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Political Risk Report: LatAmBraces for Marathon ofElections

Political Risk

Page 2Political Risk Report: LatAm Braces for Marathon of Elections

Political Risk Report: LatAm Braces for Marathon of Elections

Introduction

Latam Risk Scorecard and Podcast

Chile: Jumpstarting Growth Central Campaign Theme

Argentina: The Macri Reform Agenda and the Legislative Test

Mexico: Measuring the Trump Effect

Brazil: Glimpses of Hope Amid the Chaos

Colombia: Life after Santos

Peru: PPK’s Complex Undertaking

Latin America: FiguresColombia

Mexico

Argentina

Brazil

Chile

Peru

Contents


Introduction

Business and politics are intrinsically linked in Latin America. To understand one,

you must understand the other. BNamericas serves clients in over 1,000 companies,

NGOs and government agencies operating in the mining, energy and infrastructure

businesses throughout Latin America.

Depending on who is in power, projects in these sectors can be accelerated, delayed,

turned into key government initiatives, or get buried by new political circumstances.

Our clients demand insight that will alert them to these possibilities, and in light of

this we have decided to create a new monthly BNamericas Intelligence Series report

on Latin American political risk.

The aim of the report is to track and put into perspective all political news that impacts

the real economy (as opposed to the part of the economy concerned with buying and

selling on the financial markets) in Argentina, Brazil, Chile, Colombia, Mexico and

Peru.

This report is part of a larger transformation of our political and macro coverage.

Based on feedback from our clients, we are developing new ways of tracking the

economic implications of political events, with the aim of helping our readers get the

big picture so they might anticipate risks and structural changes in the countries in

which they operate.

Our group of reporters and analysts across Latin America, our 20-plus years of

experience in the sectors we cover, and the knowledge and insight we have accumulated

as professionals in the real economy provide us with the best possible skillset to take

on this task.

Elections are a crucial part of this picture - between now and the end of next year,

elections will be held in Argentina, Brazil, Chile, Colombia, and Mexico. We will

provide clarity in the simplest possible manner about what to expect for the current

government, and what to expect in the next, with precise details on candidates,

platforms, the actual vote, the handover of power, and everything in-between.

We believe the world has entered an uncertain time in which businesses and

individuals require clear, onthe- ground and continued examination of current events

to understand what the various risks to economic activity are.

If you have any questions or comments, please do not hesitate to contact me at

[email protected]


Latam Risk Scorecard and Podcast

Next to each sector analysis, we will provide the following markers to highlight risk:

is a neutral outlook. indicates high risk. indicates low risk.

This is the general scorecard for the six countries we analyze in this report, with a by-

sector breakdown.

If you have any comments, or would like to participate in our analysis, please contact

me at [email protected]

focuses on Chile.

Listen to the podcast here: http://bit.ly/1_politicalrisk


Chile: Jumpstarting Growth Central Campaign Theme

Chile is Latin America’s most stable country, but is going through a challenging period

marked by low growth and overwhelming disapproval of the current government of

Michelle Bachelet.

Presidential elections will be held on November 19. In the latest poll by local pollster

Adimark, the rightleaningex- president Sebastian Piñera, 67,is in the lead, with 31%

of respondents saying they would vote for him, followed by 64-year-old independent

Alejandro Guiller, at 15%. Next is leftist Beatriz Sanchez, at 13%.

In order to avoid a two-candidate runoff on December 17, the winning candidate

would have to win more than 50% of the first-round vote, which at the moment

appears unlikely.

In Chile, presidents cannot run for consecutive terms, but can run again. If Piñera

were to win, it would mean 16 years divided between him and current president

Bachelet.

Sebastian Piñera:

Piñera is a billionaire businessman who served as president from 2010 to 2014 in what

is largely considered a boom period in recent Chilean history. He was, of course,aided

by record-high copper prices. It is also worth noting that while the country performed

well, he had generally low approval ratings. He resoundingly won his Chile Vamos

coalition’s primary in early July, and has since shot up in the polls. His platform

includes:

- An overhaul of tax policy to spur investment, GDP expansion and innovation, with

the aim of “doubling growth.” This includes a corporate tax rate “at average levels

within the OECD.”

- A revision of labor laws.

- A public-private infrastructure program worth US$20 billion over 8 years.

- A perfection of the private pension system while keeping it in place.

- The ex-president has also said he would look to dismantle the controversial

Transantiago transport system.

Alejandro Guillier is a left-leaning TV and radio journalist and current senator of

Antofagasta who is running as an independent. He has lost a lot of ground in recent

months in polling. His platform includes:

- To spur growth, he calls on moving away from a dependence on raw materials and

towards diversification.


- A focus on “strengthening production and infrastructure.”

- A new state pension plan to compete with private system.

- A continued push to support green energy.

For a look at the program of Beatriz Sanchez, click here.

The following is an inspection of the political issues most impacting the real economy

in the sectors we cover in Chile:

MACRO

- Growth has slowed in Chile and is expected to hit 1.5% this year, after growing 1.6%

in 2016 and 2.3% in 2015.Over the last three decades, growth has averaged around

5%.

- The Chilean peso has lost considerable ground to the dollar in the last five years. At

end-2012, the dollar traded at 479 Chilean pesos. Today, its value is 655 pesos, and

has generally stayed within the 650-700 pesos band in the past 24 months.

- Inflation remains stable in Chile. Since peaking at 10% during the 2009 financial

crisis, annual inflation has remained between 2-5% and was at 1.7% year-on-year in

June. The Central Bank kept the benchmark interest rate unchanged at 2.5% in July,

its lowest level since September, 2010.

- Copper prices are at their highest levels since early 2015, at US$2.75/lb. This is still

a far cry from 2011, when they nudged close to US$$4.5/lb, but is a considerable

improvement on average prices in 2015 and 2016 of close to US$2/lb. Chile is the

world’s largest copper producer and 47% of its exports were copper-based in 2016 (in

2010, this figure was 56%).

MINING

- 2017 started with the 44-day strike at the Escondida mine. Workers returned to the

mine after invoking a rarely used legal provision that extends the existing contract for

18 months, a poor outcome for both sides that leaves significant risk ahead when it

comes time to revisit the contract in 2018 under the new labor rules.

- Chile is losing ground in terms of its general reputation as a good place to do

mining, but remains attractive overall in regional as well as global terms. The

country’s unrivaled copper reserves mean the majors already invested here, even if

the changing operational context presents new challenges. Indeed, they must invest

even to maintain production levels as deposits age. This simple fact will form the basis

for Chile’s mining investment to continue at one of the highest rates in Latin America

despite the difficulties.

http://www.beatrizsanchez.cl/


- Structural efficiency improvements through innovation and end-to-end integration

of operations is key. As Codelco CEO Nelson Pizarro noted earlier this year, “only with

competitiveness” can miners face long term market uncertainties. One way companies

have sought efficiencies and risk reduction in Chile is through collaboration, such as

Goldcorp and Teck combining two projects into Nueva Unión or Teck and Collahuasi

looking at sharing a port.

ENERGY

- Chile remains a global leader in renewable energy where it has enjoyed a boom in the

last four years. But financing for power projects is almost impossible without a long

term PPA. With the mining industry contracting, this means securing a contract in a

highly-competitive government-sponsored auction is essential.

- In the immediate future, perhaps the biggest question is whether - and if so, how -

the government adjusts the bidding rules for upcoming power auctions. Developers

of conventional projects are likely to lobby strongly for changes in their favor, and it

wouldn’t be unreasonable to expect the same of renewable energy firms.

- While once vociferous protests have slowed, some projects, just as AES Gener’s Alto

Maipo project have been severely delayed (the project will likely be scrapped).

- A recent extended power outage in capital Santiago exposes the out-dated distribution

system and need for infrastructure upgrades.

ICT

Chile has relatively good ICT infrastructure, as well as good penetration of services

and devices. Like few years, especially as uptake of 4G service continues to increase.

There is also the challenge of leveraging the country’s strong ICT adoption to best

effect, which means applying it to smart city, e-government and IoT scenarios, among

others. And despite the country’s relatively advanced state, there are pockets and

socio-economic segments that still require work.

INFRA

In the infrastructure quality index of the Global Competitiveness Report of the World

Economic Forum (WEF), Chile fell 24 positions between 2010 and 2015, now ranks

48th among 140 nations.

A bill to create a new centralized concessions authority is stuck in congress with

little prospect of it being approved anytime soon. The same applies to a promised

infrastructure fund, announced mid-2015, which was meant to manage about US$9

billion in project investment.


WATER

Chile has almost 100% potable water coverage, but its water resources are squeezed

and its regulation is in the process of reform. The reform includes a constitutional

amendment to reclassify water as a public asset in the spirit of prioritizing the

resource for human consumption and would introduce a 30- year extendable limit on

new concessions and the partial or total expiration of unused rights - a fundamental

change from the rights granted in perpetuity under the existing code. The reform also

seeks to revamp the institutional structure and bring all administrative and control

functions under one entity.

Experts say that speculation by large companies and a multiplicity of institutions

involved in granting and managing water rights has led to chaos and a lack of clarity

regarding how much water is actually being used, while Chile’s main business

chamber CPC has accused the government of intending to expropriate water rights

held by private users. The reform bills were approved by the lower house last year and

could be approved by the senate before Bachelet’s term ends in March 2018.

FITCH RATINGS (definition of ratings, here)

- Long-term foreign currency rating: A+

- Long-term local currency rating: AACountry

- Ceiling: AOVERLYING

RISKS

Growing debt -In 2016, Chile’s government debt increased to 20% of GDP, double the

level it was in 2011.

Climate Change - Chile has been hammered by climate-influenced events including

raging wildfires, mudslides, drought and strange rain and snow storms. These impact

infrastructure and have led to serious water and electricity outages in recent month.

Slow growth - Slow growth impacts all areas of the economy from consumer

confidence and job creation to energy demand.

The Mapuche question - Continued arson attacks in the Araucania region place

pressure on logging companies and large farms and provide a level of insecurity to

people and business in the region.

Copper - The price of copper is on the rise and is often a barometer of Chile’s overall

economic health.

https://www.fitchratings.com/site/definitions


Argentina: The Macri Reform Agenda and the Legislative Test

Argentina is undergoing sweeping change under president Mauricio Macri, the

former mayor of Buenos Aires and a business tycoon who assumed the presidency in

late 2015, but many of the reforms have yet to bear fruit. Market-friendly measures

such as scrapping FX controls, cutting energy subsidies, publishing reliable statistics,

and paying back debt so the country might return to international capital markets

have not been easy to implement, nor have they produced immediate results.

Legislative elections will be held in Argentina on October 22. In this election, 127 of

the 257 seats are up for renewal for a four year term in the lower house. One-third of

the 72 senators are up for grabs in the vote too.

The Peronist center-left Front for Victory (FPJ) coalition, the party of former President

Cristina Fernández, has the most number of senate seats up for grabs at 15.

The Cambiemos coalition of president Mauricio Macri can lose two seats, and has the

most to gain. However Cambiemos, which is the leading party in the lower house, has

the most to lose in the representative election.

Polls show that the legislative elections are not expected to significantly change the

balance of power in Congress, where no party has a majority, but will be seen as a

barometer of current support for Macri, who under Argentine law can seek reelection

in 2019.

A vote of support for Macri’s party would do much to grant impetus to the numerous

reforms he has instated since coming to power and provide momentum for a second

run at president.

Of interest is the fact that ex-president Fernández recently announced she is running

for a Senate position in Buenos Aires, as a member of a new party she formed,

independent of Peronism, which should dilute the opposition in Congress even

further.

MACRO

- Argentina is inching its way out of recession.

- Compared to other countries in the region, inflation is worryingly high, but it is

actually on the mend. A July central bank survey found expectation for inflation for

full year 2017 was 21.6%. In the same survey, the 2017 GDP growth forecast rose to

2.7% from 2.6%.

- In monetary policy, analysts are forecasting the central bank to cut the policy rate 75

basis points to 25.5%, 50bp higher than estimated in the previous survey.


INFRA

- Macri’s government has announced several ambitious infrastructure projects, such

as the Belgrano Cargas rehabilitation railway program, and a US$12.5bn investment

to “double” the size of the highway network by 2019. There is still the general feeling

that there have been more announcements than concrete actions. Ratings agency

Standard and Poor’s casted doubt on a recently approved law that aims to streamline

the process for PPPs, saying that the new regulation might not be enough to

ENERGY

- In the year and half since Macri has taken over as president, there is renewed

optimism in the energy sector, particularly in two key areas: the unconventional oil

and gas formation known as Vaca Muerta in the Neuquén Basin, and the country’s

vast untapped renewable energy potential.

- In the natural gas segment, guaranteed higher wellhead pricing provides incentive

for companies to invest.

- Scarce financing and underdeveloped projects remain the biggest hurdles to

installing the 2.4GW of renewable energy capacity awarded through Argentina’s

RenovAr Ronda 1 and Ronda 1.5 tenders.

MINING

- There are some indications that mining activity is starting to increase, but investment

may be slower to roll in than the government envisioned. This is only partly due to

the country’s still immature economic recovery and policy consolidation. Mining

companies are still cautious following five years of low metal prices and generalized

contraction.

ICT

- Although the Macri administration has brought about change, in some respects it

is digging itself into a hole, for example, in having the new regulator Enacom closely

tied to the government.

- Much of the change can be seen to be adhering to a political agenda, more than

bringing the sector up to the level apparent in peer nations, but there is nevertheless

a sense that Enacom has been “clearing the decks” in order to move ahead with what

is important.

- Thus, in the last year Enacom dealt with some 13,000 pending issues, and recently

began reviewing regulations on interconnection and number portability.

- However, at the same time the government appears to be trapped in a perplexing


state of inertia with respect to several important matters that have far-reaching

consequences, such as ensuring full use of the 700MHz band, awarding 4G spectrum

left over from the 2014 auction, giving the green light to MVNOs, and moving ahead

with the Convergence Law.Still, amid all the political activity, the operators have

pledged hefty investment plans, so the sector is unlikely to drift back into the kind of

stupor it suffered for the last decade or so.


- Long-term foreign currency rating: B

- Long-term local currency rating: B

- Country Ceiling: B

OVERLYING RISKS

Continuity - Commercial banks and international investors remain hesitant to invest

in Argentina. They seek continuity, and will be given a degree of this if the midterm

result demonstrates support for the Macri administration. Multilaterals IFC, IADB

have traditionally been crucial to the advancement of large infrastructure projects in

Argentina, and this remains the case.

Inflation- Argentines are always weary of inflation, and though it is now in check, at

around 20% a year it still causes considerable social discontent and brings people to

the streets.

History - Argentina is a question mark simply because of its own turbulent past, and

its inability to ensure long-term economic and political stability.

Crime - Anecdotally, petty and violent crime seems to be a growing concern in

Argentina, but moves by the Macri government to provide reliable information help

to provide transparency and show that the problem is not as dire as some suggest.

Corruption - Corruption and cronyism continue to plague politics and business in

Argentina. Former president Fernández is being investigated in a corruption case

involving public works (she would be immune from prosecution if elected Senator).

Unemployment - Argentina’s unemployment rate was 9.2% in the first quarter of

2017, according to the government’s Indec statistics agency, compared with 7.6% in

the fourth quarter of last year. A poll by the firm Analogías published in July showed

that unemployment has now surpassed crime as the public’s top worry: 32.3% of the

people fear unemployment versus 29.5% who said they were mostly worried about

crime. Only 11.5% mentioned corruption, just above inflation (10.2%).



Mexico: Measuring the Trump Effect

General elections are scheduled to be held in Mexico on June 2, 2018. Voters will

elect a new president to serve a six-year term. Incumbent President Enrique Peña

Nieto of the Institutional Revolutionary Party (PRI) is not eligible for a second term

by Mexican law.

In June gubernatorial elections, Mexico’s ruling PRI party fended off a leftist

challenger in the central State of Mexico, a sign of the upcoming tight race next year.

Former Mexico City mayor and left-leaning candidate Andres Manuel Lopez Obrador

(or AMLO, as he is known) is an early favorite for president. He will represent the

National Regeneration Movement (MORENA) party, which has accused the PRI of

vote-buying and other malfeasance in the recent election.

AMLO, a populist who has vowed to stand up to Donald Trump’s aggressive rhetoric,

has said he would cancel the Mexico City airport mega-project if elected, and to hold

a referendum on whether energy reform should proceed.

MACRO

- The IMF forecasts Mexico’s economy will expand 1.9% this year, and 2.0% next year.

- Inflation reached an annual 6.30% in mid-June - nearly doubling in the span of six

months. Better news is that consumer confidence has recovered roughly 20% since it

plummeted to the lowest level on record in January amid a spike in fuel prices and the

inauguration of Donald Trump as US president.

MINING

- Guerrero and the northern mining states are hotspots for organized crime gangs.

Mine robberies, kidnappings of workers are occasional incidents, plus companies

have to pay out for additional security measures. Mining companies continue to

contest the new mining royalty, which establish the country’s 7.5% mining royalty on

earnings minus certain deductions, and the additional 0.5% gross revenue charge on

gold, silver and platinum.

ENERGY

- The revamped Mexican electricity market has opened up the power market to

the private sector. The success of the first long-term auction in 2016 was a notable

achievement for what is likely to be a long implementation process. The wholesale

market’s launch was also an important step, but it remains in its infancy. So far, few

other opportunities - such as merchant power projects - have materialized outside of

the auctions and CFE’s tenders for generation and T&D projects.


- Mexico’s oil production has been in steady decline since 2004, due to declining

reserves at existing wells and under investment in E&P by state oil firm Pemex,

particularly in deepwater development. However, the 2014 energy reform has allowed

for greater private E&P investment, and the seven auctions held so far have awarded

more than 50 contracts to foreign majors and local firms, some of which have already

begun production. As a result, the country has set its sights on raising oil production

to 3.4Mb/d over the next 10 years, a 1.2Mb/d increase on current output.

INFRA

- A little over a year after taking office in 2012, president Enrique Peña Nieto launched

a 7.7tn-peso (US$394bn) national infrastructure program for 2014-2018. The

current administration is currently carrying out a number of mega-projects such as

the US$10bn new Mexico City international airport, and the US$2.5bn Mexico City-

Toluca interurban passenger rail line.

- However, this promising scenario for the Mexican infrastructure sector has faced

several challenges and shortcomings. While some of the projects included in the

government’s program were started during the previous administration and were

about to be completed when the current government took office, the plan is well behind

schedule. In addition, the country has faced lower public investment in the past few

years due to budget cuts, significantly affecting infrastructure projects -particularly

waterworks. The reduced spending has been partly made up for by the use of public-

private partnerships (PPPs), and the implementation of new infrastructure financing

mechanisms, such as the Fibra E investment trust securities. Nonetheless, the

allegations of corruption in the award and execution of infrastructure works that have

plagued the government of Peña Nieto, as well as the uncertainty on the future of the

bilateral relation with the United States and the renegotiation of the NAFTA, pose

potential risks to the sector.

ICT

- Amid criticism that the dominant players’ market shares have changed little in the

four years since the reform started, the regulator IFT appears to be reacting - finally

insisting on mechanisms like Telmex’s passive infrastructure leasing platform (SEG)

and the idea of treating the group’s wholesale services as a separate unit. There is

doubt as to exactly how the authorities are going to measure whether AméricaMóvil

has complied with the conditions in its concession contract and with the asymmetric

rules defined more recently. This could set the operator back another 18 months

before it can apply for the right to offer pay TV services.

- However, the market continues to evolve, with the Red Compartida project

promising to shake things up, and Telcel preparing to launch LTE Advanced over

2.5GHz spectrum. The downside on this point is that rival operators probably won’t

be able to compete in this space until late 2018.



- Long-term foreign currency rating: BBB+

- Long-term local currency rating: BBB+

- Country Ceiling: A

OVERLYING RISKS

Currency - The peso has been in freefall against hard currencies since 2015 and hit

its lowest level last November with the election of Donald Trump. That said, as of late

July, the peso has recovered about 20% against the US dollar since January.

Donald Trump - Trump’s immediate threat to the economy appears to have receded,

although, as seen with his coercion of Ford and other companies, he could yet

dissuade investment into Mexico. The sophisticated nature of supply chains that

now exist between Mexico and the US make the practicality of withdrawing from

Mexico almost inconceivable. Nevertheless, Trump repeatedly called for an outright

scrapping of the deal on the campaign trail. Meanwhile, any attempt by Trump to

ramp up deportations of undocumented Mexicans would have an economic and social

impact, while reducing families’ incomes from remittances, for example.

Violence - This is shaping up to be Mexico’s most murderous year ever. There were

more than 12,000 homicides in the first six months of the year, including 2,234 in

June, the highest monthly total on record, the Interior Ministry said in late July.

Violence may increase as elections approach, particularly as cartels jostle for influence

with incoming local and state-level administrations, and may result in a new strategy

on behalf of the incoming federal government to crack down on mafias. The last PAN

administration, under Felipe Calderón (2006-12) for example, launched an offensive

against organized crime that resulted in some significant captures but also tens of

thousands of disappearances and deaths, and heightened criminal activity in many

states, and which contrasted with the previous administrations’ more passive attitude

to drug cartels.

Opposition to projects - Social unrest in the form of opposition to large infrastructure

projects remains a threat to investment and this threat could increase as more and

more projects are built as a result of the electric power auctions. Opposition to wind

farms in Oaxaca is increasing, the Morelos pipeline and power generation plant

(Proyecto Morelos) and the Sonora pipeline being built by IEnova, for example,

continue to face stiff opposition.

Labor and other disputes - Recent strikes and blockades by workers have taken place

at Ahmsa, First Majestic and Primero Mining’s operations. This adds to mass strikes

and demonstrations after the price of fuel was hiked early in 2017.



Brazil: Glimpses of Hope Amid the Chaos

Political uncertainty continues to plague Brazil. Before the recent scandal involving

president Michel Temer, Brazil seemed to tentatively be on the road to recovery after

being hammered by recession and the Lava Jato corruption probe. Now there is

doubt about whether Temer will finish his term, a position he was granted after the

democratically elected Dilma Rousseff was impeached.

In the latest twist to a corruption probe that shows no sign of slowing down, former

president and frontrunner for next year’s elections, Luiz Inácio Lula da Silva, was

convicted in July of accepting kickbacks from construction firm OAS and sentenced

to more than nine years in prison.

As it stands, the country is exhausted and distrustful of its political class. Here are a

few candidates who will likely run in next year’s general election, slated for October,

2018, and are currently at the top of most polls:

Marina Silva - A center-left politician, and champion of the environment, she came

close to winning the 2014 election for president, only to fade in the weeks before the

vote.

Luiz Inácio Lula da Silva - The former metalworkers’ union leader who led Brazil from

2003 to 2010 is still the most popular president in Brazil’s history, and might yet run,

if he doesn’t end up in jail.

Joaquim Barbosa - A former Supreme Court judge, and the first black judge to be

appointed to it, he stepped down from the Court in 2014. Brazilians admire him for his

work in the Mensalao corruption trial in which more than 20 people were convicted,

including top politicians from the governing Workers’ Party.

Jair Bolsonaro - A controversial and outspoken right-leaning, law-and-order

candidate, the 62-year-old is a congressman and former army captain.

João Doria Junior - The mayor of Brazil’s biggest city, São Paulo, the ex-marketing

executive Doria has said he may enter the 2018 presidential race.

Despite the upheaval, there is a flurry of reform underway in Brazil that is rapidly

changing how the real economy functions.

MACRO

The good news is inflation is slowing. The country’s 12-month inflation rate ended

mid-July at 3.52%, reaching the lowest level since June 2007. The central bank has

cut the Selic base rate by a total of 400 basis points since October 2016 to the current

level of 10.25%, and analysts expect more reductions in the coming months.


The bad news is that the number of Brazilian companies in delinquency reached an

all-time high in May due to cash flow problems stemming from a troubled economy.

Latin America’s largest economy contracted 3.8% in 2015 and 3.6% in 2016. Local

economists expect a timid recovery this year with a GDP expansion of around 0.35%.

ENERGY

Legislation that eases local content requirements in Brazil’s oil and gas sector will be

valid for existing concession contracts under plans unveiled by sector regulator ANP.

The proposal includes all exploration and production blocks awarded in the past 12

years. In February, the energy ministry reduced minimum percentages of locally

sourced goods and services required in E&P contracts by about half.

The 14th licensing round for concession contracts, scheduled for September 27, will

be followed by the second and third pre-salt auctions - held under Brazil’s production

sharing regime - on October 27. The government has also lifted private sector

restrictions in pre-salt areas and royalty payment cuts for concessionaires that renew

contracts.

Brazil’s power sector has also been hit by the deep recession, which has eroded

demand for electricity, and the Lava Jato corruption scandal, which has affected a

number of major power generation projects, such as Belo Monte and the Angra 3

nuclear power plant

Proposed new reforms, which include higher revenue caps and tax cuts for generation

concessionaires, are designed to attract new investment and facilitate the privatization

of a raft of assets belonging to state-run electric power holding Eletrobras.

MINING

The Brazilian government is advancing on modifications to the existing mining code

after withdrawing earlier in 2017 a long-stalled bill to create a new code, in line with

statements by Temer since becoming president regarding his government’s intention

to make the legal framework friendlier and to attract investment. The main proposed

change of is an increased royalty. Current charges are between 0.3% and 2% of net

sales for iron ore. The proposed charges involve a sliding scale of 2-4%, depending on

the iron ore price, charged on gross sales.

INFRA

Brazil is attempting to revive investment in infrastructure through a new PPP

model based on market criteria and private financing. Over the last 12 months, 90

infrastructure projects have been included in the PPI infrastructure program. Of

these, 12 have been auctioned and 78 will be concluded by the end of 2018.


ICT

In the last two years Brazil’s ailing economy has caused consumers to cut down on

pay TV, while changes in call tariffs have eliminated the need for multiple mobile

lines, leading to a reduction in prepaid mobile lines especially. However, adoption

of fixed broadband and 4G mobile continues to increase, and Brazil is ahead of most

peer nations in the transition to digital terrestrial TV. And despite the relative expense

of deploying FTTH in such a large nation, Brazil ranks high in terms of FTTH as a

proportion of total broadband.

Brazil was the first Latin American nation to propose the idea of drafting a national

IoT plan, much as it was the first to draft a comprehensive bill of rights for internet

users and players.


Long-term foreign currency rating: BB

Long-term local currency rating: BB

Country Ceiling: BB+

OVERLYING RISKS

Project risk - While FDI inflows continue to be significant, most of these funds are

going into M&A as assets are cheap and the exchange rate favorable, which means

actual projects remain delayed. Meanwhile, beyond financing, projects in all sectors

are difficult to construct because of red-tape and political volatility.

Corruption - When will it end? The corruption investigations, spearheaded by judge

Sergio Moro, are so extensive that they have almost completely depleted the political

class, with almost no one untouched.

Political turbulence and the reform agenda - The turbulent political and economic

scenario raises doubts about the country’s economic reforms encompassing tax,

labor and pensions, reforms that are considered crucial in order to cut government

spending and lower debts. Temer came into office on a reform agenda, but may now

be too weakened to push them through.



Colombia: Life after Santos

The next Colombian legislative elections are scheduled for March 11, 2018. One

interesting note will be to see how the Revolutionary Armed Forces of Colombia

(FARC) is incorporated into this process now that a peace deal has finally been

signed which includes the provision that they are represented in congress. The FARC

becomes a political party on September 1.

The presidential elections are set for next May 27, bringing to an end the two-term

(eight-year) rule of Juan Manuel Santos. If no candidate gets 50% of the vote, a runoff

will be held June 17.

Recently, former presidents Álvaro Uribe and Andrés Pastrana announced that their

parties, the Democratic Center and the Conservative Party, were joining (as is a

custom in Latin American elections) to form a right-wing coalition. The new grouping

is critical of Santos, and his peace process with the FARC, but they have yet to name

an official candidate.

As it stands the leading names in polls areformer vice president Germán Vargas

Lleras, and former Bogotá mayor Gustavo Petro.

Vargas is a long-time establishment politician who served as vice president to Santos,

and minister in his first term, as well as four terms previously as senator.

Petro is a former guerilla who is the leading leftist candidate and a former mayor of

Bogota.

MACRO

- In July, Colombia’s central bank cut the benchmark rate 50 basis points to 5.75%,

going further than most expectations, indicating greater urgency for stimulating the

economy. The bank noted inflation had fallen to 4.37% in May with core inflation

reaching 5.33%.

- In June, Colombia’s finance ministry lowered its 2017 GDP growth estimate to 2.3%

from the 2.5% forecast made in December, moving in line with the May IMFestimate.

ENERGY

- A landmark 2014 law on renewable energy appears to have put Colombia on track to

eventually join its Latin America neighbors in the renewable energy revolution. Solar

parks made up 20% of the country’s 13.117GW early-stage projects at the end of May

and wind farms 17%. But the country remains heavily reliant on hydropower, leaving

it vulnerable to frequent drought caused by El Niño weather patterns.

- Future supply to gas-fired thermoelectric plants is also threatened by the country’s


dwindling natural gas reserves, though investments in LNG regasification terminals -

such as the recently completed import facility in Cartagena, may allay those concerns.

The country is also in need of additional transmission infrastructure, particularly grid

connections to wind projects in the Caribbean region.

- The rebound in oil prices is set to halt the decline in Colombian oil production

in 2017. However, with no new tax incentives, or profound changes in community

relations or in environmental permitting processes, there is no indication that output

will againget close to the 1 million barrels a day recorded in 2015.

INFRA

- According to the Global Competitiveness Report 2015-16 of the World Economic

Forum (WEF), Colombia ranks just 98th in the transport infrastructure index.

Colombia’s intermodal transport master plan (PMTI) involves a list of 200 priority

projects, requiring total investment of about US$70 billion by 2035.

MINING

- When he took office in 2010, Santos had an ambitious growth agenda that included

mining as one of the drivers of the country’s economy. To promote mining, the

government assigned 20.5Mha of strategic mining areas (approximately 20% of the

entire national territory) that were to be auctioned in 2014 for large-scale exploration

and exploitation. This initiative did not prosper and in 2015 the country’s highest

court suspended the demarcation of these areas, citing concerns for the environment,

agriculture and the right to prior consultation.

ICT

- Colombia scores well in a number of international ICT and development rankings.

However, a recent regional broadband report from Eclac found that the internet

access gap between urban and rural areas is worse in Colombia than in any other

Latin American nation (50% of urban homes connected vs 10% of rural homes).

- True LTE coverage is thin on the ground, as operators focus on growing and

monetizing HSPA+ instead, and Azteca Comunicaciones has had trouble selling

capacity on its government-sponsored fiber backbone that reaches 788 municipalities.

- The burning issue for most sector participants continues to be AméricaMóvil’s

market dominance.


- Long-term foreign currency rating: BBB

- Long-term local currency rating: BBB



- Country Ceiling: BBB+

Overlying Risks

Violence - Though the peace deal with the FARC is in place, Colombia’s infrastructure,

especially in its oil and gas industry, has seen numerous violent attacks so far this

year.

Climate- Varying weather patterns related to the El Niño weather phenomenon

are damaging particularly to the power sector, which relies heavily on rainfall and

hydroelectric capacity.

Corruption - Attorney general Nestor Humberto Martinezhas said that Odebrecht

made irregular donations to presidential election campaigns in 2014 which could

have reverberations in next year’s votes.Colombian prosecutors are also investigating

four active senators for allegedly having benefited from bribes paid by Brazilian

construction company Odebrecht.

Price of oil - Like neighboring Ecuador, Colombia’s economy has been hit hard by the

fall in oil prices witnessed since mid-2014.


Peru: PPK’s Complex Undertaking

Peru is a little over a year into the presidency of Pedro Pablo Kuczynski (PPK), an

economist and businessman who has promised billion-dollar projects and structural

reform but who has met stiff opposition to his leadership in a divided Congress.

The 130-member Congress is controlled by the opposition Fuerza Popular party with

74 seats. As a sign of the difficulties PPK has faced, at the end of June, finance minister

Alfredo Thorne resigned after losing a vote of confidence in congress.

MACRO

Peru’s central bank opted to hold the benchmark interest rate at 4.0% in June.

In its decision, the central bank noted that shocks to supply lines occurring in the

first quarter, largely related to severe flooding, were still having an effect on prices,

“bringing inflation close to the upper limit of the target range [of 1-3%].”

Peru’s annual inflation rate fell from 3.69% in April to 3.04%. Nevertheless, the bank

said it remains “especially alert to new information on inflation and its causes.”

ENERGY

- The Peruvian electrical system has a surplus of energythat is drying up most new

investment opportunities, with the (partial) exception of the transmission business.

This creates a window to pursue interconnections with neighboring grids in Ecuador

and Chile, and regulation is being established so this is a reality. These two bilateral

interconnection projects are also occurring within the framework of the SINEA

initiative, which seeks to create a regional Andean power market that involves Peru,

Ecuador, Colombia, Bolivia and Chile.The exaggerated nature of the electricity glut

could prove disruptive if it persists. Both generators and distributors may run into

financial problems should prices remain low.

- Peru’s government hasproposed changes to the regulation that governs hydrocarbons

E&P activity in a bid to make the sector more attractive and increase efficiency

and sustainability.Among some of the proposed changes are the introduction of

greater and improved economic and technical criteria to optimize development of

hydrocarbon fields, simplified administrative procedures, and the incorporation of

deepwater. At the moment, 21 oil and gas contracts are affected by force majeure.

INFRA

- Along with Thorne, PPK also lost his transport minister, Martin Vizcarra, under

pressure from congress, which led to the shelving of key infrastructure projects such

as the Chinchero airport. There is also mounting criticism of the way PPK’s people

ousted the comptroller and two special anti-corruption prosecutors who were a thorn

in PPK’s side.


MINING

- PPK created a social advance fund in January 2017 with a view to financing projects

in water, transport, communications, electrification and social infrastructure in the

areas of influence of mining and other industrial projects ahead of their development.

The idea is to reduce conflicts and allow projects to proceed; however, the details of

the fund’s functioning have not been made public. The fund is billed as a key element

in PPK’s drive to “unblock” investment in mining and other sectors. Peru’s energy and

mines ministry has sent legislation to the opposition-controlled congress to create

a framework for the advance social spending, but approval depends on a difficult

political consensus.

ICT

- For years Peru has been engaged in dealing with Telefónica’s market dominance in

fixed and mobile telephony as well as broadband, which has led to a very dynamic

regulator, Osiptel.

- The country has succeeded in attracting competitors like Bitel, Viettel and Entel, but

the issue of building out services and infrastructure to remote regions consumes most

of the authorities’ time and energy.

- This has prevented Peru from developing the kind of convergent regulatory

apparatus that orchestrates the full range of digital services, as found in peers like

Chile, Colombia and Brazil.


- Long-term foreign currency rating: BBB+

- Long-term local currency rating: ACountry

- Ceiling: AOVERLYING

RISKS

Corruption - In mid-July, former president OllantaHumala became the country’s

second former leader to be detained on corruption charges, while a third has an

international arrest order, underscoring a region-wide clampdown on money

laundering following the Odebrecht scandal.

Peru, which awarded Odebrecht US$16.9bn in 23 contracts from 1988-2015, earlier

this year issued an arrest order for former President Alejandro Toledo (2001-2006)

on charges of bribe-taking and money laundering. Toledo, a professor at Stanford

University, denies he took bribes.

In March, Kuczynski set a six-month timeline for Odebrecht to pull out of Peru. In



January, the government ruled out further contracts with Odebrecht after the company

said it paid at least US$29mn in bribes in Peru from 2005-2014. Odebrecht’s projects

in Peru remain halted, leaving thousands of exemployees and contractors unpaid,

according to the finance ministry.

Labor disputes- A week-long strike in mid-July by miners affected operations at

Southern Copper, Antamina and Glencore’sAntapaccay, in addition to units of Pan

American Silver, Buenaventura, Minsur, Volcan, Milpo, MineraRaura and Mitsui unit

Minera Santa Luisa. The strikers opposerecent legislation that will make it easier for

companies to fire workers and hire young people with fewer benefits, in addition to

lowering mining royalties for the regions after metals prices fell last year.Workers

earlier this year staged strikes at Southern, Freeport-McMoRan’sCerro Verde unit,

VotorantimMetais’Cajamarquillasmelter and Century Mining to pressure for wage

increases and better working conditions.

Social protests - Many large-scale projects have been halted in Peru due to social

conflict. At the same time, the number of social conflicts actually dropped to 177 in

June from 212 a year ago, according to the Peruvian ombudsman’s office. The decline

is due to the drop in mining investment, fewer exploration concessions and a focus

on reconstruction following record flooding and landslides caused by the El Niño

phenomenon, according to according to NGOs such as Grufides and Fedepaz.


Latin America: Figures

Colombia



Mexico




Argentina




Brazil




Chile




Peru

Page 39Power Transmission: Connecting Latin America’s Evolving Grids

EditorContact

Christopher [email protected]

Business News Americas. Los Militares #6191, Las Condes, Santiago, Chile: +56 2 2941 0300 [email protected]

Documents

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