May 28: Second thoughts in Ecuador

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Ecuador may be starting to regret its knee-jerk expulsion of Occidental, the US oil company that was until two weeks ago the biggest foreign investor in the Andean country.

Alfredo Palacio’s government has found it increasingly difficult to maintain that its decision – based on the allegedly improper transfer of a 40 per cent stake of the Block 15 oil field to EnCana of Canada in 2000 – was strictly judicial.

The ruling was made by the energy ministry, which said it could not legally do anything else. But although most in Ecuador agree that Oxy broke the law, there are increasing grumblings about the proportionality of the response – and the fall-out.

Oxy looks to have a strong case in arbitration proceedings in Washington. It will argue that it informed the energy ministry of the EnCana transfer at the time. It will also point out that its contract said the government “may” terminate its contract in the case of an improper transfer, not that it must do so.

Ecuador, meanwhile, will have its case made by an attorney-general who ruled on three separate occasions that the government could have legally negotiated for Oxy to remain in charge of Block 15.

That could land Ecuador with a compensation bill of up to $3bn.

More immediately, the country will have to deal with the implications of Washington’s postponement of trade talks in response. When current trade preferences with the US expire at the end of this year, the effects will start to be felt.

Government spokesman have been saying publicly that Ecuador can find other markets for its products.

That is bordering on delusional: in sectors such as flowers, one of the success stories of Ecuadorean exports, 70 per cent of all production goes to the US. Without a trade agreement, come January producers will face a 6.8 per cent tariff. Little wonder that they are already making plans to transfer the industry wholesale to neighbouring Colombia.

Ecuador’s top trade officials are frustrated. Jorge Illingworth resigned as trade minister last week and Quito’s top negotiator told the FT that up to 30,000 jobs a year could be lost without a trade deal with Washington.

The indications are that Ecuador will be paying for this government’s decision long after Mr Palacio steps down in January 2007.

Uribe’s election

Álvaro Uribe looks certain to win his second term as Colombian president, with opinion polls showing that he is likely to achieve victory in Sunday’s first round of voting. But Mr Uribe’s next four years in office are likely to be no less difficult than his first term in office. Having pacified the most populated north and western part of the country, which includes cities such as Bogotá, Medellín and Cali, the president must now start to begin to make dents into alarmingly high poverty levels.

Nearly 50 per cent of Colombians earn less than $2 a day and have been excluded from the benefits of economic recovery. The warning signs will be visible for those who care to look. The level of abstention for one, predicted to be near 50 per cent. Another could be what is expected to be a strong showing by the candidate of Colombia’s left-wing opposition – the Pólo Democrático. Carlos Gaviria barely figured in surveys conducted earlier this year but should achieve more than 20 per cent of the vote on Sunday, pushing Horacio Serpa of the Liberal Party into third place.

Not a good start

If Peru’s polls are as accurate as they were in the first round of presidential elections on April 9, Alan García looks set for a comfortable win in the second round run-off on Sunday June 4. That will be sure to soothe foreign investors, who were alarmed at threats by Ollanta Humala, Mr García’s rival, to nationalise some sectors.

But before they get too excited, it would be worth taking a look at what kind of Peru Mr García will preside over.

Unlike the start of his first stint in the presidential palace in 1985 or the elections of Alberto Fujimori in 1990 or Alejandro Toledo in 2001, Mr García will begin his government with little popular support.

Up to a quarter of all voters are likely to spoil their ballot papers rather than vote for either candidate, giving Mr García a somewhat hollow victory. Moreover, the largest party in Congress will be Mr Humala’s nationalists, who will continue to agitate for higher taxes on international mining companies and may bring out their supporters on to the streets to help squeeze the new president.

Support from other factions in Congress is likely to be flaky in the long term. Social protest, particularly in the southern highlands where support for Mr Humala is strong, will probably flare up again within the next year.

Governability looks likely to remain difficult at best in Peru – and that will put pressure on Mr García to give in to his populist instincts.

Nationalisation: the sequel?

After Bolivia’s surprise nationalisation of the gas industry this month, President Evo Morales may have another surprise up his sleeve this week.

On Tuesday his government is due to announce the winner of an auction to develop El Mutún, a massive iron ore deposit in the south-east. But foreign interest had evaporated so much that only two companies put in offers – and of those, Mittal Steel was told its bid did not meet the criteria.

That leaves only India’s Jindal group, which is not particularly happy about the less attractive terms under which Bolivia now wants to operate the concession.

Mr Morales may well be preparing to announce that no foreign investors have met the conditions and that the deposit will be exploited by Minersur, a recently created joint venture between the Venezuelan and Bolivian governments in which Caracas is the senior partner.

That would further cement Venezuela’s influence in Bolivia – and further alienate South America’s poorest country from the global economy.

Mexican remittances

Is there any limit to the growth of remittances – the money Mexican migrants living abroad send back to their families every month? According to figures released by the central bank on Friday, it would appear not.

During the first quarter of this year remittances totalled $5.19bn. To put that figure in context compare it with foreign direct investment during the same period, which was just $3bn.

The rate of growth has taken almost everyone by surprise. Remittances last year were a record $20bn, which was the most important source of foreign earnings after oil. But this year they are almost certain to be a lot higher: the figure published on Friday was a staggering 27.5 per cent more than remittances received during the same period last year.

All this money is having a profound effect on Mexico’s population. Drive through rural areas and witness families upgrading their once humble houses with new windows, fittings and even entirely new floors – all thanks to remittances.

And it is creating untold opportunities for business. The construction sector and related companies are booming thanks in large part to the purchasing power remittances have afforded families once limited to spending all their income on basic necessities.

Cemex, the Monterrey-based cement company, has already set up a system whereby migrants living in the US can pay for bags of cement locally to have them delivered to their families in their native towns and villages back home.

In the financial sector, meanwhile, banks and mortgage lenders are scrambling to get in on the action. Mexican mortgage lenders such as Hipotecaria Nacional and Su Casita have opened up branches in the US where even undocumented Mexicans can take out a five, 10 or 15-year loan to buy new or used property back home.

Bancomer, the Mexican operation of Spanish-based BBVA, is even working on a special “migrants’ fund” to encourage recipients of remittances to save a portion of their money.

All of this, combined with Mexico’s increasingly established macroeconomic stability, is helping to create a growing middle class now able to buy property, open bank accounts for the first time and even to start saving. And that can only be good for Mexico.

A more cautious Copom

Brazil’s monetary policy committee, the Copom, meets this week to decide the next move, if any, in the central bank’s target overnight interest rate, the Selic. At its last meeting in April it cut the rate from 16.5 per cent to 15.75 per cent, the fourth 75-basis-point cut since December. Before the turbulence on financial markets last week, most economists had expected a similar cut this time. Now, the consensus has fallen to a 50 point cut. It could be smaller. In trading on Friday, interest rate futures priced in a cut of 25 points. At the height of the turmoil, there was talk on markets of no cut at all or even an increase.

That can probably be ruled out. But it is clearer than ever that the central bank, whose mandate is to use interest rates to pursue its inflation target – 4.5 per cent this year – is concerned with more than the impact of the Selic rate on consumer prices. At the top of Copom members’ minds will be the Treasury’s ability to roll over domestic debt, much of which is linked to the Selic, at rates any less attractive than they are now. The Treasury is entering a period of exceptionally heavy amortizations. Debt equal to more than 20 per cent of gross domestic product falls due over the next 12 months.

Foreign investors have piled into Brazilian domestic debt in recent months, as yields on Brazil’s foreign debt have fallen so much that they are no longer compelling. Foreign investors were especially attracted to long-term inflation-linked bonds issued over the past three years. At auctions earlier this year for such bonds maturing in 2045, foreigners took as much as 90 per cent of the Treasury’s offer. Bonds that were sold to yield inflation plus 7.5 per cent in March traded for closer to 7 per cent on secondary markets. But in last week’s turmoil they were changing hands at inflation plus 9.4 per cent – wiping about 40 per cent off the profits of many investors.

The Treasury was forced to cancel further auctions and instead bought bonds back during the week (at inflation plus 9.44 per cent for the 2045s on Tuesday – the bargain of the year for the Treasury). It also sold floating-rate bonds of the kind it has been trying to retire. Sentiment improved later in the week and it was able to sell inflation-linked notes again. Nevertheless, the Copom is unlikely to risk another run on the currency this week by cutting rates by as much as manufacturers would like.

Alckmin not taking off

Supporters of Geraldo Alckmin, the presidential candidate of Brazil’s opposition centrist PSDB, are wondering when – or if – he will start to make any dent in the lead in opinion polls held by president Luiz Inácio Lula da Silva of the leftwing PT. Two polls last week suggested Mr Lula da Silva could win an outright majority in the first round in October, avoiding the need for a second round run-off – Mr Alckmin’s only hope of victory. Senior figures in the PSDB are becoming frustrated and despondent. One of them recently told diplomats over dinner he was ready to become a “soldier for governability” in the next Lula administration. Turning to the party’s top rank for help, Mr Alckmin has been told the party will do what it can but it is up to him to start energising voters.

So far, there is little prospect of this happening. One reason is Mr Lula da Silva’s absolute imperviousness to scandal. His natural constituents among the poor seem ready to accept his depiction of the alleged cash-for-votes scheme with which the PT bought governability as no worse than standard corruption among Brazilian politicians. If nobody else gets ejected from office for such behaviour, they may reason, why should they kick out “their” man?

But Mr Alckmin must take much of the blame himself. Brazil needs growth, and there is little sign that Mr Lula da Silva or the PT understand how to deliver it. Mr Alckmin apparently does, and has spoken publicly of the need to cut current expenditure – although he has stopped short of telling voters he will cut their pensions, which is what must be done. But this is not the stuff of successful election campaigns. Mr Alckmin’s promise is to offer better management. In the words of one commentator, the place for better management is in Casas Bahia, the successful retail chain. What Brazil needs is a leader. Mr Alckmin had better start to look like one soon.

Notes by Richard Lapper, Hal Weitzman, Jonathan Wheatley and Adam Thomson.

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