Calderón and Lula Talk Economic, Energy Ties

Mexican President Felipe Calderón visited Brazilian leader President Luiz Inácio Lula da Silva this week to talk trade. Feeling economic heat from the financial troubles in the United States, Mexico plans to “diversify and intensify relationships” with other countries, said Calderón. Latin America’s most populous countries make up 70 per cent of the region’s GDP yet trade between them stands at $7.4 billion—a figure that Calderón described as “peanuts.” In addition to hopes for stepped-up trade ties, the leaders expressed an interest in developing a strategic alliance between state-owned oil firms Pemex and Petrobras. The Mexican president also traveled to Colombia and Uruguay with a similar goal of deepening trade ties.
BRASILIA -- A leading reason for President Felipe Calderon's 3-nation trip through South America is to look for new markets for Mexican goods.

"Our fundamental dependency on the United States economy explains why Mexico was so badly affected in this global crisis and our intention is now to diversify and intensify relationships," with Brazil.

Calderon also visited Colombia and Uruguay, where he expressed a similar intent.

The president showed particular interest in Brazil, where he met with President Luiz Inacio Lula de Melo, who touted the Mexican's visit as "a new era" of bilateral relations between Brazil and Mexico.

At a press conference on Monday, Calderon said that "after this visit I am more than convinced that we, Brazil and Mexico, must build a great and powerful alliance which contributes to the well being of both nations and Latin America."

The president stressed that "it is inconceivable" that two nations which boast 300 million inhabitants between them have a mere $7.4 billion in trade.

"This is peanuts," Calderon said.

Calderon also pointed out that trade is the equivalent of one percent of their individual gross domestic product.

"Let us exploit our market potential," Calderon told Lula de Melo.

The Brazilian President was in complete agreement and said that he had little more than a year left to serve as president of his country, but that it was more than enough time to build a new era in bilateral relationships.

Both presidents discussed doing oil business through state-owned companies Petrobras and Pemex.

The two leaders called upon Brazilian and Mexican businessmen to meet more often and get closer to diminish mistrust and pave the path for a possible free-trade agreement.

Calderon was to arrive in Mexico late Monday ending his three-nation tour.Source: Copyright (c) 2009, The News, Mexico City. Distributed by McClatchy-Tribune Information Services.

Chavez and Cristina sign a billion USD trade agreement

Venezuelan President Hugo Chavez received on 11th august Argentine President Cristina Fernandez de Kirchner in Caracas to sign agreements expanding trade between the two countries. Among the deals was an accord to import as many as 10,000 cars from Argentina this year instead of Colombia.
President Chavez and his counterpart C.F. Kirchner. The deal includes 10.000 cars, farm machinery and food products

Chavez said last month he’d “freeze” relations with Colombia over the country’s plan to allow the US military to use its bases and accusations by Colombia that Venezuelan weapons fell into the hands of Colombian guerrillas.

“This bilateral meeting today is aimed at deepening our vital integration” Mrs. Kirchner said today on the steps of the Miraflores presidential palace in Caracas, following a meeting of the two leaders.

Venezuela is Colombia’s second-biggest trading partner, and last year bilateral trade rose to 7 billion US dollars.

Mrs. Kirchner and Chavez signed agreements for Venezuela to import one billion US dollars in agricultural machinery, leather goods and poultry products, Argentine newspaper Clarin reported on its Web site. The deals were signed after more than 70 Argentine businessmen arrived in Caracas Monday to meet with government officials.

Pedro Bergaglio, president of Argentine textile makers association Fundación Pro Tejer told reporters today in Caracas that Venezuela’s state importing agency Suvinca agreed to buy 100 million USD in textiles this year.

In preparation for Tuesday’s meeting, Argentina’s Production Minister Deborah Giorgi met with representatives from carmakers, including Renault Argentina unit, Ford Motor Co., Daimler AG’s Mercedes, Toyota Motor Corp. and Fiat Spa, according to a statement from the ministry.

Mrs. Kirchner also anticipated that among the bilateral agreements is “a rice export deal, the biggest ever in Argentina’s history”.

Mexican president proposes free trade agreement with Brazil

Mexico’s President Felipe Calderon has said he will propose a free trade agreement with Brazil. “Trade enriches economies,“ said Mr Calderon during a meeting with business leaders in Sao Paulo.
Calderon is on the last leg of three country visit to South America

Calderon began on Saturday a three day visit to Brazil, when he will meet President Lula da Silva and visit oil firm Petrobras.

"I offer to put the idea [of a trade agreement] out there before different industries, and political and social groups," said Mr Calderon.

Brazil and Mexico are Latin America's largest economies. The two nations are responsible for around 70% of all economic activity in the region. However

Mexico's economy has been hard hit by the recession and more recently by swine flu. The US slowdown has meant less money is being sent home by migrant workers, and Mexican exports have fallen.

Mexico sends 80% of its exports to the US, so has been particularly exposed to the US fall in consumer spending.

President Calderon also called for Mexico’s state-run oil monopoly Petroleos Mexicanos to form a “close collaboration” with Brazil’s Petroleo Brasileiro SA in all areas, including operations.

With such a partnership, Pemex, as the company is known, could turn falling oil production around and could expand production, Calderon said in an e-mail copy of a speech.

“It’s in the interest of the Mexican government to strengthen the mechanisms for scientific, technological, academic and operational cooperation between Petrobras and Petroleos Mexicanos” Calderon said.

Two years earlier, at the beginning of his six-year administration, Calderon had discussed more cooperation with Petrobras when he lobbied Mexicans and the Congress to pass an energy reform bill to help Pemex tap deep-water crude deposits.

Calderon’s energy reform plan, which called for more private investment in the oil industry, was rejected and ended up mostly as a tax cut to Pemex and a board with independent members.

Pemex’s oil production dropped to 2.63 million barrels a day in the first six months this year from 3.38 million barrels per day on average in 2004.

Perspectives: BRAZIL, CHILE, COLOMBIA, PERU, ARGENTINA, MEXICO, VENEZUELA, ECUADOR

Brazil, Chile, Colombia and Peru are top recommendations. Neutral on Argentina, Mexico and Venezuela and underweight on Ecuador.

TOP PICKS: Presidents Luiz Inácio Lula da Silva and Alan Garcia in Brazil in April. (Photo: Ricardo Stuckert/Brazilian President's Office)

BRAZIL

Brazil’s history is a continuum of commodity booms and busts, from sugar to rubber, and coffee to iron ore, Brazil always benefited from its vast mineral and agricultural wealth. The gold boom of the 16th and 17th century was one of the most prosperous times for the country, transforming the small town of Vila Rica in Minas Gerais into one of the richest cities on the planet. The town was subsequently renamed Ouro Preto, which means Black Gold. Today, Brazil is reliving another Black Gold boom as it develops its deep water oil fields.

The Ministry of Mines and Energy recently announced that international companies will be allowed to bid for the pre-salt offshore oil fields as early as next year. However, the process may be delayed since the congress needs to pass new legislation to enable the regulatory framework. The recent rise in oil prices sparked renewed interest in the offshore concessions. Brazil has almost doubled its oil production since the start of the decade, reaching 2.6 million of barrels of oil per day from an initial level of 1.4 million barrels of oil per day. This is converting Brazil into one of the biggest energy producers in the western hemisphere.

CHILE

The sudden rise in copper prices brought a much needed respite to the Chilean economy. Chile is clearly suffering the effects of the global downturn. Economic activity contracted 4.6 percent y/y in April, marking the worst downturn since 1999. Fortunately, the decline in economic activity is easing inflationary pressures. Consumer prices rose 3 percent y/y in May. This was below the market’s forecast of 3.5 percent y/y, and well within the target range of 2 percent to 4 percent set by the central bank. The easing of inflationary pressures is allowing the central bank to loosen monetary policy in a bid to jump start the economy.

However, the recession is providing the opposition with the ammunition needed to criticize government policies. Even though Finance Minister Andres Velasco won international praise for his stubborn adherence to fiscal discipline during the copper boom, opposition leader Sebastian Piñera and his economic adviser, Cristian Larroulet, criticized him for not doing enough to help small businesses. Chile clearly needs to take steps to revitalize the economy by introducing reforms to improve labor flexibility, improve education and boost productivity. Hopefully, the uptick in copper prices will provide it with some respite from the international storm.

COLOMBIA

After a sudden change of heart by President Obama on his opposition to the Free Trade Agreement, the White House appears to have cooled on the idea. Government officials indicated that the Administration would try push through the trade pact before the end of the year, but it now looks like it will revisit the issue in 2010. It is not clear whether other legislative priorities, such as addressing the U.S. economic crisis, were more important, or whether pressure from the labor unions forced the U.S. President to acquiesce. Unfortunately, Colombia is accustomed to such sudden stops and starts. Bogota always thought that the free trade pact was imminent, only to be left jilted at the altar.

Interestingly, the devaluation of the U.S. dollar against the Colombian peso is making the trade agreement a moot point. With the dollar quickly approaching the 2000 mark, Colombian exporters are losing their competitiveness. This is particularly true with regards to the manufacturing sector. Colombian textile and apparel producers are extremely price sensitive. Given that the Chinese Yuan is virtually pegged to the dollar, the appreciation of the peso is eroding their maneuverability. The Colombian central bank may need to respond by lowering interest rates in order to avert the peso from gaining too much ground.

PERU

The Peruvian economy showed signs of more deceleration. Peru’s GDP grew only 1.8 percent y/y in the first quarter, the slowest pace in more than 7 years. This was down sharply from the 6.6 percent y/y GDP growth that was posted during the fourth quarter of 2008. Exports were seriously affected by the decline in U.S. demand. Manufacturing dropped 5.1 percent y/y and fishing plunged 20 percent y/y. Peru’s mining sector also contracted during the first quarter, but the recent rise in commodity prices should offset the decline.

Fortunately, Peru’s consumer sector remains strong. Private consumption expanded 3.4 percent y/y. The banking sector is well capitalized, thus providing Peruvian households with the liquidity needed to confront the downturn. Along the same lines, the central bank is easing monetary policy to provide relief to consumers and companies. The effects of the international crisis forced us to revise down Peru’s 2009 GDP forecast to 2.7 percent y/y.

ARGENTINA

With elections only a few weeks away, and the government lagging in the polls, there is a sense that the government will need to change its behavior. The polls show that President Cristina Fernandez de Kirchner will lose her majority in the lower house and erode some of her majority in the senate. In a desperate ploy to boost his wife’s standing, former President Nestor Kirchner threw his hat in the ring. However, the government’s approval rate is hovering near 40 percent, about half of where it was a year ago.

At the same time, the economy is decelerating sharply. Automobile sales dropped 25 percent y/y in May and some economists expect the economy to contract 3 percent y/y in 2009. We still have our forecast at 0 percent growth, but will need to revise it if the data continues to show a deceleration. Moreover, the government looks like it may be forced to trim its aggressive behavior. Argentine asset prices rallied at the beginning at the beginning of June, when the Ministry of the Economy announced that it was making an early payment on the Boden 12s. Given its dwindling resources, the government is realizing it may need to tap into the capital markets to make ends meet. Therefore, it may be time to behave.

MEXICO

Mexico is enduring a barrage of international crises and domestic problems. Given the high level of integration with the United States, the credit crisis is wrecking havoc with the Mexican economy. Not only has it depressed the demand for Mexican exports, it sent remittances lower. Transfers from Mexican workers residing abroad fell 19 percent in April, the largest drop ever. The decline in remittances adversely affected many of the poorer regions, aggravating the social tensions.

To add to the economic woes, the H1N1 virus sharply depressed tourist receipts. It was bad enough that many U.S. and European households were cutting back on their vacation plans, but the swine virus was the coup de grace. The disease is also increasing medical costs, helping to aggravate the budget deficit.

Last of all, the economic downturn is providing further fuel to the narcotic wars that are ranging throughout the country. The decline in economic activity if forcing many people to turn to illegal operations. This is creating a perfect storm that will push the country into the worst recession since 1932.

VENEZUELA

Hugo Chavez is in the midst of a nationalization spree, as oil prices recover. In addition to recent takeovers in the banking and steel sectors, the Venezuelan government approved new legislation to nationalize chemical companies. Moreover, the new legislation indicated that the owners would not be allowed to take their cases to international arbitration. The move is clearly ruffling feathers throughout the region, forcing President Chavez to state that he would not nationalize any Argentine and Brazilian companies. The government’s actions are odd, given that it is also trying to attract foreign investment to help offset the decline in oil production.

In another strange move, the government approved $7 billion in new bond issues and financing. The funds will be used for further acquisitions and the modernization of the electricity sector. The government will plow $22 billion into the sector. The bond issues will be denominated in bolivars and dollars, and it could be another channel for local investors to avert capital controls. The recent rise in oil prices allowed the central bank to shift the devaluation of the bolivar to the back burner. Therefore, many local investors and businesspeople are looking for new ways to shift their capital offshore.

ECUADOR

Ecuador stubbornly continues to march to a different beat, despite being shunned by the international community. President Correa won a second term in office, winning 52 percent of the vote. With a new mandate in hand, the Ecuadorian leader successfully restructured the external debt. The government offered bondholders 35 cents on the dollar. It claims to have gained control of 80 percent of the bonds through the debt exchange and buybacks. Most of the remaining bonds consist of the 2015’s, which the government is still servicing. The rating agencies, led by Fitch, indicated that they would raise the country’s debt rating due to the successful completion of the restructuring operation.

Although Ecuador was able to engineer its debt restructuring, investors are very reticent about the government’s behavior. Capital inflows increased sharply during the second quarter, as international banks slashed credit lines. International reserves dropped 30 percent. This forced Quito to order the banks to repatriate funds in an effort to keep liquidity high.

Brazil Economy: Worst Over?

Is the Brazilian economy past the worst of its recession? Four experts share their predictions.

MORE CREDIT: The recently launched 'My House, My Life' program (Minha Casa, Minha Vida) and the expansion of credit are some of the drivers for Brazilian economic recovery, experts say.

On June 9, Brazil's national statistics agency said the country had officially entered a recession as GDP for the first quarter of 2009 contracted 0.8 percent, following a 3.6 percent decline in the fourth quarter of last year. The first-quarter drop, however, was not as steep as economists had expected. Is Brazil's economy past its worst point? What will drive Brazil's recovery? Which industries will be the first to bounce back?
Paulo Levy, economist at Brazil's Institute of Applied Economic Research (IPEA): The main difference between last year's fourth quarter and this year's first quarter was the behavior of private consumption, which dropped 1.8 percent in the last three months of 2008 and grew 0.7 percent in the first three months of this year. In both quarters, investment plunged, accumulating a 21 percent decline. The impact of the international crisis in Brazil was felt mainly through the trade, credit and confidence channels. In the first case, exports have fallen 20 percent year-to-date through May, but some reaction has already taken place since January, especially regarding commodities exports. The decline in manufactured exports, on the other hand, remains depressed and has had a strong impact on the manufacturing sector, as exemplified by the performance of the auto industry, where, even after the recent recovery, the difference in output levels when compared to last year can be assigned almost entirely to lower exports. The recovery of sales in the domestic market stems from the measures taken to unblock the credit supply. Even though credit concessions remain below their year-ago levels, especially in the corporate sector, in some cases — like consumer loans — it has already increased significantly from the lows seen in the last quarter of 2008. Another factor that might explain consumption's resilience is the so-far relatively mild impact of the crisis in labor markets, with workers' total income still growing close to 6 percent on a year-to-date comparison. Increased government transfers, including the impact of a 12 percent increase in the minimum wage, with strong impact on social security benefits, also played a role in this process of supporting consumption demand. At the same time, confidence is gradually returning in both entrepreneurial and consumer circles. These factors point to a gradual recovery of economic activity in the coming quarters, driven by sustained consumption and, if China returns to its high growth trajectory, also by exports. Given the sharp decline of economic activity in the fourth quarter of 2008, however, it will not be an easy task to avoid negative growth over the year.

Joel Korn, managing partner at Performa Partners in Sao Paulo: Notwithstanding two consecutive quarters of negative economic growth, the performance of Brazil in the period underscores its resilience and strong fundamentals. Unlike in the past, when the country had very high vulnerability to external shocks, Brazil posted a relatively moderate downturn in the past six months, despite the severity of the recession in the United States, other developed countries and worldwide slowdown in the economic activities. The pace of recovery will depend on the intensity of the gradual turnaround of the developed economies, still unclear at this point. Outlook for commodity prices and exports of manufactured and semi-manufactured products is mixed in an environment of slow and uneven growth in foreign markets, with rising unemployment. Nevertheless, largely driven by domestic demand, Brazil is very well positioned to come out of recession and resume moderate economic growth in the second half of this year. Infrastructure projects and construction will help foster economic activities. In addition, industries that benefit from the growing middle class are expected to perform well such as automobile, food processing, personal care, selected retail segments and corporate services. Discipline in current expenditures and sound fiscal stimulus policies are essential components for the sustainability of the economic recovery.

Albert Fishlow, professor emeritus of International and Public Affairs at Columbia University: Brazil was a late entrant into the current world recession, and promises to be an early leaver. Most analysts now believe that the second quarter, almost over, will show some positive growth. Whatever the doubts about the 'green shoots' of global recovery, modestly stimulative monetary and fiscal policy backed by extensive international reserves have enabled Brazil to avoid the larger downturn many had earlier predicted. For the year 2009, the growth rate may be slightly negative because of the speed of the decline in the fourth quarter, but the agenda has now shifted to creating a firm basis for resumption of faster growth. Much lower real interest rates are a positive factor, since reigniting private investment is the heart of the matter. expenditures under Brazil's Growth Acceleration Program (PAC) continue, so public contributions will not fail. Increased exports of manufactured products will help, particularly if economic recovery becomes more generalized. The challenge is not to push excessively, which conflicts with the political reality of a close presidential race in 2010.

Nei Cristofolini, chief representative in the US of Brazilian state-owned bank Caixa Economica Federal: To say for sure that Brazil's economy has past its worst point could be premature, considering that we are talking about a simple comparison between two quarters and a result better (or less bad) than expected. A deeper look at the behavior of the components of GDP like consumer spending, industrial production, investment and so forth, could provide more clues, though not certainties. But it is quite possible that the worst is behind us. What seems to be an important message from this data is that Brazilian resilience to external shocks has improved a lot in recent years. A capitalized financial system, robust domestic demand, reserves and controlled inflation provide support for the measures taken by the Brazilian government to smooth the impact of the world financial crisis and allow an easier recovery. Combining steps in monetary policy and credit, such as the expansion of credit at state-owned banks, reduction of both banking reserves requirements and interest rates, compensatory fiscal measures such as tax exemptions and an increase in public investments have shown to be effective so far. Investments in infrastructure included in the Growth Acceleration Program (PAC), the recently launched 'My House, My Life' program (Minha Casa, Minha Vida, which targets the construction of one million houses) and the expansion of credit including within the private financial sector probably are some of the drivers for Brazilian economic recovery. Therefore, it is reasonable to believe that the industries related to investments in infrastructure and housing sector, including its supply chain, will be among those that will bounce back first.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

Latin America: Smartphone Outlook

Will smartphones remain on hold in Latin America? Three experts share their views.

BlackBerrys are appearing in businesspeoples' hands throughout the region because they are generally free with an email or data plan, experts say. That contrasts with lack of subsidized offers for other smartphones. (Photo: BlackBerry)

Latin America's smartphone market is still in its infancy, representing only 3 percent of total handset unit sales in 2008, while globally smartphones accounted for 12 percent of sales, Pyramid Research said last month. The firm predicts, however, that the smartphone segment in Latin America will grow from 7 million units sold in 2009 to 48 million in 2014, swelling from 5.4 percent to 30 percent of total handsets sales. Why has Latin America been so slow to adopt smartphones compared to other parts of the world, especially emerging markets with similar demographics and income characteristics? Will it continue to lag behind the rest of the world in 2014, even if smartphones make up 30 percent of the region's handsets? What public policies can spur faster adoption of new communications technologies in Latin America? Should that goal even be on the radar of governments in the region during an economic downturn?

Wally Swain, senior vice president for emerging markets at the Yankee Group in Boston: Latin America may be below average on smartphone penetration, but netbooks and laptops with broadband mobile modems are flying off the shelves. For all the attractions and convenience of a smartphone, they have been expensive, so expensive that laptops and notebooks are available for about the same price. Unless you really need handheld mobile data (for mobile email for example) other devices are better positioned on the price-value curve. A laptop plus a mobile broadband modem can be cheaper than a good smartphone. That being said, smartphone prices are coming down as volumes in the developed world drive the costs of basic components down. The latest iPhone retails for $100. That compares with a mid-scale phone in Latin America. Blackberrys are appearing in businesspeoples' hands throughout the region because they are generally free with an email or data plan. The primary challenge to greater penetration has to do with distribution and the common use of subsidies. Nokia, Samsung, LG, HTC—the list goes on of manufacturers with excellent smartphone offers. But in Latin America these are often only available through retail channels (not through the operators) and without subsidy. Without subsidy and side-by-side with, on the one hand, phones below $100, and on the other hand, notebooks and laptops, they suffer by comparison. Mobile operators have to educate consumers about the benefits of smartphones and wean them off the concept that all mobile phones are under $50.

Calvin Monson, principal of Alhambra Consulting in Chicago: Latin American mobile operators, especially America Movil, have focused on a business model aimed at putting as many telephones in the hands of as many members of society as possible. This has meant that the handsets they have been selling have not so much been high-end smartphones but rather simple inexpensive telephones capable of just voice calls and text messaging. So far, the strategy has proved to be profitable and has resulted in tremendous growth in the number of subscribers and in volumes of calls and messages. How does this work? The business model uses prepaid service (avoiding billing and credit issues) and Calling Party Pays (allowing service to even the lowest income members of society). In other words, if the low income customers don't have the disposable income to pay for the cost of a phone and can't pay to initiate many calls, how can they be profitable to serve? They are profitable because they receive calls that others pay for. Society is better off because they have phones. If they didn't have phones, they couldn't receive calls. Government policies on pricing calls therefore should explicitly recognize those benefits when setting the level of charges. Charges should reflect the direct network costs involved but also the costs of acquiring new customers, since these customers are almost all going to be low income and wouldn't connect otherwise.

Andres Maz, executive director of advanced technology policy at Cisco Systems in Washington: Mobile data services are now growing at triple digits across the region and all indicators suggest that the trend will continue. The deployment of new applications such as mobile banking, which by the way, has a significant impact in helping poverty reduction, also raises the value of connectivity and motivates new consumers to upgrade their subscription packages. However, this trend will only be feasible if more spectrums become available to deploy new networks. Countries that implement the right policies to attract investments in new networks will not only catch up, but will take the lead in the information economy. Putting spectrum to work is the best mechanism governments have to drive the expansion of wireless networks. In the current economic environment, it is even more important that governments move faster to make spectrum bands available, as the deployment of new networks will also generate jobs and investments in the economy. Opening spectrum does not require government investment, just the political will to navigate and sort out the political process. Another policy that does not require government funds and could push service providers to invest in rural areas is to authorize them to establish commercial agreements to share passive infrastructure, such as antennas and buildings. Sharing infrastructure via commercial agreement allows service providers to reduce capital expenditure and operating expenditure, thus making more attractive the deployment in new regions. The World Bank just published a report that takes an in-depth look at how information and communications technology (ICT) impacts economic growth in developing countries. The report is conclusive on its message to governments on the need to foster the adoption of new communications technologies. The report finds that for every 10 percentage-point increase in high-speed Internet connections there is an increase in economic growth of 1.3 percentage points. The report also identifies the mobile platform as the single most powerful way to reach and deliver public and private services to hundreds of millions of people in remote and rural areas across the developing world. Broadband networks and ICT are a critical foundational element for the information economy and countries' ability to compete.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

Brazil: Serra's Health Card

Health could start to play a greater part in Brazil and Jose Serra is in a strong position to claim that he is the right man to handle it.Sao Paulo governor and presidential hopeful Jose Serra has useful expertise in health issues as a former health minister, the author points out. (Photo: Sao Paulo State Government)

If São Paulo state governor Jose Serra stands for the presidency next year he will find it difficult to attack President Luiz Inacio Lula da Silva's economic record. Brazil's economy has grown under Lula's administration and has avoided the worst fallout from the global economic crisis. Serra – who is well ahead in opinion polls - might be better advised to play up his track record as health minister from 1998-2002 when he led a successful campaign to combat AIDS and slashed the cost of drugs by introducing generics. Health will cast a shadow over this election in another way as Lula´s favorite candidate, Dilma Rousseff, is being treated for cancer and there are still doubts over whether she will stand.

Serra's hands-on approach contrasts with the government's unimpressive handling of the current swine flu outbreak and the recent dengue epidemic. Health is still near the top of Serra's agenda and he is currently involved in a legal battle to ban smoking in public places in São Paulo. Just as he took on the drugs companies, he is now confronting the tobacco, catering and hotel sectors.

CONSTANT ISSUE

Health is a constant issue in Brazilian politics. The state system which is used by the lower income groups is inefficient and in places primitive. The ending of the CPMF “check tax” on financial transactions in 2008 which was supposed to be destined for the health sector was a blow to Lula who claimed it had deprived the sector of R$40 billion. If Lula had been able to persuade taxpayers that the money had actually gone to improving the health service, then he might have succeeded in retaining it ,but he could not.

Health is also a crucial part of the Bolsa-Familia social welfare program for poor families, which receive a modest monthly grant providing they send their children to school and ensure they have regular medical exams.

If people can afford to, they take out private health plans, but these are expensive and most formally employed workers rely on their employers' health plans, which generally form part of the fringe benefits. More people have started to enjoy this benefit in recent years as the economy has expanded and more people have joined the formal payroll. There are now an estimated 40 million beneficiaries of these plans. This movement has benefited practically every segment involved – the employees, those health plan companies which were strong enough financially to cope with the extra numbers and the increased regulation, along with the drug manufacturers, distributors and retailers. And the government has benefited as higher corporate earnings have brought in higher tax revenues and many people have switched from the state health scheme to the private sector, thereby reducing the government´s burden.

SALES DOUBLED

Drug sales more than doubled from R$15 billion (around US$8 billion) in 2002 to almost to R$30.7 billion (US$16 billion) in 2008, according to the trade association FEBRAFAMA. The average price per unit also almost doubled in this period from R$9 to R$17, well below the rate of inflation.

Another triumph for Serra was his introduction of generic drugs in 1999 which has slashed the cost of a wide range of medicaments and made them more affordable to the general population. The first question most people now ask their doctor when a drug is prescribed is whether it is available in generic form. The difference in price is usually around 40 percent, but the discount can be much higher as drugstores compete for what is now a huge market. The fact is that generic medicines are now so popular that they are growing at a higher rate than overall pharmacy sales. Generics are expected to represent 20 percent of the sector by volume in 2010, according to Piribo, a consultancy specializing in the biotech and pharmaceutical industry. They currently account for around 14 percent of sales and 11 percent of total revenues. This compares with the United States where generic drugs have existed for 20 years and have a 35 percent share of all drugs sales.

Serra also took advantage of a World Health Organization resolution that allowed countries to break drug patents in the public interest. This paved the way for Lula to break the patent on Merck´s AIDS drug Efavirenz in May 2007 which he claimed was too expensive. He signed a law which allowed the government to buy a generic version of Efavirenz from laboratories certified by the WHO. It was the first time Brazil had broken a patent since it recognized patent protection for drugs in 1996, according to Bloomberg.

CONTROVERSIAL

This approach has been condemned by the drugs industry, trade bodies like the American Chamber of Commerce in São Paulo and others which have pointed out that drugs companies have to make massive, long-term investments and deserve the profits they make, particularly as expiring patents deprive them of their star products. However, just as few people have sympathy for big oil companies, lawyers or used car salesmen, few electors are likely to vote against any politician who reduces the price of medicine. This is particularly so among those most dependent on drugs, such as the elderly, the chronically ill and those with young children.

One can understand the arguments of the drugs companies, but it has to be pointed out that no company has pulled out of the profitable Brazilian market because of this decision; the opposite in fact, as we will see below. In any case, the whole sector is something of an oligopoly with around eight companies controlling 40 percent of the world market. This shows the companies have plenty of room to negotiate price cuts or even subsidize prices in some cases if this protects their other products.

Brazil is also a big net importer of drugs (although it exports about 5 percent of production) which is yet another motive for drugs companies to set up business here and for the government to welcome them. For all its public expressions of concern over the wellbeing of the population, the government taxes drug sales at a rate of 35 percent.

GROWING INTEREST

The attraction of lower-priced generics can be seen in the growing interest by multinationals in emerging markets. The French company Sanofi-Aventis announced in April that it was acquiring the troubled Brazilian company Medley for R$1.5 billion. One of the attractions of Brazil is the upcoming end of the patents of blockbuster drugs like Viagra, Cialis and Liptor. Sanofi-Aventis´s CEO said on June 29 that the company was aiming to buy more generic drugs companies. Meanwhile, the UK-based company GlaxoSmithKline has announced a series of licensing deals with generic drugs producers in South Africa and India while Pfizer, the world’s largest pharmaceuticals group, has entered into partnership with two Indian generic groups.

June 29 was also the day the German company Celesio announced that it had acquired a majority stake in Brazil's largest drugs distributor Panpharma. Reuters said Brazil was being seen as a key growth market for the global healthcare industry. It quoted an estimate by a market research company called IMS Health that the Brazilian pharmaceuticals market would grow by 13 percent to 16 percent a year to 2013.

RETAIL PROFITS

Finally, contrary to what might be expected, retail stores and drugs distributors are happy to handle cheaper generic drugs as the profit margins on generics are generally higher than those of branded products.

All this activity shows that health could start to play a greater part in Brazil's future political and business agenda and Serra is in a strong position to claim that he is the right man to handle it. Note: Sources for this article besides those mentioned above include the Financial Times, the São Paulo state government, the Brazilian Health Ministry, the WHO and reports and presentations by economists, researchers and equity analysts.© John Fitzpatrick 2009

Panama Canal: Transparent Process

The Panama Canal has been transparent in its multi-billion dollar bidding process, experts say.

The Panama Canal Authority is getting ready to award its contract for the third set of locks at the waterway and a European-Panamanian consortium appears to be the recipient. (Photo: ACP)

Experts praise the bidding process for the largest contract in the $5.2 billion Panama Canal expansion.

“When I left the board…my biggest concern was there would be too much politics involved in any of the contracts,” says Robert McMillan, a former chairman of the Panama Canal Commission and author of Global Passage: Transformation of Panama and the Panama Canal. “To the contrary, they’ve been extremely transparent. I give a lot of credit to Panama and [Panama Canal Authority CEO] Alberto Aleman Zubieta.”

A European-Panamanian consortium, Grupo Unidos por el Canal, is the likely winner of the contract to build a third set of locks at the waterway after receiving the best overall score on price and technical merit, beating firns like U.S.-based Bechtel and Japan-based Mitsubishi.

“Now the proposal has to be reviewed to make sure it is fully in compliance with the request for proposals,” McMillan says.

Although the Panama Canal Authority (ACP) has said that a formal contract won’t be announced until a later date, most experts believe it will end up being Grupo Unidos por el Canal (GUPC). “The formal winner of the bid [is] likely to be the above-mentioned group,” Global Insight said in a commentary today, referring to GUPC.

Meanwhile, an official at ACP told Spanish news agency EFE that GUPC is “virtually the winner of the contract” as it received the best technical score of all the bids, had the lowest price and the only one that was under the ACP budget for the contract.

GUPC offered to do the work for $3.1 billion, which was under the ACP budget of $3.5 billion. That figure was “maintained secret during the bidding and selection process,” Global Insight points out.

By comparison, the Bechtel-Mitsubishi consortium proposed to do the work for $4.2 billion, while a consortium that included Spain-based ACS Servicios and Mexico-based ICA, offered to do so for almost $6.0 billion.

Despite the big difference in price proposals, experts like McMillan believe GUPC’s bid should be realistic. “If I look at them and thought they were fragile and small I would really wonder about the pricing [but] they are very, strong companies...with vast experience in major projects,” McMillan says. “With Deloitte, a very responsible accounting firm, overseeing the whole picture [and] assuming the vetting comes out 100 percent, I feel comfortable with the proposal, which I think is good for the canal that it comes in at that [lower] level.”

The ACP, the government agency that runs the canal, will likely announce the contract the next few days, Aleman said in a statement yesterday after the ACP held a live event where it opened the price bids for the first time. It then added points for technical merit, which was the result of a four-month long process since the proposals were submitted on March 3.

More than 50 local and international experts provided on-the-ground support for the ACP’s Technical Evaluation Board, working in coordination with the official ACP Contracting Officer, while accounting firm Deloitte served as auditor and reviewed the process to certify that this committee followed the necessary procedures to evaluate the bids, the ACP said in a statement. Meanwhile, all Technical Evaluation Board members signed confidentiality and conflict-of-interest agreements, it added.

“Throughout the review period, the ACP’s Technical Evaluation Board and external auditors worked tirelessly to ensure an airtight course of action that reflects our staunch commitment to a fair, rigorous and transparent contracting process, Aleman said.

That process should help ease concerns that there was a conflict of interest. GUCP includes Panama-based Constructora Urbana, which is owned by relatives of Aleman – a fact criticized among many Panamanians.

“We’re related, but there hasn’t been any type of tip, information or benefit,” Aleman said yesterday, according to local newspaper La Prensa.

McMillan says he doubts that Aleman, the ACP and Deloitte would be part of anything that wasn’t completely transparent. “I can’t see them doing that in light of international community [spotlight],” he says. “Knowing Deloitte, their credibility is so important. If they saw one possibility of a tip off, they would have expressed themselves.”

The GUCP’s other members are Spain-based Sacyr Vallehermoso, Italy-based Impregilo and Belgium-based Jan De Nul.

The GUCP competed against a consortium consisting of Bechtel, Mitsubishi and Japan-based Taisei Corporation and a third consortium known as C.A. N.A.L. That group consisted of ACS Servicios, ICA, Germany-based Hochtief Construction and Spanish firms Acciona Infraestructuras an Fomento de Construcciones y Contratas.

In addition to presenting the lowest offer, GUPC also got the highest technical score of the three consortia - 4,088.5 versus 3,973.5 for C.A.N.A.L and 3,789.5 for the Bechtel-Mitsubishi group.

The ACP used a “best value” process to determine the winner, with technical considerations weighing more heavily – 55 percent – than the cost, 45 percent.

ON TRACK

McMillan also praises the fact that the expansion is on track despite the global economic crisis.

In October last year - while the global economic meltdown was going full speed ahead -- the ACP secured a $2.3 billion loan package from a group that include the Japan Bank for International Cooperation ($800 million), the European Investment Bank ($500 million), the Inter-American Development bank ($400 million), the International Finance Corporation ($300 million) and the Andean Development Corporation ($300 million). That followed news in September that Moody’s had given the ACP an investment grade.

The loans, along with toll revenues, will help pay for the $5.2 billion expansion, the ACP has stated.

”Even with the downturn in the economy [and] even retreating a little from toll rises, even with all that put together they will finish on time,” he says.

He’s also encouraged by the fact that the expansion will be completed under the watch of Panama’s new president, Ricardo Martinelli, a former chairman of the ACP and canal affairs minister.

Latin America: Caracas Most Expensive

Caracas becomes more expensive, while Brazil's and Mexico's top cities become less expensive for expats.

MOST EXPENSIVE: Caracas is now Latin America's most expensive city for expats and more expensive than London , Mercer data shows. (Photo: Guillermo Ramos Flamerich)

Venezuela's capital Caracas has replaced Sao Paulo as the most expensive city in Latin America for foreign executives, according to a new cost of living survey from Mercer. Caracas is now more expensive than cities like London and Helsinki and only slightly less expensive than Oslo, Mercer data shows.

The survey looks at the comparative cost of over 200 items, including housing, transport, food, clothing, household goods and entertainment in 143 cities worldwide, including 16 in Latin America.

MONTERREY LEAST EXPENSIVE

The latest survey also shows that Monterrey in Mexico has replaced Paraguay's capital Asuncion as the least expensive city in Latin America.

Caracas now has a score of 93.3 points, up from 79.3 points. Venezuela's inflation last year reached 36.4 percent, higher than the 30.3 percent registered in 2007. This year, it will likely reach between 35 to 37 percent, estimates Pedro Palma, president of MetroEconomica. In both cases that represents the highest inflation rate in Latin America and one of the highest worldwide, according to a Latin Business Chronicle analysis.

In addition to Caracas, other cities that became more expensive since the last survey include Buenos Aires, Panama City, Santo Domingo and Quito.

BUENOS AIRE MORE EXPENSIVE

Buenos Aires now has a score of 65.7 points, up from 62.7 points a year ago. “Although the Argentine peso has lost value against the US dollar, the high inflation rate observed on goods and services have caused Buenos Aires to rise in the rankings,” Nathalie Constantin-Métral, a senior researcher at Mercer, said in a statement.

Cities that became less expensive include Sao Paulo, Rio de Janeiro, Guatemala City, Bogota, Lima, Santiago, Montevideo, San Jose, Mexico City, Asuncion and Monterrey.

Sao Paulo's score fell from 97 to 74.3 points, while Rio's core fell from 95.2 to 73.9 points. That means that the two cities now are considered less expensive than Miami and Madrid.

MEXICAN CITIES

A similar pattern has taken place in Mexico, where capital Mexico City saw its score fall from 73.6 to 55.5 points, while Monterrey's score fell from 65.8 to 49.8 points. Monterrey now ranks as the world's second-cheapest city for expats after Johannesburg.

Meanwhile, Bogota and Santiago have also seen a steep decline in cost of living. Bogota's score fell from 80.1 to 65 points, while Santiago's score declined from 78.5 to 63.5 points. That means that Bogota is now less expensive for expats than cities like Pittsburgh and Detroit, while Lima is less expensive than Ottawa.

Latin America Broadband Jumps

Mexico grows most in broadband users, while Colombia sees the strongest increase in Internet usage.

Mexico is seeing the strongest growth in broadband Internet in Latin America. (Photo: Government of Navojoa, Mexico)

The number of broadband Internet users in Latin America jumped by 38.2 percent last year to 27.7 million, according to a Latin Business Chronicle analysis of new data from the International Telecommunications Union (ITU).

That was five times more than the growth seen in Internet in general, where the number of total users increased by seven percent to 156.9 million.

Those results come as sales of notebook PC’s are growing strongly in Latin America, according to new data from market researcher DisplaySearch. The number of notebook PC’s are likely to grow by 19.8 percent this year to 5.4 million units. Only China can boast higher growth, while global sales will fall by 0.1 percent. Meanwhile, sales of mini-notes (netbooks) are expected to jump by 88.1 percent to 1.9 million units, DisplaySearch estimates.

For every 10 percentage-point increase in high-speed Internet connections there is an increase in economic growth of 1.3 percentage points, The World Bank said in a recent report.

“The report is conclusive on its message to governments on the need to foster the adoption of new communications technologies,” Andres Maz, executive director of advanced technology policy at Cisco Systems in Washington, told the Inter-American Dialogue’s Latin America Advisor (see Latin America: Smartphone Outlook). “Broadband networks and ICT are a critical foundational element for the information economy and countries' ability to compete.”Mexico saw the strongest growth in broadband.