Upheaval in Latin America – the best option is staying the course

Economic and political turnarounds are swiftly, indeed almost simultaneously, agitating 650-million-plus Latin Americans from north to south. For almost a year the new governments in the region’s two largest economies have been trying to implement their election promises. And that in opposing directions: in Mexico with a left-wing agenda, in Brazil with a right-wing but economically liberal one. In Argentina, too, the victory of left-wing opposition candidate Alberto Fernández in recent presidential elections brought about a significant political change, and thus a departure from the liberal economic course of Mauricio Macri.

Demonstrations and protests in various countries evince the displeasure of various segments of the population with regard to ongoing government policies, as has been seen in Ecuador, and currently in the former local poster-child for stability, Chile. On the heels of dubious elections, crisis-stricken Bolivia must now elect a new president. Unlike Venezuela, which is still in an ongoing state of emergency.

But it is indeed such situations that render thorough analysis of the countries there the order of the day so that long-term prospects don’t go unnoticed in the prevalent fog. Because current circumstances alone don’t define the market, its characteristics do. There really is a common denominator that can be seen in almost all ongoing political tensions in Latin America: a more informed society with an unprecedented interest in politics. This presents a challenge to established systems regardless of country or party. And it is precisely this attuned and unrelenting society that represents a significant achievement towards an increase in law and order and improved future framework conditions in Latin America’s still relatively young democracies.

Things will remain exciting in 2020. Trade disputes between the US and China are leaving a mark on the region. Companies in Latin America will initially have to adjust to economic uncertainty, an overall economic slowdown, and a broadly tense situation. But not in the long term. In Latin America, upheaval is often followed by revival. And Brazil’s role as anchor and source of stability will prove all the more important: should the country manage to implement its ambitious plan for structural reforms, state modernisation and infrastructure expansion, markets in the region will benefit massively. And that’s not to mention the opening of markets and free trade agreements with the USA, China and other nations that Brazil now has on its agenda. All of which being a further reason for us in Europe to rapidly move towards ratifying the EU-Mercosur Free Trade Agreement as long as we’re still in the race. Staying the course remains the best option!

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Andreas Renschler

LADW Chairman, Member of the Board of Management Volkswagen AG and CEO TRATON GROUP

Sunday Brief N°11

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The CEO Agenda for Economic Cooperation with Latin America

With this agenda, LADW and McKinsey & Company hope to offer decision-makers from politics and business an up-to-date, factual base for discussion, thereby contributing to the generation of a sustainable perspective for cooperation between Germany and Latin America. The CEO Agenda was developed by McKinsey & Company for the LADW, and its primary findings were summarised in a publication initially presented at the Latin America-Caribbean Conference of Federal Foreign Minister Maas in 2019.

Publication “CEO agenda for Germany’s economic cooperation with Latin America and the Caribbean”

Preview CEO Agenda
Preview of the CEO Agenda at the LADW Dinner with the Ministers of Foreiogn Affairs from Latin America and the Caribbean © Christian Kruppa

Sunday Brief N°11

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South America experiences turbulent times

The continent is in turmoil. And that isn’t likely to change soon. Should Brazil or the global economy recover more swiftly than expected, it might stabilise the region.

Political change in South America is currently so rapidly it’s almost impossible to keep abreast of. The surprising changes on the continent began in August with the Argentines; these made it clear that they would vote out ruling liberal president Mauricio Macri – and they did as much in October. Now a Peronist, Alberto Fernández, is again assuming power in the country that, beside Columbia, ranks as South America’s second-largest economy. Fernández ran with ex-president Cristina Kirchner as his vice-president. This is not a good omen for entrepreneurs and investors. They’ve had unfortunate experiences with the latter left-wing populist.

There have been riots in Ecuador and Bolivia, too. In Bolivia, President Evo Morales had to leave the country because the military and police were no longer willing to support him after electoral fraud. The biggest surprise, however, is Chile: the most successful and stable country of the region, no less, has witnessed violent mass protests. The Chileans currently wish to draft a new constitution. But protests continue.

It doesn’t seem as if the riots in South America will stop soon – and they might, furthermore, spread to other countries. In Peru, for example, the situation is unclear and new elections are set for January. But only a tiny minority of Peruvians still trust their politicians. In Colombia, tensions are rising because of refugees from Venezuela and the resurgence of guerrilla activity. In Argentina, too, protests might also be held in a few months when voters realise that the new government has little room for manoeuvre and must, above all, save money.

The causes of tensions in these countries are different, but the reasons for dissatisfaction and anger are pretty similar from Panama to Patagonia. The weak growth that has lasted almost a decade has scuttled the poor’s hopes for advancement. The traditional middle classes also fear decline. They increasingly have to pay privately for services unfurnished by a weak state. The great divide between rich and poor and their respective incomes outrage many. As does the fact that campaigns against corruption are increasingly being thwarted even though in some countries they hadn’t even really begun. There’s a growing risk that, on the one hand, political outsiders will exploit people’s frustration, and, employing social media, overtake the political establishment, and on the other, that governments might attempt to restore order in an authoritarian manner by enlisting the military. Both of which would further fuel tensions.

Nonetheless, these developments are not to be generalised. The political basis for a settlement is apparent in Chile: there’s a will on both sides of the political spectrum to reach a compromise. It’s hard to imagine that the vast majority of Chileans would care to risk everything they’ve built up over the last three decades. The major Pacific states are also economically sound: inflation is low in Chile, Peru and Colombia, and budgets are balanced. These states thus have room in which to manoeuvre and introduce social expenditure or distribution measures. Economies could quickly recover when protests subside.

Brazil could also stabilise large parts of South America through economic recovery; a strong Brazil would lend growth momentum to Mercosur’s Argentina, Uruguay and Paraguay, yet also to Bolivia and even Chile. Under President Jair Bolsonaro’s government, Brazil is on a liberal reform course that can be seen, for example, in the implementation of pension reform. The government now wants to re-rail further reform packages with strict spending regulations for public budgets. Whether it will be able to implement them remains to be seen. Business activity is beginning to recover. Yet it’s improbable that this will be enough to soon set the whole of South America in motion like a locomotive. Nonetheless, Brazil’s reforms are currently the greatest source of hopes for growth in a region that has become surprisingly volatile.

Renewed growth in global demand for raw materials – both agricultural and industrial – could also have a stabilising effect. South America’s economies and national budgets are disproportionately dependent on the export of primary commodities. Growing tax revenues could be directly used to mitigate social tensions.

In the face of this tumultuous situation, one would do well to recall that lasting calm and stability have generally been the exception in South America, whilst abrupt economic and political change have largely been the rule. Most companies that have been active in South America for an extended period are used to this. Even in the boom years, day-to-day business in South America was by no means simple.

planet-earth
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Alexander Busch

Correspondent for Handelsblatt, Wirtschaftswoche and Neue Zürcher Zeitung in Latin America

Sunday Brief N°11

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What’s now at stake for us in Latin America

New presidents Jair Bolsonaro in Brazil and Andrés Manuel López Obrador in Mexico are daring to make a fresh start on a grand scale. The one is politically on the right, the other to the left. Both hope to win points by eliminating such problems as crime, corruption and bureaucracy. And the economy is to be stimulated. This is impossible without foreign input. That much seems clear to both countries – dubious remarks and inflammatory slogans by both presidents notwithstanding. In 2019 we will see how exactly the rhetoric of these new heads of state translates into reality.

One thing is for sure: these new starts are bound to turn the entire region upside down. Brazil and Mexico not only account for around sixty percent of Latin America’s economic output, they also exercise a stabilising function on the continent. Their slightest changes of course are certain to leave a mark on neighbouring countries. Although German companies are well represented and integrated in Latin America, there is still much more potential. So the question now is not so much “whether” one is involved in Latin America, but rather “how”.

Indices of growing confidence are already increasing. A leap of faith is being made by investors from all around the world, particularly in the case of Brazil. And indeed, the country is in a solid economic position. The financial market is more buoyant than ever. And not for nothing – such a political and economic turnaround offers opportunities that have to be seized promptly. By German companies, too. Should we fail to do so, we run the risk of missing out. And this would come at a high price, since the region is, and remains, an important market.

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Andreas Renschler

LADW Chairman, Member of the Board of Management Volkswagen AG and CEO TRATON GROUP

Sunday Brief N°10

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“Brazil and Mexico – two directions, one mandate: reform”

The decisive electoral victories of Andrés Manuel López Obrador in Mexico and Jair Bolsonaro in Brazil indicate the faith that the people of both countries have placed in change. As different as the respective political directions may be, the citizens of both countries want smart economic policy that creates prosperity and reinforces social equilibrium, as well as decisive action against corruption and improvement in terms of security. These are issues that are of central importance in the German economy.

Both presidents are at the beginning of their terms. And both carry a banner emblazoned with the same slogan: Reform. The need for action is enormous. So we, as companies, view the future with an open, constructive and optimistic outlook. Brazil and Mexico are important partner-countries for German companies with great potential to be tapped through clever, business-friendly policies. Both presidents have clear mandates. They are now being called upon to use them for the good of their countries.

LADW Vice Chairman Guido Kerkhoff - Thyssenkrupp
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Guido Kerkhoff

Chief Executive Officer of thyssenkrupp AG, LADW Vice Chairman and Co-Spokesman of LADW Working Group „Brazil“

Sunday Brief N°10

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Change of government in Latin America’s most important markets

New presidents have taken office in Mexico and Brazil. How they will govern remains unknown. One thing is for sure: they are bound to change Latin America’s political and economic climate.

The year 2019 is getting off to a tense start in Latin America’s two biggest countries. In both Mexico and Brazil, presidents have taken office whose manner of governance over the coming years is hard to predict. Their respective success or failure will significantly impact the region: the two countries account for almost two thirds of the gross domestic product, and, with around 335 million inhabitants, slightly more than half of Latin America’s population. These are important locations for the German economy. Whilst German industry supplies the large local market in Brazil, it primarily uses Mexico as an export platform to the USA and the world at large.

At first glance the two heads of state contrast starkly: Andrés Manuel López Obrador in Mexico is critical of business and wants to eliminate poverty in the country – primarily through the redistribution of wealth. Mexican entrepreneurs fear that he intends to wind back the clock and return to policies of closed borders, state dirigisme, and social policy in accord with the unions. Jair Bolsonaro in Brazil is a right-wing politician and former captain who wants to carry out neoliberal reform. The business community in Brazil is hoping that Bolsonaro will finally give the country the urgently required impetus towards reform, privatise state-owned companies, and open up the economy.

But despite the ideological differences, the two incumbents bear a certain resemblance. Not only that they are of a similar age, both being in their mid-sixties; both were able to successfully present themselves to voters as anti-establishment candidates. They have promised a break with conventional politics and mean to take a hard line on corruption and crime. The governments preceding them failed. Brazil and Mexico are both states with extremely high levels of crime and corruption. Furthermore, a significant factor in their respective victories was that they were able to secure the votes of the much-increased evangelical groups in the world’s largest Catholic countries.

Neither candidate, however, is a political outsider: both Obrador and Bolsonaro have been professional politicians for decades. The Mexican president began his political career in the Institutional Revolutionary Party (PRI), which ruled the country for seventy years. He was mayor of the capital, Mexico City, and is a three-time presidential candidate. The Brazilian, Bolsonaro, has been a member of parliament for almost thirty years. Yet both politicians have always been mavericks.

The new presidents are celebrated by supporters as saviours; individuals who, unlike the unloved politician-caste, will govern nationalistically “for the people.” Yet, given the cult of personality created around them, they each resemble the traditional caudillos of South America. Both are politicians who hardly know the world beyond their national borders and for whom it seems to hold no great interest.

Nevertheless, there are differences between the two countries for businesses and investors: López Obrador is assuming great power in Mexico. His party has a majority in Congress and his government is in control of the budget. With the construction-block of the new airport in Mexico City, he has shown that he will not take the pragmatic course towards the economy that entrepreneurs had hoped he would. Furthermore, the judiciary, media and opposition in Mexico are not strong enough to make the president more willing to compromise. Mexico’s economy is in good shape, too. López Obrador is under no pressure to deliver economic reform in the near future.

Things are different in Brazil: Bolsonaro is obliged to get the problematic pension-reform swiftly under way. Only then can the budget deficit be reduced in a timely manner so that the Brazilian economy might grow again, providing that investors implement their projects and businesses create jobs. Should he fail in this phase, Bolsonaro will be rapidly weakened politically as the economy will stagnate once more – in the wake of three years of recession. Furthermore, he faces a strong Congress, with only a minority of members of parliament on his side. The media, the judiciary and civil society will hold sway over the president. He has also relinquished performative economic competence: his super minister for economic affairs has filled all the relevant positions with capable economists, bankers and technocrats.

In conclusion, then: at first glance the chances for economic reform in Brazil appear greater than in Mexico. Yet both presidents are populists. So it is difficult to predict how they will react in the face of resistance to their policies or to crises. Both heads of state might try to strengthen the executive branch. This would inaugurate a sea-change in Latin America’s largest states similar to the one that has been ongoing in Turkey, Hungary, and more particularly the USA, for some time.

Change of Government in Brazil and Mexico
© Pixabay, Gerd Altmann

Alexander Busch

Correspondent for Handelsblatt, Wirtschaftswoche and Neue Zürcher Zeitung in Latin America

Sunday Brief N°10

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Confidence is warranted: there’ll be no “just carry on” in Brazil

A general election is a Herculean endavour in Brazil: those required by law to vote make up almost 70 percent of its 210 million inhabitants. In October, the Head of State and Head of Government, 513 Federal Deputies, two thirds of the Federal Senate, and the State Governments and Parliaments of all 27 Federal States are to be elected. And the current political situation is exacerbating matters. Popular parties have been deeply shaken in recent years by a broad reappraisal of corruption. Renowned politicians have been or are currently serving prison terms. The fifth largest country in the world is fragmented because the “tried and tested” is no longer an option yet actual novelty is not to everyone’s taste. So it’s unsurprising that the upcoming elections are polarising opinion by the day and throughout the land.

This extraordinary state of affairs is putting Brazil to the test: politics must dare to rethink itself. The economy will have to hold its own for some time in uncertain waters. And, what’s more, Brazilian society will have to find a new common denominator.

The outcome of any election is always uncertain, but one thing is a foregone conclusion: no matter who wins the election, there will be no simple “just carry on.” An ever more open society, a vigilant public, and an economy striving for growth is increasing the drive for political action. Which gives us cause for confidence. As German companies we will continue to require staying power, but Brazil is in a good position to convert its potential into stable growth and to move ahead in the international field.

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Andreas Renschler

LADW Chairman, Member of the Group Board of Management Volkswagen AG and CEO TRATON GROUP

Sunday Brief N°9

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Mr Sennes, must one fear the Brazilian elections?

This year’s elections are of the utmost significance. The country is in crisis due to tensions created by the rapid socio-economic and institutional progress seen in recent years. This progress has been accompanied neither by a renewal of the political elite nor by a competition-oriented agenda. The 2015/16 economic crisis, as well as various corruption scandals, destroyed the political centre and centre-right, and made room for a populist right-wing extremist candidate: Jair Bolsonaro.

Bolsonaro combines aspects of Chavez from Venezuela and Duterte from the Philippines. A former captain, he entered politics twenty-eight years ago and is currently in his seventh term of office as a Federal Deputy. An apologist for the military dictatorship, he is known for his statements in favour of torture and against human rights, homosexuals and blacks. His profile in Congress is predominantly against privatisation, budgetary adjustment and economic liberalisation. His economic advisor, however, is an ultra-liberal with a PhD from Chicago University and experience in Pinochet’s government in Chile. It is thus unclear what Bolsonaro’s platform will actually be should he be elected.

Lula and the PT are no longer the link binding the forces of the centre and centre-left, yet remain the dominant force in this camp. Haddad is smart and has a long-term vision, but has not yet demonstrated his ability to manage complex projects. His performance as Minister of Education was positive, although this is less unconditionally true of his time as Mayor of São Paulo. Bolsonaro and Haddad should go to the second round and Haddad should win.

Ricardo Sennes
© Christian Kruppa

ricardo sennes

Brazilian economist, Managing Partner Prospectiva and Senior Fellow Atlantic Council

Sunday Brief N°9

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China is strategically expanding its presence in Brazil – in accordance with a detailed plan

To put it simply, before the turn of the millennium, China hardly existed as a trading partner, investor or political player in or to South America. The transformation has been swift. And applies most particularly to Brazil. Around fifty-five percent of all direct investments from China to South America have flowed to Brazil in the last decade and a half. They amounted to fifty-four billion dollars. Brazil is the world’s number three recipient of Chinese investment. Furthermore, China is now Brazil’s largest export market. And also the source of most of its imported products. All of which is no coincidence, but rather the fruit of long-term planning. China is proceeding in South America precisely as the government formulated it in its 2008 and 2016 papers on Latin America and the Caribbean. The rapprochement occurred in three phases.

From 2005 to 2013, China was primarily concerned with securing raw material and energy sources. During this phase, there were large loans to Petrobras against future oil supplies, also investments of Chinese agricultural traders and, increasingly, holdings in ports. In São Paulo, the first of what are now five Chinese banks set up operations, their initial remit that of financing trade with China, although now they also accompany investments.

Phase two is in accordance with the Chinese proverb: “If you want to get rich, build a road.” Chinese state-owned companies have been investing in the Brazilian infrastructure for three years now. In 2017 alone, Chinese companies bought into the Brazilian electricity sector to the tune of around ten billion dollars. State Grid is now Brazil’s largest integrated power company and China Three Gorges is the country’s leading private power producer. And China is showing a flair for timing: its companies began investing in Brazil when the state and private entrepreneurs there were on the ropes due to the recession and the “Lava-Jato” corruption scandal. When it comes to investments, China is strategic and future oriented: digitisation and the interlinking of investments is only a matter of time. For he who controls electricity grids, roads, railways, ports, and, in the near future, telecommunication networks, has a huge advantage as an investor when it comes to Brazil’s digitisation and data communication.

Phase 3 of the investment strategy is now commencing. Three examples: the online department store Alibaba wants to buy the license for the Brazilian freight airport Viracopos. The company intends to set up its logistics centre for Brazil there in order to service a market of two hundred and ten million consumers. The Chinese car and battery manufacturer BYD (“Build your dreams”) is currently delivering the first twenty of two hundred electronic lorries to a municipal waste-disposal facility. The company also produces electric buses and solar panels in Brazil. The Chinese competitor to Uber, Didi Chuxing, bought up the Brazilian app 99 for three hundred million dollars at the start of this year, making the Brazilian company the first start-up with a market valuation of over a billion dollars. China wants to integrate Brazil more closely into the value chains of its industry.

The 2016 concept paper also notes how things are to play out; at the level of major politics and through the conclusion of trade agreements; through increased institutionalised cooperation at a ministerial level in Brasília as well as in the Federal States; through public-private investment projects; through intensive contacts with future political leaders; by setting up academic think tanks. Evidence for each of these points is already available.

In just a few years, China has accumulated a vast amount of knowledge about Brazil at its universities and established political networks. After just one decade, Chinese correspondents, diplomats, academics, businessmen and bankers are making discreet but very well-founded appearances in Brazil. They are well networked, speak perfect Portuguese and know all the niceties about Brazilian politics and bureaucracy. Diplomats in Brasília report that their Chinese colleagues come and go at important ministries as if they were at home. In the Ministry of Planning, for example, there is a Chinese-Brazilian technical working group that now, at its third meeting, intends to decide on investments totalling four billion dollars.

China is thus increasingly filling the vacuum left by the USA in Brazil. And by the EU: a high-level Mercosur-China economic dialogue is to be held in Montevideo in late October – whilst the chances of an agreement between the EU and Mercosur in the near future have just fallen again. Given this offensive from the Far East, we Europeans should consider whether our Latin America concept does not require an update. This especially applies to us Germans, who wish to hold regular consultations with Brazil as a strategic partner country: as of now, these have only been held once – in 2015. Much has happened in Brazil since.

Chinese paper lantern
© Fotolia, 6464128 L

alexander busch

Correspondent for Handelsblatt, Wirtschaftswoche and Neue Zürcher Zeitung in Latin America

Sunday Brief N°9

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Latin America an important ally for free trade

The new German government has just established itself, whilst landmark elections are still pending in Latin America. In the German economy, we look with anticipation to Latin America’s largest economies, those of Brazil and Mexico. Their new heads of state will have to maintain both countries on an accelerated course of growth, no easy task in these troubled times. For us it is evident that the countries of Latin America are more important allies than ever before.

Despite all the turbulence at home, Latin America has proven itself as Germany’s central partner in crucial matters. Global policy-making on issues such as the climate or energy could be dealt with more effectively together. Germany should use this opportunity to join forces. Since other players, especially those from Asia, must seek new alliances in view of the challenge being mounted against globalisation and free trade, Latin America’s geopolitical importance is continually growing. Despite the USA’s departure, the adherence to the Trans Pacific Partnership (TPP) in the form of the recently signed successor agreement, CPTPP, is just one indication of this, with Chile, Peru and Mexico being its Latin American signatories.

Politics and business in Germany would therefore be well advised to pursue the intensive dialogue with its Latin American partners established in recent years and to take advantage of the opportunities offered by these markets. Mutual understanding and shared political, economic and social values make Latin America an important ally. And that’s precisely what we need in times like these!

Foto des LADW Vorsitzenden Andreas Renschler - Volkswagen AG und TRATON SE
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Andreas Renschler

LADW Chairman and Member of the Group Board of Management of Volkswagen AG

Sunday Brief N°8

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