Brazilian assets have tanked along with the best of them over the past few weeks. The currency slumped from R$1.84 to the US dollar on July 23 to R$1.95 at Friday’s close. Thursday and Friday, as word spread of investment funds in difficulty across the globe, were especially punishing.
But few in Brazil are alarmed. Guido Mantega, finance minister, said Brazil ’s resilience to global financial market turmoil would hasten the approach of the country’s long-awaited investment grade. ”We’ve got dollars to spare,” he said.
True, Brazil’s foreign currency reserves of more than $150bn provide a useful cushion in an environment of diminishing liquidity. What’s more, at a time when investors’ main priority is to de-leverage themselves away from risky, illiquid securities, it is hard to imagine Brazilian assets falling into that category. A certain amount of contagion is inevitable. But Brazil is no longer in the firing line as it once was.
That is, if what we are seeing is limited to a liquidity crisis. But as Nouriel Roubini convincingly argues the world may now be heading into a solvency crisis. If that is true, the twin pillars of Brazil’s relative recent prosperity - abundant liquidity and high commodity prices - will start to wobble. Complacency may not be the best approach.
The implications for the rest of Latin America seem to be pretty similar. Higher risk credits such as Ecuador and Venezuela did less well, but in general, Latin America survived unscathed from the sell-off, with Colombia’s bonds and currency closely following Brazil. ”The quiet and orderly erosion of debt prices contrasted with the landslide of negatives coming from the US and Europe,” commented analysts at IDEA, the economic consultancy. Although, IDEA did point out that when European fund managers come back from holiday at the end of this month there could be more of an impact. That is because - according to IDEA at least - Europeans are more risk averse than their US counterparts.
Jonathan Wheatley and Richard Lapper
Cash in a suitcase
After ”toiletgate” we now have what will - no doubt - soon come to be known as ”suitcasegate”. It is a scandal that could well prove politically costly for Argentina President Néstor Kirchner. What happened was relatively simple. A Venezuelan businessman travelling in the company of Argentine and Venezuelan state oil company employees on a state-chartered plane was caught last week trying to bring $800,000 in cash in a briefcase into Argentina.
Why it happened is still a mystery. Although it has evidently caused huge embarrassment for Mr Kirchner, who has had the official deemed responsible – a department head in the ministry of planning – sacked. Mr Kirchner has reason to worry. Corruption is affecting his government’s popularity ratings and damaging the election prospects of his wife, Cristina Fernandez, or at least putting at risk the chance of her winning in the first round of the October contest.
According to one pollster, Mr Kirchner’s approval rating has dropped 10 points in the past 12 months, reaching its lowest level of 49 per cent in July. And, says the same survey, middleclass voters especially are upset by a strong of corruption scandals. Mr Kirchner, who was evidently displeased with his Venezuelan counterpart Hugo Chávez at a get-together in Bolivia on Friday, can hardly count on the good sense of his Venezuelan allies to dig him out of the hole. Pdvsa, the Venezuelan state oil company, some of whose employees were on the plane, says it is investigating. But Venezuela’s foreign minister evidently doesn’t think it is worth the bother. He wonders what the whole fuss was about since things like this happen at airports ”every day” and predictably blames an imperialism for concocting a plot in order to ”weaken the countries of the south”
The ever-generous Mr Chávez
On his latest petro-diplomacy drive in Latin America, President Hugo Chávez has once again flamboyantly pledged to dish out billions of dollars left, right and centre. It remains to be seen, however, whether all of these projects will actually happen, or indeed whether Venezuela has the capacity to fulfill all of Mr Chávez’s promises.
The biggest commitment is to help Ecuador build a $5bn oil refinery that would process 300,000 barrels of oil a day – adding to Ecuador’s current capacity of 535,000 bpd. They are also considering adding a petrochemical plant worth around $10bn.
This is hardly small change. Industry experts worry that Venezuela ’s state oil company, PDVSA, is already under enough pressure with production declining even as oil prices reach historic highs. The company is already taking on more work with the recent increase of state control of the oil-rich Orinoco belt. And it is also being burdened with more and more social commitments that have nothing to do with the business.
PDVSA’s president admitted recently that the company is in an ”operational emergency” due to a lack of oil drills. So he can hardly have been pleased when the ever generous Mr Chávez promised to send two of these valuable items to Ecuador.
A drugs plan for Mexico
Mexico ’s war on drugs has been intensifying and it has not been going well. During the last 12 months, drugs-related violence has claimed the lives of more than 3,000 people and the severed heads of gang-land violence have washed up on the beaches of Acapulco, one of the country’s most popular beach resorts. This year, Felipe Calderón, the president, admitted to the FT that drug traffickers had, in effect, taken over parts of the country.
Now, at last, help appears to be on its way. US and Mexican diplomats are talking about a big increase in drugs aid and a pact could be announced later this month, possibly at the North American summit on August 20.
But there are two difficulties to overcome if the plan is to become a reality. First, there will be those in the US Congress who will question the purpose of more spending, given the limited successes of the $5bn effort that has been going on in Colombia since 2000. Coca plantations have been eradicated but cocaine continues to be produced in Colombia and output is growing in Peru and Bolivia. On US streets the drug is cheaper and purer than ever.
Second, even assuming US congressional approval there is the delicate task of persuading the Mexican public that the US should have a greater role in Mexico. The population of 105m has always been strongly opposed to US involvement in Mexican affairs, and governments have been extremely wary of allowing any kind of US military presence.
Mr Calderón will have to sell the idea not as an aid package but rather as a tardy recognition by Washington that it is finally prepared to pay the costs caused by the virulent appetite of its citizens for cocaine and other illegal substances.
