July 30, 2006 6:56 pm

July 30: Mexico’s vulnerability

After the series of wobbles experienced by global markets in recent weeks Mexico’s stock market index once again started heading upwards, piercing the important 20,000-point barrier to finish the week on 20,252 points.

And if you limit your view to local events there is every reason to think that the index will continue to climb. Last week all of Mexico’s biggest companies reported excellent figures that in many cases surpassed market expectations; there is a growing sensation that business-friendly Felipe Calderón will be named president elect following a hotly disputed election this month; and on Friday the central bank kept interest rates on hold at 7 per cent and said that annual growth would be “over 4 per cent” this year.

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The problem is that all these factors are likely to produce a rally that could reach as high as 22,000 points – but only until September or perhaps October. With further evidence coming last week that the US economy is decelerating – real gross domestic product growth was sharply down in the second quarter while consumer prices were sharply up – any longer-term optimism surrounding Mexico’s stock index should be questioned.

The fact is that Mexico’s economy and its companies are still woefully dependent on the ups and downs of US industrial production. And with analysts predicting that the US economy is going to head into increasingly difficult territory next year it is probably wise not to get too carried away with medium-term prospects south of the border.

A weaker Real?

Brazil’s decision last week to allow exporters to keep a percentage of their earnings outside the country represents a significant shift in policy and a welcome reduction of red-tape. But it is unlikely to produce the desired result - a weaker and more competitive Real – any time soon. The idea is that by allowing exporters to keep some of their foreign exchange abroad (initially a limit of 30 per cent has been set) in order to pay off debt or pay for imports the government will take some of the pressure off a currency that has appreciated significantly over the last couple of years. Under existing rules, all such earnings have to be repatriated and exchanged for Reais. Unfortunately, any falls that might result will signal buying opportunities for portfolio investors. Brazil’s high interest rates are continuing to attract hot money. Rates are falling but the pressure to continue financing a still growing public sector will limit the scope for the kind of reductions achieved by countries such as Mexico and Chile

Brazil’s mobile battles

Few businesses in Latin America have more potential to expand sales among the lower income groups than those offering mobile telecommunications services. Brazilian operators, for example, have been expanding apace at the so-called bottom of the pyramid in the last few years. But as first half results released over the last ten days or so show the business is not necessarily profitable, at least in the short term. Vivo, the market leader owned jointly by Telefónica of Spain and Portugal Telecom, lost R$493m in the second quarter compared to R$253m a year ago. TIM, the Telecom Italia subsidiary that is number two, also recorded a net loss of R$249m in the second quarter (albeit less than in the same period of last year), while Oi, a third company, made a net profit of only R$400,000. Part of the problem is that many poor people can’t afford to use their phones very much, depending entirely on pre-paid cards. Another difficulty is that so many companies have entered the sector in recent years, aggravating competitive pressures. Carlos Slim’s América Móvil is one of the most aggressive. Its Claro subsidiary has been discounting handsets, selling them for as little as R$1 in one recent promotion in Minas Gerais state. Consolidation seems inevitable. Expect some of the smaller players to drop out of the game pretty soon.

Brazil and Bolivia still at loggerheads

When Argentina agreed to pay a higher price for Bolivian gas last month, there appeared to be some momentum behind La Paz’s strategy for the sector. Higher prices, it seemed, would be rewarded with pledges of larger export volumes.

But those who had hoped that the agreement with Argentina would set a precedent for a deal with Brazil are becoming increasingly disappointed.

Last week, Julio Gomez, Bolivia’s deputy minister of hydrocarbons, accused Petrobras of fiddling with gas measuring equipment to make them show that output was lower than it really was. Petrobras denied the charge. A day later, Luiz Inácio Lula da Silva, the Brazilian leader, said his country had made a mistake in becoming dependent on Bolivian gas and pledged to work for natural gas self-sufficiency by 2008. By the weekend, the third set of meetings between Petrobras, Brazil’s state-operated energy company, and YPFB, its Bolivian counterpart, had ended in failure.

Mr Lula da Silva’s downbeat comments reflected his own failure to be firmer with Evo Morales, the Bolivian president, who declared at a Petrobras facility on May 1 that he was nationalising the sector. Rather than recognise that there is a divide that needs to be bridged, the Brazilian leader’s leftwing instincts have led him to back his Bolivian counterpart in public.

Meanwhile, Mr Morales appears caught between a desire to hike prices and not wanting to damage the electoral chances of his ally in a presidential contest later this year. If neither head of state can bring himself to compromise, the issue may go to international arbitration in 45 days’ time. Neither side should want that: at least for the next few years, the two are dependent on each other and must find a way of doing business together, rather than relying on the courts to solve their differences.

Bolivian cross talk

In the immortal words of Monty Python, no one expects the Spanish Inquisition.

And few expected the ongoing dispute between Evo Morales’s leftwing Bolivian government and the Catholic church to flare up in the way it did last week, when the radical president claimed that “some hierarchs of the Catholic Church are acting as in the times of the Inquisition.” It was a crass observation, but one that speaks to the depth of feeling on both sides.

Ostensibly the disagreement is over education: the government wants to reform the system in order to break the church’s monopoly over religious education. More fundamentally, it is about recognising the cultural and religious diversity that is Bolivia’s reality. The church may still dominate the official curriculum, but its power is waning in Bolivia, spurred on by the increasing pride in indigenous identity and the growth of evangelical Protestantism. In the 2001 census, 56 per cent still declared themselves Catholics, but that number is falling while other forms of Christianity are growing fast.

Next Sunday (Aug 6), Bolivia is due to inaugurate its constituent assembly and the religion question is sure to come up. The church has suggested it is up for the fight, with the cardinal archbishop of Santa Cruz rallying Catholics on the issue and warning that “big wars started from minor pedantic points”. The constituent assembly is charged with recasting the constitution to include the historically marginalised indigenous majority, and the education debate is also about whether all Bolivian schoolchildren – including those in private Catholic schools – should learn something about traditional rites and practices.

In most high Andean communities, Catholicism and pre-Colombian religion co-exist in a mixed, dualist system, and that would seem to be a model for educational reform. This may be one conflict in which Mr Morales has right – if not God – on his side.

Edited by Richard Lapper. Notes by Richard Lapper, Hal Weitzman and Adam Thomson.

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