Central America & Caribbean

EL SALVADOR: Budget pressures

24 April 2007 Hits: 302

Next year is an election year and this will impose a (small) extra burden on the budget. The government admits that although investment in social projects is the priority for 2004, it will have to spend a lot of money on the elections, transfers to municipal governments, improving the court system and making a contribution to the old public pension system. All in all, these administrative expenses will swipe US$565m from a budget of US$2.79bn.

Under the traditional budget formula, 6% of current budget income has to go the judicial system and another 6% has to go to municipalities. A further 6% of the current income has to go on restoring the deficit in the public pension system. The government also has to pay for the elections next March. The cost of the elections is likely to be US$12.2m. The transfers to the municipalities may have to rise: the supreme court has yet to decide whether the 6% transfer should in fact be 8%.

These four items of expenditure all have to be financed by the Fondo General de la Nación. This means that they cannot draw on the proceeds of foreign debt issues. One of the steepest increases envisaged for 2004 is in the administration of justice. The cost of this is budgeted to rise by 22%, to US$137m. Municipalities will also get a decent real increase in their federal transfers, albeit 8%, to US$114m.

The biggest winner, however, is the pension system: the government is budgeting to increase payments to the system by a thumping 45%, to US$301m.

Overall, the government is budgeting on spending US$2.79bn. Of this 91%, (US$2.5bn) will be financed through the general fund. Another 7% will be financed through foreign borrowing, and the remaining 2% will be financed through aid donations.

The government is reckoning on US$1.9bn in current income in 2004. Of this US$1.88bn will come from tax revenues and US$80m from non-tax revenues. The big foreign borrowers will be the education ministry (where US$39m of its expected spending of US$464m will come from foreign loans); the health ministry (US$13m of US$251m) and the public works ministry (US$92m of US$221m).

América Movil buys out France Telecom
América Movil, the Mexican-based mobile telecoms company that was spun out of Teléfonos de México, announced that it would buy a majority of the country's fixed link telephone company. It is paying France Telecom US$417m for a 51% stake in the Compañía de Telecomunicaciones de El Salvador (CTES). The CTES has about 623,000 subscribers and dominates the local market, with a 95% share. It also has 152,000 mobile phone subscribers.

France Telecom took control of CTES five years ago when the company was privatised. Ironically, its bid of US$275m then beat Telmex. The government still owns 43% of CTES and employees have a 6% stake.

The country bowed to pressure from the US and withdrew from the G-21. This is the group of emerging market countries, led by Brazil, India and China, which argued that tariff reform should be a two-way street. They say that they will only lower their tariffs on condition that the industrialised countries open up their markets to agricultural products from emerging market countries and end export subsidies for their farmers. El Salvador felt that its relationship with the US was being compromised by the G21's tough line.

COSTA RICA: Scandals continue to rock Pacheco

24 April 2007 Hits: 324

A succession of political scandals has shaken the government. The government has now shed eight cabinet members and more may go. President Abel Pacheco is being tainted by a congressional investigation into the way the two main parties financed the elections last year. The treasurer of his party, the Partido Unidad Social Cristiano, refused to speak when called to testify to the investigation earlier this month (September), on the grounds that he might incriminate himself.

Pacheco has all but admitted that his party broke the law on campaign finance: he said that what was done was nothing compared with what his predecessors had done. Pacheco has denied, however, that he had full knowledge of what his election team did when collecting campaign funds. A congressional commission, set up to investigate the issue last October, has found serious irregularities in the way Pacheco's campaign was financed. In particular, the investigation found that US$67,000 had been given to Pacheco's campaign by Chi Kwon Li Su, a businessman of Taiwanese origin but Costa Rican citizenship. Under the law, the maximum personal donation to any one campaign is US$30,000. What makes the scandal reek is that Chi Kwon Li Su fled from Costa Rica to Canada at the end of August, having defrauded the government of US$12.3m in income and sales taxes over the past three years.

Pacheco admitted that he had been introduced to Chi Kwon Li Su by leading members of the Taiwanese business community. He added that officials from the Taiwan embassy had also been present at the meeting. Chi Kwon Li Su had been president of the Taiwanese-backed Banco de Cathay.

The economy
The irony is that the political scandal is obscuring an impressive economic recovery. The economy is on course for 5% growth this year. This growth is leading to a rise in budget spending: it is scheduled to rise by 11%, to US$5.3bn. The big problem for the government is that debt service is still swiping the bulk of spending: next year the government expects to pay US$2.6bn on debt service. Altogether 78.6% of the proposed budget will go on staff and pension costs and debt servicing.

The recovery in the economy in 2003 and 2004 will not be even. The computer component manufacturer Intel will grow by 8.4% this year, while agriculture will have a tough time just to keep abreast of last year's marked decline. The business and construction sectors would have the least growth, according to forecasts from a set of private-sector analysts, Ecoanálisis. These projections shatter the expectations of a vast number of Costa Ricans, who anticipated a major increase in production and an ensuing rise in job numbers and greater income for workers.

CUBA: Betting on Chinese tourists, as nickel ignored

24 April 2007 Hits: 1549

The tourism ministry is eyeing the Chinese market to drive its key foreign currency earner. The ministry is forecasting (again) that 2m tourists will visit the country this year. One of the big disappointments for policymakers has been the lack of interest from big foreign mining companies in developing the island's nickel resources

One of the key tourist businesses on the island is the Grupo Hotelero Gran Caribe. It has 11,000 rooms across the island and is the 87th-biggest hotel group in the world. It is aiming for sales of US$240m in 2004, up from US$213m this year. The company expects profits of US$58m this year. In the nine years since it was set up, the group, whose flagship is the Hotel Nacional de Cuba in Havana, has increased its use of Cuban inputs (excluding labour) from 14% to 68% of the total.

Tourism needs to put in a decent performance because the traditional spine of the economy, sugar, is bowing. Nickel mining, another commodity business that should be pulling in investment and generating exports, is floundering. At least two international mining companies have looked at revamping and expanding nickel mines in the country, but have taken no action. The worry is the threat posed by the US Helms-Burton Act, which allows expropriated owners of Cuban assets to use the US courts to sue the new owners for damages.

The failure of nickel and oil to attract foreign investment means that again the economy is having to rely on tourism and sugar. The sugar crop this year has been disastrous, at just 2.15mt of sugar. The sugar minister, General Ulises Rosales del Toro, claimed that the sugar harvest for 2003/04 would be much better than recent harvests. It needs to be. The 2002/03 harvest was the lowest ever recorded and well below even the gloomiest estimates from independent analysts. The 2001/02 crop was 3.6mt.

DOMINICAN REPUBLIC: Electricity: renationalised and Fenosa happy

24 April 2007 Hits: 290

President Hipólito Mejía has done a deal to sort out the country's perennial problems with electricity supply. The government has bought back control of the problem-ridden electricity distributors, Edenorte and Edesur, subsidiaries of the Spanish-owned Unión Fenosa. High electricity prices and widespread blackouts have been the scourge of the Dominican public since privatisation five years ago.

Under the agreement, the Dominican group of state electricity companies (CDEE) will buy back Unión Fenosa's 50% holdings in the two companies for 384.3m euros (US$434m) over 12 years. The companies were originally sold by the government for a promise to invest US$240m in the distributors. The money for the buyback deal is coming from the IDB

The leader of the opposition Partido Liberal Dominicana (PLD), Leonel Fernández (the man, incidentally, who privatised the electricity sector while he was president from 1996-2000), led the criticism of the government. He claimed that there was no doubt that the decision was taken with elections in mind and that what is being looked for is public approval and votes. Fernández implied that the government was saddling its successor with debt. He wondered how the government could afford to take on the burden of the electricity distribution business when it is already running a monthly deficit of RD$400m (US$12.5m).

GUATEMALA: Textile producers pleased by Cafta

24 April 2007 Hits: 294

Textile producers in the country are relieved that the negotiations over the free-trade agreement with the US are going their way. They feel that the agreement, under which Central American textile producers will be able to use thread and cloth from outside the region for textiles which are processed and then sold on to the US, will not damage the industry.

The only wrinkle is that the Central Americans can only import the inputs from countries which already have free-trade agreements with the US. This is a major concession by the US, which had originally insisted that only US thread and cloth could be used by the Central American industry for products to be sold in the US. Textile producers say that the agreement should encourage fresh investment in the industry.

HONDURAS: Hoping for a December deal

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The government is warning that if it fails to clinch a deal with the IMF by the end of the year, it will have to tighten fiscal policy. A deal with the Fund would allow it to get relief on its foreign debt of US$4.4bn through the IMF's Highly Indebted Poor Countries debt relief programme.

The World Bank and the IDB are both insisting on an IMF agreement before Honduras can activate the programme that was agreed in 2000. Honduran officials say that the debt relief programme will cut the country's debt service costs from US$350m to US$200m a year. Most of the savings can go into poverty reduction programmes.

In order to appease the IMF, the government issued a decree in September to end the fixed line telephone monopoly held by Hondutel. The decree has to be ratified by congress, but the government is confident that it can get a majority.

The decree will allow private companies to install up to 300,000 new lines. A mobile company, Celtel, which is controlled by Motorola, has been operating in the country since 1996. It has 350,000 mobile subscribers. Another group, Megatel-EMCE, has been given the right to compete with it from 2004.

Hondutel has 290,000 lines. The last effort to privatise it collapsed in October 2001. The government reckons that there is demand for at least 600,000 more fixed link lines.

NICARAGUA: Good prospects for offal

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Ranchers claim that there are decent prospects for increasing offal exports. Mexico and El Salvador both import over US$1m worth a year of Nicaraguan offal. The great prospect for the market is Japan, which imported US$403,000 worth of offal in 2001. Nicaragua has been exporting offal to Japan since 1975: it only started exporting offal to Mexico in 1999, following the clinching of the FTA with Mexico.

Agribusinessmen point out that although total offal exports are still under US$5m, they are equivalent to cheese exports and fish fillet exports, both of which bring in US$4m a year. The country's total exports are around US$800m. The big four offal markets are El Salvador (US$1.5m), Mexico (US$1m), Guatemala (US$600,000), and Japan (US$400,000). World demand for offal is rising by 10% a year. In countries such as Taiwan, calves' liver is a particular delicacy. Calves' liver is the highest priced piece of offal at around US$5 a pound. Tongue trades at around US$1.25, oxtail at US$1.25 per pound and tripe at US$0.20 per pound.

PANAMA: General strike reasonably well supported

24 April 2007 Hits: 342

The opposition held a general strike on Tuesday 23 September. The government claims that the (illegal) strike cost US$15m in lost production. The action was called by the Frente Nacional por la Defensa de la Seguridad Social, an umbrella organisation for 60 separate unions and social organisations. The Frente fears that the government has plans to privatise the social security system. It also objects to the sacking of the well-known academic economist Juan Jované, who chaired the Caja del Seguridad Social (CSS). The government sacked him for ineptitude: he claims that he refused to sanction a government order to use fund resources to buy government bonds.

In the strike, the worst affected industries were construction, small and medium sized businesses and tourism. The industries that were least affected were shipping and port activity, telecoms, and bigger companies.

Raúl Delvalle, president of the Cámara de Comercio, Industrias y Agricultura, reckons that the strike sends out all the wrong messages about Panama to the international community. He claims that the strike will hurt tourism and put off investors.

To a large extent, the government's cackhanded response to a series of different problems provided the momentum that led to the strike. The main trigger was the sacking of Jované. Belatedly, the government tried to reassure people that it had no designs on the social security system. President Mireya Moscoso signed an agreement with religious leaders promising not to privatise the agency. She did admit, however, that the agency needed major reforms. These include forcing people to work for at least 30 years before they become eligible for a pension, and raising the female retirement age by three years, to 65.

The anti-government protesters say that Jované was sacked because he refused to allow the agency to buy government debt. The government was issuing the debt, the protesters say, to pay for election expenses. The government is lagging badly in voter intentions for the presidential elections, due in May.

Protesters are concerned about Jované's allegation that the government still plans to raid the CSS to issue US$500m in debt for campaigning for next May's elections.

The strike was considered illegal by the labour ministry, and the government said that public sector workers who went out on strike would not be paid. Even so almost half the public sector workers joined the strike. The government claims that the strike is political. Moscoso accused the opposition Partido Revolucionario Democrático and its presidential candidate, Martín Torrijos, of fomenting the strike. Torrijos has won the backing of the singer Rubén Blades, who stood for the presidency in 1994 and won 20% of the vote running for the political movement he set up, Papá Egoro. Besides being a world-famous musician, Blades also has law degree from Harvard.

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