August 20: Bolivia’s trapped gas

To anyone following developments in Bolivia since Evo Morales triumphantly declared the nationalisation of the country’s gas reserves it was no great surprise that the policy came to a grinding halt this month.

Nationalisation – designed and timed primarily to meet domestic political concerns – was a classic case of a government trying to run before it could walk. YPFB, the Bolivian public energy company recently revived from its long-moribund state, is starved of funds and technical expertise and is in no condition to direct an overhaul of Latin America’s second-biggest gas sector.

But there is another problem. Bolivia’s energy regulator has accused Jorge Alvarado, YPFB president, of signing an illegal contract in June to export discounted crude oil to Brazil in return for refined diesel. The watchdog says that not only would the deal lose the state $38.5m, but by authorising an intermediary company to export the crude, Mr Alvarado contravened the nationalisation decree, which states that only YPFB can sell oil and gas.

The aftermath has been an ugly row, with Mr Alvarado using YPFB as a vehicle to wage a personal war against the regulator and the watchdog claiming the government has tried to quash its report.

Mr Morales, who in the first months of his administration took a strict “sack first, ask questions later” approach to the merest sniff of corruption, appears unsure of how to act. In the face of demands by opposition senators to sack Mr Alvarado, he has resorted to attacking their motives and denying that any of his team will lose their jobs.

YPFB is probably correct to say that it will need a $180m injection to press forward with nationalisation but before handing over an additional penny, Mr Morales should make sure the state company has a management team competent enough to know how to spend the money.

Gone with the windfall

Ollanta Humala, the radical nationalist who came close to winning Peru’s presidential race this year, sent shivers of fear through the international mining community when he promised to slap a “windfall tax” on foreign investors and rewrite existing contracts.

So big miners might be wondering now why they were celebrating so hard when Alan García defeated Mr Humala in the presidential race – given that he too promised to levy a “windfall tax”, thereby changing current tax arrangements and effectively altering operating contracts.

In the three weeks since he took office, Mr García has softened a little, saying the payments are “voluntary contributions” rather than a tax, but whatever the terms are, he is still putting pressure on foreign investors to pay more into the public purse.

It is, of course, a question of degree and approach, but in one important sense the most serious problem with investing in Peru remains, regardless of the outcome of June’s election.

Analysts constantly cite Peru’s main problem as being at the local rather than the national level. Many foreign investors, including BHP Billiton, Newmont and Monterrico Metals, a small UK resource development company, have been targeted by protestors in the past year, forcing them to suspend operations or withdraw from projects.

Mr García’s predecessor, Alejandro Toledo, had a habit of crumbling in the face of such protests. The new president, who in some areas of the country is likely soon to see his popularity fall to the single-digit levels Mr Toledo enjoyed for much of his presidency, would do well to develop a strategy for dealing with unrest directed at foreign-owned installations before the protests begin again.

Brazil’s watchdogs under fire

More howls of protest in Brazil as the government appears yet again to be encroaching on the powers of its independent industry regulators. This time it is the turn of Anatel, the telecommunications watchdog, which plans to sell licences for wireless broadband services on September 4.

The decision to sell the licences was taken several months ago after lengthy public consultation and had caused no controversy until two weeks ago, when Hélio Costa, communications minister, announced that the auction as planned would leave insufficient bandwidth for the government’s “digital inclusion” projects and demanded that it be delayed. Anatel – which has just four council members because the government has dilly-dallied over appointing the fifth since last year – reached a split ruling on the demand and, in the absence of a majority either way, declared that the auction would go ahead regardless.

The spat is a fine example of the confusion over Brazil’s regulators. The present administration accuses its predecessor of “subcontracting” government by giving too much power to the regulators. But it has yet to take a clear position on how this should change. Meanwhile, investors face uncertainty over who is actually devising policy and who has the power to implement it. The situation is made no clearer in this case by the fact that, while defending the interests of digital inclusion, the minister is also making Telefonica of Spain and Telmex of Mexico much happier, as they control the fixed-line operators that Anatel wants partly to exclude from the auction in an effort to increase the sparse competition in Brazilian telecoms.

Argentina grows, but debt remains a worry

The Argentine government last week announced that the economy grew by 8.8 per cent in the first half according to preliminary data – promising news by any measure, and a sign that Argentina is set to meet analysts’ forecasts of at least 7 per cent growth this year. Felisa Miceli, economy minister, is in upbeat mood, predicting exports of $45bn in 2006, up from last year’s record level of $40bn.

But scrutinise the debt numbers and the outlook looks less lovely. That was the message from Mauro Leos, senior sovereign risk analyst at Moody´s Investors Service. Five years after its devastating financial meltdown and in spite of having paid off its entire $9.8 billion debt to the IMF in January, Argentina’s debt indicators are worse than before the crisis, he told a conference in Buenos Aires.

He said he expected a debt-to-GDP ratio of 50 to 60 per cent this year – compared with 48 per cent before the crisis – falling only next year to pre-crisis levels. The ratio of debt to income has risen to 270 per cent in 2005-06 compared with 240 per cent in 1999-2001.

Leos’s assessment was not all bleak. He noted that the proportion of foreign currency-denominated debt had almost halved, reducing vulnerability to exchange rate fluctuations. But he said he remained “worried” about Argentina, in spite of the recent fast rate of growth, high commodities prices and twin trade and fiscal surpluses. Of most concern were a lack of transparency, a lack of institutional checks and balances, and the influence of political considerations on fiscal policy. Ms Miceli retorted that “prophets of doom” were doubting the country’s economic progress and forecasting “that this recovery was just a little summer”. But Argentina has plenty more work to do.

Venezuela to divert oil to China

Hugo Chávez, Venezuela’s peripatetic president – recently returned from a world tour that took in Russia, Belarus, Iran, Vietnam and Mali, with stop-offs in Portugal, Qatar and Benin – heads off on another foreign trip this week, to China, Malaysia and Angola. The most important act of Mr Chávez’s fourth visit to China will be to sign an agreement with President Hu Jintao for the construction of 18 oil super-tankers. Once built, Caracas hopes, they will allow Venezuela to divert a much greater share of its oil exports from the US to China and in turn boost bilateral trade with Beijing, which was worth $2.1bn last year. Venezuelan oil exports to China have risen from 14,000 b/d in 2004 to 80,000 b/d last year, and Mr Chávez has said that his short-term goal is to send 300,000 b/d. There is one problem in the medium term, however: China’s refineries are not configured to process Venezuela’s heavy crude.

Notes by Hal Weitzman, Jonathan Wheatley, Jude Webber and Andy Webb-Vidal.

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