On 12 October President Evo Morales won a resounding election victory, taking 61% of the vote to secure a third term in office, starting in January 2015 and running to January 2020. Most analysts agree that the country’s exceptionally strong economic performance was a key factor underpinning the popularity of this left-wing but pragmatic leader, a representative of the traditionally impoverished Aymara indigenous community (which makes up about two-thirds of Bolivia’s 10m-strong population). The Morales government now has to beware of complacency and start planning for the day the country’s natural gas boom may come to an end.

While Morales is a close political ally of his fellow left-wing leaders in Argentina and Venezuela, the small Bolivian economy seems to be functioning in an entirely different league. Both Argentina and Venezuela will experience recession in 2014, along with rampant inflation (over 60% in the case of Venezuela, according to the IMF). By contrast, Bolivia will see real annual GDP growth of 5.2% and inflation of not more than 6% this year (also on IMF forecasts). The country’s recent performance doesn’t look like a flash in the pan, either. Morales and his economy minister, Luis Arce, have achieved 5%-plus economic growth every year since they came to office in January 2006, delivering the longest, most consistent period of economic expansion experienced by Bolivia in the last three and a half decades. Arce, a Marxist, is sometimes described as a ‘closet liberal’. Certainly he has balanced the budget more years than not and Jeffrey Webber, a Canadian analyst of the Bolivian economy, was recently moved to comment that “inflation rates have been clamped at levels that would keep Milton Friedman resting peacefully in his grave”.

At many different levels Bolivia’s performance has been impressive. Foreign currency reserves stood at US$15.4bn in October, equivalent to just over 48% of GDP (comparatively speaking, one of the highest levels in the world). Per capita GDP has doubled, according to IMF data. The proportion of the population living in conditions of extreme poverty has been reduced from 38% to 18%, a result the World Bank this year described as “extraordinary”. In July, UNESCO said Bolivia had freed itself of illiteracy (the proportion of Bolivians who cannot read or write has been brought down to under 5% of the population). Income inequality has been sharply reduced. This was achieved in part by major increases in the real purchasing power of the minimum wage – up 87.7% in 2005-2014. Social spending (on health, education and pensions among other things) has also grown significantly, although it has lagged behind overall economic growth – as a result it has fallen as a proportion of GDP, from 12.4% in 2005 to 11.5% in 2012. Public sector investment has also grown, with funds going into the construction of roads, schools and hospitals. And despite the government’s leftist credentials, Foreign Direct Investment (FDI) has kept on coming. At 5.9% of GDP in 2013, it was ahead of Peru’s 4.9% and Brazil’s 3.0% in the same year.

One of the keys to the government’s success was the 2006 nationalisation of the hydrocarbons industry, in particular the natural gas sector. While presented to domestic and international opinion as a body blow delivered against exploitative international companies, the move was carefully balanced. Operating companies such as Petrobras, Total and Repsol lost ownership of the gas deposits but were kept on as service providers, keeping their expertise in the country and delivering their output to the state-owned hydrocarbons company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). While revenue shares were adjusted in Bolivia’s favour, at a later stage these companies were offered new tax and other incentives to boost output. The move coincided with rising gas demand from Bolivia’s energy-hungry neighbours Brazil and Argentina. As a result, Bolivia’s gas export earnings have rocketed from around US$1bn in 2005 to US$6.1bn in 2013. Bernardo Fernández, of the Universidad Católica Boliviana, notes: “When Evo Morales came to power, no-one was expecting this bonanza. These have been a very prosperous eight years, and there’ll be a couple more before the fiscal situation starts to deteriorate”.

This then, is the key issue for the third Morales term in office: how to prepare the country for a potential ‘post gas-boom’ economy. On current calculations, Bolivia’s main gas fields, which account for 57% of exports and 45% of government revenue, are likely to begin to decline in 2017. The government is stepping up exploration: YPFB is to spend US$300m searching for new gas fields, and Russia’s Rosneft is expected to join Gazprom to operate in the country. But critics on both the Right and the Left say not enough is being done to diversify the economy beyond the extractivist economic model. César Arias of Fitch Ratings says the next four years may not be as good to Bolivia as the last. Eric Farnsworth, of the Washington-based Council of the Americas (usually highly critical of nationalist governments), notes, “there is a huge competitiveness issue that’s going to take years for the Bolivians to get their arms around.” Writing for Los Andes, Peruvian journalist Eder Pérez Fuentes also had the competitiveness issue in mind when he listed two big challenges for the government: first to make good a deficit in education spending and quality of delivery; and second to develop an industrialisation policy, particularly focusing on the potential of adding value in the iron ore and lithium sectors.

Mexico’s President Enrique Peña Nieto will mark two years in office this December – that’s one third of his six-year term. The president’s most significant economic achievement so far has been to secure congressional support for 11 major structural reforms. While it will take a few years for the results to feed through, international markets have been deeply impressed with the scale of the economic changes. Unlike other big Latin American economies, Mexico is now on its way to recovery. But these gains may be at risk because of the government’s poor record on security.

On taking office in December 2012 Peña Nieto had two big problems. One was an underperforming, oil-dependent economy with deep structural imbalances. The other was a savage war with the country’s drug gangs, escalated by his predecessor, which had cost around 70,000 deaths in the preceding six years. It is now evident that the new president decided to concentrate on the economic problem as priority one, envisaging that there could be slower, more gradual improvements in security – in effect relegating it to priority two. He may have also hoped that getting the economy right would help make the security problem more manageable.

In any case, Mexicans remain a little unclear as to how exactly government security policy has changed under the current administration. Officials say it is now more low-key and more intelligence-led; they also point to the creation of a small new police force, the National Gendarmerie. Critics counter that nothing has really changed; the latest massacres (including that of student teachers in the state of Guerrero), in their view, indicate an almost complete breakdown of law and order in certain parts of the country.

It is hard to underrate the significance of the structural reforms. President Peña Nieto tackled the fundamental problem of stagnating oil production and revenues by ending the seven-decade old oil, gas, and electricity generation monopoly. International oil companies will bid for exploration and production licences starting early next year, bringing in a flow of new inward investment. Petróleos Mexicanos (Pemex), the state oil company, will compete with them. As its obligation to fund the treasury with petro-dollars is eased back, it will be able to re-invest more. Meanwhile, to make up the shortfall, a fiscal reform has been approved to increase the contribution of non-oil taxes to the government budget. Reforms in the telecoms and broadcasting sectors are designed to reduce the power of oligopolies and promote competition (see inside for more details). Education reforms are designed to improve the skills of the work force. The overall aim is to achieve a more modern and competitive economy.

The optimists see signs that it is all beginning to work. At a time when Brazil, Argentina and Venezuela are all struggling with stagnation or recession, the Mexican economy is modestly gathering pace. After a slow start in 2013 the IMF predicts real annual GDP growth of 2.4% this year and 3.5% in 2015, due to “a stronger recovery in the US, an upturn in domestic construction activity, and the gradual dividends of the energy and telecoms reforms that are underway”. The IMF has also said that the reforms will help Mexico achieve an annual GDP growth of 4% within five years - well above the average of the last decade. Despite complaints from the business sector, there is evidence that the fiscal reform is beginning to pay dividends – tax collection rose by 6.3% in January-August this year. There are some question marks on the horizon. For example, lower-than expected international oil prices next year could widen the budget deficit (currently predicted at around 3.6% of GDP) and force the government to take on more debt; but at 48% of GDP Mexican debt is considered manageable and well below that of the UK, Germany, Brazil and Argentina.

However, it now appears that the big threat to the structural reforms is not posed by external factors such as oil prices. The threat is internal, and can be summarised in two examples: Iguala (Guerrero state) and Tlatlaya (Estado de México). In late September in Iguala, 43 students were kidnapped: it is feared they were massacred by municipal police acting in collusion with a criminal gang, on the orders of a local mayor, and with the complicity of other state officials. Amid the outrage, the governor of Guerrero was forced to take a leave of absence. In Tlatlaya in June, 22 people died in what was described as an armed clash between the army and another drug gang. Subsequent investigations revealed that the army’s account of events was untrue and that most were killed in extrajudicial executions. Both cases are considered emblematic of a breakdown in law and order, particularly at state level, for which President Peña Nieto is being held responsible. In late October, Mexico was shaken by a series of demonstrations around the country accusing the government of failing to protect its citizens.

Various analysts have highlighted how poor security threatens to undermine the economic reforms. “This is the most serious crisis Peña Nieto has faced”, said political consultant Alfonso Zarate, adding, “the President’s narrative in recent months has been all about the resources his structural reforms are going to bring the country. These tragic events are taking us back to the reality of widespread lawlessness”. The central bank (Banxico) governor, Augustín Carstens, acknowledged that “there is no doubt that violence has been a negative factor” in the management of the Mexican economy. While arguing that things would eventually improve, Carstens noted that in a Banxico survey of analysts taken in early October, most had identified security issues as the top obstacle to economic expansion; followed by fiscal policy, weak domestic demand and international financial instability. The international press – which has a big impact on investor sentiment – has also begun to turn. The Economist – which has expressed enthusiasm for the structural reform programme, commented at the end of October, “Mr Peña has prioritised economic reform, and played down law and order, as the way to modernise Mexico, without admitting that both are equally important”. While attempts have been made in the past to reduce corruption, improve the integrity of state institutions, professionalise the police, and reform the inefficient and slow-moving criminal justice system, the Peña Nieto administration may need to recognise that they have not succeeded. Initiating deep reforms in this area remains difficult and daunting, but the president will postpone them only at his own peril.

Things are moving quickly in the wrong direction for Venezuela, but the government is sticking to its line that everything is fine.

It is not inconceivable that Rafael Ramírez, Venezuela’s former longstanding oil minister, president of the state oil company Petróleos de Venezuela (Pdvsa) and latterly vice president of the economic area under President Nicolás Maduro, is glad of his brand new post at the foreign ministry, where it is relatively easy to chalk up popular victories. Just weeks into his job, Ramírez was in full flight at the United Nations(UN) in New York, celebrating Venezuela’s new two-year seat on the UN Security Council (UNSC, see next article). Thereafter he was bound, along with Maduro, for Cuba, for a summit of the regional left-wing Bolivarian Alliance for the Peoples of Our Americas (Alba) on the Ebola crisis, in which Cuba has taken a recognised global lead.

Back home, Ramírez’s successors; Asdrúbal Chávez in the oil ministry, Eulogio del Pino at Pdvsa and Brigadier General Rodolfo Marco Torres in the vice presidency of the economic area (also the finance minister), are feeling extreme heat, as international punters bet on the imminent meltdown of the rentier state.

Presenting the 2015 budget on 21 October, Marco Torres said the treasury was prepared for “whatever scenario that presents itself with the price oil”. That scenario, to most external observers, is one of an oil shock that Venezuela - despite the government’s protestations – is ill equipped to absorb. President Maduro might insist that the country can live with oil at US$40/b, but right now all the facts suggest otherwise.

The budget assumptions are - in a word – glib. The US$117.7bn plan, up 35% in annual terms, uses the existing official exchange rate of BF6.3US$ and is based on an oil price forecast of US$60/b in 2015, unchanged on the 2014 budget. The Socialist government routinely uses an artificially low oil price assumption so that it then spend the subsequent ‘windfall’ generated by above-budget oil income at its discretion. Oil accounts for the 96% of the country’s export earnings and about 45% of its fiscal earnings.

However, the Venezuelan oil basket is in fact trading perilously close to the 2015 forecast – at US$77/b currently - having dropped US$15 in the last six weeks. Analyst Francisco Rodríguez of Bank of America calculates that a drop in crude prices to about US$80/b (or US$75/b for Venezuelan basket), will reduce oil export revenues in Venezuela by about US$10bn in 2015, from an estimated US$75bn in 2014 , a drop of 14%.

And with global oil supplies set to outstrip still-weak demand in the near and medium term, its future direction is pointing firmly down. Tellingly, President Maduro in mid-October called for an emergency meeting of the Organization of Petroleum Exporting Countries (OPEC), a request yet to be accepted.

Marco Torres forecast real annual GDP growth of 3% next year, which might technically be possible, depending on the depth of this year’s recession (some estimates go as low as -4.5%), but will not mean a ‘recovery’ in any sense for the vast majority of Venezuelans.

Likewise, the minister pencilled in inflation of 25%-30% (the IMF projects average inflation of 63% next year), yet admitted that the budget deficit this year is 17% of GDP – the only way around that is to devalue and/or monetise it by printing reams of local currency Bolívares – either option means inflation. There was no mention of devaluation, but it seems almost inevitable. Neither was there any mention of a reduction in the country’s lavish fuel price subsidies (amounting to US$12bn-US$15bn a year) – but again, some sort of recalibration seems unavoidable.

The finance minister again insisted that Venezuela had full capacity to service its external debt. Yields on Venezuelan bonds hit a five-year high of 17.87% in mid-October, as investors demanded ever more of a risk return to hold the country’s sovereign debt. And the country’s five-year credit-default swaps, already the highest in the world, hit a five-year high of 19.89 percentage points the day of the budget presentation, according to the financial wire Bloomberg, implying a 75% chance that Venezuela will default in the next five years.

The state oil company Petróleos de Venezuela (Pdvsa) has US$3.0bn in bond payments due on 26 October (and has the liquid reserves to do so). Venezuela paid US$1.6bn on 8 October to service its Global 2014 bond. Unusually however, it did so from its (already-scarce) central bank foreign reserves. Normally, the Venezuelan treasury makes these payments by drawing down US dollars from its external accounts, rather than buying currency at the time of payment, fuelling the speculation about the true state of the country’s financial position. Venezuela has US$17.6bn in debt service falling due on bonds over the next three years: US$5.9bn in 2015, US$4.7bn in 2016 and US$7bn in 2017.

Our sister publication, LatinAmerican Economy & Business (LAEB), in recent editions has looked into the possibility – being touted by some economists since June — that the country could/or should default. LAEB identified three signs to watch out for indicative of an imminent default. The first is an increase in the velocity of money in the country, a monetary alarm bell indicating that households and businesses have lost faith and see a collapse as inevitable; the second fiscal - a sharp drop in the price of oil, dramatically affecting prospects for Pdvsa and the government; and the third political - widespread social unrest, most likely over rampant inflation and the continued shortages of basic goods and a gradual withdrawal of public support for the government’s (ostensibly) inclusive Socialist agenda.

While Venezuela’s overall debt is low – at 51% of GDP (though some analysts put it at a higher 70% to account for various off-budget credit sources) — that does not automatically mean that it is solvent. In fact, Venezuela is facing a US dollar liquidity crisis of major proportions – forcing the heretofore exuberantly high spending government to hoard scarce dollars - and force the bulk of a very difficult adjustment onto the local population, in the form of a severe cutback in imports (to which the country is addicted) and rampant inflation, as the central bank prints local currency Bolívares hand over foot in a bid to monetise its debt.

LAEB analyst Andrew Hutchings presciently noted that “…a 10% fall in the global price of oil would have serious implications”. Other analysts are even gloomier, suggesting that the government’s true cash needs are so high that the breakeven oil price for the country is up to US$121/b. Ominously, in just six weeks, the price of Venezuelan oil has dropped 16% - from US$92.6/b on 5 September to US$77.7/b in the week of 13-17 October.

• Venezuela has US$17.6bn in debt service due on its sovereign bonds over the next three years: US$5.9bn in 2015, US$4.7bn in 2016 and US$7bn in 2017.

• Import cover down to two days

After Venezuela used central bank reserves to service its US$1.6bn bond payment in early October, the bank’s liquid foreign reserves came down to an estimated US$300m, from US$2.0bn before the amortisation. That is just two days of import cover. There is still no sign of the US$750m special strategic reserve fund announced by President Maduro in September, which he said would fold monies from the various (multi-billion dollar) off-budget funds like the China Fund and the National Development Fund into central bank reserves.

Development: On 2 October Brazil’s presidential candidates held their final televised debate before the 5 October general elections.

Significance: A bad-tempered, and at times chaotic, debate shed little light on what any of the candidates might do in office. If anything, the most substantive exchanges were between ‘nanicos’, the also-ran candidates who have no chance of making it through to the second round. Among the leading three, the debate was notable in that President Dilma Rousseff (Partido dos Trabalhadores, PT) did not slip up, while Marina Silva (Partido Socialista Brasileiro, PSB), the president’s erstwhile closest rival, was unimpressive. A rejuvenated Aécio Neves (Partido da Social Democracia Brasileiro, PSDB) was plausible and measured. With Silva sinking fast in the polls, Neves may just have done enough to ensure he makes it through to the second round.

• Over and over again, candidates from both the Left and the Right raised the issue of corruption in their head-to-head exchanges with the president. Rousseff rarely answered any of their questions directly, but blithely reeled off statistical achievements. Her only direct comments on the issue of corruption was to claim credit for personally firing those responsible for malfeasance at Petrobras, the state oil company, and promising to ban ‘Caixa 2’ political donations (the slush funds for campaigning that come from private companies).

• In fact, the PT would like to replace campaign financing with a system based on congressional representation; given its size, the PT would receive the lion’s share of any such financing, much as it now dominates the free-to-air campaign broadcasts in the run-up to the election.

• After weeks of PT television adverts showing Brazilian families’ food literally vanishing from their plates under an imagined Silva presidency, the PSB candidate has found her promises that she would not touch the 'Bolsa Família' benefits programme drowned out. To combat that, in the debate she promised to increase the stipend, adding a 13^th month salary (Brazilian workers get an extra salary in December) to ensure that poor families can afford a decent Christmas.

• But elsewhere Silva was weak where she needed to be strong. On the question of central bank autonomy, one of Silva’s campaign promises, Rousseff managed to successfully muddy the waters by extemporising on the difference between autonomy and independence. Neves also attacked Silva for staying in the government during the 'mensalão' cash-for-votes scandal and questioned why some of her party's candidates were disgraced former members of the PT.

• Neves, by contrast, was clear and succinct. Unlike Silva or Rousseff, he did not find himself caught short by the very short answer format demanded by the organisers of the debate. When Rousseff attacked him over his apparent obsession with privatisation, Neves pointed to the successful sell-offs managed by the PSDB in the past, such as fixed-line telephones. Without going into any detail about what he would do with the state-owned oil firm, Petrobras (only one fringe candidate has talked openly about privatisation), he insisted that the status quo could not continue. He was also clear about his plans to continue with both Bolsa Família and the Minha Casa Minha Vida housing programme, while questioning the value of others, such as Pronatec, a technical training school.

Looking Ahead: According to Ibope, Rousseff is on course to win 47% of valid votes; Silva is five percentage points ahead of Neves. Datafolha, however, puts Rousseff on 40%, with Neves (21%) and Silva (24%) in a technical tie. Those who don’t know are on 5%, with those planning to vote for none of the above also on 5%. In last night’s debate, Silva will have done little to persuade those people to back her on 5 October.

For the first time since the April reform of the military code of justice, the civilian authorities will be trying soldiers for involvement in a mass killing of civilians. This was announced in late September, almost three months after the event, which was initially portrayed by the defence ministry (Sedena) and the authorities of México state, as the result of an armed clash ensuing from the ambush of an army patrol by criminals.

The official version of incident, which took place at a warehouse in Tlatlaya on 30 June, was challenged almost immediately by the media and human rights advocates, which suggested that most of the 22 civilian victims had been executed after surrendering [SSR-14-07]. The federal procurator-general’s office (PGR), which took over the formal investigation, remained non-committal invoking the confidentiality of the proceedings. This changed on 19 September, when Esquire Latinoamérica published an exposé on it, supported by firsthand testimony.

On 22 September, President Enrique Peña Nieto told the media that all the questions regarding the episode would be answered by the PGR. Three days later an army officer and seven soldiers were arrested. As the month drew to a close, procurator-general Jesús Murillo Karam announced that three members of the military would be charged with homicide and five others with involvement. He said that after examining the forensic evidence and testimonies given ‘it is clear to us that there was a confrontation between military personnel and a group of criminals who were in the warehouse, which lasted for eight to ten minutes [but] after the firing had ceased three soldiers entered the warehouse and made a new sequence of shots with no justification [...] With what we have we are able to conclude that there was excessive use of force and homicide.’

Murillo added that Sedena was conducting a separate investigation into the actions of the eight soldiers that may constitute offences under the military code. The amendment of the military code of justice stipulates that common or federal crimes committed by members of the military in times of war or ‘other circumstances envisaged in the constitution’ will be dealt with by the military courts ‘whenever the passive subject [the victim] is not a civilian.’

■ In 2013 there were 1,505 reports of torture and abuse by law-enforcement and security officials in Mexico, almost seven times as many as in 2003 says a report entitled Out of Control: Torture and Other Ill-treatment in Mexico, released by Amnesty International (AI) on 4 September. AI notes that the number of torture and abuse cases began to rise in 2006, when the previous Felipe Calderón (2006-2012) administration launched its all-out war of the drug cartels. It says, ‘The large-scale deployment of the army and navy marines in recent years to combat organized crime has been a key factor in the increased use of torture.’ It also noted that the national human rights commission verified less than 1% of the complaints of police abuse it had received, and in 2010-13 none of the complaints on cases of torture led to convictions.

On 12 September the Comisión Mexicana de Defensa y Promoción de los Derechos Humanos (CMDPDH), the Mexican branch of the Citizen Commission on Human Rights (CCHR) and the Paris-based International Federation for Human Rights (FIDH) submitted to the International Criminal Court (ICC) a report on abuses by members of the military and security forces during the Calderón administration. The ICC can only hear cases which national courts are unwilling or unable to investigate or prosecute.

• “On 12 September the Comisión Mexicana de Defensa y Promoción de los Derechos Humanos (CMDPDH), the Mexican branch of the Citizen Commission on Human Rights (CCHR) and the Paris-based International Federation for Human Rights (FIDH) submitted to the International Criminal Court (ICC) a report on abuses by members of the military and security forces during the Calderón administration. The ICC can only hear cases which national courts are unwilling or unable to investigate or prosecute.”

In August the Economic Commission for Latin America and the Caribbean (ECLAC, also known under its Spanish acronym, CEPAL) became the latest multilateral institution to cut back its regional growth forecast.

The UN commission now says regional GDP growth this year will be only 2.2%, down from its earlier 2.7% projection, made in April, and down from the 2.5% result achieved in 2013. The ECLAC reduction had been preceded by a similar revision by the IMF, which in its World Economic Outlook, published in July, reduced its growth forecast for Latin America to 2.0%, down from its earlier forecast of 2.56% in April of this year. ECLAC attributed the change to weaker external demand, something of a slowdown in domestic consumption growth, insufficient investment, and a lack of new economic policy initiatives. For the region as a whole, ECLAC said the most important downside risk was slower growth in China. Key Latin American commodity exporters could suffer if the Chinese growth rate slips under 7%. On the plus side, however, some of the world’s other leading economic areas, such as the US (and to a lesser degree the European Union [EU]), seemed set to strengthen their recovery towards the end of this year, boosting demand for Latin American exports.

The various regional economies are showing quite wide variations in expected performance. The more pessimistic outlook for the region as a whole in part can be explained because some of the bigger economies are lagging behind the average. These include Brazil (only 1.4% growth predicted for this year), Argentina (0.2%), and Venezuela (-0.5%). Mexico, the number two economy, is expected to do a little (but not much) better than the average (+2.5%), as manufacturing exports to the recovering US economy begin to rise. The fastest-growing Latin American economies this year tend to be small- to medium-sized. The ranking is led by Panama (6.7%) and Bolivia (5.5%), followed by Colombia, the Dominican Republic, Ecuador and Nicaragua (all forecast to post annual GDP growth of 5.0%).

While noting the need for short-term business cycle management, ECLAC in its report stresses the importance of planning for the long term, investing in infrastructure, and raising productivity. “Macroeconomic policy must be reoriented, seeking to create the conditions for sustained growth and increased productivity. For that to happen, it is necessary to foster greater investment (public and private) in infrastructure and innovation and to boost the diversification of production,” the report said.

President Rafael Correa managed to duck a potentially awkward referendum on the exploitation of oil in the Yasuní national reserve earlier this year, but he might not be able to avoid a referendum on his plans to amend the constitution to be able to stand for indefinite re-election. The political opposition is preparing to gather signatures to demand a referendum in late 2015 on a reform that has not even been approved by the national assembly yet. Correa insists that such a referendum holds no fears for him – and his high approval rating suggests his confidence is not misplaced – but it could still be a threat. Correa is well aware that the opposition dealt a blow to his ruling Alianza País (AP) in February’s municipal elections in part by persuading voters of the dangers of the concentration of power.

The leader of Movimiento Creando Oportunidades (CREO), Guillermo Lasso, who finished second to President Correa in the last presidential elections in 2013 with 23% of the vote (the equivalent of 1.95m votes), is behind the drive to hold a referendum on indefinite re-election. At present, the constitutional court is deliberating over whether the national assembly can alter the constitution itself to allow indefinite re-election or whether a referendum is required to make the amendment. Lasso said that if the court goes for the first of these options then CREO will immediately launch a signature-gathering drive with a view to holding a referendum on the matter in September 2015. “Alternation of power is vital in a democracy,” Lasso said.

Lasso expressed his confidence that there is public demand for a referendum on the matter. A poll on 27 June by local pollster Cedatos suggested that 61% of Ecuadoreans would like to be consulted in a referendum, while 53% disagreed with the national assembly being able to approve the constitutional amendment itself.

President Correa appears unperturbed. On his weekly television and radio programme on 9 August he said that he would only seek re-election in 2017 “if the circumstances merit it” and as “a last resort” in the face of a surge in support for “the Right”. “They want to gather signatures, the Right with the Left, and some of the indigenous leadership: see how they conspire against the [Citizens’] Revolution,” Correa declared.

Correa also wished the opposition luck in convening a referendum, saying that he would add other issues to the public consultation, such as the recent trade accord with the European Union (EU) (see below), or the installation of electric induction cookers in households instead of natural gas, which is part of the government’s plan to start replacing some 3.5m kitchens with gas stoves in 2015 and remove the fuel subsidy. Correa added that “If we lose [a referendum on indefinite re-election], I would thank them [the opposition]; believe me it is a very serious dilemma for me.”

The ‘Left’ lumped by Correa with the Right and indigenous leadership includes the Marxist-Leninist Movimiento Popular Democrático (MPD), which is affiliated to the teachers’ unions; and Movimiento Ruptura de los 25, a founding member of the ruling AP coalition. In early August, both parties were stripped of their registration by the national electoral council (CNE), along with two traditional parties on the Right - the Partido Renovador Institucional Acción Nacional (Prian), of banana magnate Alvaro Noboa; and the Partido Roldosista Ecuatoriano (PRE), of former president Abdalá Bucaram, who was dismissed by congress for alleged mental incapacity in 1997 after less than a year in office and is living in exile in Panama.

The CNE threw out an appeal by the four parties and ratified a ruling it issued in early July arguing that they had failed either to obtain sufficient votes (4%) in two consecutive elections (legislative last year and municipal this year); or to return three deputies to the national assembly; or to win 8% of mayoralties, in order to retain their status. The CNE adopted these thresholds in a change to the electoral law two years ago.

Ruptura de los 25 issued a statement accusing President Correa of “advancing an authoritarian system concentrating power”. Ruptura, the original forajidos (the name given to the protesters who brought about the downfall of President Lucio Gutiérrez in 2005), left the AP in January 2011 in protest at a referendum calling for constitutional and judicial reforms which, it argued, betrayed the principles of the ‘Citizens’ Revolution’. At the time, Ruptura had two cabinet members and four congressional deputies, but it has since failed to thrive outside of the AP umbrella.

• Parties wound up in Ecuador
  

Three other parties - Concentración de Fuerzas Populares (CFP), Unión Demócrata Cristiana (UDC) and Izquierda Democrática (ID) - were eliminated by the CNE when changes to the electoral law were introduced two years ago.

• Bucaram

Abdalá Bucaram Pulley, the former president’s son and the PRE’s sole deputy, reacted to the party’s forced dissolution by accusing the government of a calculated political strategy “to eliminate all political organisations and construct one sole political party in accordance with the government’s vision”. The PRE and the other three parties wound up by the CNE have one last chance to appeal open to them - the Tribunal Contencioso Electoral (TCE) - but they are also mooting turning to international forums, such as the Inter-American Commission on Human Rights (IACHR), which they hope might issue precautionary measures on the grounds that the decision violates due process.

Claims have been made that the number of flights on Peru’s cocaine airbridge has been increasing, and that traffickers may have been testing the use of bigger aircraft to carry the drug. In the mean time interdiction of the ‘narcoflights’ (on the ground, since Peru does not have a shootdown policy) is hampered by the lack of radar surveillance, and acquiring it is taking time.

On 3 July the joint command of Peru’s armed forces announced that joint military-police operations in the last week of June had led to the location and destruction of 12 clandestine airstrips (designated PACs, for pistas de aterrizaje clandestinas) in the Vraem portions of three regions: Río Tambo and Pangoa, Satipo, Junín; Llochegua, Huanta, Ayacucho; and Pichari, La Convención, Cusco. Almost a fortnight later a military patrol seized on the ground a light aircraft in Satipo, Junín — the third such occurrence so far this year.

One thing the authorities appear to have missed, according to ‘sources in the know’ cited by Gustavo Gorriti of IDL-Reporteros, was the mid-June landing in the Vraem of a bimotor with the capacity to carry 800 kilos of cocaine — more than twice the regular cargo of the Cessnas that ply their trade on the clandestine Peru-Bolivia airbridge. Should the traffickers find feasible the use of larger aircraft, the flow could increase considerably.

Gorriti notes that the ground-based flight monitoring (which lacks radars) indicates that four to six flights take place every day, each carrying 300 kilos of cocaine, but that ‘human intelligence sources’ claim that the number of flights, adding those in the Vraem and the Pichis-Palcazú valley, has increased recently to 8-10 a day. At six flights a day the traffic adds up to 54 tonnes (t) a month; at eight to 72t.

In late June Gorriti asked defence minister Pedro Cateriano about this situation. He said his information did not tally with the claim of 8-10 flights a day: ‘It is a journalistic source and I can’t verify it. I don’t have that figure. There are statistics and reports which indicate that there are approximately four flights a day.’

Cateriano’s explanation of what has been happening was that, with the deaths last August of the Sendero Luminoso (SL) leaders known as ‘Alipio’ and ‘Gabriel’, the drug traffickers ‘stopped paying a toll to the terrorists [and] paradoxically, this blow against terrorism led to the facilitation in the Vraem of this illicit air traffic.’

He explained that the absence of radar surveillance was due to Peru’s agreement not to use the radar lent by the US for purposes of aerial interdiction, and that in any case that radar is in need of repair. Tenders, he said, have been invited for the supply of four radars and at present Peru is awaiting the technical specifications which the air force must assess.

This means that there is no firm delivery date yet, at best, Cateriano conceded, it could be ‘in the coming months of the second half of this year’. Gorriti’s arithmetic is that each month that passes means at least 180 more ‘narcoflights’.

The annual accounts of Venezuela's state-owned oil company show that both it and the government are (very) short of cash.

Petróleos de Venezuela (Pdvsa), the state-owned oil company and government cash-cow, has scale by world standards. Total proven reserves of conventional and extra heavy crude oil of nearly 300bn barrels are the world's largest - and about 12% more than those of Aramco, its peer in Saudi Arabia. Just under one third of the reserves are held by joint ventures (JVs) in which Pdvsa is a majority investor.

Huge reserves, but no growth

However, as chart 1 shows, Pdvsa is not a growing business. Total crude production has stagnated at just over 3m barrels per day(b/d). Exports of crude in 2013, at just under 2m b/d, were more or less the same as in 2011. Exports of refined oil products - of about 0.5m b/d last year, have been falling. The company's refineries have been operating at near full capacity, and have not been increasing throughput.

Pdvsa's annual report for 2013 quantifies the government's (and, therefore, Pdvsa's) commitments to provide oil in support of the government's geopolitical objectives, and to service barter loans. Production dedicated to these ends has been running at about 1.0m b/d over the last three years. In effect, about one third of daily production has been pre-sold. Deliveries under these arrangements fell from 1.09m b/d in 2012 to 0.94m b/d in 2013. Requirements to supply oil to Portugal, Iran and Belarus ended in the earlier year. Deliveries to China rose from 0.53m b/d in 2012 to 0.55m b/d in 2013.

However, deliveries to other countries in the region under the Petrocaribe oil alliance dropped from 0.46m b/d in 2012 to 0.39m b/d in 2013. We suggest that this points to one (or both) of two developments, neither of which is positive. One is a slippage in demand and/or ability to pay on the part of the 17 Petrocaribe client states, which are acquiring Venezuelan oil on concessional terms (see below). The other (which we think more likely) is a reluctance and/or inability on the part of the Venezuelan government and of Pdvsa to maintain deliveries at 2012 levels.

Cutting back on the social programs

Chart 2, which looks at selected items from Pdvsa’s income statement, shows that the company's contributions to government-backed social programs have also been reduced. Contributions for social development in 2013 amounted to US$7.8bn, or about half of what they were in 2011. Net contributions to FONDEN, the national development fund, were US$5.2bn, or a little over one third of what they had been in 2011. Even so, net contributions to FONDEN, along with contributions for social development, amounted to almost one eighth of gross revenues from sales of oil and oil products. Net contributions to the Fondo Simón Bolívar para la Reconstrucción (a government-controlled fund for housing) were, last year, relatively small in the overall context of Pdvsa's operations at US$1.7bn, but significant by most other standards.

However, gross revenues have been falling, given the stagnation of output and slippage in the prices received by Pdvsa for its products.  Revenues from the sale of oil and other products were basically the same in 2012 (US$124.5bn or so) as in 2011. Subsequently, they dropped by around 9% to US$114.0bn in 2013. Lower oil prices have kept a lid on the purchases of crude oil and products that Pdvsa makes. However, production royalties and depreciation & amortisation expenses have crept upwards over the last two years or so. Most ominously, operating expenses, at US$22.5bn in 2013, were 55% higher than they were in 2011 (if marginally lower than they were in 2012). Operating expenses are among very few items in the company's income statement that are not explained in detail by a note to the accounts. They do not include exploration expenses (of US$0.2bn-US$0.4bn annually over the last three years) or sales, administrative and general expenses (of around US$4.0bn annually).

The grim truth is this: Pdvsa's gross profit from its core business of extraction, processing and shipment of hydrocarbons (i.e. the sales of oil and products less total expenses, as per chart 2) has dropped from just under US$35.6bn in 2011 to US$25.8bn in 2012 to US$16.4bn in 2013. Of course, these amounts include production royalties, but are before the payment of contributions for social development, transfers to the Fonden or income tax.

Pdvsa’s US$30bn gold mining subsidiary

However, a glance at Pdvsa's total revenues indicates that something like 15% came from 'finance income' in 2013, up from a little over 2% in 2012 and a negligible amount in 2011. An examination of the notes to the accounts shows that most of the US$20.3bn booked as finance income comes from two items.

The first of the two items is an exchange gain of US$7.8bn. Pdvsa's standard operating procedure is to hold its US dollar revenues on its own books in that currency. It only sells to Banco Central de Venezuela (BCV, the central bank) the minimum foreign currency needed to buy the local currency Bolivares that it needs within the country. This is prescribed in the Reform Law of the BCV, which has been effective since 20 July 2005.  Usually, Pdvsa is a net debtor in relation to parties within Venezuela with which it deals. In other words, it typically has net liabilities in Bolivares. These local currency liabilities include “accounts payable to the Oficina Nacional del Tesoro (ONT - the Treasury of the Bolivarian Republic); accruals payable to contractors, presented as accruals and other liabilities; accounts payable to domestic suppliers; financial debt in Bolivares and liabilities for employee benefits and other post-employment benefits from local employees.” On the other hand, local currency “monetary assets mainly consist of accounts receivable owned by [the government] and other government institutions; fiscal credits to be recovered and prepayments to contractors”.

The amounts involved are very substantial. Just before the Bolívar was devalued by just under a third (32%) in early February 2013, Pdvsa’s local currency net liabilities amounted to just over US$25.0bn. The devaluation reduced the US dollar value of the net liabilities by US$7.8bn, and this amount was booked as a gain.

The second, and larger item, was a profit of just over US$9.5bn booked from the sale of a 40% stake in a company called Empresa Nacional Aurífera (ENA). ENA was incorporated in December 2013 with equity of US$30.0bn. According to the notes to the Pdvsa accounts, “ENA is mainly engaged in exploring, developing, producing, transforming, refining, manufacturing and distributing any kind of material deriving from the utilisation of gold mines and fields at all phases”. In fact, ENA looks to be a shell company. As Pdvsa's own accounts make clear, ENA did not operate at all during 2013. As we discuss below, the valuation of ENA seems entirely notional.

This leads to another grim truth: but for the devaluation and the ENA deal, Pdvsa's profit before income tax would not have been US$23.7bn. It would have been US$17.3bn less, or US$6.4bn - a little over half of the US$11.6bn profit before income tax in 2012. Pdvsa simply is not in the position to support the level of contributions to government-backed social programs and to the FONDEN that it was making as recently as 2011.

Shuffling paper, but not cash, with the government

Several aspects of Pdvsa's balance sheet, which is summarised in chart 3, are noteworthy. The first is that the company does not appear to be highly geared.  Total financial debt, at US$36.4bn, is not particularly large. As is clear from the income statement, its cashflows are easily able to cope with the interest payments.

Accounts receivable have remained broadly constant. They were boosted by US$30.0bn, being gold exploration rights granted by the government to Pdvsa at the end of December 2013 as a part of the ENA deal. However, given that Pdvsa was unable to determine the true value of the rights, this amount was written off immediately.

The sale of 40% of ENA to the government did not result in a cash payment of US$12.0bn to Pdvsa. Rather, amounts owed by Pdvsa to the government (i.e. accounts payable) were reduced by this amount. At the end of the year, Pdvsa declared a dividend of US$10.0bn. This was not paid in cash. Rather, accounts receivable (specifically from the government in relation to oil provided by Pdvsa for Petrocaribe deliveries) were reduced by this amount.

These transactions reduced both accounts receivable from and amounts payable to related parties (i.e. mainly the government, FONDEN and other official institutions) by roughly the same amount. They ensured that the government did not have to pay US$12bn in cash for the 40% of ENA - effectively a shell company - that it purchased from Pdvsa at the end of last year. They also reduced the amount that the government would otherwise have had to pay for the oil that it needed for its Petrocaribe commitments. As noted above, profit before tax would have been just US$6.3bn last year had it not been for the devaluation of the currency in February and the ENA deal. At US$10.0bn, the dividend is much larger than would ever be contemplated by an enterprise that was operating according along purely commercial lines.

In essence, the government is squeezing Pdvsa for cash, even though the company's ability to support FONDEN and other social programs has diminished. Pdvsa is sharing some of the pain with its JV partners. The notes to the accounts indicate that these liabilities (mainly dividends from the operations) have risen from US$0.8bn in 2011 to US$1.8bn in 2012 to US$2.5bn at the end of last year.

One item in the balance sheet that is not a problem now, but which unquestionably has the potential to become one, is Pdvsa’s liabilities for employee benefits to employees, both present at past. The total liability of US$16.6bn is not particularly large in the context of total assets of US$231.1bn. However, it has grown by over 60% since the end of 2011.

Part-funding (inefficient) capex by squeezing the trade creditors

Pdvsa's cash flow statement, summarised in chart 4, confirms the overall picture of a financially stressed company. Capital expenditure (Capex) in 2013 amounted to around US$23.3bn. As we have seen, this was not sufficient to increase output. Depreciation & amortization has been rising, but at around US$8.3bn is much less than the capital expenditure. Given that net new borrowings were just over US$4.0bn, about US$9bn came from other all other sources. Those sources included a US$7.9bn rise in trade accounts payable. Meanwhile, Pdvsa has been husbanding cash by allowing increases in tax and other liabilities (or being permitted to do so).

In short, Pdvsa and its shareholder, the Bolivarian Republic of Venezuela, are comrades in adversity. Pdvsa's annual capital expenditure of tens of billions of US dollars is barely maintaining production volumes. Cashflow is being reduced by the relentless rise of operating costs (and, over the last two years, the fall in the price of crude oil -from US$100/barrel to US$98/barrel - and gas - from US$5.24 to US$3.97). Pdvsa already has made a significant reduction to its contributions to FONDEN and to other social programs. It is squeezing its suppliers and its JV partners.

For its part, the government has reduced the amount of money that it has to pay Pdvsa for oil that is used for Petrocaribe commitments. It has done that by extracting a US$10bn dividend from Pdvsa, even though the oil giant is marginally profitable and faces a number of strategic problems. The dividend would have been unjustifiable but for the US$17.3bn boost to earnings which came from two one-off events - the devaluation and the profit from the ENA deal. Central to the ENA deal was the concept that 40% of the new shell company was worth US$12.0bn in late December 2013, even though it had not commenced trading.

To date, Pdvsa has had sufficient financial strength and cashflow to shelter the government (through payments of royalties, taxes, contributions to social programs and dividends) from the generally downwards move in energy prices.

The latest data suggests that this is no longer the case. Both of the comrades in adversity are far more vulnerable to a fall in the price of oil - whether as a result of a crisis in China or some other reason - than they were one or two years ago.

• Petrocaribe Ts & Cs

Petrocaribe system allows for the purchase of market value oil from Venezuela’s Pdvsa on preferential payment terms, with a 5%-50% upfront payment (and a grace period of one to two years); the remainder can be paid through a 17-25 year financing agreement at 1% interest if oil prices are above US$40/barrel. Payment is also accepted in kind (goods and services).

At the end of June, the Mexican and US governments outlined their respective responses to the massive increase in the number of unaccompanied minors, mostly from Central America, looking to cross Mexico into the US.

The US Customs and Border Protection agency (CBP) first detected an increase in the number of children coming from the Central America’s ‘Northern Triangle’ (Guatemala, Honduras, El Salvador) back in 2011. In the past year, however, the numbers have reached record levels. According to CBP data, 52,139 unaccompanied children were apprehended trying to cross the border in the eight months to June 2014– a 99% increase over the same period of the previous fiscal year (FY, running from October). Almost 40,000 of these were from Central America. Whereas Mexican children accounted for the majority of unaccompanied minors between FYs 2009 and 2013, they were overtaken by Hondurans and Guatemalans in June 2014. Mexico’s interior ministry (Segob) recently corroborated the CBP data with its own figures. On 24 June, it reported that Mexican border patrols had so far detected 9,622 unaccompanied minors between January and June 2014, compared with the 9,724 identified during the whole of 2013.

According to an April report by the United Nations Human Rights Council (UNHRC), most of the children who attempt to travel across Mexico to reach the US are escaping from “criminal threats inflamed by drug trafficking, polarised political systems, weak law enforcement and social hardships – such as poverty and unemployment”. The UNHRC noted that 53% of the 404 migrant children interviewed for the report discussed deprivation and lack of opportunity as one of the reasons for leaving; 21% mentioned abuse in their households; 41% feared violence by organised crime. The majority of the interviewed children (58%) would probably qualify as refugees under international laws.

The response

After both the US and Mexican authorities recognised the full scale of the problem, on 19 June President Obama phoned Mexico’s President Enrique Peña Nieto to discuss the “joint responsibility” of the two countries to guarantee the safety and security of all migrants and to explore ways in which they could work together to tackle what the US president said was an emerging humanitarian crisis.

Soon afterwards, on 27 June, the Segob announced the launch of a new ‘safe passage’ plan designed to protect migrants found in Mexico’s national territory. Under the ‘safe passage’ provisions, Mexico will share intelligence with Honduras and El Salvador to combat people trafficking gangs, and will attempt to collect biometric information from migrants in collaboration with neighbouring Guatemalan and Belizean authorities. In addition, the Segob also will conduct an information campaign to warn parents in both Mexico and Central America of the very serious risks posed by people traffickers, who promise to guide would-be migrants through Mexico and into the US, where they claim that children can easily secure US citizenship. In announcing the plan, Mercedes del Carmen Guillén Vicente, Segob’s deputy minister for population and migration, said the government’s priority was to regulate migration flows, and that “in no way will Mexico advocate walls, or the closing of its borders”, in an apparent reference to the argument often made by US Republicans that the best way to control migration flows is to physically close off US borders, rather than making changes to migration laws aimed at deterring illegal immigration (as Obama argues his proposed reform would do).

Meanwhile, on 30 June President Obama sent a letter to the US Congress requesting US$2bn in emergency supplemental funds to be used by various US government agencies to prevent the arrival and hasten the deportation of unaccompanied migrant children from Mexico and Central America. The funds are to be used to significantly increase the number of immigration judges assigned to process recent border crossers and to enforce sustained actions against human traffickers. A significant part would also be spent in developing a set of security and education initiatives in Central America, aimed at discouraging parents and children from trying to enter the US via Mexico.

US Homeland Security Secretary Jeh Johnson and Attorney General Eric Holder have already been tasked to redirect immigration enforcement resources to the US-Mexico border, while President Obama has also solicited advice on further initiatives that could be taken by his administration without requiring congressional approval.

President Obama has also said that if the Republican-controlled US House of Representatives continues to hold up approval of the immigration reform bill approved by the Senate last year, he would consider issuing executive orders to introduce sweeping changes to the US immigration system instead of waiting for Congress to arrive at a consensus over the reform. But this would be a last resort, as it would be an extremely bold move ahead of the November mid-term elections. In addition, there is also the possibility that any changes introduced via executive order by Obama could be overturned by the next administration.

Crisis factors

The US response appears designed to address some of the endogenous issues that have contributed to the present situation. The most relevant of these is the inadequacy of the legal procedures for handling underage migrants. The 2008 William Wilberforce Trafficking Victims Protection Reauthorization Act, which stipulates that unaccompanied illegal migrant minors from neighbouring countries seized by US Border Patrol (USBP) cannot automatically be deported but should instead be deferred to an immigration office to evaluate whether they may qualify for refugee status, was introduced at a time when the majority of illegal migrants crossing the border were Mexican nationals. But now, the act is looking inadequate.

As per the William Wilberforce Act, the USPB has 72 hours to transfer non-Mexican illegal migrant children to either known family members residing in the US or to the Department of Health and Human Services (HHS) for safekeeping, while they wait for their status to be determined. But during a 25 June congressional hearing, the administrator of the Federal Emergency Management Agency (FEMA), Craig Fugate, admitted that the 72-hour limit was impossible to meet in the current circumstances. “We wanted to get these kids as quickly as we could from a detention facility to a bed…we have increased capacity but the number of children has increased as well and we have not reached the 72-hour mark”, Fugate said. The current housing system managed by HHS provides for a total of just 9,000 beds, with heavily subsidised NGOs such as Southwest Key supplying additional housing.

The overload of Central American children was met with dismay by USBP agents, who do not possess proper training or facilities to handle the situation. Meanwhile Art del Cueto, a USBP union vice-president, accused the Mexican authorities of inaction in the face of the crisis, and stated: “These children who are here in the US crossed over from Mexico, so what responsibility is Mexico assuming?”

Mexico’s role

But south of the Rio Grande, the notion is that the US inability to pass a comprehensive immigration reform is one of the main contributing factors. At a regional meeting in Guatemala on 21 June, the presidents of Guatemala and El Salvador expressed this criticism in person to US Vice-President Joe Biden, and suggested that the crisis would not be resolved until the US reforms its immigration laws. The view was backed by Mexico’s interior minister, Miguel Ángel Osorio Chong.

The attention of the Mexican media is now keenly focused on the issue. The leading Mexican daily, El Universal, sent its reporters to investigate the conditions of some of the detained minors and to detail what it referred to as the “business” of service providers for the unaccompanied migrant children in the US.

Mexican children still constitute a sizeable proportion of the minors detained by USBP officers. According to the UNHRC, many are likely to have been recruited by people traffickers to be used as guides for other migrants.

Finally, the UNHRC also notes that the number of asylum seekers in Mexico itself from Central America has more than doubled over the last five years. If this trend continues, Mexico might have to deal with its own migrant crisis.

Several Mexican government officials, including Foreign Minister José Antonio Meade Kuribreña (see sidebar), have called for closer collaboration between the US and Mexico on the issue. Judging from what both governments have announced so far, it seems that most of the cooperation will be limited to information campaigns aimed at debunking rumours of easy access to the US spread by human traffickers in Central America. But a wider agenda, including a proposal to set up a joint migration control, as suggested during the XIX regional migration conference held in Managua, Nicaragua on 27-30 June, may also become necessary.

• Obama addresses parents

During a 26 June interview with the US TV channel ABC News, President Obama asked the parents of Central American children not to send their children to the US border. “Our message absolutely is don’t send your children unaccompanied”, Obama said, adding, “If they do make it [to the border], they’ll get sent back. More importantly they may not make it… we don’t even know how many of these kids don’t make it, and many have been waylaid into sex trafficking or killed”.

• Meade

Mexico’s Foreign Minister José Antonio Meade toured parts of the Mexico-US border area on 24 June. During his visit to a border patrol centre in McAllen, Texas, Meade said that the Mexican consular network would redouble its efforts to inform the migrant community in the US of the dangers of sending unaccompanied children across international borders. Stating that the Mexican government was acting to “protect the rights of this vulnerable population”, Meade stressed that the issue also requires a “bilateral, regional-wide and multilateral effort”.