Most parents have heard those barely credible ‘I won’t do it anymore’ promises from a misbehaving child.

In Argentina, the public dared to believe the misbehaving government. ‘When the new CPI index is introduced, it will start to reflect what is really going on with prices in the economy’, they hoped.

But, while the government reports monthly inflation at 0.6%, private estimates are more than double the official rate. What’s going on? Are private analysts grossly mistaken?

That’s what Commerce Secretary Guillermo Moreno thinks. “The true indexes are the official ones. Anything else is just speculation.”

Let’s take a look at a topical example. As daily headlines inform us all, food prices around the world are soaring. But in Argentina, which is suffering from shortages of some goods due to a major agricultural strike, they are rising at just 0.7% a month. Interesting…

The ‘food & drink’ category of inflation is critical for poverty indicators. So there is a clear motivation for the state to try and keep official figures from reflecting the recent surge in prices. And so, in Argentina, while poverty indexes are in decline, the view from the streets paints a very different picture. And it’s not some visual illusion, as the government claims. You just have to step outside to see what’s really going on throughout the country.

Poverty isn’t the only indicator ‘benefiting’ from under-reported inflation data. Real GDP growth also gets a boost. Why? Because price indexes are used to ‘deflate’ economic activity. Put simply, any part of nominal growth that is not put down to price increases must be due to higher output.

Of course, the list of negatives associated with the deliberate manipulation of inflation data is much longer than this. Some of the notable others are: fewer new investment projects in the economy, capital flight away from national public debt, limited (or no) access to international financial markets, and distortions in relative prices. Worst of all, it makes it impossible to tackle the actual inflation problem.

This situation hits every investor with a stake in the Argentine economy, whether it is in the real economy or financial markets.

In the real economy, the unpredictable price dynamics (that is, not the official ones), make it impossible to forecast future returns from investment. Even short-term projects become difficult to evaluate in the current environment. For example, two months ago you might have invested in Argentina’s export sector, following consensus forecasts for further peso weakening. You’d be pretty annoyed that the Central Bank unexpectedly changed position, and has prompted the peso to appreciate from AR$3.21 to AR$3.04 during that period.

In capital markets, things aren’t much better. On top of an undeveloped and inefficient local market, Argentine paper is becoming more and more volatile as instability in the economy increases.

Perhaps the biggest deception in the price indexes is creating the illusion that things are going in the right direction. They are not. The government wants you to believe that inflation is stable, when it is rising in all other corners of the world. That poverty levels are falling. That growth rates comparable to China are positive (even as this seems impossible given current conditions). And all the while, actual inflation will continue to harm the economy, until we reach a point of no return. By then, it will be too late.

Until tomorrow,
Horacio Pozzo

The US presidential elections are approaching. Latin America has a keen interest in the outcome, though maybe not as much as before. Not only has the region grown stronger in recent years, but the US has lost some of its global influence to the Eurozone and emerging Asian giants.

The Bush administration forgot Latin America. This is a grave mistake — and one that the incoming president needs to remedy.

For now, the candidates are doing whatever they can to attract Latino support within the US. With an estimated 10 million eligible voters, this community could be decisive in determining who wins the White House. A Gallup opinion poll says 62% prefer the democratic candidate, Barack Obama. There’s a long way to go yet though.
“Obama brings a perception that the country is changing; that it recognises its errors and is prepared to amend them,” says Ted Piccone, Vice President of foreign policy at the Brooking’s Institute. “Meanwhile, [Republican nominee] John McCain projects an image of continuity.”

Obama promises to a radical change in relations with Latin America. It’s time to “lend a helping hand” he says. Too bad no-one thought of that earlier, when the region needed US support the most…

But according to Otto Reich, former assistant Secretary of State for the Western Hemisphere, McCain has the upper hand over his rival.

“McCain has visited nearly every Latin American country, while Barack Obama has never even set foot in Latin America,” says Reich.

This could work in McCain’s favour. If people think he has a better understanding of the region, they will view his policies as more credible. The Republican candidate is hammering this point across.“I know the [Latin American] leaders, I know their problems, and I understand the importance of our relations with them,” he says.

Meanwhile, Latin America awaits. My colleague Germán Sanchez referred to comments by Hugo Chávez in this recent article.

The Venezuelan president declared  “I would like to get ready so that, whoever becomes the next US president, we will work together to fight global hunger and save the world from food, energy and environmental crises.”

In Mexico, the choice of president does matter. It is by far the most exposed Latin American country to decisions made in Washington DC.

One of these concerns the future of the North American Free Trade Agreement (NAFTA). On this front, Mexico would prefer a McCain victory. His support for NAFTA has become a central feature of his campaign. In contrast, Obama wants to renegotiate the agreement. He has even suggested he would abandon it altogether if necessary.

McCain also supports a Free Trade Agreement (FTA) with Colombia. Quoted in Argentina’s La Nacion daily, he says “one of the main goals of my government will be to promote free trade [in Latin America]. It is key to improving economic conditions in the region and will benefit the US economy.”

Obama, on the other hand, is less than convinced. “If John McCain believes that 80% of Americans think the country is heading in the wrong direction because we haven’t approved free trade with Colombia, he doesn’t understand the American people” says the Democrat.

McCain is also considering the elimination of agricultural subsidies, which would be hugely beneficial for some Latin American states. Without doubt, countries like Argentina and Brazil would earn billions of dollars from increased agricultural exports to the US.
Latin Americans (and especially Mexicans) are also interested in US migration policy. Obama has promised “reform within the first year of my presidency”. McCain also says he is committed to change. “We will tackle migratory reform,” he says in an article on CNN Expansion, “the day after my inauguration, I will send the matter to Congress.”

Energy is another topical point in the coming election. “I want to work with countries like Brazil to find cleaner ways of producing energy…” says Obama.

Another major concern for both candidates is drug trafficking. Both recognise the efforts of Mexico and Colombia in the fight against drugs, and have promised to continue supporting them. This issue is clearly of great importance to both Latin American states, not least in their efforts to promote sustainable growth.

I’m not certain that either candidate will follow through on all of his promises regarding future relations between the US and Latin America. But at least the US is clear that it can no longer neglect the region.

But Washington shouldn’t only seek to improve relations as a way of curbing the influence of socialist leaders like Chávez and Bolivia’s Evo Morales. It should forge closer business ties for growth and development of the entire region.

Buenos Aires, Argentina June 27, 2008

My friend Alfredo is so lucky! Thanks to his profession he is traveling across the continent. Alfredo is a geologist, and with the price of a barrel of crude oil soaring in the clouds, he has plenty of work to keep him busy.

This is so because the main oil companies are roaming the entire region in search of areas to explore. And the countries that guarantee institutional stability and exhibit respect for the law are the ones that are benefiting the most at this time. For example, Peru has managed to successfully attract several bids in the field of hydrocarbon exploration and has already received its first positive results. My friend Alfredo is preparing himself for a new trip as his company has already been working in Peruvian territory …

Now it is probable that Alfredo will also travel to Colombia, since this country has just announced that it will auction oil blocks for hydrocarbon exploration. The pending bidding has been nicknamed “Mini Round 2008”.

As reflected in the economic website “América Economía” (and confirmed by Alfredo), in this “Mini Round 2008”, companies will bid on a set of distributed blocks of small and medium sized river basins totaling 5.1 million hectares: Valle Medio del Magdalena-Catatumbo, Valle Superior del Magdalena, Llanos Orientales, Putumayo and Cordillera Oriental, most of them having the same basic characteristics: most of them come with geologic information and are located in areas with rich hydrocarbon potential.

This represents without a doubt a great opportunity for the oil companies if we consider the potential wealth of hydrocarbon that is yet to be discovered in Colombia (it seems there are around 20,000 million petroleum barrels in reserves yet to be discovered), and about which I have already spoken in previous articles.
Colombia, like the rest of the countries in the region, wants to take advantage of the good moment for the price of oil. However, it tries to prevent being too exposed to oil price fluctuations since the strong increase in the value of the barrel has been hitting internal prices hard and this is one of the main explanations for the inflationary pressures that its economy is undergoing.

Attached to the subject of inflation is the increase of the internal supply of energy. Colombia not only wants to increase the production of oil, but also has bid on the expansion of its energy capacity, which is not a unique strategy that the government of Alberto Uribe is taking to control prices. They are now also looking to attenuate inflationary pressures by decelerating internal costs.

I believe that last week’s change regarding price agreements was a good decision. Companies’ commitment to wanting to maintain prices without variation is not a bad thing. However, this becomes problematic when this policy fails to lead to measures resolving the underlying cause of price increases and when the system becomes greatly abused leading to temporary extensions of price agreements. These policies have been shown to consistently fail, as they are already being demonstrating again in Venezuela and Argentina.

The announced fiscal measures taken in the last few hours to minimize inflationary pressures consist of the reduction of public expenditure by $ 1.5 billion pesos (representing something like a US$ 858 million savings). Through this cut, the Colombian government took care to not affect the social policy of public costs and this is a good political decision as well, from the perspective of Colombia’s well being.

Although I say that these measures, taken to reduce public expenditures, are positive, I have to ask myself: are there any negative effects created by these cost cutting measures? It depends on how you look at them; one could say that since they will affect internal demand, it could lead to smaller growth in domestic consumption. Perhaps it is possible to think that they could have a negative impact on economic activity in the short term, although not one of significant magnitude.

Something positive that I see regarding these policies that are being carried out in Colombia is that they are consistent with long-term economic growth. What do I mean by this? Colombia is not seeking a solution to problems that arise such as inflation, which amounts to the application of a “Band-Aid”, a measure that only provides momentary relief and one that generates negative consequences in the medium to long-term. The government of Colombia is prepared to endure the costs, which in the short-term imply adverse shocks such as the increase of energy and food prices to ensure sustained growth.

It is for this reason that Colombia appears to be an attractive country in which to risk medium and long-term investments, one of them is related to the oil sector.

We will meet again tomorrow,

Horacio Pozzo

In October 2007, I took a trip to Montevideo in Uruguay and was surprised by the boom in the real estate market there. It’s full of new construction.

The real estate market in Uruguayan cities has been performing well lately. The conflict between Argentine farmers and their government is having a positive impact on the Uruguayan real estate industry.

However, Uruguay is experiencing more than just a real estate boom. From the air I could see large expansions of crop fields… ones I later discovered were primarily soy fields.

The expected annual growth rate for Uruguay is 6.89%. Its economy is growing due to internal factors as well as external ones. But it is the external factors that are creating both opportunities and threats for Uruguay.

The strong price increases for agricultural commodities, coupled with the Argentine government’s recently implemented higher tax rate on farm exports, has created a strong expansion in Uruguay’s grain sector. The soy boom is not limited to only Argentina and Brazil…

As we pointed out last Monday, Uruguay recently shipped its largest consignment of soy ever, sending 38,000 tons of the grain to China. This opens up the possibility of accessing new markets and continuing its expansion.

Argentine newspaper Clarín reports: “Lately, soy has become part of the Uruguayan agenda. In 2003 there were 4,000 cultivated hectares. Today they surpass 400,000. According to the Ministry of Agriculture, Livestock and Fisheries, soy has expanded throughout the country, replacing fields that were once allocated to livestock, dairies and other crops.”

Many Argentines have seen very good investment opportunities in Uruguayan farmland and the number of Argentine-owned fields there has increased.

Although this large wave of Argentine investment has generated benefits for the Uruguayan farmers, such as contributing to the modernization of technology and creating fresh capital for the sector, its “locust like” behavior represents a threat to the future of Uruguayan farmlands.

The main cause for alarm is soy farming methods: leases are short-term and companies want to extract the greatest yield from the land in the shortest amount of time. This practice, in turn, depletes the soil.

For this reason the Uruguayan Ministry of Agriculture, Livestock and Fisheries has said it will force farmers to explain their methodology and to rotate crops. It says this is the “best way to conserve the soil.”

The Uruguayan government’s concern over soy farming has risen with the influx of Argentine farmers who, escaping the taxes imposed at home, have moved to Uruguay to plant soy.

Andrés Berterreche from the Ministry of Agriculture, Livestock and Fisheries said to local newspaper El Espectador: “The State is the guarantor of natural resources, and even when they are in use, they belong to the State, even if the land has a registered owner”.

It is probable that greater control by the Uruguayan government will put pressure on the soy boom there, or it will reduce the obtainable yields (since it will closely monitor planting methods). But the government hopes that soy production will keep on growing it tries to limit the negative effect this boom could have on farmland.

Uruguay is not only trying to take advantage of international food prices regarding soy. It is also growing strong in the meat sector. Uruguayan newspaper El Observador de Montevideo reports that, so far in 2008, meat exports increased 58%.

It is important to note, however, that this strong growth of exports is linked, to a large extent, to the rise in meat prices (an increase of 60% from January to May). During this same period the volume of exports increased by only 4%.

Even though the increase in the amount of meat exported might be low, the outlook for this sector is more than favorable thanks to the rise in prices.

I have tasted Uruguayan meat. It’s top quality. And I have no doubt that its growth potential is huge.

The Uruguayan government is extensively promoting beef. It’s doing so now at Expo Zaragoza 2008 (a three-month exposition in Zaragoza, Spain) — the goal being better penetration in the European market.

Uruguay also wants to continue growing in the lamb market. During his trip to Mexico, Uruguayan president Tabaré Vazquez opened the Mexican market to lamb meat. Uruguayan’s Ambassador in Mexico José Korzeniak said to ADNMundo: “Mexico is a market that imports 40% of its bovine meat and 56% of its ovine meat. That’s the reason why we believe that it is a market interested in our ovine meat”.

One final thing. If investments in the food sector don’t interest you, on Tuesday there was a natural-gas-field discovery in the Uruguayan continental shelf, and the government has said it is very probable that there is an oil field in the territorial waters facing the city of Punta del Este, 100 km from the coast line.

Raul Sendic, the president of Ancap, the Uruguayan company that discovered the fields, said: “There is evidence that in various areas of the shelf natural gas reserves exist, but we cannot yet determine if there is oil there, which is what really interests us.”

The magnitude of this discovery cannot yet be precisely determined. But Uruguayan authorities are hoping it will help them reduce their energy dependence.

Additionally, Sendic announced the Uruguayan government is contacting international companies to sell that information. It is calling interested parties regarding exploration in the area by the middle of next year.

We will meet again tomorrow,

Horacio Pozzo

Buenos Aires, Argentina June 23, 2008

What is the relationship between Scotiabank (SCOTIAC1) and the British fund Aureos Capital to the increase in local currency loans in Peru? You will find the answer in the following lines…

The first thing I want to point out is that Scotiabank has reached an agreement to manage pension funds in Peru after acquiring a 50% share of Profuturo AFP (PROFUTC1), according to the Peruvian newspaper El Comercio. The deal will cost Scotiabank $35 million.

AFP Profuturo was founded in 1993, when pension funds were starting in Peru, and manages the country’s fourth private pension fund (there are four pension funds in Peru). It serves 21% of the total pension fund clients and accounts for 17% of the total market share.

The Peruvian pension fund is a multi-fund system which means affiliates can choose, according to their risk aversion, between three different types of funds. This shows the development of the Peruvian’s pension fund system. Argentina has been debating the possibility of multi-fund systems, but until now it has been impossible to achieve this goal (and it is still a long way from becoming a reality).

El Comercio also noted that during the month of May the dollarization of loans granted by the financial system had decreased in all its segments, totaling 75.24% on mortgage loans, 72.1% on commercial loans, 20.03% on micro-company loans and 19.75% on consumer credit. There are also more people repaying their loans. Levels on delinquent accounts are 0.83% on commercial loans, 3.16% on micro-company loans, 2.55% on consumer loans and 0.81% on mortgage loans.

This dollar loan reduction and the current low delinquency levels are clear signs of a good stable macroeconomic and growth context which makes additional local currency financing possible.

And regarding the private capital fund Aureos Capital (a fund that invests in medium sized companies), the Peruvian press agency Andina interviewed Erik Peterson, the regional manager of the company, last week. He noted the following regarding investment prospects in Peru: “We see a lot of potential in the Peruvian market which is rapidly growing; its economy has one of the highest growth rates in the region; and we feel that this growth is sustainable.”

For Peterson, Peru is transforming itself into a country that interests foreign investors: “We feel that over the long term there is going to be more interest in the capital market sector and among strategists that want to invest in Peru”.

I cannot affirm that those issues mark a definite trend, but they are clear signs of the progress the Peruvian economy has been experiencing.

Moreover those signs also indicate a very good outlook for the development of Peru’s financial system. According to Andina, the pension funds in Peru are growing at a 20% year-on-year rate, a higher level than its regional peers (averaging about 15%) and one obtained by more people entering the labor system… This increased flow of resources to pension funds has to look profitable to investors and we will surely find them in the Peruvian economy and its capital markets (will they invest in Petroperu when this company goes public?)

On the other hand, the increased financing using local currency will encourage a higher loan demand for consumers, investments and mortgages (the latter at a slower pace).

Finally, the economic stability of Peru and its growth potential will probably encourage the development of venture capital and private equity, which in turn will grant access to financing and external support to many companies that rely on investment to grow.

It will be necessary to closely watch the evolution of the financial system in Peru so that good opportunities do not pass us by.

We will meet again tomorrow,

Horacio Pozzo

Everything fares well for Brazil.  Good news abounds and everyone is joyful… All is well?  No, not everything…. The inflationary specter has returned to frighten and preoccupy Lula, who up until recently had everything going well this year.

However, while everything was going well and the economy grew, so too did inflation, reaching 0.79% in May, the largest increase in the last 12 years.  So far this year retail inflation has reached 2.88% and 5.58% for the last 12 months.

And while it is true that inflation remains within the generous goal of two percentage points going either way, currently it is less than a percentage point from reaching the upper limit and is threatening to continue to rise.

Making matters worse, the inflation is making the poorest of the country its primary victim as food prices in May increased 1.95% (for an increase of 6.4% the last 12 months).

Is there a problem with an inflation level of 5.6%?  By comparison, Brazil is surely the envy of countries such as Venezuela and Ecuador.  However, the truth of the matter is that it is imperative to get levels such as these under control.  This is desirable not only because this level of inflation greatly affects the purchasing power of Brazilians (and it does), but also because it runs the risk of taking on a life of its own.  This in turn creates a vicious cycle, increasingly difficult to halt, for as food prices rise, the workers ask for higher wage increases (thus spiraling the situation out of control).

What will Brazil do to restrain the price increases?

In a similar situation, Argentina decided to limit its food exports (meats, wheat, corn, and the like) and the result was clearly different from that which was intended. Argentina now has an inflation problem far more serious than the one it had two years ago, only this time the situation is exacerbated by the fact that export revenues have been affected as well.  The higher inflation has stopped all investments in the economy, and Argentina was granted the investment rank of a “country not to be trusted”, due to the fact that they are now receiving less income from exporting meat than Uruguay does.

Perhaps it has not crossed Lula’s mind to limit food exports thanks to Argentina’s negative experience.

Brazil is one of the world’s largest food suppliers.  At a time of increased food production, it must now face a rise in food prices that is continuing to worsen.

Noting this situation, the Central Bank of Brazil has maintained a strong commitment to the stabilization of prices and it is clear from their demeanor that they are able to act independent of government constraints and that they are prepared to take whatever measures are necessary, including raising interest rates, to avoid runaway prices.

The Brazilian government’s Monetary Policy Committee (COPOM) Wednesday announced an interest rate hike of 50 points to 12.25%.

Brazil is showing how to combine long-term policies with measures directly related to the current situation… But how?

To clarify things: with this monetary policy, Brazil insures control of inflation using traditional methods. Since these efforts are directed at correcting the effect of rising prices, it fails to resolve the problems associated with the deterioration of the income level for the people.  Since taking office, Lula has been making plans to develop measures intended to address the needs of Brazil’s poor.  One of his plans is to increase the Family Scholarship Program’s funding to assist about 40 million Brazilians at a cost of around 11 billion reales (about U$S 6.75 billion) amounting to a 6% increase for each beneficiary (although Lula would like to see that rate a little bit higher).

Additionally, Lula has not only adopted a cautious position, but has also demonstrated sound judgment that has enabled him to take advantage of opportunities as they arise.  And this is important when one considers that increases in food prices are expected to continue for several more years.

As a result of this, Lula is creating programs to improve food production and the provision of necessary supplies (such as fertilizer).  Brazil is already contemplating measures to stimulate the growth of food production through its Program for Industrial Development (Programa de Desarrollo Industrial).

Brazil is doing well so far and that is why they are taking the current bad news so calmly, because the have confidence that the problems confronting them will be solved sensibly through strategic vision.

We will meet again tomorrow,

Horacio Pozzo

Buenos Aires, Argentina June 11, 2008

“And to think that I had to face a totally adverse situation… I wouldn’t have missed such an opportunity”… I can imagine what ex- presidents Raúl Alfonsín and Fernando De la Rúa are thinking to themselves about now, because although a substantial portion of what happens in a country depends on the capacity of governmental management, it cannot be denied that a good economic situation helps facilitate positive results.

Perhaps Lula would not have achieved all that he has so far, had he been elected president of Brazil in the 80’s.  The clearest example of this is demonstrated by the current management style of Alan García, the president of Peru… for there is no clear distinction in the way in which he governs from that of the past.  The fact is that although his style of governing has not changed very much, what have changed are the circumstances facing his administration.

With each passing day, the people are more and more aware of the fact that Argentina is failing to take advantage of a historic opportunity to leave the traditional cycles of growth and crisis (stop-and-go) which has plagued this country in the past. Argentina is being transformed into one of the few world-wide examples of a country that creates its own crisis at a time when the economic situation is quite favorable.

Even the most optimistic leaders could not have imagined circumstances as favorable as the ones Nestor Kirchner had during his presidential term.  Starting out during a period of such great international circumstances and with the opportunity to “fine tune” things, no one would have imagined that in just a few short years the situation would have come to where it is today.

The simple fact of the matter is that Argentina does not tend to move forward to establish solutions to the problems confronting it.  This Monday the government did manage to take a significant step, however it was one that advanced its problems even more.

On Monday, the Argentine president, Cristina Fernandez de Kirchner, let the public know what the government intends to do with the additional income generated by the agricultural tax retentions (ones that surpass 35%).  The strategy they are actually proposing is to hold their ground and not to reverse the decision to enforce the new taxes… Instead they are trying to justify those measures, by claiming to use them to provide greater social equality for all.

Cristina announced a “Program of Social Redistribution”.  With the money generated from the recent increase in taxes, the Argentine government intends to construct hospitals and to invest in housing and the country’s rural roads.  The execution of these public works will be realized in a decentralized way via the creation of agreements with the respective provinces and/or municipalities where these works will be performed … Could this be just another ploy to maintain political control?

It certainly looks that way. It seems that these measures are a way to maintain political control in the provinces.

In fact, these announcements do not solve many problems. In the instance of several of the provinces in Argentina, the problem lies not in the need to construct new hospitals, but rather in the current lack of funds providing basic expenses for the facilities that already exist. This is the real problem to be solved.  The need the provinces have for more public works is less important than the need for more income to cover basic operating expenses (such as consumable supplies and maintenance costs, for example).

Cristina is worried about the poor, and for that reason she needs more resources… And she does not always use them wisely … An example of this can be found on the website Misionlandia, which recently noted:  “to travel to Rome, President Cristina debuted a new presidential airplane leased from Aerolíneas Argentinas at a cost of U$S 400,000, paid for by the Secretary General of the Presidency”.

I think Cristina will have to immediately discard her fashion advisor, for how can anyone seriously consider someone’s concern for the plight of the poor who is flashing around in a French Hermès foulard? And I wonder who her fashion advisor is?  It seems that Cristina likes to dress well.  A few days ago the English newspaper “The Guardian” selected a group of  Heads of State for a photo gallery entitled  “Kings of Bling”: lovers of jewels and all the upscale brand names… and guess who is located there in the top ten ranking of the most fashionable and ostentatious presidents…

Of course Cristina offered her  point of view on the matter: “It is a good policy for me not to be masquerading about as a poor person”.  But sometimes her image is not in accordance with her words…

A recent magazine article discussing Monday’s speech noted that while Cristina is a harsh critic of the farmers, insisting they stop their blockades,  “the president was using jewels costing as much as a 4×4 truck.  She was wearing a Rolex worth about $20,000; on her left hand was an 18 carat ring of white and yellow gold with a brilliant solitaire, and on her right hand is a sapphire ring set in platinum and gold, each purchased from luxurious shops from abroad and valued at  $ 10,000 apiece… and a pair of hoop earrings valued at $10,000”.  A prestigious Italian newspaper, “Corriere della Sera”, presented the matter in a different way noting that Cristina “spent an hour shopping on Via Margutta” during the FAO summit in Rome and that she has bought jewelry in the prestigious Bvlgari’s jewelry store “Enigma” …  Clearly the government had to deny the report, but the number of details in this article regarding the shopping spree certainly gives one a reason to think.

Back to today’s article, here is my conclusion regarding the presidential speech on Monday: Argentina’s problems continue without being resolved (and worse: yesterday was the debut of the new price index methodology, one that is every bit as much as fraudulent and biased as the one it replaced)…  I have already told you about what can happen when problems are not confronted realistically by using solid measures to resolve them.    And what worries me more most is that the poor are going to be the ones affected the worst by the costs created by these mistaken political decisions.

We will meet again tomorrow,

Horacio Pozzo

Buenos Aires, Argentina June 12, 2008

The prophecies regarding oil seem to be coming true. The barrel remains over $ 130 and is creating innumerable conflicts. Worse still, there are no short term fuel alternatives that can replace oil. OPEC states that speculators have been driving up prices at a time when supply and demand don’t seem to justify it.

It seems that biofuels are not the answer to the energy question but rather the source of a new problem. This is demonstrated by the current global debate regarding accusations that these alternatives to oil are actually creating a worldwide rise in food prices…. The situation is generating conflicts as much as, or perhaps greater than, the ones caused by the rising price of oil in itself.

In Europe, the oil price is generating massive unrest. Spain, is experiencing the worst situation in the Eurozone. In May, Spain’s year-on-year inflation variation reached 4.6%. This is also a problem for the competitiveness of its economy. In order to have an idea of the gravity of inflation rates, it should be noted that their current levels have not been registered since 1995…. And the price of oil is clearly one of the main causes of this phenomenon. It would seem that the rate of inflation is settling in at over 4% and with this being its fourth month at that level, it is expected to remain there.

However, the main problem for Spain is not the increase of oil prices itself, but rather the outbreak of situations created as a result of those rates. For example, the truck drivers’ union has been on strike because of the strong rise in the price of fuels and this action has already been at the expense of one life. This strike is by far the worst one that José Luís Rodríguez Zapatero has had to face since he assumed the presidency of Spain in March 2004.

The strike has generated shortages and widespread panic for Spaniards who have already begun stockpiling food. On the BBC’s Spanish site one can read about the impact of these shortages in Spain: “We went to the supermarket to buy groceries but there was nothing fresh. All the meat counters were completely empty. There was little fruit and no dairy products such as yogurt or milk… people are stocking up in case there is going to be a shortage”.

Zapatero proposed a series of thirty measures to alleviate the situation with the truckers’ union due to the constant rise in the price of fuels. These proposals were rejected due to the union’s demand for “minimal tariffs” on transport services so that the rise in the price of fuel could be offset by a decrease in transportation costs.

Spain’s current situation is much more complex than simply a conflict caused by the increased price of fuel. In the “Financial Times” Leslie Crawford noted that “It is hard to bid farewell to an era, particularly when it has been as dynamic and prosperous as the one drawing to a close in Spain”. And now, after the collapse of its 10-year construction boom, the Spanish real estate sector is significantly impacting the economy.

Using research conducted by the University of Barcelona, Leslie Crawford goes on to explain that the backlog of a million unsold homes will take about two years to clear. This situation indicates unfavorable prospects for this sector for the next few years.

In the face of economic deceleration and an increase in inflationary pressures, Spain’s government seems to lack a monetary policy that it can effectively wield to resolve its current situation…. and Spain will have to act quickly if it wants to avoid seeing this scenario worsen over time.

Next Wednesday, Zapatero promised to meet with union and business leaders to discuss the present economic crisis that is affecting Spain. Is a new agreement with Moncloa Palace possible? It seems that the economic situation is requiring the solidarity of all of Spain’s sectors in order to overcome the crisis. In the past Spain has experienced success combating situations such as this and is prepared to allow history to repeat itself… Will all the various sectors be willing to yield, to obtain an economic recovery in Spain?

We will meet again tomorrow,

Horacio Pozzo

Buenos Aires, Argentina June 5, 2008

In 2007, the strong appreciation of the Chilean peso had been the central preoccupation of the Chilean businessmen. In the last few months, active policies initiated by the Central Bank of Chile, coupled with a fall in the international price of copper and a strengthening in the worldwide value of the dollar have noticeably depreciated the value of the Chilean peso. In fact, the Chilean peso is the currency that depreciated the most against the dollar in the month of May.

This depreciation in the rate of exchange must have created a certain level of calm for Chilean businessmen. But while the exchange rate adjusted to the situation, other negative factors attacked the way in which businesses operate. For this reason, businessmen were unable to take full advantage of the improvement in the rate of exchange.

Inflation is perhaps having the worst effect on the Chilean economy at the present time, with a year-on-year rise of 8.3% for the month of April. Meanwhile, the Central Bank of Chile has as its goal an increase of only 3%, with a margin of 1% either direction. While the rate of inflation has been harming the Chilean economy, it has been partially offset by an improvement in the overall competitiveness of the economy.

The issue of inflation is causing Chilean monetary policy to move in a more restrictive direction for the next few months. This is why on May 8, during the last meeting of the Council of the Central Bank of Chile, it was discussed whether to maintain or raise the interest rate from its current level of 6.25%.

Even worse, the price of fuel has continued to rise and it is effecting the costs of production. The price of fuel is continuing to rise, and has already reached its highest level since 2001. Yesterday 120,000 trucks were lined up on a highway in a show of protest over this increase in the price of fuels. The government of Chile had injected $1 billion to create a Stabilization Fund for Fuels. However this has not persuaded the truck drivers to halt their protests.

Chilean businessmen are pessimistic, and with good cause, for they are finding themselves in a time of inflation while at the same time the Central Bank is insinuating that an increase in interest rates would adversely affect internal demand. And to make matters worse, Chile’s problems regarding power have been aggravated in the last few days by the cancellation of gas shipments from Argentina.

It is for that reason that business confidence finds itself at a historical low point in Chile. In fact, according to the Monthly Indicator of Business Confidence (IMCE), the perspective for commerce, construction, industry and mining fell to 53.4 points in May, the lowest level for that month since this registry was created. Logically, the most pessimistic area is the industrial sector for which indicator IMCE showed a value of 47.2.

Nevertheless, in spite of the general pessimism of businessmen, one can still find companies with good prospects for growth. Such is the case with the Empresa Nacional de Electricidad SA, (NYSE: EOC). During the first quarter of this year, ENDESA Chile reported earnings of $77,649 million (U$S 160 million) which represents a year-on-year variation of 44.5% (although principally due to increases that were not the result of operating costs).

Although the operating costs of ENDESA Chile have been affected by the low water levels and the high amount of fuel purchased in Chile, adequate commercial policies and the emergence of highly efficient stock portfolios have created a situation offsetting the effects of those factors somewhat. And all of this allows ENDESA Chile to be in a suitable position not only to face its next challenges, but also to transform them into opportunities for growth.

ENDESA is initiating diverse projects of investment that are mainly in Chile, Colombia and Peru. Also it has planned investment projects in Argentina.

In the middle of January of 2008, ENDESA Chile’s San Isidro II power station closed its combined cycle with a total power load of 353 MW. In 2009, once liquefied natural gas (LNG) is available in Chile, the plant will reach a total production level of 377 MW. The projected figures for the early portion of 2008 serve as an endorsement of Chile’s local electrical production ability. Another important contribution made by ENDESA to Chile’s power supply for the next few years is the installation, this past March, of the N°1 unit of the Taltal power station. This station has a capacity of producing 120 MW of power, using a diesel engine. Additionally, ENDESA is participating in the initiative of the Government to diversify the electrical grid through a project entitled GNL Quintero.

In January of this year, ENDESA signed a contract in Peru with Siemens Power Generation, to install a turbine that produces 183 MW of power in Santa Rosa plant. This project required an investment of approximately U$S 90 million. In Colombia, ENDESA is considering bidding for a public contract for energy and power programs for this year in that market by means of the development of a hydroelectric power station, capable of producing 400 MW, in Quimbo located upstream from the Betania Station. In Argentina, through its branches, Endesa Costanera S.A. and Hidroeléctrica El Chocón S.A., the company has realized an investment of U$S 160 million, that includes a U$S 42 million loan. This means ENDESA has a participation level of 21% of the thermoelectric societies of José de San Martín S.A. and Termoeléctrica Manuel Belgrano S.A. (with each of them producing combined cycles of 800 MW each).

Additionally, ENDESA Chile is a company that has a strong commitment regarding the environment through its development of projects using non-conventional renewable energies (ERNC) through its ENDESA branch Echo. It has a wind power-generating park named Canela that has been in commercial operation since December of 2007 that contributes 18.15 MW to the Central Interconnected System (SIC), Chile’s national energy grid. Also, ENDESA is committed to the acquisition of adjacent lands for the development of an immediate extension of around 60 additional MW to the park.

ENDESA Chile is a good company to bet on as an investment as a medium to long-term addition to one’s investment portfolio.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: in Chile, businessmen seem to have been infected by the same mood as their Argentine colleagues. Although the reasons that affect the growth of both countries are almost the same, the origin of the problems and the search for solutions vary. The recommendation of the week. You can send your comments to me at: paola@latinforme.com

The Colombian economy is going through one of its best economic periods in the last 50 years. Colombia is growing strong. In 2007 the economy grew by 7.52%, investments in the country multiplied, foreign direct investment in Colombia grew, and internal demand became more and more strong.

But in the midst of this moment of splendor for the Colombian economy, inflation hangs over it like a great black cloud that threatens to water down this good moment. The inflation in Colombia continues to increase and worrisome to its authorities, it creates several dilemmas that Colombia must face in resolving this problem of inflation. In the month of May, the Consumer Price Index (CPI) grew by 0.93%, the highest rate for that same month since 1999.

Already, in the first five months of this year, the retail inflation in Colombia has reached 5.12%, and 6.39% for the last 12 months. One needs to be sure to remember that the Central Bank of Colombia has a goal of 4% for inflation with a margin of a percentage point going either way. Clearlythe rate of inflation month to month has gone beyond this proposed goal.

It is for this very reason that one week ago the Central Bank of Colombia decided not to bother with raising interest rates. Currently they remain at 9.75%. In explaining this decision, the Central Bank stated: “Our meeting emphasized that inflation and the expectation of further inflation will continue at levels greater than our goals. This also appears to be happening with several other indicators of basic inflation”.

The Central bank is not only worried about the data present about inflation, but also about strong dynamics that are influencing the financing of consumption. That is a subject that the monetary authority is closely following, due to the impact that it has beyond the phenomenon in the internal demand (and consequently, in the inflationary pressures). This situation of major inflationary pressures and lending levels that encourage consumption is generating the sense that a period of a sustained rise of rates is approaching.

Market analysts are pessimistic about the inflation, since they think that the Central bank of Colombia cannot fulfill its goal of inflation for this year.

In this situation, a logical thing is to hope that the Central Bank of Colombia would decide to increase its interest rate, as the market is expecting. However the Central Bank of Colombia, and its monetary policy, seems to be facing a dilemma in considering whether to maintain or raise the interest rate. Some are pushing for high interest rates along with pressure to increase the currency’s rate of exchange in hopes of creating a context of stability within the Colombian economy. And that, in turn, it creates a situation where foreign investment capital becomes attractive.

These investments of foreign capital, so valued and hoped for by the economy, are generating problems for Colombia since they affect the type of change required to impact the competitiveness of the Colombian economy.

It is for that reason that the Treasury Department decided to elevate from 40% to 50% the minimum liquidity requirements that foreign investors are required to pay prior to creating a portfolio in the country. This policy was established by the Government for more than a year and additionally, the Government established a minimum time of permanence of two years for any Foreign Direct Investment (FDI) entering the country.

Logically these measures have generated a lot of criticism, mainly on the part of those harmed such as large foreign investment banks. However, from my perspective, it is a proper measure to take to limit the negative effects generated by raising interest rates.

It is true that these measures are an attempt to limit the free flow of capital, but I understand that sometimes this is one of the only valid alternatives that exist when dealing with speculative capital.

From my point of view, the message of Colombia is clear. “Colombia is willing to guarantee that foreign capital may enter the country, but at the same time it does not want that capital to work against the stability of the economy. For that reason, Colombia is encouraging those that invest capital in the country remain there for a substantial period of time.”

We will meet again tomorrow,

Horacio Pozzo

Editor’s note: Colombia has returned to its inflationary levels from 90s, and it is taking measures to avoid major inflationary pressures. But these measures are creating as much of a risk for the economy as a dissatisfaction for the international investors. You may leave your comments with us at: www.latinforme.com