LATIN AMERICA ADVISOR a DAILY PUBLICATION of the DIALOGUE Thursday, December 10, 2015

LATIN AMERICA ADVISOR A DAILY PUBLICATION OF THE DIALOGUE www.thedialogue.org Thursday, December 10, 2015

BOARD OF ADVISORS FEATURED Q&A TODAY’S NEWS Diego Arria Director, Columbus Group ECONOMIC Genaro Arriagada What Challenges Nonresident Senior Fellow, Moody’s Puts Inter-American Dialogue Brazil on Review Joyce Chang Global Head of Research, Face Argentina’s for Possible Junk JPMorgan Chase & Co. Status W. Bowman Cutter Former Partner, New President? If Moody’s strips Brazil of its E.M. Warburg Pincus investment-grade credit rating, it Dirk Donath would be the second of the three Senior Partner, major ratings agencies to do so. Catterton Aimara Such a move would likely cause Marlene Fernández Corporate Vice President for investors to drain money from the Government Relations, country. Arcos Dorados Page 2 Peter Hakim President Emeritus, Inter-American Dialogue BUSINESS Donna Hrinak President, Boeing Latin America Mexico Approves Jon Huenemann Sanofi ’s Dengue Vice President, U.S. & Int’l Affairs, Philip Morris International Vaccine Mauricio Macri is only the third non-Peronist candidate to have won Argentina’s presidency James R. Jones since military rule ended in 1983. // File Photo: Facebook page of Mauricio Macri. Mexico became the fi rst country Co-chair, Manatt Jones to approve a dengue vaccine for Global Strategies LLC Mauricio Macri, who takes offi ce today as Argentina’s pres- sale, however the approval does Craig A. Kelly not allow for the vaccine to be Director, Americas International ident, has signaled big policy shifts away from those of his Gov’t Relations, Exxon Mobil given to children under nine or predecessor, Cristina Fernández de Kirchner. They include tourists. John Maisto Q Director, U.S. Education optimism about reaching a debt settlement next year with Page 2 Finance Group U.S. “holdout” creditors, and lifting capital controls, a move that could Nicolás Mariscal POLITICAL Chairman, devalue the peso. How diffi cult will it be for Macri to make sweeping Grupo Marhnos changes in policy? What do these early moves say about his focus for Guatemala’s Pérez Thomas F. McLarty III the early stages of his presidency? What do Macri’s cabinet picks fore- President, Molina Formally McLarty Associates tell about his priorities for his fi rst months in offi ce? Accused of Graft Carlos Paz-Soldan Partner, Prosecutors formally accused DTB Associates, LLP Juan E. Santarcángelo, senior researcher at the Conse- former Guatemalan President Otto Beatrice Rangel jo Nacional de Investigaciones Económicas y Técnicas Pérez Molina, who stepped down Director, in September, of corruption. AMLA Consulting LLC (CONICET) and the Universidad Nacional de Quilmes in Page 2 José Antonio Ríos Buenos Aires: “The negotiation policy with the vulture funds Chief Executive Offi cer, A Vadium Technology Inc. is one of the most important economic policies that Kirchnerism has Gustavo Roosen left Argentina. The refusal to pay the holdouts at any cost, going against Chairman of the Board, Envases Venezolanos Judge Thomas P. Griesa’s ruling, as well as the highly successful rally for Andrés Rozental support put on by the Argentine government at the United Nations, have President, Rozental & Asociados and Senior both been very important in terms of strengthening Argentina’s national Policy Advisor, Chatham House sovereignty against speculative interests. President-elect Macri’s plan to Shelly Shetty Head, Latin America pay vulture funds on their terms, especially at a time when the U.S. court Sovereign Ratings, Fitch Inc. is beginning to rule in favor of Argentina, is a true defeat to the Argentine Roberto Sifon-Arevalo people and a victory for the capitalist speculators. It is an error for which Managing Director, Americas Sovereign & Public Finance Ratings, generations of Argentines will pay. Macri also seems to indicate that he Standard & Poor’s will be eliminating the fi xed exchange rate, which will severely decrease the value of the peso and will lead to high infl ation and a sharp decline Pérez Molina // File Photo: Guate- malan Government. Continued on page 3

ECONOMIC NEWS said. Last week, Brazil’s government statistics NEWS BRIEFS agency announced that Latin America’s largest Moody’s Warns economy had shrunk 4.5 percent in the third Guatemalan Prosecutors quarter as compared to the same quarter last Formally Accuse Pérez of Possible Brazil year. The announcement marked the third con- secutive quarter of contraction and confi rmed Molina of Corruption Downgrade to Junk that Brazil is in its worst recession in 25 years. Prosecutors in Guatemala on Wednesday The country’s rate of infl ation has also risen formally accused former President Otto Pérez Moody’s Investors Service on Wednesday put above 10 percent. Also on Wednesday, Moody’s Molina of corruption and urged that he be put its credit rating for Brazil on review for a possi- downgraded its ratings for Brazil’s embattled on trial in connection with a bribery scandal in- ble downgrade to junk status, Reuters reported. state oil company Petrobras, the Financial volving the country’s customs agency, Agence If Moody’s downgrades Brazil to junk status Times reported. In the move, Moody’s lowered France-Presse reported. Guatemala’s public after its typical three-month review period, it its ratings for the company to Ba3 from Ba2 ministry presented a “conclusive declaration” would become the second of the three major and placed them on review for another possible against Pérez Molina, special prosecutor Juan ratings agencies to do so. Standard & Poor’s downgrade. “These rating actions refl ect Sandoval told reporters. Judge Miguel Angel Petrobras’ elevated refi nancing risks in the face Gálvez is expected to decide in January wheth- of deteriorating industry conditions that make er to put the former president on trial. Pérez it more diffi cult to raise cash through asset Molina denies wrongdoing. sales,” Moody’s said. [Editor’s note: See related Q&A on the Nov. 2 issue of the Advisor.] U.S. Warns it Won’t

BUSINESS NEWS Replace Venezuela’s Petrocaribe Program Rousseff // File Photo: Brazilian Government. Mexico Approves If Venezuela’s newly-elected National Assembly votes to end Petrocaribe, its subsidized oil took that action in September. A second down- Sanofi ’s Dengue program for Caribbean and Central American grade to junk would likely trigger large capital nations, the United States will not be able to outfl ows as large foreign investors such as Fever Vaccine provide subsidized oil to the region in Vene- pension funds are required to keep their assets zuela’s place, U.S. Deputy National Security in countries rated investment grade by two of Mexico on Wednesday became the fi rst country Advisor Ben Rhodes said Wednesday, the the three agencies. In October, Fitch Ratings to approve the sale of the world’s fi rst dengue Miami Herald reported. downgraded its sovereign credit rating for Bra- fever vaccine, which is produced by French zil, but left it one notch above junk status. In drugmaker Sanofi , Reuters reported. The its move Wednesday to put its rating for Brazil vaccine, called Dengvaxia, has been approved on watch, Moody’s said it made the decision Brazilian Court Orders due to the country’s deep severe recession, Bank Secrecy Protection failed efforts at austerity measures and a Dengvaxia has been Lifted for Lula’s Son growing risk of political paralysis, Reuters approved only for reported. The ratings agency added that Brazil A Brazilian court ordered that bank-secrecy is facing “worsening governability conditions” patients between the protection be lifted on a company controlled after lawmakers last week moved ahead with ages of nine and 45 who by former President Luiz Inácio Lula da Silva’s impeachment proceedings against President live in areas where son, as part of a larger investigation into Dilma Rousseff. Also, Brazil’s economic and whether companies bribed Brazilian tax offi - fi scal situation is unlikely to improve beginning Dengue fever is endemic. cials, The Wall Street Journal reported today. in 2017, as analysts had expected, because The court’s order is part of an investigation into the effort to unseat Rousseff has diverted whether sports marketing fi rm LFT Marketing attention away from debate on needed eco- only for patients between the ages of nine and Esportivo, controlled by Luis Claudio Lula da nomic measures, said Samar Maziad, a senior 45, who live in areas where Dengue fever is Silva, received bribes from a consulting fi rm analyst at Moody’s. “It makes a complicated endemic, Sanofi said. The vaccine does not yet that lobbied for tax benefi ts for car makers in political dynamic even more complicated,” he have approval from Mexico for patients under Brazil. The younger Lula da Silva through his lawyer has denied wrongdoing.

FEATURED Q&A / Continued from page 1 the age of nine or for tourists, which are two of the groups that are most vulnerable to the mos- quito-spread disease, Reuters reported. The in real wages. What’s more, redistributive of others, they can do a good job. However, company will soon seek to roll out the vaccine policies will be abandoned, which will lead the task ahead is daunting. A large oppo- in Brazil and Colombia, said Olivier Charmeil, to acute economic recession and eventu- sition in Congress will force them to move head of Sanofi Pasteur, the group’s vaccines ally inequality, poverty and low levels of carefully. The central bank’s cash position division, the Financial Times reported. The de- production. The cabinet Macri has chosen is, is critical, with very low liquid reserves and cision to seek approval in Latin American and as expected, comprised of individuals with with future dollar contract obligations for Asian countries fi rst represents a departure extremely orthodox economic ideals and yet-unknown amounts. The world environ- from the norm of most pharmaceutical compa- offi cials who have no previous history in the nies, which is to debut a product in the United areas over which they are going to preside, States or Europe before approaching markets as is the case with Rabbi Bergman on the The government may in other parts of the world. Mexico’s federal environment, for instance. Macri’s cabinet seek to be more medical safety agency said Dengvaxia had refl ects an economic policy that will hold the gradualist than the undergone testing on 40,000 patients world- market in the highest regard and will severe- country can afford, wide, and that its manufacturer had proven its ly limit the role of the state by subordinating and not ask for help safety and effectiveness, the Associated Press national interests to the decisions of the big from the IMF.” reported. The vaccine is said to have a 60.8 powers and economic policy.” — Claudio Loser percent success rate in preventing patients from contracting one of the four strains of den- Claudio Loser, president of gue currently circulating, according to a report Centennial Group Latin America from the World Health Organization published and former head of the Western ment is in a serious situation, while the last year. A Hemisphere Department of the self-generated confl ict with the holdouts still International Monetary Fund: “Argentina’s stands and drowns out all kinds of sustained incoming government will have to overcome support. The internal work is the most Liberty Mutual Posts strong headwinds. The new economic diffi cult, since they must move quickly to exit $427 Mn Loss for Q3 cabinet is eminently prepared for the task. the ‘cepo’ or clamp, move the exchange rate, The appointees are young-ish and experi- modify the pace of fi scal spending, and seek enced, although they have had only limited to reduce infl ation. The government may Boston-based property and casualty insurer government tenure. Alfonso Prat-Gay as seek to be more gradualist than the country Liberty Mutual on Wednesday posted a loss minister of the treasury and fi nance brings can afford, and not ask for help from the of $427 million for the third quarter, its largest fi eld knowledge, and he has gained political IMF. If that were to happen, the imbalances quarterly loss in at least a decade, due to costs experience. Federico Sturzenegger, another will remain, and the hopes for improvement partner of Macri, is a natural candidate to can disappear quickly. Chances are good, Venezuela’s economic manage the central bank, while Rogelio however, that they move promptly as a team. Frigerio, the future minister of the interior, If so, there is hope for Argentina to resurrect problems, such as a also has had practical training. With the help from its ruinous state.” falling currency and Continued on page 4 skyrocketing infl ation, Liberty Mutual had an impairment charge of oil deepened the insurer’s losses in the third took a toll on the $690 million related to its operations in Vene- quarter. “Our continuing strong operating company’s earnings. zuela, which it plans to consider discontinued performance was masked in the third quarter and held for sale. In a conference call with by a nonrecurring loss of approximately $700 analysts in August, company executives said million from the deconsolidation of our Venezu- it incurred through scaling back its opera- Venezuela’s economic problems, such as a elan subsidiary and energy investment-related tions in Venezuela and also because of some falling currency and skyrocketing infl ation, took losses, Liberty Mutual’s chairman and chief investments in the energy sector, Bloomberg a toll on the company’s earnings. Additionally, executive offi cer, David H. Long, said Wednes- News reported. By comparison, the company energy assets, including natural-resources day in a statement. The company’s third-quar- posted a profi t of $605 million for the same partnerships and direct investments in oil and ter loss was the largest since at least 2004. In period last year. In this year’s third quarter, gas wells accounted for 4.1 percent of Liberty the fourth quarter of 2012, it had a $234 million Mutual’s portfolio, and the plunging price of loss because of Hurricane Sandy.

FEATURED Q&A / Continued from page 3 LATIN AMERICA ADVISOR is published every business day by the Inter-American Dialogue, Copyright © 2015 Estanisalo Malic, economist prices. Given the explicit support that the at the Centro de Estudios agricultural exportation sector gave for the Erik Brand Económicos y Sociales (CESO) new policies, it would be diffi cult for the Publisher [email protected] A and professor of macro- new economic team to resist the pressures economics and the history of economic of devaluing the peso. However, the search Gene Kuleta Editor thought at the Universidad de Palermo in [email protected] Buenos Aires: “The strong public fi gures Nicole Wasson in President-elect Mauricio Macri’s cabinet Depreciating the Reporter, Assistant Editor are centered on the economic sector. From peso would likely [email protected] Alfonso Prat-Gay (economy) to Federico lead to strong wage Sturzenegger (central bank), they are known resistance and would for their work with transnational banking, accelerate infl ation in which implies that the future government Michael Shifter, President will give the economy and the ‘holdout’ lend- the short term.” Genaro Arriagada, Nonresident Senior Fellow ers priority. Given Argentina’s low level of — Estanisalo Malic Sergio Bitar, Nonresident Senior Fellow liabilities in foreign currencies, the country Joan Caivano, Director, Special Projects has ample room to maneuver in the case Kevin Casas-Zamora, Director, Peter D. Bell Rule of Law Program of re-accessing fi nancial markets. The full Maria Darie, Director, Finance & Administration liberalization of the capital account seems for a depreciated real exchange rate seems Ramón Espinasa, Nonresident Senior Fellow to be the new economic team’s priority, as to be at odds with the high level of employ- Ariel Fiszbein, Director, Education Program the team gives the same dubious reasoning ment that is already a reality in Argentina. Alejandro Ganimian, Nonresident Fellow that it will have a positive effect on real eco- Depreciating the peso would likely lead to Peter Hakim, President Emeritus nomic indicators. Another challenge for the strong wage resistance and would acceler- Claudio Loser, Senior Fellow incoming government is how to reduce infl a- ate infl ation in the short term.” Nora Lustig, Nonresident Senior Fellow tion. However, other early announcements Margaret Myers, Director, China and with respect to the future policy surrounding The Advisor welcomes comments on its Q&A Latin America Program exchange rates merely generated a sense section. Readers can write editor Gene Kuleta Manuel Orozco, Director, Migration, Remittances & Development of shock or uncertainty, sharply driving up at [email protected]. Jeffrey Puryear, Senior Fellow Lisa Viscidi, Director, Energy Program

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