LATIN AMERICA ADVISOR a DAILY PUBLICATION of the DIALOGUE Friday, July 30, 2021

LATIN AMERICA ADVISOR A DAILY PUBLICATION OF THE DIALOGUE www.thedialogue.org Friday, July 30, 2021

BOARD OF ADVISORS FEATURED Q&A TODAY’S NEWS Diego Arria Director, Columbus Group POLITICAL Devry Boughner Vorwerk Will Colombia’s Biden to Discuss CEO, DevryBV Sustainable Strategies Joyce Chang Protests With Global Head of Research, JPMorgan Chase & Co. Revised Tax Plan Cuban-Americans Paula Cifuentes U.S. President Joe Biden is to Director of Economic & Fiscal Affairs, host Cuban-Americans today Latin America & Canada, Win Approval? at the White House to discuss Philip Morris International historic protests that broke out in Marlene Fernández Corporate Vice President for the Caribbean nation earlier this Government Relations, month. Arcos Dorados (McDonald’s) Page 2 Peter Hakim President Emeritus, Inter-American Dialogue BUSINESS Donna Hrinak Senior VP, Corporate Affairs, TotalEnergies, Royal Caribbean Group Equinor Exit Jon E. Huenemann Council Member, Venezuela Venture GLG Inc. TotalEnergies and Equinor have James R. Jones decided to exit their Petrocedeño Chairman, Colombian President Iván Duque’s government this month proposed a revised tax reform. The Monarch Global Strategies government withdrew an earlier version in May after it sparked violent protests. // File Photo: joint venture in Venezuela. State Colombian Government. oil company PDVSA will now own Craig A. Kelly 100 percent of the venture. Senior Director, Americas Colombian President Iván Duque on July 20 presented Int’l Gov’t Relations, Exxon Mobil Page 2 Barbara Kotschwar lawmakers with a nearly $4 billion tax reform bill, a more Executive Director, Visa Economic modest proposal than a plan his government presented in Empowerment Institute POLITICAL Q April, which sparked weeks of deadly protests and nation- John Maisto Peru’s Castillo Director, U.S. Education wide strikes. How much of a chance does the new plan have at winning Finance Group approval in Congress, and how might lawmakers revise it? Does the Names Far-Leftist Nicolás Mariscal Chairman, public support the plan, and what chance is there that protests will again as Prime Minister Grupo Marhnos derail it? To what extent would Duque’s new plan address Colombia’s New Peruvian President Pedro Thomas F. McLarty III Castillo swore in Guido Bellido fiscal problems, and would its passage help Colombia to regain its Chairman, as his prime minister. The ap- McLarty Associates investment-grade status, which it lost in early July? pointment of Bellido, a far-leftist, Beatrice Rangel quashed some expectations that Director, Castillo might seek to govern from AMLA Consulting LLC Richard Francis, director of Latin American sovereigns at Jaana Remes closer to the center. Partner, Fitch Ratings: “Colombia’s revised tax reform proposal is con- Page 2 McKinsey Global Institute sistent with Fitch’s assumptions at our most recent sovereign Ernesto Revilla Head of Latin American rating review on July 1, when we downgraded Colombia to Economics, Citi A ‘BB+’/Stable. The updated proposal’s 1.2 percent of GDP target is about Gustavo Roosen President, half that of the April proposal, and the corporate income tax measures IESA essentially amount to unwinding some cuts and deductions introduced Andrés Rozental three years ago. Furthermore, a large part of the adjustment depends on President, Rozental & Asociados tax administration and expenditure control measures, which are uncertain Shelly Shetty as to timing and size. The government also announced the expansion of Managing Director, Sovereigns Fitch Ratings certain pandemic support measures though the end of 2022, including the Solidarity Income program and employment subsidies. Therefore, we fore- cast a large 6.9 percent of GDP deficit next year, with downside risks if tax administration does not deliver envisaged revenue benefits, if the new proposals are watered down, or the government is unable to divest assets Bellido // File Photo: Facebook Page of Guido Bellido. Continued on page 3

POLITICAL NEWS ers of the song “Patria y Vida,” which became NEWS BRIEFS an anthem for protesters this month, will Peru’s Castillo reportedly be at the meeting. The White House Thousands Take to Streets has consulted several Cuban-American leaders in Guatemala Following Names Far-Leftist and members of Congress since the protests, which were harshly repressed, swept through Prosecutor’s Firing as Prime Minister the country. Democrats in Florida, which swung Thousands of protesters took to the streets for Republicans by in large in the 2020 U.S. and blocked major highways in Guatemala New Peruvian President Pedro Castillo on election, have been urging their party leaders to on Thursday to demand the resignation of Thursday swore in Guido Bellido, a fellow embrace the protests against Cuba’s commu- President Alejandro Giammattei and his far-leftist, as his prime minister, quashing nist regime, CNN reported. In related news, attorney general, Consuelo Porras, Prensa Libre hopes by moderates that Castillo would govern Biden on Thursday picked Cuban-American reported. Pressure has been building domes- from closer to the center, Reuters reported. Frank Mora as his nominee for U.S. ambassa- tically and abroad since Porras fired anti-cor- Castillo also swore in most of his cabinet, but dor to the Organization of American States, the ruption special prosecutor Juan Francisco he did not name a finance minister. Bellido is Miami Herald reported. Mora, who previously Sandoval on July 23. The United States this under investigated for alleged “apology for ter- served as a deputy assistant secretary of de- week said it had “lost confidence” in Porras. rorism,” which is a crime in the Andean nation. fense for the Western Hemisphere, would play Giammattei expressed his concern Thursday In an interview with local media in April, he a key role in garnering international support for that a suspension in U.S. cooperation would be defended members of the Maoist Shining Path U.S. policy in Cuba, as well as other sensitive “counterproductive” to fighting organized crime rebel group, which killed tens of thousands of areas such as Nicaragua and Venezuela. and corruption, the Associated Press reported. people in the 1980s and 1990s, The Guardian reported. The cabinet swearing-in ceremony on Thursday night began more than two hours BUSINESS NEWS late, and the person expected to be named Brazilian Officials finance minister, leftist economist Pedro Begin Mass Vaccination Francke, left the venue just before it started, TotalEnergies, Program in a Rio Favela Reuters reported. Francke’s departure at the Equinor Exit Joint Health authorities in Brazil on Thursday began last minute raised questions about whether a novel mass immunization program in a large he had rejected the job just as he was about Venture in Venezuela poor neighborhood, or favela, of Rio de Janeiro to take office. The incomplete cabinet that in a bid to control and monitor the spread Castillo swore in included several other far-left Paris-based oil producer TotalEnergies and of Covid-19, the Associated Press reported. figures and only two women, The Guardian Norway’s Equinor have decided to exit their Researchers leading the effort say they are reported. [Editor’s note: See Q&A on Peru’s joint venture in Venezuela, Bloomberg News not aware of another program elsewhere in the finances including comments by Francke in the reported Thursday. Venezuelan state oil world that has specifically focused on slums. Feb. 17 issue of the Advisor.] company PDVSA will now own 100 percent Although more than 1.5 million people live in of the Petrocedeño venture, which produces Rio’s favelas, research of this type is usually extra-heavy crude oil from the Orinoco Belt in done in hospitals and health clinics that do not Biden to Discuss Venezuela, transports it and transforms it into exist there for the most part. Protests With light crude oil. According to a statement from TotalEnergies, the transaction was carried out Cuban-Americans for a “symbolic amount in exchange of a broad indemnity in relation to the past and future Banco Santander Chile U.S. President Joe Biden will host Cuban-Amer- participation of TotalEnergies in Petrocedeño.” Reports $253 Mn in Profit ican political leaders, social activists and The deal will result in the recognition of an Banco Santander Chile on Thursday reported artists at the White House today to discuss exceptional capital loss of $1.38 billion in the $253.4 million in net income for the second historic national protests organized in Cuba on financial statements of TotalEnergies. Arnaud quarter, the Associated Press reported. The July 11, NBC News reported. Biden’s foreign Breuillac, the president for exploration and bank said it had earnings of 54 cents per share policy team is reportedly weighing new sanc- production at TotalEnergies, said the sale is for the quarter. The bank also posted revenue tions on Cuba’s government, as well as options in line with a strategy of “focusing new oil of $935.6 million for the quarter. Its shares for providing Internet access to the island’s investments on low carbon intensity projects, have risen approximately 2 percent since the population. Yotuel Romero, one of the perform- which does not correspond to extra-heavy oil beginning of this year.

COPYRIGHT © 2021, INTER-AMERICAN DIALOGUE PAGE 2 LATIN AMERICA ADVISOR Friday, July 30, 2021 development projects in the Orinoco Belt.” FEATURED Q&A / Continued from page 1 Although Total, as the company was formerly known, once was a major player in Venezuela, as planned (estimated at 0.6 percent of GDP also boost inflation if companies pass along last year less than 0.5 percent of the compa- next year) in an election year. We expect higher costs to their customers. Lastly, a ny’s combined oil and gas production came debt to rise to 64 percent of GDP in 2022 structural reform to expand the individual from the Andean country. Petrocedeño is one from 61 percent in 2021 before stabilizing tax base is still needed to stabilize public of the largest projects in the Orinoco Belt and in 2023. Fitch believes the revised reform is finances over the long term, as expenditure possibly the largest private investment project likely to pass after the government consult- pressure will remain to improve Colombia’s in the history of Venezuela, Francisco Monaldi, ed widely on its proposals, which rely largely safety nets, education, health and pension director of the Latin American Energy Program on corporate tax measures while increasing systems.” at Rice University, said in a tweet Thursday. social expenditure. However, the president’s “The abandonment of the project reflects low approval rating, upcoming congressio- Sergio Guzmán, director of two very bad circumstances for Venezuela ... nal and presidential elections scheduled Colombia Risk Analysis: “This is The lack of prospects for improvement in the for March and May 2022, respectively, and not a structural tax reform, and it investment environment and the lower interest a possible resumption of anti-government A does not pretend to be. Instead, of European companies in extra-heavy crude protests could threaten the reform or lead it is a reform that responds to the govern- due to CO2 emissions,” Monaldi said. to more watering down. We believe the new ment’s short-term financing needs and the proposal will help stabilize public debt-to- political realities in play ahead of the next GDP ratio in 2023 but that further fiscal congressional and presidential elections. Banco de Bogotá adjustment would be needed to place the The reform’s scope is surprisingly limited, to Test Crypto debt ratio on a steadily declining path. If the and its language is concise and direct—a government were able to lower debt, over welcome innovation for Colombian legalese Transactions time it could help restore some of the fiscal political culture. Although there seems to be credibility that Colombia lost pre-pandemic an acknowledgment that Colombia needs Colombia’s oldest commercial bank, Banco and help lead to positive ratings momen- to improve its fiscal position and reduce its de Bogotá, is planning a pilot program to test tum.” debt-to-GDP ratio, there is no unity on how to deposits and withdrawals using a cryptocur- pay for it, an issue that is likely to re-emerge rency exchange, CoinDesk reported Thursday. Manuel Orozco, director for during the campaigns. The government’s The program is part of a government initiative sovereign and international proposal slightly raises corporate income to test the use of cryptocurrencies for banking public finance ratings at S&P taxes, eliminates a series of tax benefits transactions. Through the program, which is to A Global: “The new fiscal reform and introduces a surcharge on financial start early next month, Banco de Bogotá will al- continues to show the Colombian govern- institutions. The lack of public pushback low its customers to perform the transactions ment’s commitment to fiscal sustainability. from the private sector on these measures, through Chilean crypto exchange Buda.com, The current proposal is the result of a fast for which they intensely lobbied before, can according to the exchange’s country manager but important process of consultation be understood as a concession. Under the for Colombia, Alejandro Beltrán. The bank and with different economic and social groups, reform, social spending remains high, and the exchange are still defining the exact terms and with crucial political backing from many of the pandemic-related subsidies will and conditions of their contract for the service, the business community. Moreover, the stay in place until the end of 2022. Although said Beltrán. “Banco de Bogotá has been very current reform is less ambitious than the their permanence is unsustainable, eliminat- detailed and careful in this process, which is prior proposal and does not directly touch ing subsidies or phasing them out altogether understandable since it is entering a new world individuals, which makes it more likely that would be politically catastrophic for the gov- and they want to understand it in all its di- Congress will approve it this year. We expect ernment. Whereas the Ministry of Finance is mensions,” he said. In January, the Colombian this fiscal measure to help stabilize net hoping for a clean and speedy passage of government’s financial watchdog, the Financial general government debt at just above 60 the reform, members of Congress are bound Superintendency of Colombia, announced that percent of GDP during 2021-2024, which is to meddle in the process with their electoral out of 14 applicants, it had chosen nine crypto consistent with our assumptions sustaining interests in mind. Opposition groups will firms to test banking services as part of a year- our BB+ long-term foreign currency rating on be constantly looking for opportunities to long pilot program. The partnership between Colombia. However, there is a risk that the reignite protests and indignation toward Banco de Bogotá and Buda.com is the second higher taxes could potentially translate into the government. Both of these factors are such service to be launched in Colombia this less investment and lower potential GDP and likely to affect the government’s timeline. year. Continued on page 4

FEATURED Q&A / Continued from page 3 LATIN AMERICA ADVISOR is published every business day by the Inter-American Dialogue ISSN 2163-7962 The political considerations ahead and the reform stands to further alleviate lingering content of the reform suggest that the next social tensions, even as economic anxiety Erik Brand administration must also introduce changes remains high. As a result, the new proposal Publisher [email protected] to the tax code in an environment of growing is highly likely to receive swift approval political polarization, congressional obstruc- in Congress, despite the efforts of some Gene Kuleta Editor tion, and impatience from rating agencies political figures to mischaracterize its [email protected] and investors. Where some see growing content and rally a new wave of protests. Anastasia Chacón González risks, others are bound to find opportunity.” Absent substantial macroeconomic shocks, Reporter & Associate Editor this proposed reform can act as a bridge for [email protected] Maria F. Valdés, coordina- Colombia’s government through this period tor of tax issues at Fried- of pandemic recovery. However, it will not be rich-Ebert-Stiftung in Colombia: “It is very likely that this bill will A The new proposal Michael Shifter, President pass in Congress. A key reason is that, be- is highly likely to Rebecca Bill Chavez, Nonresident Senior Fellow fore it was officially presented to the public, Bruno Binetti, Nonresident Fellow the bill was discussed with parties close receive swift Sergio Bitar, Nonresident Senior Fellow to the president. Finance Minister José approval in Congress.” Joan Caivano, Senior Advisor Manuel Restrepo likes to call it a ‘consensus — Andrés Martínez-Fernández Santiago Cantón, Director, Peter D. Bell proposal,’ which means that it already has Rule of Law Program the approval of a significant majority of Kevin Casas-Zamora, Nonresident Senior Fellow members of Congress. This reform does not sufficient to restore long-term fiscal balance Julia Dias Leite, Nonresident Senior Fellow reform much. As a result, it is not creating and regain the country’s investment-grade Ariel Fiszbein, Director, Education Program discontent to the same level as the April bill status. This reform once again postpones Sandra García Jaramillo, Nonresident Senior Fellow did. The fact that this reform will not have a necessary expansion of Colombia’s tax Selina Ho, Nonresident Senior Fellow a direct negative impact on the middle and base in the face of growing fiscal imbalance Edison Lanza, Nonresident Senior Fellow lower classes has been described by many and expanded demands for social spending. Nora Lustig, Nonresident Senior Fellow Margaret Myers, Director, Asia Program protesters and opposition members in Con- There is also uncertainty around the revised Manuel Orozco, Senior Fellow gress as a triumph of the strike. President proposal’s ability to deliver on even its Xiaoyu Pu, Nonresident Senior Fellow Duque’s proposal is cosmetic, unambitious, lowered revenue goal of 15.2 trillion pesos, Jeffrey Puryear, Senior Fellow and wisely designed to pass the fiscal as it relies on complex sources of revenue Tamar Solnik, Director, Finance & Administration problem along to his successor, who will such as still-recovering business activity, Lisa Viscidi, Director, Energy Program be elected next year. This is so evident that combating tax evasion and new austerity for Denisse Yanovich, Director of Development rating agencies will soon realize that this law operational government expenses. All of this will not solve Colombia’s fiscal problem.” points to the need for another tax reform Latin America Advisor is published every under Colombia’s next president. However, business day, except for major U.S. holidays, by the Inter-American Dialogue at Andrés Martínez-Fernández, adopting a robust reform that expands the 1155 15th Street NW, Suite 800 senior analyst for Latin America tax base will remain politically perilous even Washington, DC 20005 at FrontierView: “By removing after the country recovers further from the www.thedialogue.org tax increases on consumption pandemic, and the 2022 elections leaves Subscription inquiries are welcomed at A [email protected] and the middle class, Colombia’s revised uncertainty around the next government’s tax reform has eliminated the core elements willingness to pursue such a reform.” The opinions expressed by the members of the Board of Advisors and by guest commentators do not necessarily that made the original proposal unaccept- represent those of the publisher. The analysis is the sole able for congressional leaders and sparked The Advisor welcomes comments on its Q&A view of each commentator and does not necessarily widespread social unrest. The expansion section. Readers can write editor Gene Kuleta represent the views of their respective employers or firms. The information in this report has been obtained from of social spending programs through this at [email protected]. reliable sources, but neither its accuracy and completeness, nor the opinions based thereon, are guaranteed. If you have any questions relating to the contents of this publication, contact the editorial offices of the 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.