LATIN AMERICA ADVISOR a DAILY PUBLICATION of the DIALOGUE Thursday, April 14, 2016

LATIN AMERICA ADVISOR A DAILY PUBLICATION OF THE DIALOGUE www.thedialogue.org Thursday, April 14, 2016

BOARD OF ADVISORS FEATURED Q&A TODAY’S NEWS Diego Arria Director, Columbus Group POLITICAL Genaro Arriagada What More Can Nonresident Senior Fellow, Rousseff Foes Gain Inter-American Dialogue Ground, Vote Still Joyce Chang Global Head of Research, Mexico Cut From Too Close to Call JPMorgan Chase & Co. Legislators pushing for the im- W. Bowman Cutter Former Partner, Next Year’s Budget? peachment of Brazilian President E.M. Warburg Pincus Dilma Rousseff have picked up Dirk Donath the support of another centrist Senior Partner, party in their bid to oust Rousseff Catterton Aimara in a vote scheduled on Sunday. Marlene Fernández Page 2 Corporate Vice President for Government Relations, Arcos Dorados ECONOMIC Peter Hakim President Emeritus, No Evidence Inter-American Dialogue Found in Mossack Donna Hrinak President, Boeing Latin America Fonseca Raid Jon Huenemann No evidence was found in a Vice President, U.S. & Int’l Affairs, Philip Morris International The approval rating of President Enrique Peña Nieto has sunk to 30 percent, a “historic low” raid of Panamanian law fi rm for a Mexican head of state, according to a poll published on Wednesday by Reforma, AFP Mossack Fonseca that would James R. Jones reported. // File Photo: Government of Mexico. Co-chair, Manatt Jones merit action against it at this time, Global Strategies LLC Panama’s public prosecutor said Mexico’s Finance Ministry said April 1 that the govern- Craig A. Kelly Wednesday. Director, Americas International ment will cut $10 billion from its 2017 budget due to lower Page 3 Gov’t Relations, Exxon Mobil economic growth and low prices for oil, the country’s chief John Maisto Q Director, U.S. Education export. Where does President Enrique Peña Nieto’s admin- POLITICAL Finance Group istration have room to cut its budget? What is the outlook for Mexico’s Former Argentine Nicolás Mariscal economy in the year ahead? What political consequences will budget Chairman, President Makes Grupo Marhnos cuts have on Peña Nieto and his party, the PRI? Thomas F. McLarty III First Court Visit President, Former Argentine President Cristi- McLarty Associates Eduardo Suarez, director and co-head of LATAM FIC Strategy na Fernandez de Kirchner refused Carlos Paz-Soldan to answer questions verbally in Partner, at Scotiabank: “Sadly, a fairly large share of the cuts are likely DTB Associates, LLP to come from investment, but we will also likely see some court Wednesday, instead handing over a prepared statement and Beatrice Rangel personnel being let go. Some of the obvious places to cut Director, A using the opportunity to accuse AMLA Consulting LLC non-capital spending, such as the Pemex / ISSSTE health services, will the judiciary of “incompetence.” José Antonio Ríos need to come on the back of reforms and negotiations with the unions. Page 2 Chief Executive Offi cer, Vadium Technology Inc. The good news is that in some cases we can see cuts being offset by Gustavo Roosen the private sector through farm-outs by Pemex, energy joint ventures and Chairman of the Board, Envases Venezolanos monetizing assets through the Fibra E investment structure. Also good Andrés Rozental news is that the Mexican economy remains somewhat of a global bright President, Rozental & Asociados and Senior spot despite a challenging external environment. With infl ation in check, Policy Advisor, Chatham House economic growth has been slower but still over a couple of hundred basis Shelly Shetty Head, Latin America points in positive territory, with wage growth quite robust—things are go- Sovereign Ratings, Fitch Inc. ing relatively well. Spending adjustments are necessary to avert a credit Roberto Sifon-Arevalo rating downgrade, which I think will be avoided. It’s not only the spending Managing Director, Americas Sovereign & Public Finance Ratings, cuts that are relevant, but also the message sent by doing a second Standard & Poor’s ‘pre-emptive adjustment‘ in the past two months. Hacienda is signaling that it will keep cutting spending to avoid falling into a negative sentiment Cristina Fernandez de Kirchner // File Photo: Expectativa. Continued on page 2

POLITICAL NEWS conditionally released from prison on Wednes- NEWS BRIEFS day after having given testimony last week that Former Argentine reportedly implicated Fernández and her late Schreiber Foods Opens husband and former President Néstor Kirchner Mexico Cheese Plant President Makes First in a case related to money laundering and embezzling public funds. Wisconsin-based Schreiber Foods is opening a Court Appearance plant in Guanajuato, Mexico, to produce “Amer- ican-style” cheese as well as cream cheese Former Argentine President Cristina Fernán- Rousseff Adversaries and other dairy products for the retail and dez de Kirchner refused to answer questions Gain Ground, Vote foodservice industries, El Financiero reported verbally in a Buenos Aires court Wednesday, Wednesday. The plant, covering an area of 7 instead handing over a prepared statement and Still Too Close to Call hectares with 30,000 square meters of space, using the opportunity to accuse the judiciary of is expected to generate 275 jobs. Schreiber, “incompetence” and conspiring with political Legislators pushing for the impeachment of which counts McDonald’s among its custom- opponents to seek her imprisonment on false Brazilian President Dilma Rousseff on Wednes- ers, began operations in Jalisco in 1992. The corruption charges, Clarín reported. Authorities day picked up the support of another centrist company also has operations in Brazil, as well summoned the former president to respond party in their bid to oust her in a vote sched- as Europe and Asia. to questions over alleged irregularities in the uled on Sunday, giving the opposition 308 of foreign exchange market during her administra- the 342 votes needed to pass the measure, Fol- tion, the fi rst of several pending cases prose- ha de S.Paulo reported. The head of the Social Dominican Republic cutors are looking into. A crowd of supporters Democratic Party (PSD), the largest centrist Needs to Stop Borrowing, had gathered outside the court building in Bue- party remaining in the governing coalition, on nos Aires, cheering as she left court after an Wednesday night instructed party members to Business Leader Says hour of combative exchanges that led the judge vote for the president’s impeachment. Rogerio The president of the Dominican Republic’s Na- to leave the room. “They can call me in 20 Rosso told reporters the vast majority of the tional Business Council (CONEP) said Wednes- times, they can put me in prison, but they will PSD’s 38 deputies support Rousseff’s ouster, day his government should stop borrowing never shut me up,” Fernández told fl ag-waving Reuters reported. Supporters of embattled external debt and avoid a situation where it supporters as she left the building, Bloomberg President Dilma Rousseff continue to defend needs support from the International Monetary News reported, noting that many in the crowd her, however. The Minister of the Government Fund, Dominican Today reported. Speaking had camped overnight to see her fi rst major ap- Secretariat, Ricardo Berzoini, said allies of at an event with opposition party presidential pearance in Buenos Aires since leaving offi ce Rousseff in Congress have 200 votes, dozens candidate Luis Abinader, Rafael Blanco said the in December. Meanwhile, a former business more than the 171 needed to block the im- country should also prioritize exports, modern- associate of Fernández, Leonardo Fariña, was peachment process, Agência Brasil reported. ize the labor code and lower the government’s fi scal defi cit through an electricity pact to FEATURED Q&A / Continued from page 1 eliminate subsidies. Abinder is polling a distant second place in next month’s presidential race, spiral—we’ve seen how painful that can be material impact on the 2018 elections. With behind incumbent Danilo Medina. in Brazil. Mexico has seen relatively positive regard to the PRI’s popularity, as can be seen things happen on the economic front, partic- all over the world, we have to be vigilant over ularly with the rise in real wages, which has the rise of populists, including in Mexico. boosted household consumption. We have The concerning part of the political outlook, Rising Canadian Dollar also seen strong remittances (particularly in my view, is the risk that the moderate vote Sapping Export Strength: in foreign exchange terms), low infl ation will be split in the next election.” Central Bank and strong formal job creation. This should help keep support for the current economic Jana Nelson, vice president for Canada’s central bank said Wednesday that a policies in place. On the negative front, all Mexico, Central America and strengthening Canadian dollar is sapping the of Pemex’s adjustments will continue to the Caribbean at Speyside Cor- nation’s export-led recovery, BNN reported. weaken the company, and for some, it will A porate Relations in Mexico City: Growth prospects would be facing a down- be taken as a signal that the reforms were “The 2017 budget will follow a zero-based grade if not for the fi scal stimulus in the federal bad, though I’m not sure this will have any budgeting process, and budget cuts have budget, the Bank of Canada said, predicting the economy will grow 1.7 percent this year, up Continued on page 4 from an earlier forecast of 1.4 percent.

No Evidence Found LEGAL BRIEFS in Mossack Fonseca Raid: Prosecutor Cuba Visa Policy at Center of Carnival Cruise Suit Carnival Corp. is being sued in Miami federal court over its compliance with a Cuban policy No evidence was found in a raid of Panama- that prevents Cuban nationals from arriving or departing the island by sea, the Associated nian law fi rm Mossack Fonseca that would Press reported Wednesday. Two Cuban-Americans are claiming their civil rights were violated merit action against it at this time, Panama’s because they were not permitted to travel from Miami to Cuba on the cruise line. In a state- public prosecutor said Wednesday, Agence ment, Carnival said it must comply with the visa, entry and exit policies of every country it sails France-Presse reported. Offi cials raided the to, and that it has lodged a request with the Cuban government to change the ship policy. The fi rm’s offi ces Tuesday in the wake of leaked case has the potential to become a class-action lawsuit, according to the Associated Press. data revealing the fi rm’s role in creating off- Local attorney Robert Rodriguez is representing the plaintiffs in the case. shore accounts for politicians and celebrities. “Right now we don’t have any strong evidence allowing us to take any sort of decision,” Javier Paul Hastings Expands in Brazil Caraballo told reporters. The fi rm says it has broken no laws in the “Panama Papers” scan- Paul Hastings announced last week that it had opened an offi ce in São Paulo following the ap- dal and that the leak was in itself illegal. proval of Brazil’s regulatory authorities. The offi ce is the fi rm’s twenty-fi rst. Roberta Bassegio, a New York-qualifi ed energy and infrastructure lawyer, will serve as chair for the new offi ce. Bassegio joined the fi rm in December. BUSINESS NEWS

Schlumberger Trims Milbank Tweed Advises on Mexican Financing Deal Venezuela Business Milbank, Tweed, Hadley & McCloy said last week it had represented a group of lenders in fi - nancing the construction of two offshore drilling units for affi liates of Grupo R. The rigs, which as Debts Mount are known as jack-ups, will be leased to Mexican state-owned oil company Pemex for oil and gas exploration in the Gulf of Mexico. Among the lenders Milbank advised are BBVA, HSBC, London-based Schlumberger said Wednesday Sabadell and Santander. The deal is one of the few fi nancings of new offshore drilling units so that it will reduce its business activity in Ven- far this year, the fi rm said. ezuela “to align operations with cash collec- tions.” The oil services giant said the measure is a result of insuffi cient payments received in recent quarters and “a lack of progress in es- Robbins Joins BakerHostetler’s Arbitration Group tablishing new mechanisms that address past Former federal prosecutor Joshua Robbins has joined BakerHostetler to serve as counsel with and future accounts receivable.” Schlumberger the fi rm’s International Arbitration and Litigation team, the fi rm said last week. Prior to joining added that it “appreciates the efforts” of cus- the fi rm, Robbins was with the U.S. Attorney’s Offi ce for the Central District of California, serv- tomers to fi nd alternative payment solutions ing as a white collar crime prosecutor. Earlier in his career, Robbins worked at the U.S. State and “remains fully committed” to supporting Department, representing the U.S. government in international arbitration under Chapter 11 of the Venezuelan oil industry. But for now, the NAFTA. company said that it is “unable to increase its accounts receivable balances,” adding that it planned to continue servicing those customers Holland & Knight Grows Int’l Trade Practice with available cash fl ow, while allowing for “a safe and orderly wind down of operations for Holland & Knight announced Monday that James Harris, the former assistant general counsel others.” Venezuela is facing a severe economic to the Defense Security Service at the U.S. Department of Defense, has joined the fi rm a senior crisis exacerbated by exchange rate distortions counsel in its International Trade Group. Harris will focus on representing businesses that that have made it nearly impossible for compa- depend on access to national security information, specifi cally companies in the defense, nies to get paid for goods and services. intelligence, mining and energy sectors.

FEATURED Q&A / Continued from page 2 LATIN AMERICA ADVISOR is published every business day by the Inter-American Dialogue, Copyright © 2016 been widely expected and prepared for over Andrés Rozental, member of the last year. Currently, 73 percent of the the Advisor board, president of Erik Brand budget is allocated for entitlement pro- Rozental & Asociados in Mexico Publisher [email protected] grams, leaving little for discretionary spend- A City and senior policy advisor ing, meaning that some social programs will at Chatham House: “The government’s an- Gene Kuleta Editor be affected. Hacienda indicates that of the nounced budget cuts are designed to lead to [email protected] 105 priority programs, 25 will face budget reductions across the board in non-essential Nicole Wasson cuts. The Finance Ministry is using some spending, but one of the areas where there Reporter, Assistant Editor of the Mexican central bank’s reserves to is always room for savings is in government [email protected] pay off the debt and start the fi scal year personnel. This year, close to 15,900 public anew, and foreign direct investment (FDI) employees will lose their jobs. Over 8,000 of in 2015 broke historical records in 2015, these will be temporary or contract workers, with expected continued growth in 2016 but the rest will come from what are called Michael Shifter, President and 2017 due to telecom and energy reform ‘medium and senior-level’ positions. Mexi- Genaro Arriagada, Nonresident Senior Fellow implementation. Simultaneously, a befud- co’s bureaucracy is, and always has been, Sergio Bitar, Nonresident Senior Fellow dling government bailout is underway to over-staffed, so reductions in that sector Joan Caivano, Director, Special Projects salvage PEMEX and support CFE, canceling are relatively easy to accomplish. Much Kevin Casas-Zamora, Director, Peter D. Bell Rule of Law Program out the benefi ts of debt payment. The 2017 more diffi cult is selecting other parts of the Maria Darie, Director, Finance & Administration federal budget for cuts, such as in educa- Ramón Espinasa, Nonresident Senior Fellow tion, high priority infrastructure projects and Ariel Fiszbein, Director, Education Program politically sensitive transfers to states. Since Alejandro Ganimian, Nonresident Fellow A befuddling govern- this is an important election year for critical Peter Hakim, President Emeritus ment bailout is under- state governorships, the federal government Claudio Loser, Senior Fellow way to salvage PEMEX will be loath to reduce budgetary allocations Nora Lustig, Nonresident Senior Fellow and support CFE.” to entities like Oaxaca, Vercaruz and Puebla, Margaret Myers, Director, China and Latin America Program — Jana Nelson where the PRI has a lot at stake in winning next June. The International Monetary Fund, Manuel Orozco, Director, Migration, Remittances & Development World Bank, ECLAC and other agencies have Jeffrey Puryear, Senior Fellow once again reduced their forecasts for Mex- Lisa Viscidi, Director, Energy Program outlook for Mexico’s economy is a mixed ico’s economic growth this year and next. bag. On one hand, the World Bank forecasts This will make the government’s budget task Latin America Advisor is published every GDP growth for 2017 to be around 3 percent, even more complicated as it tries to avoid business day, except for major U.S. holidays, by the Inter-American Dialogue at: and Banxico predicts that, given monetary cutting resources from the productive parts 1211 Connecticut Avenue NW, Suite 510 and fi scal measures, infl ation will continue of the country’s economy. Together with Washington, DC 20036 to hover under 3 percent. On the other, the political party considerations, and with an Phone: 202-822-9002 Ministry of Finance expects that there will be eye on the next presidential elections, this Fax: 202-822-9553 a $16 billion decrease in income levels due PRI government will have to face a relatively www.thedialogue.org to continued low oil prices and a decrease mediocre economic performance for all of ISSN 2163-7962 in taxable income, compensated by an this and next year with an austerity budget Subscription Inquiries are welcomed at [email protected] estimated $9 billion increase in tax col- and low oil prices that will contribute signifi -

lections. Despite implementing signifi cant cantly to disappointing growth, at the same The opinions expressed by the members of the Board of liberal reforms to spur FDI, the Peña Nieto time as it tries to avoid losing key governor- Advisors and by guest commentators do not necessarily represent those of the publisher. The analysis is the sole administration’s efforts do not translate to ships and allowing opposition parties to gain view of each commentator and does not necessarily improved approval ratings. Criticisms over strength between now and 2018.” represent the views of their respective employers or fi rms. lack of growth and economic mismanage- The information in this report has been obtained from reliable sources, but neither its accuracy and ment abound. The budget cuts might open The Advisor welcomes comments on its Q&A completeness, nor the opinions based thereon, are the administration to further criticism for not section. Readers can write editor Gene Kuleta guaranteed. If you have any questions relating to the contents of this publication, contact the editorial offi ces of the protecting entitlements and basic services.” at [email protected]. Inter-American Dialogue. Contents of this report may not be reproduced, stored in a retrieval system, or transmitted without prior written permission from the publisher.