According to latest estimates, over 600,000 people will be visiting Brazil during the upcoming FIFA World Cup, the once-every-four years football extravaganza due to be held between 12 June and 13 July. Some US$11bn has been spent on preparations for the event. The matches will be held in 12 different cities across the country. The vast majority of the visitors – perhaps over 90% – will get to the country and to the different venues by air. On paper, this should mean a bonanza for Latin American and international airlines. In reality, apparently not: airline executives are decidedly down in the mouth about the whole thing.

Germán Efromovich, the Brazilian businessman with a controlling stake in Avianca, the Colombia-based regional airline, is certainly not hyping the World Cup travel experience. At a recent conference, he suggested that Brazil is just not ready for the expected surge in air travel demand. “You’re going to spend three hours going around in circles, you’ll go to another city 300kms away, and you’ll put the passenger in a bus or taxi, and he’ll arrive after the match is over. Then we’ll see what happens,” he said.

Enrique Cueto, the Chilean chief executive of LATAM Airlines (the partnership between Chile’s LAN and Brazil’s TAM) was in agreement. “I don’t know who’s going to win the games, but the airlines are going to lose with the World Cup” he said, adding, “if you do things right with operations you can wind up with a draw. You get it wrong and you don’t get to a game on time and you’ll soon see what you get.” Given that actually getting to the game ranks pretty high in the average football fan’s requirements, these top executives are clearly deeply concerned about the possibility of things going wrong, with all the associated bad press and reputational damage.

Behind that concern is the technical worry that the air travel system in Brazil is just not robust enough. In the last ten years, the number of Brazilian air travellers has more than tripled to around 200m per annum. Despite advances, and the expansion and modernisation of airline fleets, the country’s airport and air traffic control infrastructure has struggled to keep up. One sign of this is that around 4% of all of Brazil’s scheduled commercial flights are cancelled or not completed due to weather, mechanical, or staffing issues, about double the rate in the US.

While the government has been investing to increase system capacity, the consensus is that projects are still running behind where they need to be. Many Brazilian airports are still operating beyond their technical capacity. Expansion projects underway are being implemented by both private sector and public enterprises. Two years ago President Dilma Rousseff privatised a number of key airports. But results have been mixed. Earlier this month, she inaugurated the shiny new south terminal at Brasília, built by the Argentina-based concession holder Corporación América and Brazil’s Engevix. The project is on track for completion in May, before the World Cup starts. But others have not been so lucky. In Fortaleza, the venue for six World Cup matches, travellers will have to use a temporary canvas terminal building. In Viracopos, outside São Paulo, the new US$800m international terminal will not be ready on time. Some of the private operators point out that work has been delayed by slow and bureaucratic authorisation and environmental approval processes. At the start of March Infraero, the government aviation infrastructure agency, said airport expansion projects in seven World Cup cities were less than 50% completed. A government official cited by the Reuters news agency said that Guarulhos in São Paulo “is where we expect to get most blowback” – there, the automated baggage check and immigration systems are not going to be ready in time.

According to Paul Irvine, a Rio-based travel agent, “people coming to Brazil are going to be shocked, especially Americans, by how bad the airports are. There won’t be any catastrophic issues… but they will be chaotic and as ugly as heck.” John Strickland of JLS, an aviation consultancy, adds: “it seems that sufficient improvement will not be in place in time for the event, and airlines will pay the price with delays and disrupted flights bringing in the influx of traffic.”

On the plus side, in cooperation with government officials Brazil’s commercial airlines are re-drawing air-routes to reduce congestion. Using GPS positioning, software developed by General Electric, and advice from the Brazilian budget airline GOL, the new system offers a more efficient use of airspace and allows planes to fly closer together, reducing congestion. Budget airline Azul Linhas Aéreas says the new approach could help it reduce flying time on the Rio de Janeiro – Sao Paulo shuttle by about 4-5 minutes on each flight, which could represent an annual saving of US$10m. Chief Executive David Neeleman says this is important, because jet fuel in Brazil costs around 17% more than the global average, due to state-controlled pricing. Colonel Gustavo Oliveira of the Department of Airspace Control says “if we didn’t make this change now, we wouldn’t cope with the World Cup demand”.

While it is clear that airlines will do everything they can to get all visitors to all matches on time, since so much of their reputation will be on the line, few think they are going to make money in the process. LATAM’s Cueto points out that while there will be a spike in football visitors to Brazil, other types of travel are likely to decline. In particular, he expects to see a steep fall in business travel during the World Cup. He also points out that June-July is usually high season for outbound travel from Brazil to Europe and Miami: “Now, we don’t know if they will go to Miami or Europe, or if they will decide to stay in Brazil”. TAM’s chief executive Marco Antonio Bologna also said that lost revenue from business travel would not be offset by World Cup traffic. “During the Cup we’re expecting a slower flow, less demand”, he said.

• “People coming to Brazil are going to be shocked, especially Americans, by how bad the airports are. There won’t be any catastrophic issues… but they will be chaotic and as ugly as heck” - Consultant Paul Irvine.

Salvador Sánchez Cerén wasted no time in announcing his key cabinet ministers, and embarking on a tour of Central America, after being proclaimed president-elect by the supreme electoral tribunal (TSE) one week after the desperately closely contested presidential run-off on 9 March against Norman Quijano. Both moves sent out powerful statements of intent.

Sánchez Cerén, a veteran guerrilla, will become the first member of the left-wing Frente Farabundo Martí para la Liberación Nacional (FMLN) ever to hold the presidency, the present incumbent President Mauricio Funes being an independent. The right-wing opposition Alianza Republicana Nacionalista (Arena) accepted defeat after less than three weeks. Arena shifted progressively from a radical position of denouncing the FMLN victory as “illegitimate” and “illegal”, and even frenzied calls from Quijano for the military to “make democracy”; to a more moderate position pursuing every legal channel open to it to enforce a recount or to annul the elections; and finally to a stoic acceptance of defeat and a promise to provide a constructive opposition.

The TSE threw out six petitions by Arena to try and annul the elections, and the constitutional chamber of the supreme court, on 26 March, rejected the party’s call for a full recount. Arena had nowhere left to turn, especially after US Secretary of State John Kerry recognised Sánchez Cerén’s victory on 25 March, saying that the US “looks forward to working with [him] and to continuing joint efforts to promote security and economic development”.

Arena subsequently released a statement promising to provide “a democratic and serious” opposition to uphold the country’s “constitutional institutionality”. Irrespective of whether it is true to its word Arena demonstrated, through this statement, a degree of political maturity which eluded, for instance, Andrés Manuel López Obrador after two narrow defeats in presidential elections in Mexico. In 2006 López Obrador refused to accept the results, organising mass protests, and set about undermining the country’s democratic institutions, notably the electoral authorities.

In such a highly polarised country as El Salvador, a call for large-scale protests had the potential to be very serious. While Arena was disparagingly dismissive of the democratic credentials of the TSE, in the face of widespread plaudits for the body from international observer missions for the most efficient and accountable elections ever seen in El Salvador, the party eventually appears to have accepted that its initial refusal to accept TSE resolutions was incompatible with its professed commitment to defend democratic institutionalism in El Salvador. Not to mention the fact that Arena had representatives on every departmental, municipal and local electoral council and in polling stations and, as such, was effectively casting doubt on its own members’ work with its allegations of fraud.

It is almost inconceivable that Arena will not attack Sánchez Cerén’s legitimacy at a later date, but its decision to accept the result now, however begrudgingly, prevented an escalation of tension. Sánchez Cerén certainly played his part too, making it easier for Arena to swallow the bitter pill of defeat by his conciliatory rhetoric and overtures to the party to cooperate for the good of Salvadoreans.

Economic continuity

When Sánchez Cerén proceeded to stack his transition team with veteran guerrillas, there was a fleeting concern that he might not govern quite as moderately as his rhetoric suggested. But, when it came to naming his first cabinet ministers he made some big gestures to the private sector and potential foreign investors, and must have put some noses out of joint within the FMLN in the process.

Throughout the administration of President Funes there have been rumblings of discontent within the FMLN that the key economic and finance ministries were controlled by technocrats. Sánchez Cerén, however, followed suit. When he takes office on 1 June, Carlos Cáceres will be kept on as finance minister, signalling continuity of economic policymaking, and Tharsis Salomón López, a former vice-president of the Asociación Salvadoreña de Industriales (ASI), will become economy minister.

This was clearly designed to send the message that Sánchez Cerén is placing the emphasis on preserving economic stability: there will be no sudden departures from economic orthodoxy or risky gambles such as opening a debate into de-dollarising and reintroducing the colon. These two appointments constitute a big gesture to the business sector. The ASI is a prominent private group which along with the umbrella Asociación Nacional de la Empresa Privada (Anep) has been critical of the Funes administration for failing to do enough to drive economic growth and would pounce on the slightest hint of a drift leftwards by Sánchez Cerén.

Within López’s purview will be the promotion of trade and investment in national industry with the aim of converting it into a locomotive of growth. This should play well to the ASI and, in theory, Anep. Part of the reason for the poor relations between the present government and Anep can be attributed to the personal acrimony between Funes and the president of Anep, Jorge Daboub. However, the business association is also decidedly pro-Arena, and whether it is prepared to meet Sánchez Cerén halfway is a moot point.

There must be a concern in the medium-term (after legislative elections in March 2015, for instance) that Sánchez Cerén could take a more radical turn if Anep refuses to play ball. Sánchez Cerén is keen to offer incentives to small and medium sized businesses but it will need cooperation from Anep and ASI to improve the investment climate in El Salvador. Sánchez Cerén will be looking to Anep to acknowledge that tax reform is necessary to raise funds to maintain and enhance the social programmes which are at the heart of the FMLN’s plan of governance (see sidebar).

Foreign policy focus

The appointments of Cáceres and López also suggest that in the foreign policy arena, El Salvador would be unlikely to seek membership of the highly politicised, radical leftist integration bloc Alianza Bolivariana para los Pueblos de Nuestra América (Alba). An idea of the foreign policy focus of Sánchez Cerén was suggested by his naming of Hugo Martínez as foreign minister. Martínez served as foreign minister under Funes for the first four years of his term before taking over as secretary general of the Central American integration system (Sica) last year. In conjunction with his pre-inauguration tour of Central America, which was not conducted by Funes in 2009, this suggests Sánchez Cerén’s foreign policy priority will be on deepening Central American ties. He is also aware that the foreign investors which El Salvador craves would look askance at Alba membership, a move which would also alienate the Anep and ASI.

* Sánchez Cerén’s inner circle will be composed of trusted former guerrillas, as presidential advisers rather than cabinet ministers per se: Deputy Roberto Lorenzana will take over as technical secretary of the presidency, and former justice & security minister, Manuel Melgar (2009-2011), as private secretary to the presidency.

• Oscar Romero

President Funes marked the 34th anniversary of the assassination of the archbishop of San Salvador, Oscar Arnulfo Romero, on 24 March by unveiling a plaque naming the capital’s international airport after the iconic champion of the poor. Funes sought to draw parallels between Romero’s “challenge to the established powers, uncovering the truth of authoritarianism, corruption and exclusion” and his government, which he said has had to face “the same forces, the same intolerant spirit”. Arena refused to vote in favour of renaming the international airport in the legislative assembly, arguing that it was a political act. Arena’s founder, Major Roberto D’Aubuisson, was named as the mastermind behind Romero’s assassination in a UN truth commission report published shortly after the end of the country’s civil war (1980-1992), but the subsequent passage of an amnesty law has ensured that his murder has never been investigated in El Salvador.

• Tax reform

Tax reform is one of the big challenges for President-elect Sánchez Cerén. Sánchez Cerén’s principal promise during his victory speech was “to eradicate poverty and inequality”, but with the economy stuttering he will need a tax reform to begin to reduce the gaping divide between the haves and have nots; Arena, however, fears that more tax revenue would provide Sánchez Cerén with the wherewithal to increase the FMLN’s popularity by rolling out more and more social programmes. The FMLN would prefer to tax business rather than increase value-added tax, but Arena is closely allied to big business. Any tax reform must also be carefully weighed against the need to revive the economy, which has been growing more slowly than the population for years.

The good news is that over the past two years Haiti has achieved a drastic reduction in its epidemic-proportion rate of a kidnapping for ransom per day. The bad news is that a recent high-profile kidnapping, while foiled, has brought again under the spotlight the cosy relationship between criminal elements and Haitian officialdom — all the way to the top level.

Haiti’s success in curbing kidnapping was celebrated in early March by the Inter-American Development Bank (IDB) in an article written by Julienne Gage for the bank’s blog Sin Miedos. Largely responsible for that success was the anti-kidnapping support provided by United Nations Stabilisation Mission in Haiti (Minustah) under the leadership of Robert Arce, a former US police officer, seconded by a Haitian-American, Brunel Bienvenu, who served with the New York Police Department (NYPD).

A key early step was the recruitment of Creole-speaking officers of Haitian origin for the anti-kidnapping unit. Next came the introduction of a strategy of cell-phone log exploitation (which required persuading telephone companies to cooperate) and community policing to encourage the public to come forward with information. Overseeing the anti-kidnapping unit is Normil Rameau, director of the Judicial Police, who spent three years training in Chile and has sent some of his leading officers to Colombia for training in tactical operations and intelligence gathering and analysis.

The fruits: in 2013 the police arrested 87 suspected kidnappers — 72 of them in the last three months of the year. Since then, Gage wrote on 5 March, only one new kidnapping was reported.

On 25 March the police announced that Sami El Aziz, a Syrian-American businessman kidnapped eight days earlier, had been freed before the US$1.2m ransom demanded by his abductors had been paid. Police identified the kidnapper as the Baz Galil gang, an outfit led by Woodly Ethéard (‘Sonson Lafamilia’) believed to have been involved in a number of other kidnappings; 18 according to The Sentinel, which adds that Lafamilia ‘provides security for the sons of President Michel Martelly, Olivier and T-Mickey’. The online news service haitipolitik cites a police source as saying that the kidnapping had been carried out in a car belonging to the interior ministry, and describes Lafamilia as ‘a notorious drug trafficker and personal friend of President Martelly’.

Lafamilia was arrested in 2009 but was promptly released, despite objection by Mario Andrésol, director of the national police at the time. He is now being sought by the police for the El Aziz kidnapping. After leaving his post Andrésol wrote an article in the newspaper Le Nouvelliste denouncing the permissiveness of the judiciary in Port-au-Prince towards people linked to the drugs trade purportedly shielded by those wielding political power.

The Sentinel says that the El Aziz affair ‘has become only another branch of unseeming relationships that the Haitian government has with organised criminals.’ It mentions two notorious cases involving friends of the President: that of Clifford Brandt, head of the presidential palace’s ‘secret security’, arrested as the suspected leader of a kidnapping ring and released from prison in November 2013, and that of Daniel Evinks, arrested in possession of drugs but soon released, last heard of in late 2013.

Gage does note in her article that there is a blemish on the anti-kidnapping record: most of the arrested kidnappers were still being held without trial.

Bounded by the highways of the Avenida Brasil to the west, and the Linha Vermelha to the east, the Complexo do Maré sits between the two main roads into and out of the city of Rio de Janeiro. Getting to or from the international airport at Galeão requires passing the sprawling favela complex, with its 144,000 residents. As such it remains a strategic location that the state government has long been promising to pacify. Earlier this week, it began the process, bolstering the local police force with personnel from the federal armed forces.

The decision to occupy the Complexo do Maré followed a meeting between President Dilma Rousseff and the governor of Rio state, Sergio Cabral. Cabral travelled to Brasília last week in order to request federal assistance in the wake of an upsurge of violence against a number of police pacification units (UPPs). Over the course of the night of 20 March, four UPPs were attacked by criminal gangs in Manguinhos, Arará/Mandela, Camarista Méier and Complexo do Alemão.

The Complexo de Manguinhos UPP suffered the most severe damage during the March 20 attacks. Two UPP vehicles and five support bases were burned, and three military police officers were shot, including the UPP commander.

“Organised crime groups are using these cowardly attacks to try [...] to destabilise the police presence in these communities, creating panic and unrest in the communities and causing casualties among the military and the civil police,” Cabral said at a press conference after meeting President Rousseff. “We have no problem asking federal forces for support. The state must show its strength, its unity and its ability to triumph over organised crime.”

Cabral added that the homicide rate in the pacified areas has fallen by more than 65% since the UPPs arrived, and that it was crucial the programme be sustained. “Criminals want this policy to fail,” Cabral said. “But most of society wants this policy to be successful and to become a government-wide policy.”

Following the meeting with Rousseff, all of the city’s UPPs have received reinforcements and the military police began the occupation this past weekend. Personnel from the armed forces, comprising troops from the civil, military and federal police units – and the armed forces (army, navy and air force) have been deployed to the favelas indefinitely.

Since the 2008 installation of the first UPP, in Santa Marta, 11 UPP police officers have been killed, including four in the past two months. The actions against the UPPs have been increasing in intensity since the beginning of February, when soldier Alda Rafael Castilho was fatally shot in front of the UPP in Parque Proletariado.

To date, 36 slum areas in Rio de Janeiro have been pacified with more than 9,000 police patrolling neighbourhoods where 1.5m people live. Initial success in evicting the gangs was applauded, but the police operations have been criticised for merely displacing crime to other slums.

An estimated 600,000 foreign football fans will arrive in Brazil for the World Cup in June. Seven games will be played in Rio, including the tournament’s final on 13 July, in the legendary Maracaná stadium located a few miles from the Manguinhos slums.

The cut in the official primary surplus target to 1.9% of GDP for 2014, from 2.3% previously, was welcomed by private economists as an overdue ‘reality check’.

Announcing the move at a press conference on 20 February, Finance Minister Guido Mantega said the government would freeze R$44bn (US$18.44bn) in public spending to meet the primary surplus target, up from R$38bn last year. “Our projections are attainable and realistic and conservative, so we should deliver this result in December," he stated. The revised projection is based on real GDP growth of 2.5% year-on-year in 2014 (down from a previous forecast of 3.8%), with inflation of 5.3% (down from 5.8% previously).

Markets welcomed the move and the Real rose 1% in response to close the day at R$2.37/US$, its strongest level since 21 January. Yet fiscal analysts remain slightly sceptical as to whether the government will be able to deliver on its promise ahead of President Rousseff’s bid for re-election in October. Steadily shrinking primary surpluses mean that the overall budget deficit hit a three-year high of 3.2% of GDP in 2013, up from 2.48% in 2012.

• Energy subsidies

Following shock blackouts affecting 6m people across 11 southern and eastern states on 11 February (which the government insisted had nothing to do with the increase in demand caused by the heatwave being experienced in much of the country), the Rousseff government on 13 March announced new measures in support of electricity distributors struggling with high power costs on the back of the recent drought, and also in an effort to contain inflationary utility prices rises this election year. Under the package, the government will provide an additional R$4.0bn (US$1.7bn) of financial support (i.e. subsidies) for power distributors, who have been forced to pay more for thermal power to cover a drop in hydroelectricity supplies, while the country's electricity clearing house will also be permitted to see up to R$8.0bn in private financing to support the distributors. The government will also auction off any excess electricity in April Gradual electricity prices rises will be allowed as of 2015 only, when Rousseff hopes to be safely back in the Planalto for a second four-year term.

Treasury secretary Arno Augustin said the R$4.9bn in subsidies would be covered by an extension of a corporate tax settlement program and possible tax increases this year, with specifying. Critics said the measure was a short-term fix to repress inflation in an election year and expressed scepticism as to the government’s insistence that the measures will be fiscally neutral.

• Govt denies electricity rationing on the cards

The federal government puts the prospect of energy rationing in the country at just 2%-3%, below the 5% that the main grid operator, Operador Nacional do Sistema Elétrico (ONS), works with on a permanent basis, according to Paulo Pedrosa, executive president of Associação Brasileira de Grandes Consumidores Industriais de Energia e de Consumidores Livres (Abrace), who made the announcement on 18 March after a meeting between the government and electricity sector representatives. Operators told Energy Minister Edison Lobão  that the main hydro plants in the country were in a ‘delicate’ situation, with reservoirs, particularly in the populous and industrialised south and south east of the country, at their lowest levels since 2001. Hydro plants provide about 70% percent of Brazil’s power. The last major blackouts were in 2001, following a previous drought. Pedrosa said the Rousseff government had painted a ‘much more positive scenario’ than feared, although some of the government’s optimism seemed to be founded on long-range weather forecasts projecting rain soon.

• Water shortages are already forcing supply restrictions

Brazil’s main water utility, Companhia de Saneamento Básico do Estado de São Paulo (SABESP), in mid March began limiting the amount of water it supplies to the state of São Paulo, after the federal and state water agencies ordered the company to conserve its primary source by reducing the water drained from the Cantareira reservoir by 15.5%. The Cantareira is the biggest of six reservoirs supplying metropolitan São Paulo, home to 20m people and one of the host cities in the upcoming Fifa World Cup in June and July. On 12 March, Mauricio Tolmasquim, president of the state energy research agency Empresa de Pesquisa Energética (which sits under the energy ministry), said the drought affecting the country since early this year may be worst in 80 years.

• Credit

According to latest data from the local consultancy Tendências Consultoria Integrada (TCI), household credit for 2014 is projected to post its lowest rate of expansion since 2003. Faced with rising interest rates, Brazilian consumers are tightening their belts. The reluctance to spend will not help to accelerate Brazil’s sluggish economy, and suggests that, in an election year, voters are increasingly conscious of the slow-down. Though President Rousseff is still riding high in the opinion polls, Brazil’s unimpressive economic performance provides her opponents with some ammunition.

When adjusted for inflation, the rate of credit growth in 2014 is projected to be 7.8%. In 2013, it was 9.8%, and in 2012 and 2011 it was well over 10%. Between 2004-2011, credit growth averaged 18.7% a year. “After a consumer credit party, this will be a year of moderate growth”, Mariana Oliveira, an economist from the TCI, said. Oliveira attributed the slow-down primarily to banks’ attempts to limit mortgage lending. In 2010, mortgage lending grew by 47%; this year, it is predicted to be 18%. Following the rise in the Selic, real estate loans rose on average 0.6% in 2013, reaching 36%. According to Oliveira, that figure is set to rise to 39.6% in 2014.

The banks themselves, however, have a different explanation for the tightening in consumer credit. José Ramos Rocha Neto, the head of loans and financing at Bradesco, says the rise in the Selic has a marginal impact on consumers. Instead, he argues that Brazilians are merely becoming cannier. “That behaviour of six years ago, when the consumer was happy to rack up credit, has diminished. He is more aware”, he said. Rocha said banks were responding by trying to reduce their consumers’ personal indebtedness by switching them to cheaper lines of credit.

Nicola Tingas, the chief economist of the Associação Nacional das Instituições de Crédito, Financiamento e Investimento (Acrefi), said the Brazilian credit market is maturing. Requests for payment by instalment are also slowing, indicating either reluctance by shopkeepers to extend credit or unwillingness on the part of consumers to commit to expensive purchases.

• Still no real sign of traction

The central bank’s IBC-Br grew a better-than-expected 1.26% month-on-month in January as strong retail sales of items like air conditioners in the hot weather offset most of the sharp downturn in December (-1.4%), the central bank noted on 14 March. It rose just 0.93% year-on-year, however.

The latest (14 March) consensus forecast of local private economists compiled by the central bank for its weekly ‘Focus’ report was unchanged, with a forecast for real annual GDP growth of just 1.7% in 2014, down from 1.8% a month previously. The industrial production forecast was 1.4%, down from 1.9% a month previously. Inflation forecasts were lifted to 6.11%, on higher February results, when the IPCA index was 5.68% year-on-year at the start of the school year.

• Industrial production recovers from low base

Industrial production rose 2.9% month-on-month (m-o-m) in January, recovering from  December’s steep 3.7% m-o-m contraction, the worst monthly fall since December 2008. It fell 2.4% year-on-year however, according to the Ibge’s IP index. The Ibge revised down December’s annual result to 2.5%, from an earlier 2.3%. Capital goods output rose 10% m-o-m in January, bouncing back on a low base from a sharp 11.65% m-o-m contraction in December. Within this, automotive sector output rose for the first time in four months (8.7% m-o-m), as collective vacations ended. Consumer goods rose 2. 3% m-o-m and intermediate goods 1.2%. Of the 27 industrial sectors surveyed, 17 expanded in January from December.

• Trade deficit worsens

The industry and trade ministry (Mdic) in mid March reported an accumulated year to date trade deficit of US$5.78bn, on exports of US$39.6bn and imports of US$45.3bn. The trade account tends to be in deficit in the first quarter, ahead of the agri harvest, however the size of the deficit this year has alarmed some private economists. Brazil is facing a combination of global lower commodity prices and problems in Argentina, its main market for manufactured exports. Exports of raw materials fell 8.5% year-on-year in February to US$7.17bn, with semi-manufactured exports down 8.7% and manufactured exports down 9.2%. Meanwhile a weaker Real makes imports more expensive. Fuel imports rose 7.9% year-on-year in February. The Real was trading at R$2.33/US$ on 19 March, from R$2.38/US$ on  2 January. A year ago it was at R$1.98.

{This article is also published in our March 2014 issue of Latin American Regional Report: Caribbean & Central America.}

On 6 March, Cuba’s government confirmed that it plans to abolish the ‘convertible peso’ (CUC), and provided instructions for businesses for the day when that happens. But it did not give any date, or specify the new exchange rate.

A cautious path to reform

The announcement was low-key, with a short article on an inside page of the official Communist Party newspaper, Granma. This referred to publication of a special edition of the Gaceta Oficial (Official Gazette), which sets out instructions for adjusting accounts and setting prices on the day that currency unification is announced, as part of an established process in line with government policy, as set out in previous statements.

The intention to unify the currency system was included in the ‘lineamientos’ (policy guidelines) approved at the 2011 Communist Party congress, and the most recent statement on the subject was an official note published in October 2013, which merely confirmed that a timetable had been agreed, without giving details. Nonetheless, the new document represents an important step. It provides the first confirmation that currency unification is to be achieved by the abolition of the convertible peso (CUC) and demonstrates that preparations are well under way.

The currency reform will have an enormous impact on relative incomes, prices and economic growth and development. Once complete, it will be a major step towards removing the huge price distortions that currently exist within the Cuban economy. At present, the value of the CUC is fixed at par with the US dollar (CUC1:US$1), and it is convertible for foreign currency at Cuban banks, but cannot be exchanged outside the country. There are two exchange rates between the CUC and the domestic currency, the Cuban peso (CUP), and they are far apart: the CUP is overvalued at the official rate, used for accounting purposes by state entities, at one CUP per CUC, and undervalued at the ‘Cadeca’ rate, used for personal transactions and by the growing private sector, at CUP24:CUC1.

The separation of the external and domestic economies resulting from the dual exchange rate system not only creates a wide gulf between relative incomes, but also obstructs the linkages required to diversify exports, substitute for imports or send price signals to boost productivity.

Exchange rate reform would imply that the CUP would become convertible within Cuba at a new rate fixed by the authorities. No indications have been given concerning the rate of exchange for the CUP to be used after the abolition of the CUC. In recent months, some pilot studies have been carried out using exchange rates of between CUP12:CUC1 (that is, 12 CUPs per US dollar) and CUP7:CUC1 (7 CUCs per US dollar) for transactions between some enterprises.

However, these rates do not necessarily indicate the rate that will be used: officials acknowledge that conditions prevailing in such isolated experiments are quite different from the circumstances of an exchange rate adjustment on a national scale.

Detailed instructions for ‘día cero’

The three resolutions (19/2014, 20/2014 and 21/2014) published in the Gaceta Oficial describe, in detail, the procedures that enterprise accountants will need to carry out on the day when the CUC is abolished, referred to as ‘día cero’ (day zero).

Resolution no.19/24 explains how monetary and stock balances are to be reported, and Resolutions 20/2014 and 21/2014 provide instructions for setting wholesale and retail prices respectively. The details are complicated, with prices to be set by a combination of a ‘cost-plus’ rule and conformity to international and domestic market prices. Official approval has to be sought for the initial prices, with the ministry of finance and prices responsible for containing any inflationary surge and deciding whether some prices can be set below cost price (and therefore receive state subsidies). The Granma article makes it clear that in the process of training staff and trying out the procedures before ‘día cero’, further refinements are likely.

Disruption and risk can be minimised, but not avoided

The central aim of the approach taken to currency unification is to minimise the economic shock. These instructions are designed to guard against speculative gains, control price instability and identify winners and losers from the change, to make it possible to arrange compensation if necessary. However, uncertainty, disruption and confusion cannot be eliminated, and any adjustment in relative prices is certain to create winners and losers. The government has therefore embarked on a project that, while necessary to escape from economic stagnation, carries high risks.

The timing of the change will be one factor in the management of risk. The intention appears to be to make a decision on when ‘día cero’ happens following this next stage, of preparation and training. In line with President Raúl Castro’s mantra, ‘sin prisa, pero sin pausa’ (without haste, but without pause), the launch of the documents means that the public is now expecting the change by the end of this year. Any further delay will require explanation. It is likely that the government will seek to avoid the summer months, when household budgets are stretched by school holidays (with the cost of feeding children at lunchtime borne by families rather than the ministry of education), which means the CUC’s abolition will have to take place within the next four months or after six. The change is likely to require a bank holiday, to allow for managers to complete accounts and adjust prices before business resumes.

The critical decision will be the determination of the exchange rate. It appears that a decision on this has not yet been taken, with the results of the calculation of inventories, costs and prices to be taken into account. An advantage of keeping the rate close to the ‘Cadeca’ rate of CUP24:UC$1 would be that it would not put pressure on foreign exchange reserves and would leave room for further revaluations once relative prices had settled and confidence had been built. It would also mean a very sharp improvement in the competitiveness of state enterprises.

But if the exchange rate is too weak and the CUP remains undervalued, the extremely low value of real incomes would require a continued high burden of subsidies to provide a minimum standard of living, and the effect would be to entrench the Cuban economy into the international market as a low-wage producer. It would also perpetuate the gap between the majority, who currently earn CUP salaries (whose living standards remain severely depressed), and the privileged minority with CUC incomes.

A bolder adjustment, to CUP10:US$1 or more, would provide a beneficial correction in relative real incomes, while also introducing some improvement in competitiveness and flexibility for state enterprises. Such an adjustment would imply a reduction in profits for many non-state enterprises and in the relative income advantage for households dependent on remittances, which could cause temporary hardship in some cases. But, by the same token, it would help to boost productivity in the non-state sector. The limits to the CUP’s value depend on the demand and supply of foreign exchange, and the outcome can only be estimated.

Efforts to mitigate the initial shock have to be balanced against the potential cost of building in exchange rate and price rigidities that recreate existing obstacles to economic dynamism. If, as hoped, the initial currency reform leads to productivity gains, it could allow room for an eventual further revaluation and higher living standards. In the meantime, the government is attempting to manage a process of unsettling uncertainty and deep structural transformation.

For more discussion and analysis, please see the forthcoming (March 2014) edition of our Latin America Economy & Business Report. LatinNews also published a White Paper on currency reform in Cuba in September 2013, ‘Cuba's dual currency system: the need for urgent reform’, in which the academic economist and Cuba expert Dr. Emily Morris and the consultant economist Andrew Hutchings examine the current economic and political situation in Cuba and put forth proposals for currency reform in the context of the Cuban government’s moves to address this key issue. This timely and well-received report remains available for purchase.

Development: On 9 March Mexico’s national public security system (SNSP) confirmed the death of Nazario ‘El Chayo’ Moreno González, one of the founding leaders of the criminal gang Los Caballeros Templarios (LCT), in a shootout with federal security forces in Michoacán.

Significance: Moreno’s death is being touted as another victory for the federal government led by President Enrique Peña Nieto in its efforts to restore the rule of law in the troubled state of Michoacán. The inability of the previous administration, led by former president Felipe Calderón (2006-2012), to weaken the LCT gave rise to the current security crisis in Michoacán, with the emergence of ‘self-defence’ armed vigilante groups across the state to fight the LCT, eventually forcing an unprecedented presidential order for a federal intervention last month. The capture of the LCT’s top seven leaders is one of main demands of the self-defence groups as part of a recently-agreed deal with the federal government for their ‘incorporation’. Producing results appears to be a priority for the Peña Nieto government.

Key points:

• A prominent member of the La Familia Michoacana drug gang, Moreno was long wanted by the Mexican authorities. He was placed on Mexico’s most wanted list in 2009 and was hunted intensively by the federal security forces as part of Calderón’s ‘war’ on organised crime. In December 2010, the Calderón administration announced that federal security forces had killed Moreno, in what was hailed as victory for the government of the time. However, Moreno’s body was never found.

• Moreno resurfaced in 2011 when, along with Servando ‘La Tuta’ Gómez Martínez, he was identified by locals as one of the founders of the pseudo-religious LCT. After it first became visible (in early 2011), the LCT publicly challenged Calderón’s authority on several occasions and even accused the former president (a Michoacán native) of having links to drug trafficking groups. This made the LCT leaders priority targets under Calderón, but efforts to capture them were largely unsuccessful.

• The self-defence groups say they will not lay down their weapons until all of Michoacán’s municipalities are ‘cleansed’ of the LCT and its members arrested or killed. It appears that the Peña Nieto government’s strategy is to deliver on this, knowing that it will also play well with the general public. Indeed, yesterday’s announcement coincided with the release of a Mitofsky poll according to which Peña Nieto’s approval rating increased  from 47.6% to 50.3% following the 22 February arrest of the world’s most wanted drug kingpin, Joaquín ‘El Chapo’ Guzmán, with 45.8% of respondents agreeing that Peña Nieto now “holds the reins of the country”.

The capture of Joaquín Guzmán Loera (‘el Chapo’), boss of the Sinaloa/Pacífico drug trafficking organisation (DTO) and possibly the world’s leading drug trafficker, has been counted as a great victory for the government of President Enrique Peña Nieto. Speculation is rife about the possible consequences for the DTO, for the inter-DTO war and consequently for the government’s efforts to curb drug-fuelled organised crime. For now, however, information is insufficient for this to go much beyond guesswork.

Guzmán, sought unsuccessfully by the authorities since he broke out of the Puente Grande prison in 2001, was captured on 22 February in Mazatlán, the seaside state capital of Sinaloa. There has been no detailed official account of the events leading up to his arrest, but with gaps provided by off-the-record versions by Mexican and US officials to the media (particularly Reforma and Proceso in Mexico) it seems that serendipity played a key role.

Acting largely with the assistance of US telephone surveillance, the Mexican authorities had been engaging in the pursuit of leading figures in the branch of the Sinaloa/Pacífico DTO, headed by Ismael Zambada (‘el Mayo’). Last November this resulted in the arrest of Zambada’s son Serafín, the DTO’s overseer of operations on the northern border and Zambada’s chief of security. On 12 February it led to the arrest of Daniel Fernández Domínguez (‘el Pelacas’), leader of a gang called La Oficina in Aguascalientes, and a haul of telephones, some of which had been in touch with Zambada’s security team. The new leader of that team and five of his associates were captured the following day, and their phones provided a connection with Guzmán (chiefly his outgoing calls on a satellite phone).

With the assistance of US tracking equipment that pinpointed the satellite phone when it was on, Guzmán was located in Culiacán, where he narrowly escaped a first attempt to capture him. Over the following days he was tracked to a new hiding place in Mazatlán, where he was arrested. The authorities have said that their intention is to try him on offences for which he has been indicted in Mexico, before considering extradition requests already filed in the US.

Succession

Given the nature of the Sinaloa/Pacífico DTO (not a monolithic structure with a vertical structure but a close partnership of two organisations), speculation about who might succeed Guzmán has inevitably begun with Zambada, the head of the partner organisation. This option depends largely on two considerations. The first is how successful the Mexican authorities will be in their effort, clearly already under way, to disrupt Zambada’s side of the DTO. The second is whether someone on Guzmán’s side might rise to take his place as Zambada’s partner.

One person who has been cited as a likely candidate for that second option is Juan José Esparragoza Moreno (‘el Azul’), a former leader of the Guadalajara DTO who has been associated with Guzmán since he escaped from prison in January 2001. Others who have been mentioned are Dámaso López Núñez (‘el licenciado’) a lawyer who, as head of security in Puente Grande, had aided Guzmán’s escape and is now believed to handle the DTO’s relations with corrupt officials, former federal agent Francisco Javier Jiménez Sánchez. Also on the tentative list are Guzmán’s sons Iván Archivaldo and Jesús Alfredo Guzmán Salazar. Also to be considered is the extent to which Guzmán will be able to influence events from prison, particularly if he must serve any sentences passed in Mexico before being extradited to the US.

Few analysts believe the Sinaloa/Pacífico DTO will fall apart. Previous predictions that violence would escalate both between and within other DTOs after the capture of their leaders (particularly those of Zetas boss Miguel Treviño Morales and Gulf boss Mario Ramírez Treviño last year) did not prove right, at least not in the short term.

Overall the violence associated with inter-DTO turf wars has been declining: absolute numbers fell last year in 17 of Mexico’s 32 federal entities. Indeed, among those are six of the top 10 states in the drug-war fatalities league compiled by Milenio: Nuevo León, Guerrero, Chihuahua, Michoacán, Sinaloa and Tamaulipas. Of the 15 entities in which drug-war killings increased, only four are in the top 10 list: Jalisco, Sonora, México and Morelos. [Milenio counted 10,095 drug-war deaths in 2013; the consulting firm Lantia, 11,788. The national public security system reported 18,432 intentional homicides.]

On 7 February, Grenada marked 40 years of independence. It may be independent from Britain, but it is very far from being out of the clutches of international lenders following its March 2013 default on US$257m of foreign and local debt. A US$193m bond maturing in 2025 is currently trading at 32 cents to the dollar, and creditors are losing patience with the government’s reluctance to start “good faith” negotiations. Meanwhile the International Monetary Fund (IMF) has been looking in depth at reasons behind the failure of its 2006-2010 and 2010-2013 programmes.

The IMF attributes the failure of its programmes to a combination of unfortunate external factors coupled with a lack of commitment from Grenada, but the IMF also accepts that “more emphasis should have been given to growth-inducing measures”.

The two IMF programmes were the US$15.2m 2006-11 Poverty Reduction and Growth Facility (PRGF) and its successor US$13.3m 2010-13 Extended Credit Facility. Grenada’s turn to the IMF is usually seen as a consequence of hurricanes Ivan and Emily which hit the island in 2004 and 2005, which indeed it largely was. However, there had also been a significant build-up in debt following the slowdown in economic growth in 2000.

From 1980-1999 Grenada experienced a relatively healthy average annual growth rate of 4.5% which pushed its per capita income into the upper-middle-income group. To counteract the slowdown since 2000, Grenada followed an expansionary fiscal policy which in turn led to a rapid build-up of debt. By 2002, interest payments had doubled relative to 1999.

Then came the events of 11 September 2001 which hit the tourism industry badly; the 2004 and 2005 hurricanes which resulted in damage estimated at 200% of GDP; and then, of course, there was the global financial crisis of 2008. In short, Grenada has suffered from a decade-long battering from external shocks.

But the IMF’s point is that Grenada has not helped itself, and governments of both main parties have been to blame. The now-ruling New National Party (NNP) led by Prime Minister Keith Mitchell was in power from 1995 until July 2008 and was therefore complicit in the run-up of debt after 2000 and in the poor implementation of the initial IMF programme. However, this poor implementation continued under the National Democratic Congress (NDC) government that held power from July 2008 until February 2013.

Almost everything that could go wrong did go wrong. The two IMF programmes were based on growth projections of 6.5% in 2006 and 5% in 2007 to be followed by five years of 4% growth up until 2012. In the event, Grenada did not even get close to this, recording a -4.0% contraction in 2006, a bounce back of 6.1% growth in 2007, and then 0.9% growth in 2008, -6.6% contraction in 2009, -0.5% contraction in 2010, 0.8% growth in 2011, and (in 2012) a further decline of -1.8%.

Given this seriously off-target growth outcome it is not surprising that Grenada missed its debt targets as well. The 2006 IMF arrangement looked for an underlying adjustment in the primary fiscal balance amounting to 4.5 percentage points of GDP and a decline in the debt ratio to 60% by 2015. The 2010 programme looked for a surplus in the primary fiscal balance by 2011 and a reduction in the debt ratio to 60% of GDP by 2020.

The effect on debt levels of the well-below target growth performance was compounded by an expansionary fiscal policy in 2011, and by end-2012 public-sector debt was 108% of GDP. The March 2013 announcement of a “comprehensive and collaborative” debt restructuring was inevitable.

In the IMF’s January 2014 post-mortem on its recent engagement with Grenada, it maintains that its focus on the fiscal area was “probably appropriate” given the country’s unsustainable debt and large fiscal deficits, however it does also admit that “more emphasis should have been given to growth-inducing measures”.

But this is not a complete let-out for Grenada’s two political parties. For instance, the IMF points out that of 31 structural measures established as conditions for the two programmes, “less than one-third [were] met on schedule, and nearly 40% [were] never…achieved”.

Other criticisms include high spending by the NNP government in the run-up to the July 2008 general election and “unbudgeted retroactive wage payments”. Under the 2010-13 programme, which was supervised by the NDC government, while targets were largely met for the first review, by the time of the second review the government was indicating an intention to pursue a debt restructuring programme and “subsequently the programme could not be brought back on track because the authorities decided to undertake fiscal stimulus measures in the face of continued weak growth and a complicated political situation (thin parliamentary majority) ahead of elections”.

One point on which Grenada does get praise is the introduction of VAT in 2010. The IMF describes this as “a major and durable success of the 2006-2010 programme”. But the praise is diluted by the observation that the yield from VAT “has been eroded by the practice of granting ever-expanding exemptions”. For instance, in 2010 the NDC government granted general VAT exemptions for the tourism and construction sectors. Halting this practice is seen as a priority for future programmes.

So where to now? The IMF says that “bold strategies” are essential, by which it does not mean higher government spending to promote growth. It says that a future programme should focus on a “few key macro-critical reforms” and should be based on more realistic growth forecasts. Growth-related reforms, it says, “should be front and centre”. These reforms should be targeted towards improving the climate for business and regulatory reforms “that are macro-critical”.

Fiscal adjustment, however, will be unavoidable – as will be debt restructuring, as has been apparent since the March 2013 default, when Prime Minister Keith Mitchell announced: “It is now time for Grenada to confront the fact that it cannot continue to pay its debts on current terms, and that the restoration of growth requires the debt overhang to be resolved. We need a fresh start, and it is therefore imperative that we approach our creditors promptly to discuss an orderly restructuring of our liabilities.”

The problem is that the government has been in no hurry to negotiate seriously with its creditors, and this month they began to show signs of running out of patience. On 7 February, a committee said to be representing 75% of Grenada’s foreign and local creditors sent a letter to the government complaining that its consistent requests for meetings were being turned down; “strongly objecting” to this approach; and demanding an early beginning to “good faith” negotiations.

The security forces had warned as early as November 2013 that the Mapuche heartland in Araucanía faced the prospect of another wave of militant actions similar to that of a year earlier. By early December a communiqué had begun to circulate in social networks calling for the staging of a protest campaign between 30 December and 5 January, commemorating the 6th anniversary of the death of Matías Catrileo, a Mapuche militant killed by Carabineros during a land invasion. Plans began to be drawn up  to strengthen the police presence in Araucanía and step up intelligence gathering — but the violence began earlier than expected, and the authorities did not know for certain who was behind it.

On 27 December the main building of a rural estate in Vilcún, east of Temuco, was set on fire. Officials ventured that the authors might be connected with the same Órganos de Resistencia Territorial (ORT), an offshoot of the radical Coordinadora de Comunidades en Conflicto Arauco Malleco (CAM) which last year called for agitation in memory of Catrileo, an episode which became notorious for the brutal murder, also in Vilcún, of the farmer Werner Luchsinger MacKay and his wife [SSR-13-01].

One detail introduced an element of uncertainty: the arsonists had left behind a pamphlet in Mapudungun (the language of the Mapuche) which proclaimed, ‘Land or War’ in the name of a previously unknown Comando Pirómano Sebastián Oversluij — named after an anarchist killed in mid-December during an attempted bank robbery in Santiago.

Worth noting: four days after this incident, the CAM’s political committee issued a communiqué saying, ‘We urge all those who insist on intervening in the Mapuche struggle, wherever they come from, to abandon that path and interventionism, because the only thing they achieve is to distort and confuse our ancestral struggle with Western ideological influences that do not reflect our cosmovision and culture.’ Anarchist groups in Chile regularly present their actions in terms of solidarity with the Mapuche cause and in defence of Mapuche ‘political prisoners’.

Targeting helicopters

On 28 December at Temucuicui, Ercilla, a firefighting helicopter came under ground fire upon landing to load water. That same day in Santiago, close to the La Moneda palace, an explosive device was detonated at a branch of the Banco Estado; the absence of any pamphlet claiming responsibility puzzled the police about the motive.

It was only at this point that more than 100 Carabineros from the Metropolitan and Los Ríos regions were sent to reinforce police patrols in the provinces of Malleco and Cautín in Araucanía, and Arauco in Bío Bío, and aerial surveillance was ordered over potential hotspots.

Three days later in the province of Malleco, Araucanía, helicopters stationed at a base of logging firm Mininco were firebombed. One was destroyed, another badly damaged. The hooded attackers overpowered a responding group of Carabineros, injuring one and seizing his weapon.

By this time forest fires had been reported in six different locations in Araucanía and farmers in Ercilla were claiming that these were being started deliberately by ‘terrorists’ with the intention of attacking firefighters and responding Carabineros. Plausible as this may sound, it must be kept in mind that the whole region has been placed on red alert because of the increased risk of fire at this time of year.

On 1 January in Temuco a bomb exploded at a private residence, and two others were detected and deactivated, at a branch of Banco de Chile and the local police courthouse. Almost simultaneously two bombs were found up north in the Metropolitan region, at Carabineros stations in eastern Santiago and Ñuñoa. Police reported that all three of the Temuco bombs were gas canisters coupled with bottles of inflammable fluid, said to be a ‘signature’ of anarchist devices.

Looking beyond the Mapuche

The governor of Araucanía, Andrés Molina, announced that investigations had been launched to determine whether anarchist groups were involved in the recent attacks in Temuco. The police delegate in Araucanía, General Jorge Rojas, sounded more certain. ‘We believe,’ he said, ‘that [the attackers] may be a movement of anarchist leanings rather that a movement resorting to violence in furtherance of the Mapuche cause.’

For its part the central government appointed a special public prosecutor in charge of investigating the incendiary attacks in Araucanía, Alberto Chiffelle. Interior minister Andrés Chadwick concurred with governor Molina stating that ‘there are some indications that the attacks are not only the work of ethnic Mapuche extremists, but that there could also be links to anarchist groups.’ Investigators, he said, would also be looking into possible connections between the incidents in Araucanía and the others that took place in the same timeframe in the Metropolitan region.

While Araucanía governor Molina said that the regional government would press for charges to be brought under the anti-terrorist law against those found to have been responsible for the attacks, chief national prosecutor Sabas Chahuán said that ‘for the time being’ he would not be invoking the anti-terrorist law, but would be looking at charges for arson and the placing of explosive devices.

He did not, however, entirely rule out recourse to the anti-terrorist law, recalling that the public prosecution service had invoked it ‘in more than 18 opportunities since 2000.’ It must be recalled that the government had come in for strong criticism from the political opposition for using the anti-terrorist law against the Mapuche activists, and that on several occasions the courts had considered it inapplicable.

The violence in Araucanía did not end. On 11 January, off the highway linking Caragua and Imperial, six trucks and a frontloader belonging to a contractor engaged in roadworks for Mininco were set alight by persons who left behind leaflets demanding the release of Celestino Córdova and other ‘Mapuche political prisoners’ and stating that they are not anarchists or Marxists but ‘Mapuche autonomists’. Córdova, a Mapuche machi (shaman), is the only person charged with the murder of farmer Werner Luchsinger MacKay and his wife during last year’s week of agitation in memory of Catrileo. His trial, several times postponed, is now scheduled to begin in February in Temuco.

Up to the time of writing the Chilean police had not come up with any firm evidence of links between specific anarchist groups and the string of attacks in Araucanía. The media have picked up speculation by some police sources, based on past performance, that a new spate of protest actions may be launched as Córdova’s trial gets under way.