November 19: The worries return to Ecuador

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For the past month most observers had assumed that Alvaro Noboa, the market-friendly billionaire banana magnate, had Ecuador’s presidential race in the bag. Polls consistently showed the businessman with a lead of about 20 points over Rafael Correa, the radical who has ties to Venezuela’s Hugo Chávez.

But a string of more recent surveys have shown Correa closing the gap ahead of Sunday’s vote, and investors and their advisers are now watching the contest with renewed anxiety.

Opinion polls last week by Informe Confidencial and Cedatos, two respected local pollsters, showed just three points between the candidates – a statistical dead-heat – with Correa on 37 and 38 respectively, and Noboa on 40 and 41. Another poll, by Market, even put Correa ahead at 41 per cent to Noboa’s 37.

Ecuadorean bonds took their biggest drop for months in reaction to the polls. Correa, who had shown signs of moderating his discourse, has been reaffirming his pledge to restructure debt and to declare war on Congress by establishing an assembly to rewrite the constitution.

Much will be read into whatever the opinion polls say on Monday, although the truth is that a large chunk of the electorate is still undecided.

Suddenly, the race is interesting again, and much is riding on the result. If Correa triumphs, it will be seen as an important regional victory win for Chávez, who, after Daniel Ortega’s poll win in Nicaragua this month, will have expanded his anti-American alliance this month from three to five.

If Noboa wins, no doubt analysts will herald the death of Chavista influence in the region. Both calls may be exaggerated.

AMLO overreaches

When Andrés Manuel López Obrador declares himself the legitimate president of Mexico on Monday afternoon, many people will be tempted to conclude that trouble is in store. After all, López Obrador – narrowly and controversially defeated in July's presidential election - has proved time and time again that he is a savvy politician capable of drumming up strong grass-roots support.

But for now it looks as if the charismatic former mayor of Mexico City has played his hand poorly. By refusing to accept defeat Mr López Obrador has tried to discredit Mexico’s electoral laws and institutions – institutions that, for the most part, Mexicans continue to defend. Opinion polls show that the majority of Mexicans don't agree with the protests. According to a survey by Parametria, the polling company, 53 per cent of the population believes Felipe Calderón, the centre-right president-elect, has the necessary conditions to govern effectively.

The decision to disregard the result has also split his Democratic Revolution party (PRD) down the middle. Those who openly support Mr López Obrador’s increasingly revolutionary stance tend to be former members of the Institutional Revolutionary Party (PRI), the party that ruled Mexico for more than 70 years until 2000.

Talk to the traditional left within the PRD and many will voice vehement opposition to their leader’s tactics. If Mr López Obrador had accepted the election result and respected the legal process, the chances are he would now be the most important politician in Mexico. Instead, he could be in danger of following another famous Mexican revolutionary, Subcomandante Marcos, the leader of the 1994 Chiapas uprising, into political oblivion.

The battle for Brazilian telecoms, II

The battle for Brazilian telecoms (see last week’s Agenda) continues with reports that Deutsche Telekom may be entering a bidding contest for control of TIM Brasil, Telecom Italia’s mobile operation in the country.

Market sources says three other companies are interested: América Móvil (owned by Carlos Slim, Mexico’s richest man), Brasil Telecom (the Brazilian fixed and mobile operator controlled by Citigroup, local pension funds and Telecom Italia) and Telefónica of Spain. Analysts say Brasil Telecom and Telefónica would bid together – although Telefónica says it is not interested. América Móvil is keeping quiet about its intentions, although reports say it has offered $7.7bn for TIM Brasil.

A bid from Deutsche Telekom would make less sense than one from TIM’s competitors, as a glance at the market leaders makes clear. Vivo leads the pack but may find it hard to stay ahead. It uses the CDMA system, incompatible with the GSM technology used by its competitors. It has been considering a switch – an expensive and complicated undertaking. Buying TIM would do the job (with the exception of the north of Brazil, where Vivo operates but TIM does not).

Telefónica says it wants to concentrate on buying Portugal Telecom’s share in Vivo and will not break a commitment to spend no more than €1.5bn on acquisitions during 2006 and 2007. But it could buy Portugal Telecom’s share of Vivo with its own 10 per cent share of Portugal Telecom. Add its €1.5bn to the $2bn Brasil Telecom has in cash plus their combined borrowing power, and the joint bid begins to make sense, especially as an alternative to standing by and watching América Móvil – Telefónica’s rival for dominance of telecoms in Latin America – leap ahead in the region’s biggest mobile market.

Andean trade

If Wall Street analysts are to be believed, the 1.5 per cent dip in Colombia's stock market last week was at least in part prompted by fears that the country’s free trade concessions to the US market could soon disappear. The fears seem real enough, especially for businesses in the textile sector, which depends heavily on sales to the North American market.

Neither the current lame duck US legislature nor the incoming Democrat-controlled congress is likely to approve the Free Trade Agreements negotiated by the Bush administration with both Colombia and Peru, unless clauses affecting labour standards are revised.

True, the FTAs simply make permanent temporary benefits granted under Andean Trade Preference and Drug Enforcement Act (Atpdea) for Colombia, Peru, Bolivia and Ecuador. But that treaty is due to expire at the end of the year.

And although Democratic party leaders such as Charles Rangel, the incoming chairman of the house ways and means committee, are in favour of renewing the legislation, time is short. According to one former senior policymaker achieving renewal will be a delicate operation akin to “changing the wheel of a bus that is going downhill”.

Even so, Bear Stearns, the investment bank, takes an optimistic view, claiming – in a research note published on Friday - that Congress is “almost certain” to renew Atpdea, “given its perceived importance in curtailing drug trafficking”. It adds that after being “amended to appease pro-labour Democrats”, passage of the Colombia and Peru FTAs is also “likely” but “far from assured”.

Bear Stearns also points out that the improvements in the investment environment that would be ushered in by the FTA could occur anyway, at least in the case of Colombia. Measures to make corporate accounts more transparent, guarantee market access and provide investors with extra safeguards would be introduced as part of capital markets reforms being contemplated by the authorities.

Peru’s stock market: on the cusp

Lima’s stock exchange has broken so many historical records this year that new highs are barely newsworthy: Peru has had the world’s best performing stock market this year, with growth heading for 150 per cent by the end of 2006.

Is this sustainable? The Peruvian stock market has been exaggerated by thin volumes and lack of liquidity. As this flattered the upside, it could mean that any slowdown in growth will be that much sharper.

The Andean country is heavily dependent on metals prices: Peru is the world’s third producer of copper and zinc, and prices of both are expected to fall next year. The Peruvian arm of BBVA, the Spanish bank, is predicting zinc prices will drop 29 per cent and copper prices will fall 11 per cent in 2007.

On top of that, investment in Peruvian shares will be hit by the administration of Alan García’s proposal to end tax exemptions on capital gains from share sales.

Given that, the Lima Stock Exchange’s growth is likely to be much more modest next year – current forecasts are for growth of about 20 per cent.

There may still be some good bargains, however. Shares in Buenaventura - the part owner of Yanacocha, the massive gold mine in northern Peru - have been hit by earnings below expectations, anti-mining protests and expected lower gold production at Yanacocha. Yet if copper prices hold up next year, the company’s 18 per cent stake in the Cerro Verde mine could offset the impact of lower gold production.

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

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