BNamericas: Political Risk Report

Overview

How did the economy minister of a very unpopular government with triple-digit inflation become the odds-on favorite to win a presidential runoff? In Argentina’s politics, anything is possible.

Elsewhere, Brazil readies a tax reform, Mexico turns to nearshore to try to close its budget gap, and Colombia’s Petro wades into the Middle East conflict with disastrous results.

Argentina: A Populist Runoff

By Sebastian Pérez-Ferreiro

With nearly half of Argentina's population living below the poverty line, is it any wonder that the next president will be decided in a runoff between two populists??

Leftist populism was the big winner of the October 22 general election, where Peronist ruling coalition candidate Sergio Massa – who, as the current economy minister, is responsible for annual inflation hovering around 140% – beat expectations and his own underwhelming performance in the August primaries to record a resounding victory. ?

Perhaps like no other politician since Argentina's return to democracy in 1983, Massa used all the powers of the State to subsidize and stimulate voters' pocketbooks ahead of the election. It literally paid off, as Massa obtained 36.7% of the votes after securing a meager 21.4% in the open primaries two months earlier.

Massa is now the favorite to win the November 19 runoff against Javier Milei, the anti-establishment, libertarian populist who took the country by storm when he topped all primary candidates with nearly 30% of the mandatory votes on August 13 but who failed to grow his base in the general election.

"And the truth is that he's a runner-up with very few chances of winning the runoff," said influential political analyst Joaquín Morales Solá. "Because of the vote difference in Massa's favor and because the minister can pick up more 'friendly votes' that are out there."?

Massa is expected to benefit from the first-round votes of Juan Schiaretti, the governor of Córdoba who ran as an anti-Kirchnerist Peronist (6.8%), and socialist lawmaker Myriam Bregman (2.7%). ?

"That's eight to nine points – he'll only need four or five more to reach 50%," Morales Solá told daily La Tercera.

The biggest loser in the general election was former president Mauricio Macri's Juntos por el Cambio center-right coalition, which saw its standard-bearer Patricia Bullrich weakened by a hard-fought presidential primary against Buenos Aires mayor Horacio Larreta and watched Milei position himself as the change candidate through bold and extreme proposals like dollarizing the economy and shutting down the central bank. ? ??

Massa (left) and Milei. Credit: AFP

At Macri's behest, Bullrich, who finished third with 23.8%, will now support Milei's campaign – but it's not clear that all of her center-right votes will flow to the libertarian candidate, whose radical approach has included clashing with Pope Francis, going as far as calling the Argentine leader of the Catholic Church an "imbecile" and a "disgusting leftist." ? ??

"Juntos por el Cambio voters are pretty independent and don't just follow orders from leaders," added Morales Solá. "And between Massa and Milei, they'll keep Massa, who as a minister is burnishing his statesman image."

Massa's statesman credentials were in full display in the two months leading up to the general election, when he issued stimulus payments to workers by decree and cut VAT taxes for nearly 9mn people, among other populist measures that drove a significant increase in his voter turnout, and which should be enough to put him over the top on November 19.

But don't expect a potential President Massa to be the continuation of the very unpopular administration led by President Alberto Fernández and VP Cristina Fernández de Kirchner, who have stayed behind the scenes during the campaign. The economy minister has stressed the need for a unity government and is on good terms with Larreta, who is seen as a potential member of his cabinet.?

If Massa ultimately prevails, it will prove that anything is possible in Argentine politics – even seeing the economy minister ascend to the presidency as people line up outside supermarkets and appliance stores to rid themselves of their pesos, which lose more of their value with each passing day.

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SECTOR RISKS

MACRO ●?

Prices: The consumer price index rose 12.7% in September alone and has accumulated an increase of 138.3% in the last 12 months. When Sergio Massa took office as economy minister in August 2022, the accumulated year-on-year increase was 71%. Analysts consulted by the central bank expect inflation to reach nearly 186% this year.

For its part, the central bank raised its key rate 15 percentage points to 133%, the highest in the world.?

Contraction: In its latest update of economic growth forecasts, the International Monetary Fund warned that it now anticipates a 2.5% contraction of Argentina's GDP this year, which contrasts with the 1% expansion it previously expected.

Budget: The 2024 budget bill sent to congress by economy minister and presidential candidate Massa considers economic growth of 2.5% and inflation of 70% next year. Analysts consulted by the central bank expect, on average, a CPI of 135.8% in 2024. The budget initiative keeps the country with a primary deficit (before debt interest payments) of 0.9% of GDP.

IMF FORECAST FOR 2023 GDP GROWTH: -2.5%

MINING ●?

Lithium:?Multinational automaker and supplier Stellantis signed agreements with Canada’s McEwen Mining and Argentina Lithium & Energy to ensure copper and lithium supply for its battery and electric vehicle lines.

Stellantis will invest US$120mn to increase its share in McEwen Copper from 14.2% to 19.4%. The company owns the Los Azules project in Argentina’s San Juan province.

In February, Stellantis invested US$155mn in the company. Los Azules is due to produce 175,000t/y of copper cathodes over a useful life of 27 years. The project’s preliminary economic study pegs net present value after taxes at US$2.7bn at a copper price of US$3.75/lb, Stellantis said in a press release.

McEwen vice president Michael Meding told BNamericas that production should start in 2030.

Takeover bid: Tecpetrol, the main gas producer in Argentina’s Vaca Muerta formation and a member of the Techint group, will wait until October 20 for a response from shareholders of Canada’s Argentina-focused Alpha Lithium to its takeover bid.

The board of directors and a special committee of Alpha recommended shareholders accept the proposal that was presented by Tecpetrol's subsidiary, TechEnergy Lithium Canada, and that implies a purchase price of around US$200mn, after having declined a previous offer.

ENERGY ●?

Norwegian exit:?Norwegian renewables player Scatec has exited Argentina, citing the fallout of political and economic uncertainty on access to financing. ?

Local company Central Puerto acquired the 117MW solar park Gua?izuil IIA in San Juan province from plant owner Cordillera Solar VIII and operator Scatec Equinor Solutions. The firms are 50:50 joint ventures between Norwegian renewables player Scatec and Norwegian hydrocarbons firm Equinor, an oil and gas producer in Argentina. In a financial report, Scatec cites an “increasingly challenging political and economic situation” in Argentina that has hampered project refinancing efforts.

E&P: The government will submit a bill to congress to spur investment and production in mature hydrocarbons basins. Production of conventional hydrocarbons has been trending down in Argentina as the bulk of outlay is invested in the Neuquén basin, home to the Vaca Muerta unconventionals formation.

Meanwhile, the lower house of congress approved an LNG promotion bill that was submitted earlier this year by the government.?

ICT ?●?

5G tender: Telefónica, Telecom and Claro acquired spectrum for US$875mn in the 5G tender for the 3.5GHz band.

Claro and Telecom each won a 100MHz lot offering around US$350mn each, while Telefónica acquired 50MHz for US$175mn in the third block that was divided into two and 50MHz remained vacant. The companies must pay within 15 days for the 20-year licenses.?

"The inflow of almost US$900mn is very important in terms of fiscal goals, in terms of valuation of public goods and confidence of the private sector," economy minister Sergio Massa said at an event after the auction.

INFRASTRUCTURE ●?

A lot riding on the election: Infrastructure is one of the many sectors that face two markedly different futures depending on the November 19 presidential runoff. On the side of continuity, minister Massa would maintain the US$15bn investment program set in the 2024 budget bill. ?

The 2024 budget lists 4,107 projects involving 5.30tn pesos (about US$15bn), with the public works ministry earmarked to receive the most funds at 1.5tn pesos, according to the country’s 2024-26 investment program. ?

His opponent Javier Milei, on the other hand, proposes a complete upending of the status quo by essentially abolishing public works and leaving infrastructure development in the hands of the private sector, citing corruption scandals and underperformances under the current model. His proposal, however, has been criticized by the country’s construction chamber.?

Brazil: Tax Reform on the Agenda

By Rogerio Jelmayer?

Political players, business executives and lobbyists will descend on capital Brasília in the coming weeks to attempt to shape the main points of the tax reform being debated in congress, as the bill will likely determine the investment and profitability levels of key sectors for the coming years.?

The lower house approved the reform proposal in July to simplify the country's complex tax system while also empowering states to impose taxes on primary and semi-finished products to finance infrastructure and housing. Mining, oil, gas and agricultural representatives claim this aspect would be detrimental to their sectors.?

"I am extremely concerned about the direction that this tax reform is signaling because the mining sector tends to be penalized with the power of states to impose taxes. What originally began as a reform to simplify and reduce the number of taxes in Brazil will result in the creation of a new tax," says mining association Ibram's head Raul Jungmann. ??

The bill approved by the lower house is currently being reviewed by the senate, with a vote expected by November 9, a spokesperson of the bill's rapporteur Eduardo Braga told BNamericas. If approved with changes, the bill would have to return to the lower house for reconciliation.

The lower house. AFP

The complex tax model, which includes different taxes imposed by states, is seen as a key factor taken into account by companies before deciding on long-term investments in Brazil, with some firms anchoring their production operations far from large consumer markets in order to seek tax benefits.

For their part, state governments want to keep an article in the bill allowing governors to impose certain taxes on exported products while also providing tax incentives. ?

"We are forming a coalition between governors of the northeast region to ask the senate to include tax exemptions for renewable energy projects and also for green hydrogen, which is a frontier for expansion for the economy of the northeast, with an abundance of sun and wind," Ceará governor Elmano de Freitas told BNamericas.?

President Luiz Inácio Lula da Silva's administration wants to see the final vote on the reform taking place by the end of November.?

"I'm still working with a base scenario for approving the tax reform by the end of this year, but I do not rule out that this will be postponed with the series of decisions in the lower house and senate, which could cause a complete disfigurement of the reform approved in the chamber of deputies and greatly reduce the positive aspects of the reform," says Luciano Rostagno, chief Latin America strategist at Banco Mizuho do Brasil.?

SECTOR RISKS?

MACRO ●?

Growth: The economy is expected to grow 3.1% this year and 1.5% next, up from 2.1% and 1.2% previously estimated by the IMF. The upward revision reflects stronger-than-expected growth in the first months of 2023 driven by the agriculture and services sectors.?

IMF FORECAST FOR 2023 GDP GROWTH: +3.1%

MINING? ●?

Startups abound: Brazil's mining and steel companies are busy implementing sustainable practices, creating a fertile environment for startups and their ICT solutions. Of the 42 startups mapped worldwide that focus on mining sustainability, 22 are based in Brazil, according to a study by consultancy BIP Brasil and FIEMG Lab, the innovation arm of Minas Gerais state’s industry federation FIEMG.?

"There’s a very strong demand from mining companies regarding the decarbonization aspects of their activities. All solutions related to carbon capture, energy efficiency, circular economy and water resource management make up what is strongly demanded by mining firms," says FIE MG Lab coordinator Bruna Pereira.?

Vultures on the prowl:?The local mining sector has seen a spate of legal conflicts, which has attracted investment funds seeking to benefit from the litigation. The biggest legal dispute involves the battle over compensation for the 2015 catastrophic failure of a tailings dam in Mariana, Minas Gerais state. ?

A London-based law firm called Pogust Goodhead, which represents 700,000 people affected by the Mariana disaster, obtained an order for the case to be judged in a London court, where the firm is looking for around 230bn reais (US$46bn) in compensation for the victims.?

In August, that court ruled that Vale and BHP will have to respond jointly to the case of liability for the tragedy in the UK. Vale has appealed against the decision, claiming that the Brazilian courts are already examining the case.?

In October, Pogust Goodhead and emerging markets investment manager Gramercy announced a 450mn-pound (US$547mn) investment partnership, the largest litigation funding deal in legal history.

ENERGY ●?

E&P:?Exploration in the offshore portion of the Potiguar basin is unlikely to result in large oil and gas fields, according to Brazilian experts. In October, federal environmental agency Ibama granted a license for Petrobras to drill in the Equatorial Margin region. ?

Tenders: Brazilian energy regulators plan on holding at least five more auctions this year. They will offer E&P assets and contract electric power, in addition to transmission services. ? ?

Distributed generation: Brazil’s DG solar power market is likely to see a new investment cycle in 2024, driven by an increase in residential electricity rates and the fall in the price of photovoltaic equipment. ??

"The big challenge now will be the review of the concessions, as well as the future of the energy auctions. There are many uncertainties [due to the migration of consumers to the free market and the expansion of distributed generation], and the government has the challenge of providing predictability," says Guilherme Schmidt, a partner at Schmidt Valois Advogados, a law firm that specializes in the energy sector.

More than 4,800 consumer units joined Brazil’s free energy market between January and August, the fastest pace of migrations in history, according to electric power chamber CCEE. ??

ICT?●?

Fair share:?The demand by telecom operators that large traffic generators, such as internet companies, contribute to network infrastructure financing has been a hot topic of discussion at this year's Futurecom and Painel Telebrasil events.

"To deliver the capacity that is required, not only for 4G, 5G but in the future for 6G as well, a business case needs to be in place. And it has to be fair. This cost has to be shared more or less fairly across all sectors,” Alejandro Adamowicz, technology & strategic engagement director at GSMA Latin America, told BNamericas.

Tomás Paiva, a lawyer representing the Brazilian digital economy chamber (camara-e.net), which represents companies such as Amazon, Facebook and MercadoLibre, is against what he calls state intervention to force the payment of fees by big techs to telcos.?

"The telecom sector has unique relevance, but it is a fact that it is quite conservative in terms of research, development and innovation. The equipment industry and OTT companies are the ones doing this," he told the Futurecom event.

INFRASTRUCTURE ●?

Rail renaissance: The rail sector is expected to see a significant increase in project activity in the coming years, even though it may not be quite as buoyant as more dynamic infrastructure areas such as highways and sanitation.?

"Despite the challenges facing the rail sector, I view the scenario ahead as promising, both in terms of passenger and cargo transportation projects," Vicente Abate, president of rail equipment manufacturers' association Abifer, told BNamericas.

In recent years, Brazil has witnessed a proliferation of contracts being signed and projects commencing in the highway and sanitation sectors, but these processes tend to move somewhat more slowly in the rail sector.

"Rail projects are generally more challenging both for those who structure them and those who undertake them in terms of project viability. Railroads only start generating revenue once they are fully completed, which presents a feasibility challenge. Given this characteristic, the rail projects we are working on have required more time to ensure their feasibility before bringing them to market," Rafael Vitale Rodrigues, the director-general of national land transport regulator ANTT, explained in a recent interview with BNamericas.

Mexico: Nearshoring to the Rescue

By Ariel Rodríguez ?

October marked the beginning of President Andrés Manuel López Obrador’s last year in power, which will be marked by increased spending to finish the administration's signature infrastructure projects.

The administration's 2024 federal budget, approved by the ruling Morena party-controlled lower house on October 20, includes a 4.3% spending increase to 9tn pesos (US$512bn) and only 7.3tn pesos in revenue, which left it open to the criticism that AMLO's obsession with finishing his megaprojects is not only generating a fiscal deficit but also using valuable resources that could go to education, health and security.

"Nearly 15% of this budget goes to the Maya train," said business federation Coparmex. ??

“Mexico's 2024 economic package denotes the government's intention to accept a high fiscal deficit (greater than 5% of GDP) partly as a consequence of increased spending on priority projects,” Moody’s analyst Renzo Merino said in a statement. ?

In the meantime, the AMLO administration is betting on Mexico's nearshoring boom to help bridge the gap. To that end, it is promoting fiscal incentives to attract US$18.5bn in new deals by 2024, after confirming a portfolio of 174 commitments worth US$74bn so far.

On October 11, AMLO published a decree granting a new tax incentive for the "accelerated depreciation of fixed assets" acquired from October 12 through 2024, which can be claimed by companies producing, processing or manufacturing goods for export.

The incentive seeks to attract more foreign companies such as US electric vehicle manufacturer Tesla, which has committed to building a US$5bn plant in Nuevo León state, to move their supply chains from Asia.?

A billboard announcing the arrival of the US EV maker. AFP

The move follows previous tax incentives launched to attract investments at the 300km-long Tehuantepec isthmus rail corridor between Oaxaca and Veracruz states, where the economy ministry is tendering 10 industrial parks. ?

While well received by the private sector, some believe that the federal government must go beyond fiscal incentives and provide basics that are lacking in some parts of the country.

“Infrastructure, talent development and rule of law need to be addressed to increase the country's capacity to attract foreign capital," said the Mexican institute for competitiveness (IMCO) think tank. "Furthermore, it must be guaranteed that the measures adopted comply with the provisions of the trade treaties and commitments to which the country is a party to generate an environment of legal certainty conducive to investment.”?

SECTOR RISKS

MACRO ●?

Inflation: The annual consumer price index slowed for the eighth straight month in September to 4.45% from 8.7% a year ago, the lowest level since February 2021. The central bank's governing board unanimously decided to maintain the policy rate at 11.25% for the fourth consecutive time in its September meeting. It expects inflation to converge toward the 3% target in the second quarter of 2025.

GDP: The Mexican economy is in the midst of a broad expansion, driven by private consumption and investment, as well as notable vigor in the service sectors, construction and automobile production, according to a report from the IMF, which sees the economy expanding 3.2% this year and 2.1% in 2024.

IMF FORECAST FOR 2023 GDP GROWTH: +3.2%

MINING ●?

Production: Mexico's gold production plummeted 24.6% year-on-year in August after drops of 18.8% and 26% in July and June, respectively, largely as a result of the four-month strike that ended this month at the Pe?asquito mine operated by Newmont.?

On June 7, some 2,000 union members at the gold-silver mine, the largest in the country, voted to go on strike after denouncing breaches of the collective agreement and the profit-sharing regime. Denver-based Newmont confirmed on October 9 that it had reached a definitive agreement with the union after intense negotiations. However, the company warned that stabilizing production at the mine in Zacatecas state will take several weeks.

Armed robbery:?Pan American Silver temporarily suspended all operating activities at its La Colorada mine on October 5 due to security concerns after the operation experienced an armed robbery of two trailers of concentrate.?La Colorada is Pan American’s largest silver-producing mine.

ENERGY ●?

Renewables reinvestment: Iberdrola’s subsidiary in Mexico will reinvest every “peso and dollar” from the US$6bn sale of 13 power plants to the government, according to planning and sustainable director in Mexico Katya Somohano. The plants represent about 78% of the company's assets in the country, which will be transferred through a trust fund with public and private participation. In recent months, Iberdrola Mexico CEO Enrique Alba has held several meetings with governors of states with high potential for renewable energy amid the boom in nearshoring. ?

Pemex profit sharing: During the lower house debate of the 2024 income law, a lawmaker requested a last-minute change to reduce the profit-sharing amount from 40% to 30%, which was approved. If the senate okays the terms of the law, Pemex can look forward to a 10% reduction in the share it pays the State per barrel sold, in addition to the 145bn-peso cash injection included in the federal spending proposal for next year. ?

Returned O&G areas: At least 16 oil and gas firms this year have reportedly begun the process at hydrocarbons regulator CNH to end their exploration contracts. The list includes giants such as Repsol, BP, Chevron and Australia’s Woodside Energy, which earlier this month returned to the government more than 1,200km2 of the ultra-deepwater Trión field off Tamaulipas state, for which it partnered with Pemex to begin operations by 2028.

ICT ●?

Telecom market: Revenues from telecommunication services were up 4.7% year-on-year but increased only 0.3% in real terms in Q1, according to data published in October by regulator IFT.

The market had 136mn mobile lines in service during the period, an increase of 7.6mn on 12 months earlier, putting penetration at 106%. América Móvil (Telcel) continued to lead the market with 60% of total lines. It was followed by Telefónica with 16%, AT&T also with 16% and the group of MVNOs with the remainder.?

Capex: Local ICT and data services company Axtel?accelerated its investments in the third quarter while reporting modest growth in revenues. Overall, the B2B services-focused company?invested 346mn pesos (US$20mn) in the quarter, representing 12% of its revenues for the period, up from 285mn pesos and 10% a year earlier. Year-to-date, Axtel’s investments surpassed 1bn pesos compared to 930mn pesos in January-September 2022.

INFRASTRUCTURE ●?

Budget cuts: Four of the six highway projects considered priorities by the Mexican government look set to suffer budget cuts in 2024. The six priority highway projects are earmarked to receive 7.4bn pesos (US$409mn) next year, nearly 5.7bn pesos less than in the 2023 budget, according to a report from the public finances study center of the lower house of congress.

The initiatives that have had spending cuts proposed include the Nichupté road bridge, the Las Cruces–Pinotepa Nacional highway, the Acayucan–Entronque La Ventosa highway and the Portezuelo–Ciudad Valles road.

Maya train: Construction of Mexico’s Maya tourist and freight train?in the Yucatán Peninsula will conclude in 2024, according to defense ministry Sedena. The project is due to be partially opened by President?López Obrador in December, with stretch No. 5 remaining under construction.?

Colombia: Petro Stirs Up Diplomatic Storm

By Michael Place?

Colombian President Gustavo Petro sparked a diplomatic crisis by comparing Israel's response to the Hamas terrorist attacks to the actions of Nazi Germany. ?

Israel said it was “halting security exports” to the South American country due to remarks made by Petro following the October 7 attacks in which 1,300 Israelis were killed and more than 150 kidnapped. ?

The announcement came after Israeli officials summoned the Colombian ambassador to Israel, Margarita Manjarrez, to a meeting in which the government repudiated Petro's comments. ?

"It was made clear to the ambassador that [Petro's] statements about the savage attack were received in Israel with astonishment," defense ministry spokesperson Lior Haiat said. “In response, as an initial measure, Israel has decided to stop security exports to Colombia.”?

Israel has been one of the major foreign providers of arms to Colombia's military in its decades-long conflict with guerrilla groups, paramilitaries and drug cartels. The countries established diplomatic relations in 1957 and strengthened their ties by signing a free trade agreement in August 2020. ?

Petro is welcomed by Chinese President Xi Jinping in late October. AFP

According to Colombian statistics agency Dane, the country's exports to Israel – which include coffee, coal, flowers and aeronautical equipment – reached US$375mn in the first eight months of 2023.?

Petro has posted a series of comments on X, the social media platform previously known as Twitter, criticizing Israel's pledge to carry out a "complete siege" in Gaza. ?

"This is what the Nazis said of the Jews," he said in one post. In another, he declared that "democratic nations cannot allow Nazism to reestablish itself in international politics."?

In response to Israel's export suspension, Petro said that he would not change his stance, insisting that Colombia did not support "genocide."?

"If we have to suspend foreign relations with Israel, we will suspend them," he added.

Petro's comments also sparked outrage from the United States and opposition parties in Colombia. ?

"We strongly condemn President Petro's statements and call on him to condemn Hamas, a designated terrorist organization, for its barbaric murder of Israeli men, women and children," ambassador Deborah Lipstadt of the office of the US Special Envoy to Monitor and Combat Antisemitism (SEAS) said on X.?

Senator María Fernanda Cabal, of the Centro Democrático party, said Petro's comments did not represent ordinary Colombians.?

"Don't say that you were offended when it was you who offended a wounded people," Cabal said on X. "Genocide is trying to eliminate the Jews from the face of the earth and we already know which side you are on."?

Meanwhile, Carlos Fernando Galán, a candidate for the Bogotá mayoral election later this month, called for “prudence and responsibility.”?

"There is still time to reject the terrorist acts of Hamas and call for the protection of the Palestinian civilian population, within the framework of international humanitarian law," he said. ?

SECTOR RISKS

MACRO? ●?

Economic slowdown: Colombia's economy, which grew 7.3% in 2022, is on track to expand 1.2% this year and 1.5% in 2024, according to a new forecast from BBVA Research. Inflation is expected to close the year at 10%, down from 13.1% at the end of 2022, before dropping to 5.4% at the end of 2024, the Spanish bank said in a report. ??

It added that the central bank was likely to reduce interest rates by 75 basis points to 12.5% by December, with the figure expected to fall to 7.0% next year. ?

IMF FORECAST FOR 2023 GDP GROWTH:?+1.4%?

MINING●?

Ecominerales: Colombia's proposed new public mining company will participate in the exploration and extraction of strategic minerals, according to regulator ANM head álvaro Pardo. He said that Ecominerales, as the company is set to be known, will also participate in the commercialization of minerals, starting with gold. ?

Reindustrialization: The government is betting on metallurgical coal and coke for a mining reindustrialization program, according to ANM. The entity said government-commissioned studies of the coal industry have determined that thermal coal has little future due to forecasts of dwindling demand. ?

Oversight: Mining association ACM called for the creation of an oversight body to control where mining royalties are being invested. ACM head Juan Camilo Nari?o told an event that the entity should be the product of a government-industry joint effort, adding that in the last 10 years, the mining sector has contributed an average of 4tn pesos (US$1bn) annually, and 16tn pesos last year due to international price dynamics.?

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ENERGY ●?

Renewables crisis: EDF Renewables announced it withdrew from a 145MW solar project in central Colombia amid permitting delays and an "uncertain outlook" in the Andean country. The French multinational said the decision was based primarily on licensing bottlenecks for the project in Girardot, Cundinamarca department. ?

Investor nerves: Brookfield Corporation, the majority shareholder of Colombian power generator Isagén, warned that regulatory changes to the local electricity market pose a threat to private investment. In a letter addressed to the energy and finance ministries, Brookfield said government moves to overhaul electricity prices would impact the sector's entire value chain. ?

Electricity prices: Colombian spot market electricity prices climbed 3% in August amid fears that an El Ni?o-induced drought could cause an imminent supply deficit. Prices climbed to 542 pesos (US$0.13) per kWh, up from 528 pesos in July and 152 pesos in August last year, according to wholesale power market operator XM. ?

Grid connection requests: The energy ministry has received 1,628 requests from developers to connect new power generation plants to the national transmission grid. The combined installed capacity of the projects totals 89.5GW, around five times Colombia's current level, according to energy ministry planning unit UPME. ?

Emergency fund:?The government could set up a solidarity fund to help financially stricken electricity distributors and retailers, according to mines and energy minister Andrés Camacho. The announcement followed a series of government decrees and resolutions aimed at supporting heavily indebted energy sector stakeholders. Hidroituango contract: Colombian construction firm Schrader Camargo and Chinese partner Yellow River were awarded a contract to complete construction work at the long-delayed Hidroituango dam. The value of the contract is 1.075tn pesos (US$260mn) and the deadline for the completion of works is 1,125 calendar days, or just over three years, project owner EPM said.?

ICT●?

Rural connectivity: President Petro wants state agriculture-focused lender Banco Agrario to step up financing for the country’s rural connectivity program Comunidades de Conectividad. During an event in Bogotá’s Kennedy district, Petro called on Banco Agrario to support the initiative through the creation of a working group with local representatives.?

Cyberattack: Colombian technology and telecoms provider IFX Networks said it brought all clients back online after suffering a ransomware attack. The security breach affected government websites and some customers in other countries, including Chile, the company said.?

Spectrum sharing: Spectrum agency ANE enabled spectrum sharing in mobile frequency bands, allowing the coexistence of telecoms services and wireless communications solutions for productive sectors. The move will be implemented next year and requires ANE to establish the technical and operational conditions to allow sharing without interference.?

INFRASTRUCTURE ●?

Social PPPs: Infrastructure agency ANI plans to award the first social public-private partnership project in its portfolio within two years, the agency's vice president of structuring, Jonathan Bernal, told BNamericas. The ANI has included 13 social infrastructure projects in its portfolio of initiatives that will be carried out using the PPP model.?

Green corridor: At the request of interested companies, urban development agency IDU extended the bidding deadline for the US$626m Avenida Séptima green corridor in Bogotá for a second time, until October 9. Awarding is planned for October 25-27.?

Risaralda road link: Highway authority Invías launched tenders for a combined 3.89bn pesos (US$919,000) related to the second Cerritos-La Virginia link in Risaralda department. A contract to carry out studies and design work will be signed on November 10.?

Tren del Río: Antioquia department is advancing the 6.96tn-peso (US$1.70bn) Tren del Río passenger train, which is expected to improve mobility in Aburrá Valley and Medellín as it will link with metro line No. 1. Financing should be secured this year or early 2024 and legal and financial structuring is due to be ready in 2025, after which contracting will start, the head of project owner Ferrocarril de Antioquia, Gustavo Ruiz Agudelo, told a TV channel. ?

Chile: Political Wrangling Takes Toll

By Allan Brown

Political horse-trading – along with the drafting of bills and regulations – may step up a gear in Chile as the clock ticks for President Gabriel Boric.?

The former student protest leader has pension and energy transition bills in congress, among other draft legislation, while investors are waiting for the administration to also present its tax and project permitting overhauls and a bill to establish a state agency geared to development finance.?

On top of this, the power sector is urging a reform of the distribution law and associated regulatory tweaks to support the clean energy transition and the wider decarbonization of the economy.?

Measures are deemed necessary to support economic health, spur the flow of investment and, in the case of pensions, address a long-standing need to improve the system, deemed sustainable but not delivering the pensions originally expected. ?

The left of center ruling coalition of Boric, in power since 2022, does not enjoy a majority in congress and suffered a major setback this year when the government’s original revenue-raising tax reform bill hit a brick wall. Presidential elections are due for November 2025 and by the end of next year the political spotlight will likely start shifting to the race.?

Finance minister Mario Marcel referred to the gridlock in a context where policies are needed to help rebuild the country’s resilience after the double economic whammy of the 2019 social protests and the pandemic. His comments came after rating agency S&P Global changed the outlook on the country’s ‘A/A-1’ debt rating to negative from stable.?

Marcel. AFP

Pointing out that S&P itself identified the issue of political challenges, Marcel said: “While this rating agency values what progress has been made in reducing inflation, rebalancing public finances, and reducing the balance of payments current account deficit, it points out that, if we do not have the capacity to approve, in the political process, reforms that are necessary to stimulate growth and to strengthen the structural position of public finances, the risks of a weakening of the economy will grow.”

S&P underscored the strength of Chile’s institutions and their role in rebalancing the economy but outlined the risks. “Our negative outlook captures the risks stemming from weakening political consensus on the key parameters of Chile’s political and economic agenda,” S&P said in a statement. ?

“In our view, these difficulties in pushing forward material pieces of legislation might translate over time into weaker economic performance and prospects, as well as slower improvement in social conditions. Moreover, structurally weaker growth will continue to pressure Chile's fiscal and external profiles.”?

Debt ratios may stabilize over the coming years but, as things stand, this would not be enough to rebuild the fiscal buffers that underpinned Chile’s strong creditworthiness in the past.?

Meanwhile, Chileans are due to vote on a proposed new constitution in December. The potential macroeconomic impact of the draft magna carta is limited and what appears more critical, from an investment-business perspective, is reducing political risk in the business operating environment.?

Polls indicate voters will reject the document and the scope for another attempt at an overhaul appears slim.?

Boric may instead pump political capital into getting reforms across the line, chief among them tax, and evangelizing their benefits. ??

SECTOR RISKS

MACRO ●?

Economy: S&P Global forecasts GDP growth of 0% for this year and 2.0% for 2024. National statistics agency INE forecasts that annual inflation will reach 4.3% by the end of the year, after the the consumer price index rose 5.3% year-on-year in September.

IMF FORECAST FOR 2023 GDP GROWTH: -0.5%

MINING ●?

Copper portfolio: The local mining sector has a portfolio with 53 projects valued at US$73.7bn for the 2022-31 period, mostly brownfield projects seeking to increase or sustain copper production. ?

The price of copper is forecast to hover around US$3.3/lb in the near future, “which would be enough to balance the market and encourage the entry of projects to satisfy the projected demand for 2030," says Karen Zelmanovits, senior account analyst at FXGlobe. "However, there are uncertainties associated with the Russia-Ukraine and Hamas-Israel conflicts, the rise in transportation costs, political instability and even what will happen to copper substitutes such as aluminum, since carbon taxes to fight climate change could significantly affect the price since copper production is high in gas emissions.”

Lithium project: Despite financial problems, Chile’s state minerals company Enami is pushing ahead with its development plan with projects such as Salares Altoandinos and the modernization of the Hernán Videla Lira copper smelter/refinery, both in northern Atacama region.

Under the national lithium strategy, state copper giant Codelco and Enami will receive special operating contracts (CEOLs) to extract lithium under public-private partnerships.

For this purpose, the Enami Litio subsidiary was created to manage the US$1.5bn Altoandinos project that comprises the La Isla, Aguilar, Las Parinas, Infieles and Grande salt flats.

ENERGY ●?

Smart meters, flexible plans: Adoption of smart meters and time-of-use electricity rate plans are critical pieces missing from Chile’s energy transition jigsaw puzzle, BNamericas was told.?

In a context where electricity prices may particularly climb steeply for SMEs being tapped to subsidize the bills of smaller users, enabling customers to monitor consumption in real time and change usage patterns is deemed vital not just for billpayers but also the entire power ecosystem.?

Chile is aiming to achieve carbon neutrality by 2050, which will require increased electrification of the economy. This push, as things stand, would spur higher power consumption and, in turn, nudge some users into usage bands exposed to potential rate hikes.?

Under review: Environmental review agency SEA received a flurry of energy projects for processing involving combined investments of around US$1bn. Among the biggest are solar PV-storage hybrids Triqueta and Casas Viejas Solar, planned for Valparaíso region and resubmitted after the SEA last month said it would not process them, citing missing information.

ICT ●?

Investment:?ClaroVTR – the Chilean JV between Mexico's America Móvil?and US-based Liberty Latin America – plans to invest US$400mn to improve and expand its fixed and mobile networks, with US$200mn earmarked for infrastructure and US$45mn for backup nodes and hybrid fiber coaxial cables, as well as fiber migration.

Financing: Brazilian company Ascenty, Digital Realty’s Latin America colocation JV with Brookfield, secured US$170mn in a new financing round to support its operations in Chile.

Preparing data for AI: Banco Estado is leveraging cloud-based data lakes as it seeks to harness the benefits of artificial intelligence. “We have about two petabytes of data [in the data lake] and we’re taking advantage of it with everything related to customer segmentation, generation of offers, user behavior to determine channel preference and various other topics,” Banco Estado data director Rodrigo Montaner told BNamericas.

INFRASTRUCTURE●?

Roadshow: As part of President Boric’s visit to China, public works ministry Jéssica López met with executives from Chinese infrastructure firms to promote a concessions portfolio consisting of 27 projects worth over US$11bn, which are expected to be tendered before the end of the current administration in March 2026.?

Tender and permit barriers:?Long tender periods and permitting processes are inhibiting the definition of schedules for infrastructure projects.

According to investment consultancy CBC, 17 projects worth US$2bn that have the potential to be finished through 2027 are lacking construction schedules. “The main difficulty is in the tendering processes. Sometimes they get delayed and the [projects] with a defined schedule get pushed back, and those without schedules are also pushed back until it becomes known when the tender is going to be carried out,” says CBC CEO Orlando Castillo, who adds that archeological findings, which entail another set of permits, exacerbate the issue.

Large-scale port:? A new effort is underway to boost the US$4bn project to build a large-scale port in the central Chilean city of San Antonio. The plans include a new entity specifically dedicated to back the project’s development and renewed efforts from state port firm EPSA to engage the local community.

Peru: Pessimism and Distrust Begin Setting In

By Luis Altamirano

The business and political outlook in Peru is worsening as the months go by and there is no sign that the government can do anything about it.?

Despite numerous projections that the economy would recover in the second half of the year, that has not been the case due to a lack of confidence and external threats.

Teodoro Crisólogo, a specialist in macroeconomic projections at economics think tank IPE, told a webinar that the economy has entered a vicious circle of low business confidence, weak performance, lower job creation and weak household consumption. According to specialists, many investment decisions are being held up because there are still no signs of a rebound, and because the El Ni?o phenomenon is approaching, which could further damage the economy in the first quarter of 2024.

According to Patricia Rojas, senior?director of public affairs at pollsters?Ipsos, the business community does not expect a recovery in the short term. In a survey of leading CEOs, 51% said they expect the recovery will only begin in the second half of 2024, while 22% believe that it will start in 2025. Of those responding 60% said they will only focus on making investments in maintenance during 2024.

Apart from a rebound in mining, and certain infrastructure projects, the Peruvian economy has entered stagnation mode. It is not surprising that the gloomy expectations are reflected in lower support for the government. According to Ipsos, President Dina Boluarte’s disapproval rating jumped from 76% in September to 80% in October, the highest since she took office in December last year.

Boluarte. AFP

If Peru does not speed up investments in preventive infrastructure to prepare for El Ni?o, and fails to lay the foundations for the economy to grow this quarter, the government's disapproval rating is expected to rise further, with new calls for Boluarte’s resignation. In mid-October, congress presented a motion of censure against the president, accusing her of “moral incapacity,” but it did not advance.

With the economy stagnant, a social crisis that has not been addressed, infrastructure works not progressing and serious structural problems, it is only a matter of time before new motions of censure are presented and urgent measures demanded.

SECTOR RISKS

MACRO ●?

Contraction: The economy contracted again in August, by 0.63% compared to the same month last year, the fourth consecutive month of decline, according to the statistics office. The construction sector shrank 9.57% in August, while manufacturing fell 4.11%. In the first eight months of the year, GDP dropped 0.58%.

Inflation: The annual inflation rate fell from 5.58% in August to 5.04% in September, according to the central bank. However, food and beverage inflation – the main component of the basic basket – remained higher at 8.29% last month. The bank, meanwhile, reduced its policy rate from 7.5% to 7.25%.

El Ni?o: The probability of a moderate El Ni?o occurring by April 2024 is 51%, while that of a strong one is 35%, according to the commission that studies the climate phenomenon. This prospect, together the lack of business confidence, means that business expectations for 2024 are likely to deteriorate, along with the outlook for GDP, due to the external shocks that the phenomenon will bring and the lack of preparation in terms of preventive infrastructure.

GDP: Peru's poor economic performance in recent months has led local financial experts to predict that GDP will contract this year. The main consultancy firms indicate that 2023 will see negative growth of between 0.3% and 0.4%, with no significant rebound in Q4. Specialists also anticipate a drop in September similar to that of August.

IMF FORECAST FOR 2023 GDP GROWTH: +1.1% ?

MINING ●?

Copper: Anglo American's Quellaveco mine was Peru’s fourth largest copper producer in January-August with output of ?196,141t, surpassing Las Bambas, owned by China’s MMG, with 194,797t, according to the energy and mines ministry (Minem). Quellaveco began commercial production in September 2022 and completed its ramp-up in mid-2023.

Exploration: Although four projects were withdrawn from the Minem exploration portfolio, there are 14 initiatives for US$85.3mn that could be incorporated in 2024. At one of these, exploration has already begun. According to the ministry, there are 70 exploration projects involving US$521mn, of which 39 are underway or are close to starting work.

Copper-zinc project: Southern Peaks Mining, which operates the Condestable mine south of capital Lima, plans to resume construction of its Ariana project in 2025. Located in Junín region, the copper-zinc project involves estimated capex of US$140mn. Construction is due to conclude in 2026 and operations are scheduled to begin in 2027.

Brownfield: Hochschild Mining, one of Peru's leading precious metals miners, is optimistic about its new brownfield projects. The US$500mn Royropata deposit will be the priority in the short term, although the company will have to stop operations at its Pallancata mine to obtain the necessary third modification of the environmental impact study. The miner expects to receive the permit in the second half of 2026.??

ENERGY ●?

Force majeure: Minem accepted a new force majeure request from Hydro Global Perú (HGP) for San Gabán III, a US$448mn hydroelectric project. In its latest request, the company mentioned social conflict and the need to work more on critical components. Information from energy regulator Osinergmin shows that HGP proposed postponing the start of commercial operations to January 2027.

Pipeline call: National oil company Petroperú launched bidding to build fuel infrastructure along the Norperuano crude pipeline. The US$18mn contract is for a 140,000b crude storage tank and replacement of the fire control system at station five of the duct in the northern jungle region of Loreto.

Green hydrogen: Minem extended the duration of the working group created to promote the development of green hydrogen projects. The group will now have an additional 135 days from October 18 to present its report, according to a ministerial resolution. Among the participants are representatives of the environment, transport and economy ministries, and Osinergmin, with the support of German cooperation agency GIZ.

Oil production: Crude production fell again in September to 34,327b/d and approached this year's minimum (33,033b/d) recorded in February. Activity has been affected in part by protests and blockades, and by the low level of rivers for the transport of oil on barges from one of the country's main producers, block 95.

?

ICT ●?

Spectrum: The transport and communications ministry (MTC) and Vietnamese operator Viettel Perú signed the concession contracts for the AWS-3 and 2.3GHz spectrum bands.

Viettel was the only winner in the latest spectrum?auction?and committed to allocate US$600mn to connect 3,825 rural locations. In the first year of the contract, 86% of the locations will be served and the rest in the second year.

Investments: The government invested 351mn soles (US$90mn) through national telecoms program Pronatel between January and September. In September alone, investments were used for projects in the regions of Puno (22.2mn soles), Huánuco (13.5mn) and San Martín (11.2mn) and telecommunications concessions (2.9m).?

INFRASTRUCTURE ●

Airport access: The tender for the Santa Rosa bridge, which will be the main access to the renovated Lima airport, will be relaunched in November, according to the MTC. The project in the port city of Callao will require 346mn soles and will be developed through the works for taxes mechanism. Work is due to begin in January and conclude in December 2025.

Portfolio: Investment promotion agency ProInversión updated its portfolio of public-private partnership (PPP) projects, incorporating 24 initiatives requiring investment of US$2.54bn. The agency intends to award four lots of electrical transmission works, a port terminal, the maintenance of a hospital and various sanitation and irrigation initiatives between 2024 and 2026.

El Ni?o works: Peru is trying to advance against the clock with preventive works to deal with El Ni?o but national water authority ANA is behind with budget execution. According to the economy ministry, the entity has invested 259mn soles of the 1.20bn assigned for 2023. Comptroller general Nelson Shack said not even 20% of the 4.12bn soles earmarked for preventive works has been spent.

Metro: Construction of line No. 2 of Lima’s metro is progressing at a steady pace although the original schedule is unlikely to be met. At the end of September, this year’s spending on the US$5.35bn project totaled US$282mn, more than the US$248mn in all 2022. According to transport regulator Ositran, US$2.72bn of the total investment had been spent by end-Q3. Operations were initially planned to start by the end of 2025 but the project is only about half complete.