The worst news in Latin America business in 2019.

BY LATINVEX EDITORS

The worst events in Latin American business this year, according to Latinvex editors.

#1 Trumpnomics

This year marked another chaotic year in U.S.-Latin America trade relations thanks to the erratic behavior of President Donald Trump.

At the start of this month – specifically December 2 – Trump announced on Twitter that he would immediately restore tariffs on U.S. steel and aluminum imports from Brazil and Argentina, as a result of "a massive devaluation of their currencies, which is not good for our farmers.” In fact, the opposite is true: Both countries have actively been trying to strengthen their respective currencies against the dollar, Reuters reported.

Brazil's main steel industry body said that it was "perplexed" by Trump's decision, calling the move "retaliation,” Reuters reported. Meanwhile, Argentina's steel industry chamber said it was seriously concerned about the tariffs, which it said would harm local production and employment, Reuters reported. The news of the Trump tariffs then led both the Brazilian real and Argentina peso to fall further, showing how ignorant and incompetent Trump is on economic matters. Meanwhile, negotiations over future Brazilian steel exports to the United States have been halted, Reuters reports. 

In May, the United States imposed a 17.5 percent tariff on Mexican tomato imports after the two countries were unable to renew a 2013 agreement that suspended a U.S. anti-dumping investigation. The tariffs were suspended in September in an agreement which will be reviewed in five years, thus causing further uncertainty.

After gradually restricting U.S. relations with Cuba, the Trump Administration on April 17 notified Congress that it will activate Title III of the HelmsBurton Act on May 2, 2019, thereby allowing US nationals that hold Title III claims to file suit in US federal court against persons “trafficking” in property “confiscated” by the Cuban government, and becoming the first presidential administration to not suspend Title III since its enactment in 1996. (See this overview)

The result? Lawsuits against American Airlines, Amazon, Carnival Cruise Lines (which has been upbeat about its business before Trump became president) and others. In fact, during the six months after the activation of Title III, there were a total of 20 lawsuits by 72 plaintiffs against 67 defendants, according to an overview by John Kavulich, President of the U.S.-Cuba Trade and Economic Council.

Then there’s the fate of the North American Free Trade Agreement (NAFTA), which had boosted US-Mexico trade dramatically but was falsely accused by Trump of hurting the United States. Many thought Trump’s replacement trade deal -- the United States-Mexico-Canada Agreement (USMCA) signed in November 2018 – would put to rest any further uncertainty.

On May 30, Trump sent shockwaves globally when he announced that he planned to impose 5 percent tariffs on all Mexican imports on June 10 unless that country stopped all illegal emigration to the United States. Failure to do so would result in a gradual increase of tariffs through October when they would hit 25 percent.

“How can you trust Trump to honor a deal?” Chris Krueger, Washington strategist at Cowen said in a note quoted by CNBC. “Mexico submitted USMCA this week for ratification...Trump’s signature trade achievement was moving downfield...and he just threatened Mexico ... with unilateral tariffs on ALL Mexican goods exports to the U.S.”

Ten days before his shock announcement, Trump had finally lifted year-long tariffs on aluminum and steel imports from Mexico and Canada, which were seen as the key obstacle for USMCA ratification by legislatures in the United States, Mexico and Canada.

"We just did not see this coming," Ann Wilson, senior vice president of government affairs for the Motor & Equipment Manufacturers Association, told NPR after the new tariffs were announced. "Manufacturers flourish in this country when they have certainty. Now we have a real question about whether that certainty even exists." 

But after delays in U.S. Congressional approval, the USMCA was tweaked with new labor regulations in an update signed December 10. Yet, Mexico's deputy foreign minister, Jesus Seade, said December 14 he sent a letter to the top U.S. trade official expressing surprise and concern over a labor enforcement provision proposed by a U.S. congressional committee in the United States-Mexico-Canada Agreement (USMCA) trade deal, Reuters reported. An annex for the implementation of the treaty that was presented on Friday in the U.S. House of Representatives proposes the designation of up to five U.S. experts who would monitor compliance with local labor reform in Mexico, but it had not been  consulted with Mexico, which would have disagreed, Seade said. Two days later, Seade said he was satisfied with US assurance that there would be no labor inspectors.

Yet, the tariff threats in May and the updated USMCA process has left Mexicans with continued uncertainty about U.S.-Mexico trade relations. 

#2 Argentina: From Bad to Worse

In October, Argentine voters decided for some inexplicable reason to return to the populist policies that had again and again caused economic crises in the country.

After inheriting a mess from populist Cristina Kirchner in 2015, pro-business Mauricio Macri had failed to tame inflation and boost economic growth and after a run on the peso implemented a harsh austerity program as part of an agreement with the International Monetary Fund (IMF).

Yet, Argentines decided not to seek a third alternative, but rather the same Peronist party that had brought the original mess. Alberto Fernandez won the presidency, with Cristina Kirchner as his vice president.

Now, the old recipes of state intervention and controls are expected to be implemented. A formula that failed in Argentina in the past and will do so again.

Anne Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, compared Argentina to a sick man who refuses to follow the doctor’s orders.

“Imagine a man who has lived too extravagantly and eventually must go to the doctor for treatment of an acute disease, along with several other chronic conditions,” she wrote in a column syndicated by Project Syndicate in September. “The doctor prescribes a ten-day course of antibiotics, and advises his patient to start taking better care of himself. After three days of taking the pills and following the doctor’s orders, the man feels much better. But he finds the quiet life painful, so he forgets the medicine and his doctor’s advice and doubles down on debauchery.For a while, his return to the high life feels great. But, before long, he is back at the doctor, in even worse shape than before. The cycle repeats itself: he takes his medicine for a full week this time, but eventually reverts to his old habits. Argentina is that man, chronically overspending and over-regulating until it is forced to go to the International Monetary Fund for a new round of treatment.”

#3 Mexico Deteriorates

December marked the first anniversary of Andres Manuel Lopez Obrador as president of Mexico and what a year it has been. Economic growth has grinded to a halt, while crime has soared. Investor confidence continues to worsen every day.

The slowdown is unusual because the U.S. economy is still growing. The last Mexican economic recession that was not accompanied by a U.S. slowdown took place in the 1990s during the so-called Tequila Crisis, Bank of America Merrill Lynch economist Carlos Capistran pointed out in an interview with CNBC.

Revised data released November 25 by Mexico’s National Institute of Statistics and Geography showed the country’s economy contracted by about 0.1 percent for three straight quarters before flat lining in the third trimester of 2019. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) estimates zero growth for the full year 2019, while the Organization for Economic Co-operation and Development (OECD) predicts 1.2 percent growth next year.

By contrast, the U.S. economy will grow 2.4 percent this year and 2.1 percent next year, according to projections from the International Monetary Fund.

The reason for the slowdown is a combination of factors, but key among them is the deterioration in investor confidence after AMLO (as the president is popularly known) shocked local and foreign investors by scrapping a partly built, $13 billion international airport, renegotiated state electricity form CFE’s contracts with private firms, reversed recent energy reforms by freezing oil auctions and announced plans to build a $8 billion refinery as well as a $7.4 billion, 1,525-kilometer railroad in the Yucatán Peninsula.

It hasn’t helped matters that AMLO has repeatedly downplayed the importance of economic growth. A "key element of our policy is to put aside, gradually get rid of the technocrat obsession with measuring everything by economic growth," AMLO said in his first state of the union speech in September, according to Forbes.

"We consider that the most important is ...the equitable distribution of income and wealth." He also frequently says he prefers "soul wealth" to "material wealth."

Meanwhile, Mexico’s president has systematically overhauled the country’s bureaucracy and regulatory agencies, replacing technocrats with unqualified loyalists, saying publicly he prefers someone with 90 percent honesty and only 10 percent experience, as if the two were contradictory.

#4 Brazil Disappoints

2019 started so promising as Brazil was concerned. January saw a new administration led by the seemingly pro-business president Jair Bolsonaro. In addition to announcing an ambitious economic reform program, Bolsonaro named a well-respected economic team.

Yet, 2019 ends on a sour note. Bolsonaro has shown himself to be an erratic president, who again and again sabotages government plans and his own team (his public rebuke of Joaquim Levy, the well-respected head of the development bank BNDES and a former finance minister, shocked investors).

The highly-anticipated pension reform was finally passed in October thanks to pro-business legislators led by Congress Speaker Rodrigo Maia. Bolsonaro had done practically nothing to secure the votes, instead concentrating most of his time insulting foreign leaders like French president Emmanuel Macron, Hollywood actor Leonardo di Caprio and environmental activist Greta Thunberg. All three in large part due to their criticism of Bolsonaro’s environmental policies which have led to a 100 percent increase in deforestation in Brazil's Amazon, according to Reuters.

Bolsonaro’s lack of leadership has now resulted in other key reforms such as tax and administrative overhauls being delayed until next year.

The frustration with Bolsonaro was voiced by several prominent bankers interviewed by the Financial Times in a recent story headlined “Brazil reforms: has Jair Bolsonaro missed his moment?”

Meanwhile, a widely anticipated oil auction in November (Brazil’s largest ever) ended up disappointing as high prices and the dominant role of state-run oil company Petrobras scared off global oil majors and instead resulted in interest from Chinese state firms CNOOC and CNODC.

“Total disaster is the best way to describe this morning’s round,” Ivan Cima, a managing director at consultancy Welligence told Reuters, referring to lack of private participation and the loss of $9 billion in potential signing bonuses to be received by the government. “The round was doomed by high signature bonuses, the overly complex and non-transparent Petrobras reimbursements, and marginal economics.”

Even  worse: Brazil missed a historic chance  to attract investments, oil industry leaders say. Foreign oil companies that did not join the November auction and a subsequent one are also unlikely to bid next year, as they have decided to invest elsewhere, BP's Brazil president told newspaper Valor Economico. (Reuters has a summary in English). 

In the end, Brazil’s economy – Latin America’s largest -- is expected to only grow 0.9 percent this year, the IMF estimates.

Bolsonaro’s popularity among fund managers, economists and consultants has plummeted, going from an 86 percent good or excellent rating in January to 45 percent in October, according to XP Investimentos polls quoted by the Financial Times. 

“The message the government is giving is very confusing,” Wilber Colmerauer, a Brazilian financial consultant in London told the FT. “This is a liberal government but it has some elements which are interventionist and extremely conservative.”

#5 South American Unrest

October saw massive protests in Chile and Ecuador, followed by protests in Bolivia and Colombia. In the case of Chile and Ecuador, price increases of the metro and fuel were the original reasons, while in Bolivia it was election fraud and in Colombia a general strike.

In all four cases, the protests garnered far more support than expected and led to drastic changes, but also high economic costs. In Bolivia, President Evo Morales had to flee, while in Chile the government started a process of several key changes (including a guaranteed minimum wage, a hike in the state pension offering and the stabilization of electricity costs). In Ecuador the government backtracked on the fuel increase. And in Colombia protests have continued, albeit at a weaker pace.

The Chile protests were especially shocking as the country had long been seen as a role model for the rest of Latin America. In Ecuador, president Lenin Moreno at one point temporarily moved government operations from the capital Quito to the port city of Guayaquil.

The economic cost has been significant.

Chilean businesses lost more than $1.4 billion while the city's metro suffered nearly $400 million in damages from more than two weeks of protests in the South American country, Euronews reported. Chile's newly appointed finance minister, Ignacio Briones, said the economy will likely grow between 2.0 percent and 2.2 percent in 2019, down from a prior forecast for 2.6 percent growth. Meanwhile, hotel and tour groups have seen 40 percent of reservations for this spring and summer canceled in the past few weeks as the violence mounted, Bloomberg reported. Flight bookings plunged after the riots, going from a 5.2 percent increase from January to October 13th to a 46.1 percent drop the week after, and 55 percent the four weeks after, according to ForwardKeys data quoted by Travel Daily News. The decline has started to ease, but is still at double digits. During the week of 25th Nov-1st Dec, they were 36.8 percent down and the following week, 29.4 percent down.

Protests also impacted the salmon industry, lithium operations, port facilities, public transportation and supply chains. Walmart -- the company seen suffering most from recent violent protests -- has accused the Chilean government of neglect in protecting its stores from looting, La Tercera reports. 

In Ecuador, state-run oil company Petroamazonas EP suspended operations at three oil fields in the Amazon region. Petroecuador was forced to declare force majeure on its crude exports. Protests at installations in the country's Amazon oil fields cut production from 430,000 barrels a day to 176,029 barrels by Sunday, causing a loss of about $14 million a day. The 2-week Ecuador protests cost the economy $2.3 billion in lost productivity, spoiled goods and reduced oil production, according to the Industrial Chamber of Guayaquil, the country's most important economic centerer, AP reported. 

In Colombia, the retail, restaurant and hotel sectors were hit as were many companies which saw lost productivity during the different general strikes held since November 21, while Bolivian protests and armed clashes between opponents and supporters of Morales led to airlines suspending flights and foreign trade being paralyzed, El Deber reported. Meanwhile,  a group of armed people loyal to Morales were suspected of seizing the Carrasco oil refinery and forcing staff to flee, El Deber reported.  Morales supporters also held protests that led to food and gasoline shortages, according to AP.

Recent political volatility in a number of Latin American countries, including Argentina, Bolivia, Chile, Ecuador and Peru, reflects a broader theme of rising political risk that could amplify negative sovereign credit trends in the regions, says Fitch Ratings.

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