Brazil & Southern Cone - December 2012 (ISSN 1741-4431)

Anyone listening to President José Mujica recently would know that the ideological affinity he shares with the more “progressive” leftists in Latin America, such as Venezuela’s President Hugo Chávez, does not stretch far into the field of policymaking. Mujica argued in November that the principal objective of his government was not to forge a Socialist State, nationalise strategic industries or carry out extensive land reform but, purely and simply, to stop inflation.

It is not the first time that Mujica has said that controlling inflation is the main goal of his government. Two years ago he referred to inflation as “a slippery eel” and his government’s efforts to get a firm grip on it have not improved since.

Inflation hit 8.6% in 2011. This exceeded the government’s annual target of 6% and was up on 6.9% in 2010. Inflation is now approaching double-digits, reaching 9.11% for the 12 months through October, well above the (perennially ambitious) official target. “We have to watch spending, especially superfluous spending, as much as possible,” Mujica said. “Why? Because stopping inflation is the main battle.”

Mujica argues that one of the principal reasons for controlling inflation is because it erodes the purchasing power of the poor. “The country’s situation is not the same with 5% inflation as it is with 8% or 9%. The problem is 10%. If we cross the 10% barrier we will fall.”

Double digit inflation would also be a big psychological blow and could lead to a dangerous shift in inflation perceptions. If the government does not take steps to bring inflation down towards target, investors may calculate that its real target is simply to avoid double-digit inflation. The current rate is one of the highest in Latin America; though much lower than in Argentina, where (unofficially), it is running at between 20% and 22%; or Venezuela, where despite a fall this year accumulated year to date inflation was 13.4% in the first 10 months.

But 10% is more than just a psychological barrier. If inflation crosses into double digits it would lead to greater friction with trade unions, who would demand higher salary increases, and likely strike action. At the moment the agreement with the unions is that there is only one annual round of salary negotiations - as long as 12-month inflation remains at 10% or below.

Uruguay’s umbrella trade union Plenario Intersindical-Convención Nacional de Trabajadores (PIT-CNT) staged a four-hour general strike on 22 November over salaries and social programmes for workers, as well as more generic demands like “more profound changes to build hope” and “to accelerate the country’s industrialisation and the distribution of wealth” and “limits on profits”. Some 1,000 workers marched in Montevideo.

Mujica said there was little room for manoeuvre on the economic front. He said the unions would like to see salaries lifted by 20% but that anything more than 10% was not viable.

Mujica faced down much bigger, more widespread, and stubbornly persistent strikes by numerous trade unions at the tail end of 2010, when he was also more combative, arguing that you could give “‘these people’ as much money as you like but it never will it be enough; this is an age-old illness of the Left the world over. It is the history of the German Left, which ended up opening the doors for Hitler.”

• Bonds

Uruguay sold US$853m in new long-term global bonds due 2045 on 19 November. This was a much lower amount than the government had anticipated, with the government saying that the historically low yield may have discouraged buyers. The yield on the deal was a record low 4.13%. The government had intended to issue up to US$2bn in the debt restructuring, and its minimum aggregate expectation for the deal was US$1bn. “Perhaps, considering the rates at which Uruguay can now access the market (since recovering its investment grade rating), some investors thought they could get a better rate elsewhere,” Economy Minister Fernando Lorenzo said.