She writes: ''The tedium typical of year-end led me to watch the monotonous show of our lawmakers´ last 2008 session. The eternal formula of exposing problems without pointing at the real causes of them is back this December at Congress Hall. It´s all about a style in which, typically, the lawmaker starts saying 'Our Revolution has done a lot to improve retailing, but there are problems we need to tackle on.´Without that indispensable bow, you could be taken either as an ungrateful individual or a hypercritical dumb.´´

Quite graphic, isn´t it? The regime needs to make quick progress in economic reforms to avert social unrest. The military controls 60 percent of Cuba´s $40 billion economy -- and that share may probably increase as a way to dissuade any attempt by citizens to question the regime. But the country also faces significant policy challenges -- an eroding current account situation, supply shortages and a flagging export market. Unless Venezuela continues to extend financial aid, the Cubans will be condemned to go through a period similar to the one they went through in the 1990s. recent erratic decisions made by the government to default on certain trade financing and loans with European countries will only help to shut down more funding windows for the Communist country.

Earlybird, Dec. 30, 2008

Headlines for Dec. 30:

  • ECUADOR -- Ecuador Pays Off $28 Million of BNDES Debt to Brazil: (Reuters) Contrary to what many people had said for weeks, the Ecuadorean government decided to repay part of the loan extended by the Brazilian state development bank. In my view, which I was almost forced to change because of the recent remarks made by Ecuadorean President Rafael Correa (Didn´t I, Jim?,) the country will recognise this loan to a point that doesn´t mean a disbursement bigger than 40 percent of the total credit (which is about $245 million.) The loan still is under arbitration for Ecuador still considers it ''illegal´´ (illegal???, what Correa does mean by illegal!!!!)
  • U.S. -- GMAC Gets $6 Billion Capital Injection by the Treasury: (WSJ) In a delayed move that signals the government´s decision to increase its role in the car industry, the Treasury Department will use the Troubled Asset Relief Program to help kick start auto loans. The TARF was initially designed for banks and financial companies. This may be an indication that the Obama administration won´t spare a single penny of aid until it sees clear signs of recovery.
  • U.S. -- Housing Crisis Means Problems for Divorced Couples: (New York Times) Check this story. One-sixth of homes in America are now worth less than the money borrowed to buy them.
  • MARKETS -- Oil Expected to Rebound to $60 a Barrel: (Bloomberg) OPEC output cuts may drive oil higher. This might mean that the dollar could fall further. Will Latin regional currencies rally again in the wake of this? Probably not.
  • BRAZIL -- Government to Manipulate Job Data to Reduce Share of Informal Workers: (Globo) In another move with evident electoral bias, Labour Minister Carlos Lupi (himself a union leader) announced changes to the way the government measures unemployment. If the changes take place, informal workers who contribute to social security will no longer be counted as part of the informal economy. This comes as most economists are expecting an increase of about 1-2 percentage points in the unemployment rate by the end of next year.
  • BRAZIL -- Unions Win Injunction in Courts Stopping Reduction of International Air Ticket Prices: (Valor) Citizens don´t trust the judiciary: in a recent survey, 38 percent of Brazilians rated the judiciary power as 'corrupt' and 'inefficient'. That is, as this case reflects, the result of well-organised trade unions and business associations with powerful lobby muscle suing the state and plans to modernise the country -- and obviously winning either significant regulatory or tax concessions.
  • BRAZIL -- Business Confidence Plunges to 10-Year Low: (Valor) The indicator points to a recession, because it is one-third of those business executives interviewed who now expect output to decline, the worst reading since Jan. 1991. It is clear -- the export component of Brazilian supply plus an expected deterioration in labour numbers in the coming months will only propel declines in manufacturing. Stay fixed-income. Expect lower interest rates next month!
  • PERU -- Crisis Will Slow Growth; Economy Growing Above Trend, Says Minister: (Comercio) Peru, the ''golden economy´´ of South America, is growing above trend (oh, really???) says its Economy Minister Valdivieso. He says his ''first task´´ was to cool down growth and prepare the country for the crisis. Valdivieso is hopeful that a $35 billion investment plan will stay on track, despite the dearth of financing (ha!!) And they still want to sell bonds, as Bloomberg reported last week, to ''reinforce market confidence (!!!!)´´
  • COLOMBIA -- Government Freezes Fuel Prices for First Quarter of 2009: (Espectador) Well, that is healthier than cutting prices. At least they will wait until oil stabilises below $60 a barrel to do so. I wonder what will happen to Ecopetrol if something like this happens. The stock should rise on the news (market participants were expecting the government to trim gasoline prices.)

Brazil, the Economic Crisis and the Presidential Succession (Part 1)

A few days ago I met a number of political analysts in Sao Paulo as part of my routine duties as an ''analyst.´´ Apart from the typical lousy political jokes we make, and the arguments we have, and the speculative scenarios that we tend to fabricate, the conversations had an unusual and perhaps not quite timely focus: the 2010 presidential race.

Dear reader, you may wonder why we were talking about the campaign, which starts only in April 2010, and the election (scheduled for October of the same year.) But the global crisis is giving some sort of relevance to this discussion, so I will tend to be brief (sorry for my long epistles of the past few days) and summarise the main bullet points that we all touched during the round of talks of the first days of December.

1) The crisis and how it does/will affect presidential hopefuls: The inflation rate, the Selic and the unemployment rate won´t be as relevant as they were in defining the winner of the 2010 race, although they will play a role. The crisis poses a problem, and hardly an opportunity, to the presidential hopefuls, according to most of the analysts I talked to. For the opposition, the crisis seems to be a significant problem -- the two biggest states that it dominates (Sao Paulo and Minas Gerais) would be hard hit in the event of a recession (which I insist is day by day becoming a more likely scenario.) Governors Jose Serra of Sao Paulo and Aecio Neves of Minas (photo, right) will put into motion an ambitious programme for investments next year. I wonder how they will implement it as tax revenue declines. Sao Paulo is even creating some Frankenstein-like programme similar to what Lula created: the sovereign wealth fund. I read that in the news (can´t say where exactly and I am sorry for that.) But government supporters who dominate a great part of local governments also are in dire straits. Lula won´t be able to transfer part of his record popularity to his handpicked successor. That because his popularity depends (and will depend) upon high growth rates. Dilma Rousseff (photo, left,) so far his handpicked and preferred candidate for 2010, is lagging behind in polls, and his national presence, charisma and preparations are almost always put into questions by allies and foes. We know the good times are gone for sure and for Dilma, that´s bad news.

2. The reshuffle of political forces in the event of an economic crisis of great proportions: The crisis may make it almost impossible for the ruling Workers´Party to create a candidacy (president-vice president formula) of its own. For sure, the PT will have to rely on Lula´s choice for the succession (and it is more likely than ever that he will force the party to accept a formula where the PMDB -- the largest party in the country, -- to pick the running mate.) And it is not necessarily clear that the presidential candidate will be a ''petista´´ (as members of the Workers´Party are known.) A candidate with national presence and recognition such as Ciro Gomes (the former finance minister who is a member of the Socialist Party) or PMDB´s Sergio Cabral (the Rio de Janeiro state governor.) One analyst mention Henrique Meirelles, the central bank president, as one of Lula´s possible choice.

And for the opposition PSDB party, the crisis will also create hurdles for the unification around one single name (remember that Neves and Serra are excellent names for the 2010 presidential election.) If their administrations manage to dribble the worst of the crisis and as a consequence leverage their names a bit further for the race, and the better their image, the smaller the chance they will agree on a single name.

3. Congress and its role: The government and the opposition face a tug of war for the election of the presidents of the Senate and the lower house in February. The opposition will use its force to fracture the ruling coalition. The ruling coalition is fractured, all in all, because the PT and the PMDB want to elect their own leaders as heads of both houses. The PMDB may, in the event of a defeat in the Senate, start to depart from the ruling coalition. The consequence of all this will be, in the opinion of all the analysts consulted, a complete paralysis of the economic legislation agenda for next year in Congress.