Spotlight on... Latin America
Griesa hands Argentina small victory but holdouts committed to continue litigation saga
A group of US hedge funds has rejected the Argentine government’s offer of paying creditors USD 6.5 billion for claims of around USD 9 billion after Argentina’s USD 100 billion debt default in 2001. The proposed deal offered creditors without pari passu clauses in their Argentine bonds a total of 150% on the original principal in arrears. Creditors with pari passu were offered an option to take the base offer or a 30% haircut on the full value of the amount awarded. The holdouts have however lost significant bargaining power and credibility following US District Judge Thomas Griesa’s announcement on Friday 19 February that he will lift his pari passu injunction that had given the holdouts legal backing in the case. The government has therefore gained a small victory that builds on a recent agreement with Italian bondholders for a total of USD 1.35 billion.
Sources say Griesa had been fed up with the case, and given the change in attitude by Argentina following the election of the market-friendly president Macri, he has decided to lift the injunction under certain conditions. These are: Argentina repeals its laws stopping it from paying the holdouts, and that it pays in full those holdouts that it reached an agreement with earlier this month. While the holdouts can still delay the legal battle by appealing the decision, an end to this issue is now in sight. This would have significant ramifications for Argentina, which would regain access to international markets to help it tackle the economic woes inherited from the previous government. An agreement would be a crucial step in regaining investor confidence, which has slowly been building in the past two months following the gradual lifting of currency controls, as well as the floating and subsequent devaluation of the peso. Investors should however remain wary of an increasing likelihood of inflation in coming months.
Sources: Financial Times, J.P. Morgan, La Nacion
Brazil’s economic woes still worsening
2015 has seen Brazil suffer from falling commodity prices, slowing demand from China, Brazil’s largest export partner, as well as widespread corruption cases in the private and public sectors. Brazil is now experiencing one of its worst recessions since the 1930’s. February has brought only more bad news: recent central bank data shows that Brazil’s economic activity fell for the 10thstraight month in December. The IBC-Br economic activity index fell by 0.52%, meaning that last year’s economic activity dipped back to mid-2010 levels. This does not bode well for the Brazilian economy in 2016.
Brazil’s GDP was forecast to fall another 3.7% in 2016, while inflation is set to hit almost 10% before the end of Q3. On Wednesday 17 February, Standard and Poor’s downgraded Brazil’s credit rating to junk status. This spells continued uncertainty for investors, who will have to continue hedging against higher inflation and another devaluation of the real. Investors will also want to keep an eye on the increasing political instability of the Rousseff administration. While impeachment remains a possibility due to the president’s alleged manipulation of fiscal statistics, a Supreme Court ruling from December set conditions that will likely favour her chances of staying in office, at least in the short term.
Sources: J.P. Morgan, Global Risk Insights
Controversial Chilean labour reform to be passed in March
Chile’s biggest labour market overhaul since the Pinochet dictatorship is set to be implemented by Congress next month. After more than a year of negotiations with business and workers unions, these reforms will aim to tackle the problems posed by numerous strikes which have hindered industrial activity in recent years. Under the proposed legislation, unions will be granted extended collective bargaining rights and membership will be incentivised. The bill will also forbid the replacement of striking workers except to ensure the continuity of basic services. In a move to appease the business sector, the proposal also establishes sanctions for unions that turn to strikes without first exhausting options for dialogue.
Despite this, the new law is likely to have negative effects on Chile’s all-important copper industry, which represents one-third of government income. Already hit by the global commodity slump, the reforms are likely to increase labour costs in a sector that is fundamentally dependent on cheap outsourced workers. Copper output in Chile has been declining since its peak in 2013, when over 5,780 metric tonnes were produced. The new costs incurred by these labour reforms will contribute to this negative trend in 2016. On the upside, these developments will likely further incentivise diversification in the Chilean economy, which has been performing solidly despite the commodity setback and is predicted to grow at a rate of over 2% this year.
Sources: La Nacion, Reuters, IHS, Pulso, Sitio Andino
Peru’s general election heats up as presidential challenger Guzman’s candidacy invalidated
Peru’s National Elections Board (JNE) has ruled against the leader of the Everybody for Peru party, Julio Guzman, sustaining a previous resolution that invalidated his registration as party leader. Having garnered 20% of the popular vote in a recent opinion poll, Guzman is the candidate most likely to be able to challenge the frontrunner, Keiko Fujimori, in the upcoming election in April. The latest decision by the JNE will therefore come as a blow to his candidacy, which, if barred, could spell the end of any real challenge to Fujimori’s election.
With Peru’s central bank forecasting 4% GDP growth in 2016, Peru remains one of the more stable economic prospects for what will likely be a tumultuous year for emerging markets. The country is not immune to inflationary pressures, however: December data showed that inflation hit 4.4% in 2015. The recent decision by the central bank to raise its benchmark interest rate by 25 basis points to 4% aims to signal to markets that the government is addressing the problem by taking precautionary measures. Within this relatively stable macroeconomic context, the upcoming elections will be the main focus for investors who want to determine where the country is headed for the next 5 years. Following disappointment in Ollanta Humala’s last years in office, the run-up to the election has seen a clear shift away from leftist populist movements. All leading candidates (including Guzman) have been emphasising the need to attract investment, which should encourage the international business community.
Sources: Peru Reports, Peru 21, Control Risks
About Diego Oliva-Velez
I am a postgraduate student at LSE studying MSC Political Economy of Europe. I developed a passion for geopolitics from a young age, which gradually turned into an unbounded curiosity for how these factors affect macroeconomic and financial dynamics around the world. I have previously worked on investment promotion projects in Africa, Asia and Latin America.
