Archive for the ‘economy’ Category

Puerto Rico: Growth yes, more taxes no

Tuesday, February 11th, 2014

Says Monica Showalter of IBD, and I wholeheartedly agree:
To Avoid Becoming The Next Detroit, Puerto Rico Needs Growth, Not Taxes

Too much bureaucracy, much of it for welfare, and too much rewarding failure over success drive up costs and drive out the productive. Puerto Rico’s most talented citizens are voting with their feet. The island loses about 1% of its population a year, a deadly loss compounded over the years for any economy.
To bring these people back, the governor has to fight to cut taxes and really go after the country’s entrenched special interests with a baseball bat.

The 39% corporate tax has to go.

He [governor Alejandro García Padilla] also must fight in the U.S. Congress to reinstate Puerto Rico’s special tax break that ended in 2006 so that investment will once again return.

Finally, he must also take on Big Labor’s favorite, the Jones Act, which artificially drives up shipping costs, putting local manufacturers at a disadvantage, demanding Congress at least give Puerto Rico an exception.

Read the whole thing.


Puerto Rico: Junk bond status

Thursday, February 6th, 2014

Only about 1 percent of American municipalities have been given a junk rating by S&P:

Puerto Rico GO Bonds Inch Higher After S&P Downgrade
A Sign That Some Buyers Are Relieved To Have The Downgrade Behind Them

S&P on Tuesday lowered Puerto Rico’s general obligation bond rating to double-B-plus from triple-B-minus, stripping the island of its investment grade rating. The rating firm said it cut the rating because of Puerto Rico’s “reduced capacity” to borrow and the contraction in its economy in all but one year since 2006. It kept the island’s ratings on watch and warned of further cuts if the island is unable to raise money.

Puerto Rico has also been weighed down by large pension obligations, a 15% unemployment rate and big losses in the value of some of its debt. But the Puerto Rico government has been taking steps to bolster the economy and improve its fiscal outlook by overhauling pensions and raising taxes.

Despite the benign response to the downgrade, the cut adds pressure on Puerto Rico to shore up its finances with a near-term borrowing, analysts said. Puerto Rico, which has $70 billion of debt, has been able to put off borrowing in recent months, but its flexibility is fading, said Daniel Hanson, a credit analyst at Height Securities LLC.

Island officials have been planning a bond offering of some $2 billion in coming weeks, according to people familiar with the matter. The officials have been weighing how to raise money with offerings backed by sales taxes or the island’s general fund, or a deal structured by hedge funds and other distressed investors who may demand yields near 10%.

[T]he yields it will have to pay of up to 10% could likely scare off investors and further reduce confidence in Puerto Rico’s finances.

Moody’s and Fitch are expected to be next with their downgrades.

The White House Says There Are No Plans To Bail Out Puerto Rico

Gov. Alejandro García Padilla is finally trying to cut the budget and reduce the deficit to $75 million, something he’s been avoiding, considering how his predecessor, Luis Fortuño, was not re-elected for doing just that.

To add to García Padilla’s woes, a misspelling of his name caused a flurry of tweets under the hashtag #GobiernoPandilla (gangster government), including the news that the administration-appointed telecommunications board (Junta Reglamentadora de Telecomunicaciones) granted contracts to partisans, and that the University of Puerto Rico’s administrators’ payroll increased by 35%:

Monumental payroll increase UPR for #GobiernoPandilla’s #FriendsOfTheHeart

No word as to whether García Padilla, commonly referred to as Agapito (for Alejandro GArcía PadIlla + “to“), has considered laying off his five relatives working for the government.


Argentina And Venezuela: Chronicles Of Devaluations Foretold

Saturday, January 25th, 2014

Monica Showalter has an excellent article on a cautionary tale:

Argentina And Venezuela: Chronicles Of Devaluations Foretold And they inevitably lead to inflation. For 2012, Venezuela’s inflation surged to 56.1%, its central bank said. In Argentina, the rate was 28%, according to a watchdog.
These man-made disasters are due to governments spending more than they have to buy votes. In Argentina, spending rose 50% in the past decade, and in Venezuela it surged 60% in just the past year.
The numbers are so hard, and crisp and predictable, it’s astonishing anyone could be surprised by them.

Read the whole thing – the US M2 money supply is up 34% since President Obama took office.

Argentina: Chronicle of a default foretold

Friday, January 24th, 2014

Subroto Roy sent this article, Argentine Default Chaos Relived as Blackouts Follow Looting, which describes the deja-vu conditions as the country is about to default, again, this time on its $50 billion foreign currency obligations,

Investors are bracing for the possibility of another default. The country’s average dollar bond yield of 12.4 percent is the highest among major developing nations after Venezuela. Trading in swap contracts that insure bonds shows investors see a 79 percent probability of a halt in payments over the next five years, a reflection in part of concern that Singer’s demand of full repayment on the securities he kept from the 2001 default will disrupt debt servicing.

“Over the next five years”, maybe, maybe earlier, as the Specter of Default Stalks Argentina. Argentina’s dollar reserves have now slipped below $30 billion.

Yesterday’s 8% devaluation (the largest one-day decline since the 2002 country’s default on its debt)

and falling reserves raise the specter of a deep economic crisis with inflation already believed to be running above 25% before the devaluation, the product of years of rapid increases in government spending financed in part by money printing. A weaker currency can aggravate inflation by reducing consumers’ purchasing power and pushing up the cost of imported goods.

The devaluation is also a major political blow to Mrs. Kirchner and her new economic team led by Mr. Kicillof. Shortly after her ruling coalition suffered a steep drop in support in October’s midterm congressional elections, Mrs. Kirchner replaced her finance minister, central bank chief, price control enforcer and economy minister. Less than a year ago, the president told the public it shouldn’t expect a devaluation under her watch.

Cristina Fernandez’s chief of cabinet Jorge Capitanich rushed to put lipstick on a pig, easing restrictions on the purchase of U.S. dollars Friday, by saying “The government considers that the price of the dollar has reached a level of convergence that is acceptable with the objectives of our economic policies.”

And the economy is pining for the fjords,

UPDATE:
As a result of government price-fixing, Argentinians bought less bread and more cookies in 2013. The price of flour went up by 65%.

A parting question: Where’s Cristina?

Venezuela: Shuffling the deck chairs on the Titanic UPDATED

Thursday, January 16th, 2014

Venezuela Shuffles Economic Team
Maduro Also Pledges to Keep Fixed Exchange Rate Unchanged This Year

The president also said the central foreign-exchange board, Cadivi, would be incorporated into a separate government body overseeing external commerce.

Some Venezuelans misinterpreted that to mean that

Cadivi will be eliminated, which many interpreted as the elimination of Cadivi for the private sector, and the Government keeping the Bs. 6.3 per US$ rate to itself.

$5 says that Maduro’s regime will only increase whatever control it exerts over the private sector, Cadivi or whatever you call it. While he was at it, Maduro just created

111 new Vice-Ministers to accompany the thirty Ministers that accompany in his Cabinet. The hilarious thing is that the decree creating these new positions (Decree 730) actually says that this “optimizes” the structure of Government, not once, but twice.

I wonder how many of these new ministers are former military, a la Cuba.

The 2014 Index of Economic Freedom rates 178 countries on four broad categories, or pillars, of economic freedom:

  1. Rule of Law (property rights, freedom from corruption);
  2. Limited Government (fiscal freedom, government spending);
  3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom); and
  4. Open Markets (trade freedom, investment freedom, financial freedom).

Venezuela is 175th, or 4th from the bottom. Only Zimbabwe, Cuba and North Korea rated worse – all countries whose leaders Hugo Chavez admired.

UPDATE:
At long last socialism

What happened yesterday is that the government doubled down on the insane economic policies that, in case you have not heard, have brought growth to a standstill, fueled inflation, generated unprecedented scarcity, and has sent the black market into overdrive.

Is 2014 Latin America’s “big year”?

Thursday, January 2nd, 2014

Alexa L. McMahon asks, 2014: Is This Latin America’s Big Year?

In fact, thanks to its strong economic growth and growing international influence, 2014 has the potential to be Latin America’s best year yet.

Latin America’s economic growth will only increase in its upward trajectory in 2014, driven by countries such as Brazil, Chile and particularly Mexico. According to the U.N., “Based on promising signs of private consumption and manufacturing, the region will see [expected] growth rates of 3.6 in 2014 and 4.1 percent in 2015, according to World Economic Situation and Prospects 2014, a report that launches in January.” The U.N. Economic Commission on Latin America forecasts that Latin-American Economic development will be the highest of all global regions for 2014. Brazil is slowing down compared to its explosive performance in recent years, but still very strong. Brazilian finance minister Guido Mantega said in December that foreign direct investment continues to be robust and, according to the Wall Street Journal, “pointed to $8.3 billion in foreign direct investment posted in November as a strong signal investors continued to favor the country. In October, the figure was $5.4 billion.”

McMahon looks at Mexico, Chile and Brazil, and concludes,

All in all, things are looking up for Latin America next year, and as they’ve shown in multiple avenues, the sky’s the limit.

I wish I could share her optimism.

I am cautiously optimistic about Mexico: their recent (and very overdue) reforms may have staying power, which will propel a new era of growth and prosperity – if the opposition allows it.

I’m not optimistic on Chile: re-elected president Michelle Bachelet has promised to amend the constitution, and to expand the welfare state by raising tax rates and taxing shareholders on retained earnings along with the dividend taxes they already pay. She’s also asking for an “exhaustive review” of the Trans-Pacific Partnership; the Partnership was one of the few authentically good news of 2013 for the region,

The goal of the alliance is to create a free-trade corridor of all countries in the Americas with a Pacific coast. The hope is that dropping barriers on labor, finance and trade will help the Alliance become a hub for commerce with Asia.

If Bachelet’s changes include changing the way proceeds from copper are used (since 2000 this process has been carried out according to a rule that requires generating a structural surplus equal to 0% of the Gross Domestic Product), Chile may be in for disastrous economic policies. She had attempted to use those mining revenues during her first term, and promised “likely changes to include altering mining royalties and funding programs” during her re-election campaign.

McMahon is very bullish on Brazil hosting the World Cup this year and the Olympics in 2016, because of the “worldwide media attention,”

which will help Brazil, and Latin America more broadly, brand itself on the global stage as vibrant and culturally rich a place as any in Europe or the United States.

Some of us thought it already is “as vibrant and culturally rich a place as any,” but the question is, how will Brazil emerge financially after the billions of dollars spent on these two hugely expensive events?

Just a month ago, The Economist published this:
Brazil’s economy
The deterioration
Slow growth, stubborn inflation and mounting deficits

McMahon states, and I hope she’s right,

Brazil is projected to be the world’s fifth largest economy by the time they host the Olympics in just two short years

But the facts right now point to a flat economy that may lapse into recession.

Turning a profit on World Cups and Olympics is a risky business, and Brazil rolled the dice twice, once for the World Cup, and once for the Olympics; the structural problems of slow growth, inflation and deficits will remain, regardless of the outcome, because of its government’s current economic policies.

Two other large economies, Argentina, with a GDP of $716.4 billion, and Venezuela, with a GDP of $374.1 billion – compared with Chile’s GDP of $299.6 billion – are in dire trouble. In Argentina:

The policy mix of harsh capital controls, restrictions on imports, and a series of nationalizations has severely undercut economic freedom. Regulatory pressure on the private sector has continued to rise, with populist spending measures and price controls further distorting markets. The central bank’s independence was essentially destroyed in 2012 when its charter was changed to allow the government unlimited use of the bank’s reserves to pay its debts. Efforts to reform the rigid labor market have long been stalled.

As it collapses into communism, Venezuela‘s,

overall score has recorded one of the 10 largest declines in the 2013 Index

In Colombia ($472.0 billion GDP), lingering institutional shortcomings undermine prospects for broad-based long-term economic development, but at least is making progress. Likewise, Peru ($302.0 billion GDP), whose economy has grown in the last few years, still has weak property rights and weak institutions impeding progress.

Indeed, I hope McMahon is right in saying “the sky’s the limit;” but from where I see it, there’s a lot of pie-in-the-sky there.


Puerto Rico: Drawing on cash

Tuesday, December 10th, 2013

Last month Fitch Ratings warned that its debt rating may be reduced to junk bond status:

The commonwealth’s fiscal stability affects the $3.7 trillion local-debt market because more than three quarters of U.S. municipal mutual funds hold the securities, which are tax-exempt nationwide.

Puerto Rico Repaid $400 Million Loan With Cash on Hand
Decision Marks Latest Sign of Island’s Travails Funding Itself

Puerto Rico took on the Barclays debt to repay a loan from the GDB. Government officials touted the deal in August as providing “the GDB additional liquidity to meet its responsibility of providing financial support to the government and facilitating economic activity on the island.”

But without affordable interest rates in the bond markets, Puerto Rico has now decided to return those funds, said people familiar with the matter.

The territory announced Monday a 5.3% decline in economic activity in October compared to the year-prior period. The price of Puerto Rico’s 5.75% bond due 2041 has fallen 10% over the past month to 67 cents on the dollar while the yield of the bond has risen to 9% from 8%, according to the Municipal Securities Rulemaking Board.

Worse yet, Puerto Rico economy shrinking by 5.3% in the fiscal year that began July 1. It was the 11th-straight year-over-year drop in October.

Venezuela: Price controls, profit caps UPDATED

Tuesday, November 12th, 2013

As if the Venezuelan economy wasn’t going to hell on a hand basket fast enough, Venezuela Moves to Cap Prices, Profits
Venezuelan President Nicolás Maduro began to extend price controls over a broad swath of the economy in a bid to control inflation set off by his government’s increased spending, moves which risk exacerbating shortages in this oil-rich nation.

Caracas’s move to control prices came after the central bank reported last week that inflation had reached 54%, the highest rate in nearly two decades and, according to Trading Economics, a website that tracks global economic statistics, topping even war-torn Syria with the world’s highest rate.

Venezuela’s woes also come in an era of low global inflation, and when most neighbors, such as Colombia enjoy annualized inflation rates of around 2%.

The central bank report also signaled the likely culprit for the rise: The amount of bolívares in circulation rose 70% over the past year, a clear sign the government is printing ever larger amounts of money to stoke a slowing economy.

Rather than acknowledging increased spending, Mr. Maduro late Sunday blamed businesses that he said were responsible for hoarding and price-gouging as part of a so-called economic war against his administration.

Maduro is timing this ahead of the December 8 regional elections, even when he’s already said “that the results are already in” and has threatened jail for anyone who disagrees with same results.

Video in Spanish:

Johns Hopkins professor of economics Steve Hanke calculates that Venezuela has an implied annual inflation rate of 320%. The further radicalization of disastrous Chavista economic policies will make this worse.

UPDATE:
Regarding the looted appliance store Daka, Miguel Octavio points out that It Is All About Arbitrage in Venezuela

My suspicion is that the viciousness against Daka was largely due to the company either receiving goods from Government imports (My main bet!) or receiving some Cadivi dollars for the stuff they sell. Daka was simply taking advantage of the arbitrage the Government was handing it over on a silver plate and the Government found out about it and got mad.

Venezuela Becomes A Nation Of Looters


Mexico: Tax my chocolate!

Thursday, October 31st, 2013

Higher tax rates for the rich are only half the story; there are new taxes on sugary soft drinks, chocolate and junk food, dividends, mining, and an increase in the value-added tax to 16% from 11% in border areas,,

The Senate also ratified a new 7.5% tax on mining companies’ earnings before interest, taxes, depreciation and amortization—and an additional 0.5% charge on sales of gold, silver and platinum.

What the Mexican Senate has done is to essentially raise taxes on everybody.

The Mexican Ministry of Finance had lowered its economic growth projection for 2013 to 1.8% earlier this year.

In a country where tax avoidance is rife, adding inflationary measures like taxes on consumer items and higher VAT while at the same time punishing the mining industry does not bode well for growth.

Luckily for you, gentle reader, you can buy your Mexican chocolate through these Amazon links,

Go ahead. You know you want to.

The Cristina headache Carnival of Latin America and the Caribbean

Monday, October 14th, 2013

LatinAmerThe week’s big news: Cristina Fernández is recovering from brain surgery, which has generated a political headache.

ARGENTINA
Mary O’Grady: Kirchner Moves Against Argentina’s Free Press
The government acts to strip the most important television network of its main source of revenue.

Cristina Fernández health scare symbolises Argentina’s ills

BRAZIL
Power couple
Marina Silva joins the Socialists—and transforms the presidential race

Brazil prison fight leaves 13 dead
A fight between members of rival gangs in Pedrinhas prison in north-eastern Brazil leaves 13 people dead and at least 30 injured.

COLOMBIA
Canadian Miner Freed in Colombia Returns to Work
Gernot Wober, a Canadian mining company executive kidnapped in Colombia by Marxist rebels for 221 days, is back on the job.

ECUADOR
Chevron asks judge to review mystery documents in Ecuador case
Emails anonymously provided to Chevron may show a “conspiracy against Chevron,” the oil giant claims, as well as leaks of confidential court materials to high-level Ecuadorian government officials in violation of court orders

Chevron’s Ecuador Defendants Denied Jury Trial by Court

After Chevron-Ecuador, Lawyer Defends Himself
It took lawyer Steven Donziger two decades to secure one of the biggest environmental verdicts in history: a $19 billion judgment against Chevron. Now he’s battling to salvage his reputation—and his financial stake in the winnings.

HAITI
UN sued over Haiti cholera epidemic
The UN faces a claim for compensation by victims of a cholera epidemic in Haiti, which victims’ lawyers say was caused by peacekeepers.
, via Gates of Vienna.

PARAGUAY
Paraguay mulls patch-up with Venezuela

Paraguay will patch up differences with Venezuela that have paralyzed Mercosur — a trade and political association of several South American nations — and put free trade talks with Europe on the back burner.

PUERTO RICO
Worsening Debt Crisis Threatens Puerto Rico

URUGUAY
Maybe Jose Mujica didn’t want to miss a thing: Uruguay’s President Meets With Aerosmith

VENEZUELA
Venezuela to Pump Dollars into Economy
President Promises to Inject $900 Million Over Next Several Weeks to Help Import Foreign Goods

The week’s posts:
More on Vargas Llosa’s optimism

The Danish modern Salvadorans

Venezuela detains ship with US crew

Panama: Cuban weapons aboard N. Korean ship part of ‘major deal’

Venezuela: Maduro strangles democracy

Mexico: Why the Sinaloa Cartel {hearts} Chicago

Last night at PU: Krauze and Vargas Llosa, the two giants

Cuba: Foreign businessmen jailed for wanting to collect

Brazil: Violent demonstrations, again

Argentina: Cristina recovering from brain surgery