Politics & Markets
Left-leaning Latin America (Issue: 2)
A new wave of left-leaning governments is now emerging across Latin America. Leaders such as President Hugo Chavez of Venezuela, President Luiz Inacio Lula da Silva of Brazil, President Evo Morales of Bolivia, President Nestor Kirchner of Argentina and President Tabare Vazquez of Uruguay characterise the region?s march towards leftist politics. Chavez and Lula da Silva were both re-elected in their respective elections. Clearly, leftist are here to stay, at least it so appears.
More radical story is from Bolivia with the election of Evo Morales, the country?s first President of indigenous origin. Morales made his radical, far-left leaning policies no secret. Repeating Chavez almost verbatim, Morales denounced both ?neo-liberalism? and ?imperialism?. Morales also promised nationalization of the natural gas industry, accused foreign companies of plundering the country?s wealth and terrified businessmen with his promises of land reform and state control.
All these left leaders have expressed their intent to undertake oil and gas assets. Chavez and Morales however actually went ahead with those plans. In 2001 Chavez tabled the new Hydrocarbons Law, which increased royalties paid by private companies from 1-17 percent to 20-30 percent. The law also guarantees the state owned Petroleos de Venezuela S.A. (PdVSA) a majority share of any new projects. Failure to comply has led to prompt action. For instance, the Jusepín and Dación fields were seized by the government in response to their former operators, France?s Total and Italy?s ENI, refusal to sign new agreements.
Bolivia?s Morales also introduced similar hydrocarbon laws, which require the state owned Yacimientos Petrolíferos Fiscales Bolivianos (YPFA) to be in charge of all Bolivian oil and gas projects. Chavez acquired only two fields from Total and ENI. Morales sent troops to all the gas fields and put them under YPFB command, with no provocation on the part of foreign oil companies.
Against the backdrop of these developments it is important to ascertain the future of oil and gas sector in Latin America. The region remains important to the sector with oil and gas heavy weights such as PdVSA, Petrobras and even YPFA commanding considerable power in the regional energy equation.
Despite rhetoric, it is unlikely that Latin American leaders would continue their cowboy energy policies, largely due to their economic woes. Much of the recent growth impetus in Latin America thus appears to have originated from higher commodity prices. However, the inherently volatile and unpredictable nature of commodity prices and their recent weakness gives rise to concern over the longer term sustainability of the Latin American growth story. With most Latin American economies yet to develop internationally competitive industrial or services sectors, and the pursuit of structural reforms to boost growth being lackadaisical, the economic dependence of the region on commodities is unlikely to lessen in the short term.
Latin America has also failed to attract its fair share of foreign direct investment (FDI) in recent years, largely due to foreign investor unfriendly politics and poor business competitiveness. The region?s investment ratios and competitiveness remains low thus limiting its long term growth potential. In addition to recent tax hikes, the bureaucratic nature of doing business in Latin America makes economic expansion particularly challenging.
Signs of loosing grip on the economic reins are appearing now. As FDI falter, some leaders have already started making conciliatory statements and have even reversed some of the previous measures. For instance in Bolivia, the government ?temporarily suspended? the takeover of foreign company owned gas assets citing ?the lack of economic resources?. This was followed by the sacking of the energy minister in the face of Brazil?s opposition to expropriate Petrobras? refineries. A new set of less draconian terms were presented subsequently reducing the 82% tax under the May 1st Nationalisation Decree to 50%.
Other countries such as Argentina are now making overtures to foreign investors and keen to increase their FDI flow. Lula da Silva provided assurances to foreign investors after his re-election. Increasingly, Chavez appears to be fighting a lone battle supported not very ably by Morales in Bolivia...
Latin America always had a penchant for socialism and has been the hot bed of many socialistic leaders in the past. They failed to establish a permanent footprint as they failed to eliminate social inequality. Nothing much has changed since and Latin America?s current march to the left in all likelihood will come to halt. Latin American economics can not afford its leaders? political extravagance.
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