Chavez Launches Banco del Sur

The presidents of Venezuela, Brazil, Argentina, Bolivia, Ecuador and Paraguay have launched Banco del Sur, the new South American development bank.

It is expected to have capital of about $7bn (€4.8bn, £3.4bn) and designed to promote integration by funding infrastructure and energy projects.

Uruguay’s president, Tabaré Vázquez, was also expected to sign the founding treaty yesterday evening when he arrived in Buenos Aires to attend the inauguration, as was Argentina’s president, Cristina Fernández. Colombia, however, has pulled out of the project, the brainchild of the Venezuela’s President Hugo Chávez, and Chile has remained on the sidelines.

Finance ministers of the seven countries now have two months to translate the ideals into practice.

Venezuela and Brazil are expected to be the biggest contributors but how the funding will be shared, how the bank based in Caracas will operate, what projects it will finance, and who its president will be, have yet to be defined.

Critics say the new bank is an expensive waste of time given the presence of other multilateral lenders such as the IMF and World Bank, but its founders say it will help free the region from “imperial” domination.

Chávez could be the comeback kid in ’08

by Andres Oppenheimer

While Venezuelan President Hugo Chávez suffered a huge defeat in the Dec. 2 referendum — independent election monitors say he lost by a wider margin than officially announced and only accepted his loss under pressure — he may still make a significant comeback in 2008.

Internationally, Chávez could add new countries to his petrodollar-fueled ”anti-imperialist” bloc and regain some regional stature as early as next year. There will be elections in Paraguay and the Dominican Republic in 2008, followed by elections in El Salvador in 2009.

It is not farfetched to think that — for a small fraction of what he spent financing presidential campaigns in other countries — he could add Paraguay, and later El Salvador, to his ”Bolivarian Alternative of the Peoples” alliance.

This would expand his group of allied countries — now made up of Cuba, Bolivia, Ecuador and Nicaragua — and help him resurrect his standing as a regional leader.

To be sure, the opposition’s victory in Venezuela’s Dec. 2 referendum, which would have turned Venezuela into a Cuban-styled ”socialist” country and allowed him to become president for life, will most likely force Chávez to spend more time focusing on consolidating his own support base at home.

Exit polls show that Chávez’s defeat was not so much due to major gains by the opposition, but by the fact that Chávez’s own supporters failed to turn out. Chávez got three million fewer voters last Sunday than in the 2006 presidential elections.

There were three recurrent concerns among Chávez’s sympathizers: that he spent too much time abroad, that he gave out too much money to boost his image abroad instead of spending it on Venezuela’s poor, and that his love affair with Cuba would lead to the abolishment of private property in Venezuela.


”Chávez will have to spend more time at home, and will have less time to focus on other countries,” says Patricio Navia, a New York University professor who was in Caracas for the referendum. “But he will have a major opportunity in Paraguay, where he can exert his influence with relatively little money, and no need to travel.”

Paraguay’s leftist Liberation theology retired bishop Fernando Lugo, who political rivals in Paraguay describe as a Chávez ally, is a strong opposition candidate for the April 2008 elections, in a country that has been controlled by the Colorado Party for the past six decades. Lugo’s campaign slogan is, “change or death.”

In El Salvador, the rightist ARENA party will face a formidable challenge from the leftist Farabundo Martí National Liberation Front in 2009. The FMLN, which lost several elections fielding old-guard former Marxist guerrillas as its candidates, has recently nominated Mauricio Funes, a journalist who presents a more moderate and modern image, as its new presidential candidate.

At home in Venezuela, Chávez has a lot of things going for him. He still controls the Congress, the Supreme Court, 20 of 22 governorships, much of the media, and — perhaps more importantly — a windfall of petrodollars from Venezuela’s oil bonanza.

Chávez will most likely concentrate on rebuilding his support base through a combination of spending more resources at home, and strengthening mechanisms of political control such as his Bolivarian Circles — Cuban-styled neighborhood watch committees — to make sure that recipients of state subsidies vote for him in the next elections.


In addition, Chávez may benefit from a divided opposition. While opposition leaders showed great political maturity by uniting to defeat Chávez’s proposed constitutional reforms in the recent referendum, it’s not so clear that they will be smart enough to unite on an anti-Chávez ticket in upcoming local and national elections.

My conclusion: Chávez’s recovery or demise will depend — as it always has — on world oil prices.

His megalomania has always been directly proportional to oil prices: He campaigned as an anti-corruption democrat in 1998, when oil prices were at about $8 a barrel, and ended up proposing a constitution that would have allowed him to become an almighty president for life in 2007, when oil prices reached almost $100 a barrel.

As long as oil prices remain at their current levels, and the United States continues buying $34 billion a year in Venezuelan oil, Venezuela’s narcissist-Leninist leader will remain pretty strong. He suffered a bigger blow than many of us expected, but he is by no means out of the game, neither at home nor abroad.

Lessons for Mexico in Brazil’s Boom

In the energy sector, open markets work

“God is Brazilian!” declared President Luiz Inácio Lula da Silva upon the recent discovery of massive new oil reserves off Brazil’s coast. But while God deserves a share of the credit for Brazil’s good fortune, so too does former president Fernando Henrique Cardoso, who fought to reform Brazil’s state oil company, Petrobras, in the mid-1990s. As Mexican president Felipe Calderón considers reforming Mexico’s national oil company, Pemex, he would do well to reflect on how Brazil became a world leader in energy production.

During his two administrations, from 1995 to 2003, Cardoso continued a privatization program initiated by a predecessor, President Fernando Collor de Mello, that transformed many of Brazil’s most prominent government-owned enterprises into publicly traded corporations. Companies such as Acesita (steel), Embraer (airplanes), Telebras (telephones), and CVRD: Companhia Vale do Rio Doce (mining) went public and have exhibited astonishing growth ever since—becoming respected world leaders in their industries and creating jobs and wealth for the Brazilian people.

None of these full privatizations, however, was as controversial as the partial privatization of the Brazilian oil company Petrobras. Shortly after taking office, Cardoso faced a strike by the oil workers’ union that shut down production for more than a month. Taking a page from the Margaret Thatcher and Ronald Reagan playbooks, Cardoso ordered the strikers to return to work or face dismissal. As gasoline and natural-gas supplies began to dwindle, public opinion turned in his favor, and Cardoso was able to push through legislation that turned Petrobras into a quasi-public corporation open to foreign investment and competition. The company raised capital through a listing on the New York Stock Exchange. Today, under Petrobras’s two-tier stock structure, the federal government maintains a slight majority of voting shares, but about 60 percent of overall equity is now in the hands of outside shareholders. Foreign operators can enter into partnership agreements with Petrobras or even bid against the company for offshore drilling rights. The creation of an independent board of directors has improved corporate governance, as has the adoption of international accounting standards and other transparency measures.

As a result, over the past decade Petrobras has gone from an inefficient industry laggard to one of the world’s most respected publicly traded energy firms. Petrobras is now a leader in deep-water oil exploration and natural-gas discovery and delivery. The company has also been at the forefront of Brazil’s efforts to produce efficient sugarcane-derived ethanol. Brazil’s domestic oil production and reserves have doubled, and Petrobras now has a market capitalization of over $200 billion, with operations in 27 countries, including the United States.

Mexico, on the other hand, forbids private investment in its energy sector, strictly interpreting its 1917 constitution’s statement that all subsoil resources belong to the Mexican people. But while many countries, from Canada to Norway to China, regard oil and gas reserves as national assets, only Mexico and North Korea ban any type of foreign—or even private domestic—investment in those industries. Private firms haven’t played any real role in Mexico’s energy sector since March 18, 1938, when President Lázaro Cárdenas seized the assets of British and American petroleum companies—a date still celebrated in Mexico as “Expropriation Day.”

As a result, Mexico’s national oil company, Pemex, is notoriously inefficient, less a corporation than an arm of the Mexican government. Because the government depends on Pemex to fund over a third of the federal budget, there is often little money left over to invest in expensive exploration in the Gulf of Mexico’s deep waters, where experts believe vast reserves of untapped oil and natural gas exist. And as a result of years of underinvestment, Mexico’s oil production has begun to stall.

President Calderón gave a major address in September, telling the Mexican people that “oil reserves have been consistently falling” and that the decline was “severely threatening” government finances. He warned that current reserves would last only nine years. Given the critical nature of the situation, one would think that Mexicans would be eager to open up their energy sector; but Mexico’s “oil patrimony” has long been a political third rail. Andres Manuel López Obrador, the populist who lost a close presidential race last year, recently held a rally in Mexico City and said he would call for mass demonstrations if the Calderón administration tries to “hand the nation’s oil over to foreigners.”

Public opinion polls, however, suggest that Mexicans may be moving away from López Obrador’s nineteenth-century heroic nationalism and toward Calderón’s twenty-first-century pro-business pragmatism. Common sense is gaining a foothold in Mexico, and the idea of at least “partnering” with foreign companies (such as Petrobras) is no longer taboo. In fact, Pemex has recently begun offering some very limited service contracts to foreign firms. Recently adopted legislation slightly reduces Pemex’s tax burden and promises billions in investment—but still much less than what experts say is needed. As energy analyst George Baker puts it, “Giving Pemex more money is all very well, but a commercial framework is needed to control, administer, and account for the money.”

What Mexico needs is Brazil-style reforms that would create a real corporate-governance structure for Pemex and open up the nation’s energy monopoly to foreign investment, competition, and expertise. President Calderón is expected to introduce an energy-reform proposal in the coming weeks. His campaign slogan in last year’s election was “mas inversion, mas empleos” (more investment, more jobs). The Brazil example shows how much a country can gain with that philosophy; will Calderón and Mexico have the will to adopt it?

* Charles Sahm directs a Latin American initiative for the Manhattan Institute and is president of Inter-American Advisors, LLC.

Peru Is In, Now Where’s Colombia?

Santa came early this year, arriving on an alpaca-drawn sleigh with Senate passage of Peru free trade. But it’s not the only gift America needs. Congress must pass the even more critical Colombia pact

The Senate’s decisive 77-18 vote Tuesday signaled that free trade and bipartisan spirit are very much alive in Congress. Following the House’s 285-132 passage on Nov. 8, it was a spectacular victory.

The pact not only scraps tariffs forever on U.S. goods into Peru; it gives Peru a long-term future in which poverty will be alleviated and another Latin American country will align with the U.S.

“Approval of this agreement,” President Bush said Tuesday, “signals our firm support for those who share our values of freedom and democracy and expanding opportunity for all.”

Hernando de Soto, Peru’s great economist of poverty alleviation, said as much at the Heritage Foundation last year. The treaty is “not only about free trade,” he said. “We are trying to set up a different model for Latin America. That model is essentially a political one, because we are pro-market.”

De Soto was Peru’s special envoy for the pact and apparently a persuasive one. He delivered a big blow not only to free-trade critics such as Big Labor and CNN’s Lou Dobbs, but also to free trade’s biggest enemy, Venezuelan dictator Hugo Chavez.

Chavez must be hurling antiques at his Caracas palace. As Peruvians gain choices about their future, they won’t have to turn to Chavez for answers. Eighty percent of Peruvians wanted this pact.

Right off, 85% of U.S. goods will enter Peru duty-free; the rest of the tariffs go in 10 years. Peruvians will now snap up U.S. products at more affordable prices, raising their standard of living.

They have been waiting for this a long time. Peru has put in so many “internal free-trade” reforms to prepare for this pact that its economy is already one of the world’s fastest-growing. Real growth clocked in at 8% in 2006, pushing its GDP to $77 billion. Purchasing power was up 10%, meaning Peru’s buyers are ready to spend.

The pact also provides a new legal framework for settling business disputes, allows companies to hire the talent they want, and ensures that U.S. and Peruvian companies get treated on the same legal basis. Companies that benefit most are small ones that create jobs, not those that can hire fancy lawyers to guard their rights.

Hailing the treaty, the U.S. Small Business Administration says 38% of U.S. trade with Peru is already done by 5,000 such businesses (vs. 29% for the world as a whole).

For Peru, foreign investment will pour in. If the pact is as successful as the one signed with Mexico in 1994, trade between the two nations will quadruple from $9 billion within a decade.

In short, it’s Christmas all around, with the free trade zone of the Americas stretching ever farther across the hemisphere’s Pacific coast. It is a trade alliance that will bring confidence and prosperity as surely as it will provide an alternative to populist tyranny.

That is why the pending trade pact with Colombia is just as critical. A U.S. ally with the second-biggest population in South America and the third-biggest economy, it straddles two oceans and has implemented the same economic reforms in preparation for free trade as Peru. Its GDP is forecast to surge 7.8% in 2007.

Also like Peru, it has endured a barbaric Marxist terror war and is on the road to ending it. To pass a pact for Peru while leaving out Colombia, President Bush noted Tuesday, would insult an ally.

As he also said, quoting Canada’s prime minister, Stephen Harper, the biggest fear in South America is not the populist appeal of Chavez, but the outlook for stability if Congress spurns Colombia.

Big Labor, however, opposes the Colombia pact with the same rabid fervor it did with the Central American Free Trade Agreement in 2005, a fight it lost. It claims Colombia’s government has not done enough to defend labor unionists from the violence that has hit the entire country.

Depriving Colombia’s 44 million people of free trade won’t improve unionists’ safety. Neither will moving the goal posts or jacking the ally around with shifting demands.

With Peru showing that free trade is alive and passable, there is plenty of cause for celebration. Now is the time to move forward on a deal with Colombia. The momentum must not be lost. There is too much to gain.

Argentine Dairy Farmers to `Sacrifice’ Cows Over Price Caps

Dec. 12 — Argentine farmers plan to “sacrifice” some dairy cows tomorrow to protest government price controls on milk, posing a challenge to newly elected President Cristina Fernandez de Kirchner.

An unspecified number of Holstein milk cows will be shipped to Argentina’s biggest livestock market, Guillermo Draletti, president of the General Union of Dairy Farmers said today. Farmers sent more than 1,000 cows to slaughterhouses last week, he said. Economy Minister Martin Lousteau announced a price cap on untreated milk of 78 centavos (25 cents) a liter on Dec. 4.

“We will sacrifice our oldest cows tomorrow as a form of protest,” Draletti said in an interview. “Small and medium- sized farmers can’t survive this new measure.”

Fernandez de Kirchner, who replaced her husband Nestor Kirchner as president on Dec. 10, seeks to maintain a policy of capping food prices to protect Argentine consumers from rising global commodity prices. Cattle ranchers and wheat farmers say the measures force them to plow up land or sell their herds to grow soybeans, which are freer of government controls.

Argentine farmers also are protesting outside of plants owned by dairy co-operative SanCor SA, Draletti said. Agriculture Secretary Javier de Urquiza yesterday urged farmers to open talks with the government.

Production Costs

Dairy farmers say the price cap may lead to milk shortages because production costs are 75 to 80 centavos a liter, newspaper Clarin reported Nov. 30. Argentina is the world’s third-largest milk-powder exporter, behind New Zealand and the European Union, according to the U.S. Department of Agriculture.

Argentine sales of untreated milk to dairy companies fell 12 percent to 4.2 million liters in the first 10 months of 2007 from a year earlier, according to statistics provided by the agriculture secretariat.

Global cheese and milk-powder prices have doubled in the past year as demand rose and a surge in biofuel crops cut the amount of arable land available for food production.

Milk demand may increase by 2.5 percent a year through 2010 and prices are likely to remain elevated for some time, Rabobank Groep, the world’s largest agricultural lender, said in a report in October.

Brazil’s Bovespa Rises on Fed’s Liquidity Plan: Latin Stocks

Dec. 12 — Brazil’s main stock index rose as global growth concerns eased, after the U.S. Federal Reserve and four other central banks said they would add cash to the banking system to prevent a slowdown.

The Bovespa index of most-traded shares on the Sao Paulo exchange gained 1,179.30, or 1.8 percent, to 65,691.56 at 10:33 a.m. in New York. Petroleo Brasileiro SA paced the gain as oil rose in New York. Latin Stocks fell yesterday on concern the Fed’s quarter percentage point cuts in its key interest rates were too small to stop the U.S. economy from falling into recession.

“That idea was thrown out with the action the Fed did today,” Fernanda Mello, who helps manage the equivalent of $1.3 billion at Maua Investimentos in Sao Paulo. “Now people can look at the Brazil’s fundamentals, which are very good.”

Brazil’s economy expanded in the third quarter at the fastest pace in more than three years, the government said today. The Fed is coordinating the measures with the European Central Bank, Bank of England, Bank of Canada and Swiss National Bank to “elevate” short-term funding pressures, the Fed said in a statement in Washington.

Petrobras, as Brazil’s state-controlled oil company is known, gained 3.9 percent to 84.08 reais. Crude oil for January delivery jumped 2.5 percent after a U.S. government report showed inventories declined last week. Cosan SA Industria & Comercio, the world’s largest sugar-cane processor, advanced 3.2 percent to 22 reais.

Chile’s Ipsa index rose 0.8 percent to 3,191.82, led by Cencosud SA, on speculation that declines in the previous two days had left some stocks cheap as global credit fears subsided.

Welcome Injection

Investors welcomed the central banks’ global cash injection to spur lending and economic growth, said Valentin Carril, who oversees $3 billion as chief executive officer of Principal Asset Management SA in Santiago.

“The main impact, especially in the very short term of one day, is a reduction of risk aversion globally,” Carril said in a telephone interview today. “Longer term, any resolution of this credit crunch means all companies in Chile are worth a lot more because Chile is a highly dependent on trade.”

Cencosud, Chile’s biggest retailer that was given a “buy” rating at UBS AG yesterday, rose 1 percent to 1,965 pesos.

In other Latin American markets, the main indexes in Argentina and Colombia rose, while Venezuela’s IBVC index and Peru’s IGBVL fell. The MSCI index of Latin American shares rose 1.5 percent to 4,551.46. Markets in Mexico were closed for a public holiday.

Brazilian GDP Expands at Fastest Pace Since June 2004 (Update4)

Dec. 12 — Brazil’s economy expanded in the third quarter at the fastest pace in more than three years, stoking speculation that the central bank may keep borrowing costs unchanged for most of 2008 to cap inflation.

Gross domestic product rose 5.7 percent in the third quarter, compared with a revised 5.6 percent increase in the second quarter, the government said. The expansion was above the median 4.9 percent forecast in a Bloomberg survey of 37 analysts.

Growth in Latin America’s biggest economy is surging as record low interest rates power consumer and business spending. A jump in corporate investment last quarter may do little to add output capacity fast enough to prevent a rise in prices, prompting the central bank to keep rates on hold, said Nuno Camara, a senior economist for Dresdner Kleinwort Group.

“Investment was very strong, which will make the investor more confident about the sustainability of growth,” Camara said in an interview from Sao Paulo. “But more investment means bigger aggregate demand, which is another sign the central bank should keep a cautious scenario.”

Latin America’s biggest economy expanded 1.7 percent from the previous quarter, faster than the revised 1.3 percent pace in the second quarter, according to the Rio de Janeiro-based statistics agency.

In the four quarters ended Sept. 30, the economy grew 5.2 percent from 4.9 percent in the same period ended in June, the biggest accumulated annual growth rate since the end of 2004.

Rates, Target

Brazil’s central bank over the two years through September lowered the benchmark lending rate 18 straight times from 19.75 percent to 11.25 percent, the longest easing cycle since the so- called Selic was adopted in 1999.

The rate cuts, while fueling investment and output in the $1.1 billion economy, have also stoked annual inflation, which quickened to 4.19 percent last month from an eight-year low of 2.96 percent in March.

Accelerating inflation, growth and industrial output prompted the bank to call a pause to rate reductions on Oct. 17 and again on Dec. 5. The bank board next meets Jan. 22-23.

Inflation measured by the IGP-M index, Brazil’s broadest, accelerated 1.1 percent for the 10 days ended Dec. 1, research institute Fundacao Getulio Vargas said today.

Prices in the city of Sao Paulo posted their biggest monthly increase since January this week, the University of Sao Paulo said today.

Output, Lending

A Dec. 5 report on industrial production, a proxy for growth, showed output in October climbed the most in three years, the national statistics agency said.

The 10.3 percent gain exceeded the 5.4 percent increase in September and the 8.9 percent median forecast in a Bloomberg survey of 34 economists. Factories in Brazil are operating at a record 84 percent of installed capacity, the National Industry Confederation, Brazil’s largest industry lobby group, said.

Brazilian bank lending rose 2.7 percent in October from a month earlier to 880.8 billion reais ($473.6 billion) from a revised 857.3 billion reais in September, the central bank said Nov. 27. Lending climbed 26.3 percent from October 2006.


Still, the bank may have leeway to resume cutting the benchmark rate, Latin America’s highest, after the second half of 2008, said Alexandre Lintz, senior Latin America economist with BNP Paribas SA in Sao Paulo. He expects the bank to trim the Selic by another point to 10.25 percent by the end of 2008.

“Solid growth won’t prevent rates from falling further in 2008,” said Lintz. “But at this point, markets are urging policy makers to remain prudent and handle growth more cautiously.”

The yield on the interbank deposits future rate contract due Jan. 2009 rose as much as 9 basis points, or 0.09 percentage point, to 11.83 percent, the highest yield since Aug. 24.

Investors use the contract to bet on future moves by the so-called Selic target rate. The yield fell to 11.82 percent at 1:08 p.m. New York time.

Jobs, Production

The result is also a boost for President Luiz Inacio Lula da Silva, who has focused his policies on sparking growth and job creation ahead of mayoral elections in October next year.

Brazil’s government-registered jobs rose 58 percent in October from a year-ago month, the Labor Ministry said Nov. 14.

The economy created 205,260 formal jobs in October compared with 129,795 in October 2006. In the first 10 months, the economy created 1.81 million jobs, a 20 percent increase compared to the same period of 2006.

Manufacturing, powered by capital spending, led growth higher in the quarter after posting a 5.8 percent increase from the same period a year earlier, the agency said.

The services industry, a measure of consumer spending that accounts for about 60 percent of the economy, rose 4.8 percent in the third quarter. Agriculture, which accounts for less than 10 percent of GDP, soared 9.2 percent last quarter.

Camara plans to boost his 2007 growth estimate “above” 5 percent from 4.8 percent. ABN Amro Bank NV economist Zeina Latif boosted hers to 5.2 percent from 4.5 percent.

The bank predicts growth of 4.7 percent, according to its quarterly report released in September.

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