LatinNews Daily - 26 January 2022

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Main Briefing

On 25 January Luis Redondo and Jorge Cálix, who both claim to be the president of Honduras’s congress, held inaugural legislative sessions.

Analysis:

Honduras’s new 128-member unicameral legislature was due to begin sitting yesterday. The convening of the rival sessions follows the schism which has emerged in the leftist Partido Libertad y Refundación (Libre) of president-elect Xiomara Castro who is due to take office tomorrow (27 January). The crisis erupted when Libre rebels (since expelled from the party), with backing from the right-wing Partido Nacional (PN) of outgoing President Juan Orlando Hernández named Libre rebel Cálix as congress president last week. This broke a deal to name Redondo, a legislator from Partido Salvador de Honduras (PSH), a Libre ally, whose support had been key to Castro’s decisive electoral victory in November 2021. The convening of parallel legislatures deepens Honduras’s constitutional crisis, raises major questions about the legality and legitimacy of both, and suggests instability and tensions are set to intensify.

  • The session convened by Redondo, whose leadership Castro recognises and who had been sworn-in last week by 49 deputies, took place in the national congress building with 49 legislators in attendance and alternates making up the necessary quorum.
  • The session called by Cálix, who had received 79 votes (including the Libre rebels and entire PN bench), was carried out virtually via video conference but with the participation of 75 deputies.
  • The dispute stemmed from complaints by the Libre rebels that, as the party was due to have the most legislative seats (50) compared with ten for PSH, 44 for PN and 22 for the other main opposition Partido Liberal (PL), the congress president should have come from Libre.
  • Castro, who has ejected 18 Libre rebels so far, has accused the rebels of “imposing the plan of the corrupt elite directed by… Hernández” – a reference to the multiple corruption allegations overshadowing the outgoing administration and Hernández himself, who has been implicated in drug-trafficking allegations in the US.
  • Both Redondo and Cálix are intent on pressing ahead with their legislative agendas. Redondo said he would propose laws in line with Castro’s manifesto, such as re-establishing an international commission against corruption and impunity in Honduras (CICIH). The congress presided over by Cálix yesterday repealed a law on the classification of public documents related to security and national defence (approved in January 2014 and known as the official secrets law), which was also in Castro’s manifesto.
  • The situation in Honduras continues to draw international concern. Yesterday in a press briefing Stéphane Dujarric, spokesperson for the United Nations Secretary-General said “the Secretary-General is following political developments in that country. He calls for constructive and peaceful dialogue to resolve differences within the framework of the constitutional process.”
  • On 24 January US State Department spokesperson Ned Price said: “We call on political actors to remain calm, to engage in dialogue, to refrain from violence and provocative rhetoric, and we urge their supporters to express themselves peacefully while respecting the rule of law.” Honduras’s relations with the US – which is sending a delegation headed up by Vice President Kamala Harris to Castro’s inauguration – had been tested under the outgoing PN administration, due to the allegations implicating Hernández and the government’s backsliding in anti-corruption efforts on his watch.

Looking Ahead: Tensions could rise ahead of Castro’s swearing-in ceremony tomorrow. She retains the backing of the police (which guaranteed the security of those participating in the congress session over which Redondo presided) and the military (FFAA) which issued a statement on 21 January guaranteeing her swearing-in tomorrow and calling for elected officials to respect the constitution.

Andean

On 25 January, Peru’s constitutional court (TC) agreed to hear an appeal from President Pedro Castillo’s government against a new law limiting referendums on constitutional reforms.

Analysis:

The TC case will likely have huge ramifications for Castillo’s presidency. Triggering a referendum on a new constitution was a core plank of his election campaign, and was seen by many as the only means of delivering the fundamental change that Castillo promised but has yet to deliver. If the TC upholds the new law, Castillo will be unable to trigger a referendum via the collection of signatures, and would instead need the approval of the opposition-controlled congress.

  • The TC case relates to a law approved by the unicameral congress on 21 January which restricts referendums on constitutional reforms. Under the law, any referendum will need to first be approved by an absolute majority in congress, where parties allied with Castillo hold just 45 out of 130 seats.
  • The new law effectively maintains the rules laid out in Peru’s 1993 constitution, eliminating provisions from a constitutional amendment which had established that referendums could be triggered with the signatures of at least 10% of the electorate.
  • Following a government appeal, the TC announced yesterday that it will hear arguments today (26 January) on whether the new law is constitutional. With the seven-member TC reduced to six judges since the death of Justice Carlos Ramos Núñez in September, the government will require five out six justices to support its appeal. TC Justice Eloy Espinosa-Saldaña said yesterday that this will make it “very difficult” for a consensus to be reached in favour of the government.
  • Perú Libre (PL), the left-wing party that Castillo represented in last year’s election, had already been collecting signatures to trigger a referendum on establishing a constituent convention. PL received fierce criticism after a 17 January tweet in which the party warned that congress is “eliminating this peaceful route towards a new constitution and opening the door to the violent path.”

Looking Ahead: The TC case will further ratchet up tensions between the executive and the legislature, with both having a great deal to lose – an inability to deliver on Castillo’s promise of a constituent assembly would be a huge blow to his credibility, whilst right-wing parties in congress view the prospect of a new constitution as an existential threat to economic stability in Peru.

* Ecuador’s President Guillermo Lasso has said that during his visit to China from 4-5 February he will focus on securing a free trade agreement (FTA) and renegotiating Ecuador’s debt to the Asian giant. Lasso said that “the visit to China will be to negotiate a free trade agreement that consolidates markets for [Ecuadorean] shrimp, bananas, and dragon fruit.” Lasso has made an FTA with China an economic priority of his government, although he has faced some pushback from domestic manufacturers – particularly the textile sector – that fear an influx of cheap Chinese goods. Lasso also said he would seek to renegotiate Ecuador’s debt to China, which he said amounts to US$4.6bn, in order to separate oil from the debt payments so that this product can be freely available to the government.”

Brazil

On 25 January, Brazil was invited to formally begin the accession process to the Organisation for Economic Co-operation and Development (OECD). 

Analysis:

The OECD council decided yesterday to open accession discussions with Brazil and five other candidates to OECD membership – these include Peru and Argentina in Latin America (as well as Bulgaria, Croatia, and Romania). This has been hailed as a “historic” step by both the Peruvian and Brazilian governments. In Brazil, the accession to OECD membership was declared a foreign policy priority by the administration led by President Jair Bolsonaro – although membership comes with some conditions which may force a realignment of some of the Bolsonaro government’s policies, notably on the environment. 

  • “Brazil is fully in line with the OECD’s core values, [...] such as upholding free market principles, strengthening democracy, economic modernisation, and the protection of the environment and human rights,” Brazil’s foreign and economy ministries said yesterday in a joint statement also signed by the chief-of-staff’s office. 
  • Economy Minister Paulo Guedes hailed the formal beginning of the accession process as “recognition that we are a great nation,” and added that Brazil will be the only country at the intersection of the G20, the BRICS group of developing nations (which also comprises China, Russia, India and South Africa), and the OECD. 
  • The government says that Brazil has already adhered to 103 of the OECD’s 251 normative instruments. According to Guedes, the recent approval of a law regulating the foreign exchange market, which was sanctioned in December, was key to advancing Brazil’s accession process; the economy minister said he last week sent the OECD a letter highlighting the new law and pledging to zero the tax on financial operations (IOF) for international transactions. 

Looking Ahead: The OECD council may have launched formal discussions on accession, but there is still a way to go before Brazil – or Argentina, or Peru – achieve full membership. The negotiations can take three to five years and membership must be unanimously approved by the OECD’s 38 members. Some members may resist Brazil’s membership on environmental grounds, although this could change if Bolsonaro is voted out of office later this year and a more environmentally committed administration takes over. 

* The International Monetary Fund (IMF) has released the latest issue of its World Economic Outlook Update, in which it has slashed its 2022 GDP forecast for Brazil by 1.2 percentage points. The IMF now expects Brazil’s economy to grow just 0.3% this year, after seeing 4.7% growth in 2021. The IMF says that “the outlook has weakened in Brazil”, with the strong monetary policy response to inflation weighing on domestic demand. The revised forecast for Brazil weighs on projections for GDP growth in Latin America and the Caribbean as a whole, where the IMF now expects 2.4% growth this year, down from a projected 3% in October 2021. The IMF’s new forecast for Brazil is in line with projections from other institutions, such as the United Nations Economic Commission for Latin America and the Caribbean (Eclac), which expects 0.5% growth in the region’s largest economy.

Central America & Caribbean

* The International Monetary Fund (IMF) has urged El Salvador’s government led by President Nayib Bukele to “narrow the scope” of the legislation which took effect in September 2021 making the cryptocurrency bitcoin legal tender in El Salvador, by removing its legal tender status. The call came in a statement issued after an IMF Article IV consultation with El Salvador, which concluded on 24 January. The statement cites IMF directors as agreeing on the “importance of boosting financial inclusion and not[ing] that digital means of payment—such as the Chivo e-wallet—could play this role”. However, they emphasised the need for “strict regulation and oversight” of the new ecosystem of Chivo and bitcoin. They stressed that “there are large risks associated with the use of bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities”. Some directors also “expressed concern over the risks associated with issuing bitcoin-backed bonds” which Bukele has indicated that he plans to do this year. The IMF’s latest comments raise further questions over the future of the US$1.3bn loan which the Bukele administration has said that it is seeking from the multilateral lender.

Mexico

On 25 January, Mexico’s state-run electricity firm Comisión Federal de Electricidad (CFE) responded to criticisms of President Andrés Manuel López Obrador’s proposed electricity reform, which is currently being debated in congress.

Analysis:

The CFE was responding to statements issued by the Mexican automobile industry association (Amia) and influential private sector lobby the Confederación Patronal de la República Mexicana (Coparmex) on 24 January. Criticisms of the controversial reform have intensified in the past week, suggesting that López Obrador has his work cut out if he is to secure the support needed to push it through congress.

  • The CFE, which would gain 54% control of the domestic electricity market under the reform, issued a statement saying the criticisms formed part of a “negative propaganda campaign” and were “charged with falsehoods”. Opponents of the reform say it would marginalise private renewable energy companies, sparking anti-competition and environmental concerns.
  • Amia said the CFE had “limited capacity” to generate clean energy, leading to reliance on fossil fuels. Amia also questioned the CFE’s capacity to reach the 54% quota, saying that it had only produced 40% of the electricity generated between January and September 2021, with private companies supplying the rest. According to Amia, this inability to generate enough energy would lead to less competitive electricity tariffs, risking loss of competitivity and generating uncertainty for investors.
  • Coparmex’s criticisms centred on the environment. The group said López Obrador’s government had “turned its back on the environment”, citing budget cuts to environmental institutions including the national forestry commission (Conafor), natural resources ministry (Semernat), and national water commission (Conagua), among others.
  • Coparmex also said the reform would break environmental pledges made in international agreements such as the US-Mexico-Canada Agreement (USMCA) on regional trade and the 2015 Paris Agreement on climate change.
  • The criticisms of the business groups followed concerns raised by US Energy Secretary Jennifer Granholm about the reform’s potential negative impact on US private investment in Mexico and joint efforts on clean energy and climate.

Looking Ahead: The congressional debate on the reform will conclude on 15 February. Given the level of criticism the reform has received, the ruling Movimiento Regeneración Nacional (Morena) party will likely have to agree to some major modifications to secure its approval in the lower chamber of congress. Morena needs the backing of 56 opposition politicians to reach the two-thirds majority required to pass the reform.

* Mexico’s national statistics institute (Inegi) has released the latest figures for its monthly global indicator of economic activity (IGAE), which show that economic activity increased 0.3% in seasonally-adjusted terms in November 2021 both compared to the previous month and compared to the same month of 2020. The latest figures show that, compared to October 2021, the primary sector (agriculture) increased 7.2% in seasonally-adjusted terms and the tertiary sector (services) increased 0.5% while the secondary sector (industry) contracted by 0.1%. In year-on-year terms, the primary sector grew 6.9% and the secondary sector by 0.7%, while there was no variation in the tertiary sector. Preliminary figures for December showed economic activity had dropped by 0.2% compared to the same month of the previous year.

Southern Cone

On 25 January the Argentine government led by President Alberto Fernández convened an extraordinary session of the national congress, which is to sit from 1 to 28 February to consider a total of 18 legislative initiatives.

Analysis:

Perhaps most newsworthy about the recall of congress is what was not mentioned: the country’s negotiations with the International Monetary Fund (IMF) to reschedule debts and agree a new economic plan. The implicit deadline for an agreement with the IMF, which will need to be ratified by congress, is the second half of March when heavy capital repayments fall due, potentially pushing the country into default. Not including the IMF agreement among the 18 bills under discussion is seen by some as a negotiating tactic, a sign that the two sides remain far apart, and that government wants to extract concessions from the IMF before putting the agreement on the congressional agenda.

  • The 18 bills for discussion include reforming the council of magistrates, the key body which appoints and removes judges. Its current composition has been ruled unconstitutional by the supreme court which gave the government until April to secure congressional approval for an alternative.
  • At issue is the balance between political and non-political appointees. Discussions on the composition of the council of magistrates are likely to be tense, especially with the centre-right opposition Juntos por el Cambio (JxC) having greater clout after November’s mid-term elections.
  • The thorny IMF issue remains the top political priority. The government has not scheduled any congressional time to discuss an agreement. Nor has President Fernández made good on his promise, made last November, to present a multi-year economic plan for discussion with the congressional opposition. However, if a breakthrough is reached in the IMF talks, it is most likely that the congressional agenda will be rapidly re-written to allow it to be discussed.

Looking Ahead: Financial markets are focusing on US$1.1bn worth of Argentine capital repayments due to the IMF which fall due on 28-31 January, for a sign of progress. Foreign currency reserves remain low, increasing pressure for a deal.

* Argentina’s national statistics institute (Indec) has released the latest figures on its monthly index of economic activity (Emae), showing that Argentina’s economic activity expanded 9.3% year-on-year in November. The strongest performing sectors were hotels & restaurants (+59.8%), and exploitation of mines and quarries (+20.4%) while electricity, gas & water (-0.2%) and fishing (-6.0%) were the two sectors to register a decline. In monthly terms, the November Emae grew 1.7% compared with October, the ninth consecutive month of positive growth. The November figure brings accumulated growth for the first 11 months of 2021 to 10.3%. The latest International Monetary Fund (IMF) World Economic Outlook growth projections, released yesterday (25 January), estimate that Argentina’s GDP grew 10% in 2021 and forecast it will grow 3.0% this year, a 0.5 percentage point increase on the IMF’s previous (October 2021) estimate.

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