It is my habit to react quickly to major events, but an 85-hour power cut in our neighbourhood made me incommunicado by any electronic means, also cutting me off from TV coverage. We were also without water for much of that time. My main source of information were the two groups of radio stations which worked in chain and provided an excellent way of keeping in touch with what is going on. Now that services have been restored, here is my first look at the events of the past 4 days. I am glad to say that both myself and my family, as well as our house, suffered no consequences to speak off.
I am not a seismic engineer, but some years ago I undertook a fairly extensive study about the possible effects on Chile of a major natural phenomenon, for the InterAmerican Development Bank, so I am fully aware of various technical aspects. I even think I mention there the particular risk of the Concepción area, (I have to find the file, but I just want to prevent the Roubini-type aparecidos, who will claim they all forecast it. An Israeli-born Turk! No faltaba menos. How much lower can you get?). However, this paper will mainly concentrate to other aspects.
THE QUAKE AND ITS COVERAGE From what we hear, the strength at the epicentre of this quake was the fifth most powerful since records have been kept. Also, the extent of the areas touched was unusual, ranging from the capital and central coast down to the south-central area of Concepción, the country’s third largest town, and surrounding areas where the main thrust was.
For many journalists, both Chileans and foreign, the whole exercise for evaluating the damage was the body count. With the Chilean toll so far under 800 (but due to augment as many Tsunami victims have yet to be accounted for), when set against the 300,000 deaths of Haiti, the conclusion should be that “we’re OK, then”. With all respects to those dead, they have no more links to this valley of tears, and it is better to concentrate on those alive, and the physical damage.
The self-serving conclusions that came out of this misreading were amazing. Several publications talked about the “little damage” due to the quality of Chilean management. One publication even headlined “Milton Friedman Saves Chile”. All forecast “a quick recovery”. Well, let us look at the truth, starting with just the earthquake damage.
On an early estimate, half a million dwellings may have been damaged beyond repair, leaving some 2 million people (one in eight of the population) homeless. Luckily there is still three weeks to summer, though the weather down South knows no seasons. Another million houses may have been damaged. Only 7 % of dwellings in Chile are covered by earthquake insurance.
Much of the road infrastructure in the epicentre region is in a bad way. Unfortunately, it is where forestry and other activities take place. The country’s main harbours have had their moorings and jetties damaged, and are operating at best at half capacity. The wine industry has suffered an estimated U$ 600 million of damage, just as the grape harvest was starting. This is equivalent to half a year of exports, for a sector already beleaguered by competition and an overvalued peso. The fruit export industry is also in dire problems as power shortages and transport difficulties will affect the massive export trade.
With the US and several EU countries having advised against travelling to Chile, where the airport is unlikely to be operating in both directions until Friday, seminars, business and tourist trips have been cancelled and more will follow. Many tourists used to head towards the epicentre zone, but even in our neighbourhood Valparaiso, 400 kms from the centre of the quake, no less than 17 hotels have been damaged. The airport terminal building, operated by Vancouver airport, is a disaster area, and passengers are being processed in a tent on the tarmac. That is how it happened in the 1920’s. The fuel tanks are also damaged. There used to be another airport in the south of Santiago, but it was dislodged to favour some property speculators with links to some high officials.
In Viña del Mar, no less than half a dozen high rise buildings of recent construction have to be demolished, as will several in Santiago too. Even dwellings which are OK from the outside have suffered major damage to the contents, which not everyone can afford to replace. In my son’s bedroom, a printer flew from a shelf onto the bed at the other side of the room, one of the few such examples we suffered, but most others were not so lucky.
Public buildings gave not fared better. Shopping malls, theatres, historic buildings and even the Congress building in Valparaiso (where the March 11 change of government is to take place) and the seat of the foreign ministry in Santiago are in doubt. The newly built legal centre is close to collapse. Remember all this is 400 km away from the epicentre. You can imagine the state of houses and public buildings in the south. An 84 km underground water pipe supplying much of the Valparaiso area has a long stretch of damage, and we will have to be without water for a new bout of 48 hours when they decide to repair it.
In a country where most of internal merchandise moves by road, the situation of the roads is bound to affect the flow of the supply chain at all levels.
In all the country, 17 hospitals are heavily damaged of which 11 probably beyond repair.
THE DAMAGE’S CAUSES Chile has strict anti-seismic construction norms, but much of the damage in the south, and older properties in general, were built before the norms, or from materials such as adobe (sun-dried mud bricks), which do not resist well. Inspection quality is not that good either through municipal personnel, and that of concessioned infrastructure either. Two stretches of the new Santiago ring road collapsed. These types of constructions were built under the “supervision” of 22-year recently graduated female Spanish civil engineers who were sent to Chile by the company actually holding the concession, but were more interested in spending time in Bellavista night spots picking up who they would shag that night. They had neither the experience nor authority to impose proper quality control on the already careless Chilean worker. A disaster waiting to happen.
THE OFFICIAL CALLOUS RESPONSE Except for the foreign journalists writing rubbish from their desks in Brooklyn and the aptly named Foggy Bottom area of Washington, there is a consensus that the official management of disaster relief has been, to put it mildly, seriously lacking.
There are various reasons. One is laziness, particularly because there was less than 2 weeks left of their tenure, so ministers, undersecretaries and other non-established employees basically did not care much. Many were on their last days of summer holidays, and they would be damned if they were going to explain to their wife and children that they had to get home 48 hours early because 2 million people were homeless and hungry. Applying this warning to the likes of France, Spain and Italy (referring to August), this habit of closing down the fucking country, office or institution for a whole month and go away has to stop. IT HAS TO STOP!”. You can take holidays in the Summer only one year out of two, and the hell with what your spouse and children think. Government officials, senior staff, medical personnel and other such important people will have to be obliged to work one summer out of two, and those who are away be locumed by someone of their own level. No minister to be replaced in the interim by a director general (that would be lucky!), no admiral by a Lt. commander, etc..You don’t like it, become a beach bum. Life does not stop because you are in Gstaad, Cancun or Buzios. When people ask me if there could be another Allende in Chile, I generally answer that I do not think so, but I do wish there is a Pol Pot.
Specific ministers showed where they priorities lay. The Defence minister delayed his first press conference because “I need a smoke first”. He might as well have smoked the whole packet because he then spoke to say that “a tsunami in Chile is the same as a tsunami in Burundi. “. Burundi being a country with no sea-shore, it would have been a difficult contest, but I could not write to El Mercurio to point to the failures of the teaching of geography in the country. It took four days for another reader to do so.
René Cortazar, minister of transport and telecommunications, two areas particularly crucial to the situation, was seen jogging near his house a few hours after the quake, instead of being in his office. Possibly the prize goes to the Interior Minister for commenting: “24 hours after the quake is too early to start looting in despair”.
It is not that nobody was expecting them. Emergency “committees” were organised years ago. Coastal cities have signs (bilingual if you please) advising the “tsunami evacuation route”. I think it was Von Moltke who said that “no battle plan survives the first contact with the enemy”. I would add, “particularly in Latin America”.
The same specialist fire teams which were sent to Haiti only a few weeks ago, were ready to fly to look into a Concepcion building where 90 people were trapped. It took over 2 days to fly them out, and when they arrived to Concepcion airport, they found out that no ground transport had been arranged to take them into town. Once they started working, their equipment became useless but there were no replacements. There was also no fuel.
THE VIOLENCE On April 6, 2008, nearly two years ago, I wrote a futuristic paper about a Chile overtaken by uncontrollable violence, in 2010! Though it was kindly translated in Spanish too and widely circulated, nobody took it seriously. If you apologise for your past indifference, you can have a copy, but let me cite an extract (written TWO YEARS AGO).
“However, the most serious situation was in the Eastern residential suburbs. The protesters had reached 100,000, and it was not a demonstration, nor a riot. It was an uprising. The crowds went through district after district, looting, raping, burning and killing, but not before asking for the keys of all the cars parked outside, which they filled with all the goods they could carry. Police forces were sent in quantities, but they had neither the numbers, nor the equipment (and even less the enthusiasm) for a pitched battle of such proportions”
Armen Kouyoumdjian Chile 2015: The Alternative Scenario (The Uprising of Winter 2010)
The year 2015 being the finality of the events was taken in parallel with a very optimistic paper (in fact written in a psychedelic trance) by a Chilean academic economist, which predicted that in 2015 Chile would be like Switzerland whereas the rest of Latin America, dressed in rags, would be fighting over stray rats to eat. I wanted to give the alternative scenario. Interestingly, the economist lives in the USA.
For nearly three days, all law and order broke down in Concepcion and surrounding small towns. Gangs of several dozen started by looting supermarkets, initially to look for food, but then moved on to more expensive goods like electronics and clothing. Then they looted the chemist shops and the petrol stations. When there were no more businesses to loot, they started to enter private houses, both abandoned and occupied, and took away anything which had survived the quake. This then extended to parts of Santiago, not just the suburbs but some central parts of the capital.
The authorities thought they could control the situation by trebling the number of police, but the looters hardly took notice. In one area the police intervened not to arrest the culprits but ask them to queue and loot in an orderly fashion in order to avoid a stampede (I am not inventing this, I assure you).
It is only on the third day that the military, initially 6,000, now up to 14,000, entered the area, and imposed a curfew, but as far as business is concerned, most of the damage was already done. It is not clear if the insurance held by the large companies whose premises were affected includes riots and such public disorder. An initial estimate of their exposure (which is not the same as the amount of damage) by Chilean insurers is for U$ 2.6 bn of claims. Many if not most small businesses are not insured against anything.
As a result of the violence, many people (including 90 % of the staff at the country’s largest public hospital, which happened to be in Concepcion) have stayed away from work to protect their family and belongings. This causes many other problems.
THE INVOLVEMENT OF THE ARMED FORCES Many people were surprised as why the armed forces, whose every purchase from the satellite to helicopters is described as designed to help with natural catastrophes, took some three days to get involved.
Before that, there was the incident about the tsunami alert. There is the old American joke about the sign hanging over a bar, which read: “we have an agreement with the banks : they do not sell beer and we do not cash cheques”. It is not clear why in the XXIst century the navy should be in charge of civilian coastal matters, but quite frankly friends (and many are well known to me), please stay away of meteorology and seismology . I often laugh when in the early morning the local radio says the Navy weather service is predicting a cloudy day with no sunshine, when I see a bright blue sky from my window. As for earthquakes, there are just 7 specialists in Chile, and their number should be increased and a separate service set up.
This being said I do believe the Navy’s version that they did warn of a possible tsunami, and it is probable that the authorities decided to ignore it (“we did not understand it” was their excuse, although it was pretty clear), in order to avoid a “panic” (obviously considered worse than many deaths), but even more probably because they could not be bothered with all the logistics of an evacuation.
Now to the involvement of the military in relief logistics and maintaining order. On the first aspect, they cannot take initiatives of that kind without civilian orders. The air force said it was ready with all its available aircraft (what there is of it, how long are we going to wait before the Russian helicopter contract is signed? What were any helicopters doing when so many towns and coastal villages were isolated by road?), soon after the quake, but nobody told them to transport anything.
On law and order, the matter is more sensitive. The analysis that follows is my own for which I take sole responsibility. With states of exception and curfews imposed, and a shoot to kill policy, and despite the different circumstances, the similarity with the Pinochet years makes them nervous. In recent years, hundreds were prosecuted and many jailed for abuses, true enough, committed during the military government. However, the judges’ wrath was limited to the uniformed executors whereas the civilians who gave the orders are prosperous politicians, businessmen, or consultants (or all the above). The military once again were made to carry the can for protecting the private sector from the “Bolshevik hordes”, and got a kick in the back as a thank you. It is very easy to kill innocent people in the midst of looting and rioting, and I can quite understand that they were reluctant to be involved. On the other hand, their strong participation now has allowed them to show that far from being obsolete, they are still very much needed institutions.
The Navy and the Air force have particular problems. The navy’s major base in Talcahuano, the port city of Concepcion, including its ASMAR shipyard, were heavily damaged. ASMAR repairs and builds vessels for other countries too. The Air Force has to decide if it cancels or maintains the FIDAE 2010 air show, due that the end of march. There is no news if the ad hoc installations in the base next to Santiago airport were damaged to any extent, and the slow return to normality of the airport itself is a hindrance. On the other hand, preparations by organisers and exhibitors alike are very advanced and a cancellation may mean a loss of credibility and put at risk the whole future of the show.
THE REACTION OF BUSINESS A lot of businesses (in some small towns near the epicentre, and in Concepcion itself) have been pillaged, so the shortage of supplies has been accompanied by a rise in price, just in areas where people lost everything. From bread to public transport, prices have as much as doubled.
Big business has also been its usual heartless self . When asked by the government to donate food for distribution, Horst Paulmann of CENCOSUD, the Gauleiter of retail in Chile, answered that they would sell it to the authorities and it was up to them if they wanted to donate it. He also insisted that the press should not cover lootings because “it encouraged others”.
THE END OF MODERNITY AND OTHER CONSEQUENCES Thank heavens for small mercies, at least the quake happened before any nuclear power stations were built. With the same approach to security, we would all be irradiated by now.
The Piñera administration will have to reshuffle its whole game plans and instead of progress and modernisation, will mainly have to reconstruct and heal. The only way they can show they are different is to build real houses rather than shacks. Prospects are not good, as it has not been done in other earthquake zones when only a few thousand people were involved. What about two million?
Let this tropical striptease by the “modern” country the OECD thought it was giving its membership card to, be a lesson to all the blind analysts and journalists. I am also appalled that all these countries who always claim they have no money to pay for modest consultancy fees suddenly find millions to help a country’s inept management, on top of inviting them to freebie trips abroad. Just wait until you ask me for help next time. I will shake more than a terminal Parkinson patient.
HUEVADA DE LA SEMANA To all the useless idiots who thought life was limited to mobile phones, Facebooks and Twitter messages. The emergency and police services who replaced their old fashioned radios by mobile phones, were left high and dry like eunuchs at an orgy. Now people use their mobiles to communicate, to take photographs, to listen to radio or loaded music archives, as an alarm clock, a torchlight and even as a sexual stimulator, they should realise that once the power runs out you have NOTHING. If I had no power for 85 hours in an undamaged house 400kms from the epicentre, just imagine how easy it is to communicate in the Concepcion area.
This was another warning by the Gods to those who think they have dominated the elements nad all aspects of life.
FROM PSALM 5:5-6 “Thou shalt destroy them that speak leasing”
Once again, Brazil is riding the top of the wave in terms of world consideration. Comments one reads describe it as leading the recovery in Latin America in the short-term, flexing its regional and international muscle on the diplomatic stage, and even on the road to becoming a “new Saudi Arabia” for oil production. When you point out that in a 33-year career covering Latin America, you have all heard it before, several times over, your cynicism is countered by the comment: “ah, but this time, they really have got it right!”. How many times I have heard that one as well. Unfortunately, many of the analysts and journalists behind this enthusiasm were not even born when I started looking at Latin America in November 1976.
This is one of the main problems in not only analysing, but also putting across any contrary views on Brazil. The fan club is so large and militant that they will not hear anything against the subject of their undying love and admiration. Moreover, even with the evidence under their nose, they will not even look at it. “A virtuous circle” as one London analyst described it to me some years ago. The other problem is that, fully conscious of this goodwill, Brazilian authorities themselves take advantage and put across a positive image in an unparalleled decades-old exercise in cosmetic dressing-up.
Though I am fully capable of it (once I see the colour of your money), I am not planning here to undertake a detailed Country Risk analysis of Brazil, but just to underline some cautionary aspects which are always ignored.
WHAT IS A HADJI YATMAZ? I normally do not translate foreign expressions used in my reports, because even though I have little faith in the cultural level of much of my readership, I think it is a job for foreign embassies in Santiago. After all, there is something they should spend their time on, because updating their websites, managing their invitation lists and organising proper catering does not seem to be much of their concern. However, in this case, the concept of “Hadji Yatmaz” is fundamental to this report, so I shall have to explain it.
In the Beirut of my childhood, before it was destroyed by the invading vandals of the territory to the South, there used to be a toy called a “Hadji Yatmaz”. Probably a result of the Ottoman occupation, the expression used is Turkish. It means roughly “the Hadji that won’t lie down”. It consisted of a small plastic figure, with a piece of lead in its base. If you bent it downwards, it always stood up again, because of the heavy lead base. Such a toy was probably available in other countries, though nowadays the lead content would be illegal because it is poisonous. I had several of them, and my playing with lead probably led to the imbecility with which I generously send my reports for free.
So most people regard Brazil as a “Hadji Yatmaz", which will quickly stand up after falling down. The problem with the toy, as with Brazil’s image, is that it was made of very cheap plastic, and it was completely hollow inside.
INFLATING THE PRESTIGE Having had two emperors (Pedro I & II) for a total period of 67 years after independence (1822-89), and contrary to Haiti (Dessalines and Faustin) and Mexico (Iturbide and Maximilian), whose flirtation with imperial status was shorter and unedifying, Brazil never recovered psychologically from losing that status. In fact, soon after a military coup sent Pedro II into exile, they sent a delegation to woo him back (which he refused to do). So the country had to make do with its own imperial size, embassies that are palatial (the one in Santiago has its own chapel), and flexing its muscle from time to time among its smaller neighbours (it shares a border with all but two of South American countries, Chile and Ecuador).
Flexing your muscle is not difficult when you are the size of an elephant. Brazil is only 11 % smaller than China (though it has less than a seventh of its population). Elephants have small brains but powerful muscles, and their mere presence is intimidating. One has to say that Brazil has used its size in a generally benign and certainly “softly softly” fashion, rather than in an openly aggressive way.
Following a long period of crises, and after thinking that their economy had been “stabilised”, the country actively embarked on making its mark on stage. This has gone into overdrive in recent years. It started modestly enough with a bid to represent Latin America in a potential permanent seat of an enlarged Security Council (a UN debate that is far from being resolved anyway). Its only likely contender, Argentina, though pretending that it is still in the running, does not appear to have much of a chance, to put it mildly.
As this matter was dragging on, Brazil thought up another role for itself, closer to home. It convinced the USA, busy killing babies in Iraq and Afghanistan, that it could be its proxy “regional stabiliser”. That was not really Brazil’s real intention. It did not want to be a proxy for anyone, but have a role for itself. So it thought up UNASUR, making sure membership was limited to countries south of the Panama Canal, and more importantly, its offshoot, the South American Defence Council (or CDS). The latter had a double purpose: give a military dimension, and provide an outlet for its growing defence industry. Massive acquisitions of modern weaponry mainly from France, at various stages of confirmation, all insisted on “technology transfer” clauses. One hopes that the quality of training in their armed forces has improved to the point of handling nuclear submarines and U$ 200 million a piece state-of-the-art combat aircraft. During WWII, the Brazilian Navy had the dubious record of a destroyer sinking itself (a badly positioned machine gun fired a “training burst” into ammunition stored on the deck below, causing an explosion from which only two crew members survived to tell the story). There is no limit to the ambitions. Vice-president Alencar recently expressed the wish that Brazil would become a “nuclear power”. Contrary to people’s attitude to Iran, not a single voice protested around the world (not even when the country’s authorities refused access to an IAEA inspection team to an army facility known as IME, where nuclear research is carried out).
Among its immediate neighbours, Brazil played godfather to the start-up Bolivian gas industry, and put pressure to stop a break-up of that country sponsored by local business interests with Israeli help. With Paraguay, after playing an unusual game of toughness and carrying out live ammunition exercises on its borders, it accepted to renegotiate iniquitous agreements on revenue from the joint Itaipu hydroelectric project, trebling the sum paid to its small neighbour.
More recently, Brazil became even more proactive in terms of diplomacy by the crucial role it is playing in trying to restore democratic rule in Honduras, having arranged for the deposed president to return in secret and take refuge in their embassy of Teguchi-galpa (as French TV called the Honduran capital, probably thinking it was a provincial town in Japan). Though the gathering was held in Venezuela, Brazil was a strong voice in the recent African-Latin American summit. It had previously flirted actively in the continent, particularly with the Portuguese-speaking former colonies like Angola and Mozambique. It has also nibbled at the Palestinian problem, the G-20 group and the Doha trade round. Last April, in another fit of panache, the country lent U$ 10 bn to the IMF.
Brazil is not a member of the OECD, but holds observer status there since 1994, and some time ago became the first OECD country to join a trade pact norm with its members. Last but not least, Rio de Janeiro’s just became the seat of the 2016 Olympic Games, the first to be held in the region. This is despite the fact among the four finalists, it had the lowest “suitability” score in the evaluations. The honour will cost the country another U$ 5bn in investments.
POLITICS AND THE LULA PHENOMENON There is exactly a year to go until the October 3rd 2010 elections, which will mark the end of two terms of Lula presidencies. That day will also mark the renewal of all the Lower House and part of the Senate. Lula cannot stand again on this occasion, but he is said to be already eyeing the one election after next, in 2014.
In the meantime, his personal popularity still stands at an incredible 65 to 70 % or so, a score only bettered by Chile’s Ms. Bachelet, also coming to the end of her single term. What can the explanation of such popularity be, after years in power and in the midst of a severe crisis? Unassuming agreeable personalities, trying to stay above daily occurrences (”blindaje” as they call it in Chile), whilst appearing like the person next door (which in a way they both are).
The problem with such popularity is that it does not rub off on an heir, anointed or not. Lula has hand-picked his rather dour chief of cabinet Ms. Dilma Rousseff, a Bulgarian from his own PT party, as heir apparent. It did not help that soon afterwards she was diagnosed with cancer, but the fact is that, exactly a year ahead of the polls, she has only 15 % backing in the polls, running virtually in third position in a field led by the PSDB’s Jaime Serra.
One eyebrow raiser has been the formal announcement on September 30 that Central Bank president Henrique Meirelles would bid for the governorship of Goias state, in alliance with Lula’s PT party, thus putting a question mark on the real independence of the Central Bank ( a concept which in any case rarely goes beyond the theory in Latin America)..
THE DEBT OVERHANG I have often referred to the conspiracy of silence, for there is no other word, surrounding Brazil’s fiscal situation, which everyone appears to wantonly ignore, to the great joy of the authorities. Whereas it might be true that the way their finances currently look, France, Spain and the United Kingdom may declare bankruptcy sooner than Brazil, it is amazing that on September 22, Moody’s joined Fitch and S&P to give the country an “investment grade” rating.
Brazil is very good at pulling the wool over the eyes of the average analyst and journalist, concentrating on the totally irrelevant “primary balance”, and the size of the debt as a percentage of GDP. Debt is a precise figure, which your creditors can calculate down to the second decimal. GDP is a nebulous concept. A quotient of the two is meaningless. In any case, debt is not serviced with GDP (nor with trade surpluses), but with fiscal revenue over and above other needs.
With the just published fiscal results for January-August (the amazing thing is that these figures are available for anyone to see on the Central Bank’s website), we have the following results:
The treasury generated a primary surplus of U$ 23.5 bn over 8 months, but this only covered 40 % of an interest bill equal to U$ 58.5 bn (U$ 241 million in interest per calendar day, or U$ 10 million per hour). The resulting overall deficit was U$ 35 bn in 8 months, nearly SIX TIMES the figure for the same period of 2008. If that is an “investment grade”, I’d hate to see the figures for a junk bond issuer. Total debt as of August 31st stood at U$ 1,055 bn.
The most worrying aspect of this is that the deterioration of public finances took place in a context of falling interest rates, and in particular the benchmark SELIC rate at which around a third of the debt is denominated. A year ago, SELIC was at 13.75 %. It is now at 8.75 %, down by over a third in just a year, but a reversal is expected, with some local forecasters thinking it may go up by 4 points by the end of 2010.
Relax, more statistical games are planned in the cosmetics field (it is time that L’Oréal transfers its corporate headquarters to Brasilia). The authorities, having already taken out a U$ 10 million an hour interest bill from its fiscal deficit calculations, they are now pondering whether to also exclude the cost of reactivation packages.
In late July, Brazil managed to place a 28-year bond issue for U$ 500 million, with a coupon of 7.125 %. Admittedly this is more than Citibank is paying us on our time deposits, but at least these are guaranteed by Uncle Sam (why are you laughing?). There was actually demand for U$ 7 bn and the bonds were placed at 108.63, still giving a yield of 6.45 %. The question is whether they can keep up the coupon and pay the principal in 2037. Look at the past 28 years and you may find the answer.
SOME OTHER STATISTICS Brazil was the Latin American country with the largest stimulus programme, much of it unfortunately directed to consumption, with some going to housing. Credit card use is at a record level, and bank credits for that purpose are up. This will add debt accumulation to the population. Even though they are at a 14 year low, average interest rates on consumer credits are at an average of 7 % A MONTH (that is 125 % per year, unless you are a Chilean economist, and think it is actually 84 %).
In fact, one wonders where this lead in recovery that Brazil is supposed to be taking in Latin America can be seen (“The Clear leader of the region’s recovery”, as JP Morgan described the country in late July). One would have hoped that the shit they put us in over the past year would shut up all these investment bank twits. No, they still talk, write, get invited to speak at seminars and even insist on getting bonuses! Only retail sales and car sales recently showed positive growth, helped by all sorts of incentives. Passenger car sales to September rose by 5.5 %, but the lack of real investment is better reflected by the 20.2 % drop in truck sales over the same period. Industrial Production in the first 8 months was down 12.1 %, and second quarter GDP was a negative 1.2 %, after a first quarter drop of 1.8 %. Passenger car output to August was 10.7 % lower and that of trucks 34.6 % down. The August urban unemployment rate of 8.1 % was the same as in June, and 0.5 points above a year earlier.
On the external front, the 8 % rise in the January-September trade surplus (to U$ 21.28 bn), was only due to imports (-31 %) falling faster than exports (-25.9 %). Capital goods exports alone were down 46 % in January-August. This helped shrink the first semester’s Current Account deficit (- 52.5 % to U$ 9.56 bn).
External reserves as of end September were at a comfortable record of U$224 bn, so at least (thank heavens for small mercies) we do not have to fear a good old fashioned external sector crisis (which used to cause most Latin American disasters in the past, hence the fact that for many psychologically frozen analysts), Country Risk is limited to a study of the external sector.)
Inflation is also under control (under 3 % in the first 8 months, accumulating a 12-month total of 4.4%).
SAUDI ARABIAN MIRAGE? Those familiar with the works of French fabulist La Fontaine, himself inspired by older writers of morality tales going back to Greek literature, may remember the one about Perette et le Pot au Lait. In it, Perette, a carefree milkmaid, is walking with a pot of milk on her head and she starts daydreaming about how she is going to benefit from the milk she is transporting, ending up as the head of a major farming operation. Unfortunately, she fails to see an obstacle on her way, so absorbed she is in her fantasies, that she stumbles and all the milk is spilt, putting an end to her dreams.
No long ago, Brazil announced with great panache (no faltaba menos) that it had found a giant oil field under the sea bed, with such potential as to make the country a new Saudi Arabia. “A passport to our future”, described it presidential hopeful Dilma Rousseff . The money was going to go towards developing the country and eliminate poverty (why didn’t they do it when they had rubber or coffee, one wonders). Heated discussions started as to how it was going to be exploited, by whom and which proportion of earnings would the various stakeholders get. There was even talk of the “Norwegian model” in managing the bonanza.
Back in 1974, Brazil claimed similarly (soon after the first oil shock) that it had found major deposits that would make it self-sufficient in oil over the short-term. In fact, it took over 30 years and several more finds to barely reach that aim. In fact, strictly speaking, the country is not as yet self-sufficient in oil, gas and derivatives, as the sector’s trade balance in the first 8 months of 2009 was still in deficit to the tune of U$ 3.5 bn. Even if we grant the fact that the new deposits, known as “Pre-sal” exist in the quantities mentioned, there are a number of strong doubts and reservations.
-The deposits are some 5,000 metres below the sea-bed. Though the technology to extract at that depth does exist, it is very specialized and expensive.
-There is no single mega-deposit, but a series of “pockets” of oil, which have to be exploited separately. They are also spread over an area measuring 160,000 Km2. Each will need its own expensive perforation and production installations (only two companies in the world currently manufacture them), at a cost of between U$ 80 and 90 a barrel (the figures vary, and they are probably impossible to gauge until you actually get on with it.
-Due to the nature of the deposits, the recovery rate of the oil “in situ” is likely to be below 15 % of what is actually there
-There are some legal problems related to the proximity of some of the Pre-sal to existing concessions held by other firms.
Even if it is true that the new discovery doubles the size of Brazil’s oil reserves, it will require a tremendous investment and technical effort to exploit it, in order to sell at a price which may or may not be economic. Hardly a boon considering the previously described fiscal constraints, particularly as in order to keep control, the authorities seem keen that most of the work will be done by the state firm PETROBRAS.
According to the company’s president, they will invest no less than U$ 111bn to develop Pre-sal by 2020, to which one has to add nearly U$ 300 bn that the private sector would have to invest as suppliers of goods and services. There are strong fears that such sums will crowd out the availability of capital for other needs in both the state and the private sectors. Before Pre-sal became the talk of the town, there was another pharaonic fantasy of building 60 nuclear power stations. Petrobras estimates that it will need 40 rigs by 2017 (there are only 80 similar ones in service today all round the world), of which it insists 28 must to be built in Brazil itself. Is it the best way to spend U$ 400 bn when the rest of the world is trying to reduce dependency on fossil fuels?
STILL AN UNDERDEVELOPED COUNTRY If Brazil wants to emulate Saudi Arabia, it might better consider a policy of cutting the hand of thieves. Even by Latin American standards, the levels of corruption and mismanagement in the public sector are abysmal, as are business manners. In the past two years, I have sent umpteen messages to various Brazilian entities ranging from the Rio Film Festival to the Defence Ministry. Not a single one has ever been answered.
The national infrastructure is seriously lacking in many ways. Ports are a big problem, and recent accidents have also turned up a disastrous situation in airports and air traffic control. Here again, the announced action is on prestige projects. The prime example is the high speed train link between Rio and Sao Paulo, originally estimated at U$ 11 bn, but now expected to cost from U$ 15 to 20 bn. If such a proven technology is difficult to cost up, imagine what can happen to the calculations for Pre-sal investment. Only a third of roads in the country are considered to be in good condition. Energy shortages also loom in the medium-term.
To that, one has to add the worst income distribution on the continent, and abject levels of poverty. Farmers, over and above the 8 % drop in output estimated for this year, have seen concentration of ownership actually worsening in the past 20 years. No less than 30 % of Brazil’s farmers are illiterate. Though some poverty-reduction programmes such as Fome Zero and Bolsa Familia have brought-in relief, rural poverty is still a huge problem.
One day, the Hadji Yatmaz may not stand up after all. If you circulate this report to third parties, I am not interested in their baseless debunking comments. This paper was very well researched, and contrary to their impressionistic opinions, is based on facts and figures, goods which are often in short supply among other scribblers. Also anyone complaining that I did not mention “the good aspects”, should remember that I am a diagnosis doctor, not a publicist.
Where it's at.
BUENOS AIRES, June 22 (Reuters) - Casposo, an Argentine mine operated by Australia's Troy Resources TRY.V, will begin to produce gold and silver next year after an $87 million investment in the project, an executive from the company told Reuters on Monday.
Construction at the mine in San Juan Province, some 785 miles (1,265 km) northwest of Buenos Aires, should be complete this year and the mine will employ at least 200 people when it is operational.
"What we have said is that we could start the construction before the end of the year, now I quite clearly see we are probably going to do it faster than that," Ken Nilsson, operations director for Troy Resources said in an interview in Buenos Aires.
"And the planning (for production) is for 12 months after starting the construction but again I'm hoping to do it quicker than that. My personal target is the beginning of July (of 2010)........."
"On Friday the governor of San Juan, José Luis Gioja, defended the development of mining activity in the province and stated that thanks to this sector they “now have a important productive trajectory”. Gioja spoke in favour of of mining development during the presentation of regulations for suppliers to the Pascua Lama project being developed by the Barrick mining company.
"The presentation was held in the Civic Centre of the capital of San Juan. According to the governor, “the people of San Juan had national laws that promoted the local economy, such as agricultural and industrial promotions. Now we no longer have those tools of promotion and we have suffered somewhat (due to this). But now we are getting back on our feet again; we have found an important productive trajectory and the State is not the only entity that is creating employment, even though there are those who attack us and dont tell the truth.” He also assured the audience that “mining activity represents progress and growth for San Juan” and that “miners will be made to respect environmental impact studies and strict rules and controls to avoid pollution........”
CRISIS IMPACT ON CHILEAN FISCAL RESULTS
An Analysis of the First Quarter 2009 results
The news that Chile’s GDP was negative for two quarters and fell even sharper during April means that the country is in recession according to the generally accepted principles of economic analysis. However, the authorities have refused to use the term, adding another element to my description of “management by negation”.
There is one aspect where figures do not lie, because contrary to many other vague macro-economic statistics (such as GDP, Unemployment or Inflation), it reflects a more or less precise accounting exercise. This refers to the fiscal accounts, for which first quarter 2009 figures were published in late April, and I have only now gotten round to processing them.
PARTICULAR FACTORS Even though budgetary figures may be precise, their presentation has become exceedingly hard to fathom in recent years. The reasons include combining current, fixed and financial transactions in the final results, and allow Hacienda advisors to come up with somewhat distorted final figures. Still, the raw material is there and it can tell us a lot. Another statistic which tells us a lot about the crisis in Chile, but is not financial, are the 20,000 homeless people who seek shelter each night in Santiago alone, and that figure only relates to those staying in the hostels of one such charity, the Hogar de Cristo.
The first quarter of 2009 figures should not be projected for the full year, because they incorporate some aspects which are unlikely to persist for the whole of the year. They include the impact of the exchange rate on both revenue and expenditure denominated n foreign currency. In the first quarter of 2008, the exchange rate averaged 454 pesos per U$. The equivalent figure for 2009 was 581 pesos. Discounting inflation, the real peso value of the dollar increased by 22 % on a year-on-year basis.
The other variable which marked a strong change was the price of copper. From an average of U$ 3.54/lb. in January-March 2008, the price dropped 56 % to just U$ 1.56 this year. It has averaged U$ 2.03 in April/May and is now over U$ 2.30.
One aspect which does look as if it will continue all year is the increase in expenditure, because it is an electoral year. One has to take this with a pinch of salt as announcements and actions are separated by the Chilean bureaucratic Colorado Canyon (the U$ 1 bn capitalisation of CODELCO, part and parcel of the U$ 3bn “stimulation plan” announced ages ago, is still under discussion).
There is not much point comparing the first quarter results to the draft budget for 2009 announced at the end of October last year. This is not so much because we only have one quarter’s figures, but the hypotheses contained therein on growth, inflation, copper price and the exchange rate have long since lost their meaning.
REVENUE SIDE Looking at current revenue, which consists mainly of taxes, these plunged by 37.3 % in the first quarter, to a total of U$ 7.64 bn. Though some of the drop was due to temporary reductions or suspension of taxes on fuels and stamp duty for instance, other items truly reflect a very sick economy in terms of growth.
No tax reflects economic activity better than VAT. Revenue from that source accounted for no less than 38 % of current income, and fell by 20.5 % in real terms (all percentages mentioned in this report, in accordance with Chilean accounting principles, are in real terms).
Revenue from copper and other mining activities saw the sharpest drop, falling by 92 %, and ending up at just 3.4 % of revenue. In fact, they reverted to form, and maybe now people will believe me when I say that in most years, the Chilean state gets more out of the nasty habit of smoking than from copper. No wonder, in the country with the highest per capita expenditure on cigarette and drink, as previously mentioned. In fact, tobacco taxes brought in $ 248 million during the quarter, 70 % more than copper, and bucked the trend with a 6.5 % increase. A combination of less driving and lower taxes meant that on the other hand, fuel duties brought-in 13.9 % less, at U$ 314 million. Lower imports and statutory reductions under Free Trade Agreements meant that customs revenues dropped by 48.6 %. Income tax, another good measure of economic activity, and which accounted for 29.5 % of revenue, saw its yield reduced by 25.2 %.
There is a puzzling increase of 8.4 % in the revenue from state social security contributions, which at first glance does not square up with the increase in unemployment. The only explanation I can think of is the move of lower paid workers from private health coverage to the less expensive state FONASA scheme.
Non-current revenue only brought in an additional U$ 57 million.
Some time in the near future, if it has not already been said, some (or several) authorities will insist that the deterioration of public finances is mainly due to the fall in copper. This argument, which is older than the Tibetan Book of the Dead, once again stands no scrutiny. In the first quarter of 2009, the Treasury received U$ 2.2 bn less from copper. This represents less than half the total loss in revenue (U$ 4.54 bn).
Like all of us stupid savers, public finances also bore the brunt of the drop in interest rates on the country’s savings. These dropped by 77 % to U$ 257 million. As of March 31st, consolidated Treasury savings amounted to U$ 23.4 bn.
EXPENDITURE SIDE The analysis of the expenditure side of the equation is more complicated, because we have an important element of non-current items. Starting with current expenses, these increased by 15.3 % in the first quarter, with all items showing an increase, led by purchases of goods and services (+ 20.5 %) and subsidies & donations (+ 17.7 %). The 14.9 % increase in the interest bill (itself a modest U$ 255 million, almost exactly equal to the revenue on savings), is most probably due to the higher peso cost of servicing dollar debt, as mentioned earlier.
To the U$ 7.18 bn of current expenditure, one has to add U$ 1.55 bn of non-financial investments and transfers. The amount of investment, at U$ 922 million, jumps by 57.3 %, though transfers to other entities also shows a 57.5 % increase. It remains to be seen how much of that money has actually been spent at the receiving end. The official report mentions a 73 % increase for housing, 52 % for public works and 45 % for public security.
Combining current and investment outlays, total expenditure increased by 21.3 % in the first quarter.
BALANCE AND OUTLOOK On the basis described above, there was a quarterly deficit of U$ 1.1 bn or 0.7 % of GDP. Under the circumvoluted methodology of Hacienda, they still aim for a balanced budget for the full year.
The next edition of the IKN Weekly, as well as all the usual fun'n'frolics (our 'stocks to follow' list which is already showing an up-to-date 7.1% profit as of today, political development in Latam and how to profit from them, company news and view etc etc) will also feature a NOBS in-depth fundamental analysis report on AUEX Ventures (XAU.to) with reco, background, price target and all the usual stuff.
Click to enlargeJust wanted to say thanks for you blog on this day that my Fortuna investment reached 100.46% gain. All the best, XXXXXXXXXX
Click to enlargeJust wanted to say thanks for you blog on this day that my Fortuna investment reached 100.46% gain. All the best, XXXXXXXXXX
Due to the total lack of income recently Chez Otto, here I am again plugging the paid service. But this time my begging efforts are aimed at showing you the reports available right now over at the NOBS Library. Take a look at the reports on offer below, and if any tickle your fancy all you need to do is deposit ten dollars into my paypal account and the title is yours.