Latin America – Seven Ugly Sisters in Deep Political Trouble, by Eugen von Böhm-Bawerk

From Eugen von Böhm-Bawerk at

Get beyond endless Latin American headlines burning column inches and you come to far broader strategic conclusion: The seven ‘ugly Latino sisters’, namely Brazil, Venezuela, Ecuador, Bolivia, Colombia, Mexico and Argentina are all deep political trouble from collapsed benchmark prices. It’s merely a case of who’s in more advanced states of political decay where left leaning governments’ can’t hang on much longer vs. those trying to buy a bit of time with more ‘centrist’ positions. In either case, it’s going to be a classic example of too little too late where the seven ugly sisters have committed at least seven deadly sins when it comes to resource mismanagement over the past decade. This isn’t about whether crisis can be avoided, but how bad the impacts will be. Another ‘lost Latino decade’ beckons.

The ugliest twins are obviously Brazil and Venezuela right now. We firmly expect Rousseff to be impeached next month on the back of endless corruption scandals, and the drastically ill-judged return of Lula that poured far more oil on corruption cover up flames. Watch for Michel Temer to take over the reins of a coalition PMDB government, busily negotiating posts behind closed doors with other players to tee up a formal Worker’s Party split to form a caretaker government through to 2018. How much Temer can get done depends on how far the outstanding ‘car wash’ scandal still rubs off on PMDB factions for major economic reforms, where the rot still runs pretty deep. Initial rhetoric (and inevitable market lifts) on supposed ‘structural reforms’ and far broader liberalisation measures remain unlikely to play through. Although it’s possible Petrobras might push through 2017 licencing rounds purely for political appearances, it’s not going to deliver tangible results in current price environments. Dig just ‘under the salt’, and Petrobras leverage will remain high; local content even higher. Until Brazil can properly clear its electoral decks in 2018 Mr. Temer is going to have a very limited mandate. If anything, his core challenge is trying to make sure his caretaker outfit doesn’t end up ‘washed out’ day one, given Temer is by no means beyond political reproach, with the PMDB basically as corrupt as the ruling PT. The smart move for Brazil would actually be calling fresh elections with the TSE (electoral authority) invalidating the entire Rousseff-Temer 2014 ticket to put a line under what currently shapes up to be the worst commodity driven economic crash Brazil has ever experienced. Regrettably, Brazilian politics has nothing to do with national interests at this stage, and everything to do with narrow self-preservation societies.

Right on cue, that points us towards Venezuela where exactly the same PSUV dynamics are in play. Rather than trying to kick Maduro out of office, the PSUV is desperately trying to keep him in to take the interim pain (see Can Maduro Mayhem Last to 2017). The last thing they want is splintered opposition MUD forces launching a five month ‘recall referendum’ half way through Maduro’s term to remove him by the end of 2016. Not when the Party can actually ‘Constitutionally’ replace Maduro out of their own accord into early 2017 without needing a national election before 2019 to do so. As we’ve previously flagged, rear-guard PSUV tactics will include leaning heavily on the National Election Board (CNE) and various courts to undermine any referendum ballot. And continuing to extend ‘emergency rule’ for Maduro without the National Assembly’s (Parliamentary) blessing to do so. That debunks any notion Venezuela is even pretending to run its affairs by Constitutional strictures at this stage. Good old fashioned PSUV power grabs are back in vogue. But whether the Party can realistically drag things out that far depends on how much Chinese cash keeps coming Caracas’s way given $50bn sunk PSUV costs – and more importantly – whether economic collapse sparks mass social unrest. Short term power plant outages are getting Venezuela headlines as a potential supply problem of late, but the broader concern remains complete state collapse, and associated ‘transitional military rule’ for the generals to safeguard whatever’s left of dwindling economic rent, without being put behind MUD bars. Given structural default is now inevitable in Venezuela where the ‘government’is spending 90% of all oil exports purely to service debts, supply side losses are almost certain to accrue under Maduro’s remaining rule. Venezuela isn’t just ugly, it’s the proverbial ‘elephant man’ of Latino politics.

To continue reading: Latin America – Seven Ugly Sisters in Deep Political Trouble

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