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Richest Latin Americans should pay ‘much more’ tax, says IMF
The IMF’s top official for Latin America has urged governments to make the rich pay “much more” in tax, saying the world’s most unequal region will not develop unless it addresses demands for a fairer economic system.
In an interview with the Financial Times as he prepared to step down after eight years in the job, Alejandro Werner, the fund’s western hemisphere director, said that recent social unrest in Latin America highlighted the need for a much more equal distribution of income.
The IMF has previously called for high earners across the globe who have prospered because of the pandemic to pay more tax on a temporary basis to help those hit hardest. Latin America has suffered more than any other region as coronavirus exacerbated long-running problems of low growth, high inequality and poverty.
Werner flagged “underused” property taxes as a good place for Latin America to start.
“You need to have a much more progressive taxation system where . . . the upper segments of the population pay much more and then you have to have an economic system in which economic competition is much stronger than it is today,” he said.
“Latin America cannot be the most unequal region in the world and jump into the next stage of economic development.”
Before moving to the IMF in 2013 Werner was a senior Mexican finance ministry official and worked at a Mexican bank; he will retire from the fund at the end of August.
The spillover effects of the US stimulus, strong growth in China and high global commodity prices have helped the region to a faster-than-expected bounce back from last year’s 7 per cent fall in gross domestic product, and the IMF, along with private sector economists, has become more optimistic about its prospects.
Werner said the IMF’s current forecast of 4.6 per cent growth in Latin America this year was likely to be revised up, partly because economies had been able to maintain activity at a higher level than expected, despite continuing Covid infections.
“The correlation between economic activity and the rate of contagion is much weaker now than in [the second quarter] of last year,” he said.
The region’s two largest economies, Brazil and Mexico, have given priority to reopening their economies despite high death tolls, helping them recover more quickly than some neighbouring countries that have persisted with lockdowns.
An FT study of excess mortality found that Latin American countries have suffered some of the world’s highest death rates from the pandemic, with relatively little difference between countries that imposed strict lockdowns, such as Peru and Colombia, and those that did not, such as Brazil or Mexico.
Latin American countries also took divergent paths on extra spending, with Brazil, Peru and Chile among nations taking on significant additional debt to support those most affected by coronavirus.
Mexico was the notable exception and although Wall Street banks are forecasting it will grow by more than 5 per cent this year, this will not make up for the 8.5 per cent contraction it suffered last year. Werner said it “would have been much better served” with a stimulus package.
The region’s politics have been turbulent in recent years, with waves of street protests rocking Chile and Ecuador in 2019. They spread to Peru and more recently Colombia, polarising politics and strengthening the hand of outsider candidates from the extremes of left and right in elections.
In Peru, Pedro Castillo, the candidate of a Marxist-Leninist political party, appears to have won this month’s presidential election, although his conservative opponent Keiko Fujimori has challenged his victory with claims of electoral fraud.
“The swings that we see in the political choices by the population reflect that there’s a very strong demand for a much better income distribution, and beyond that, a much . . . fairer economic and social system,” said Werner.
In April Colombia attempted a tax reform to boost revenues and broaden its tax base but the government was forced to scrap it within days after a wave of violent protests across the country.
Werner said revenue-boosting tax changes were needed to repair public finances across the region but added that Bogotá’s experience showed the need for broad agreements on economic reforms that went beyond the traditional political class.
“The political environment is very tough for the implementation of reforms and therefore countries will have to be very careful in designing these reforms, in engaging with the population at large and eventually in generating the consensus . . . because these reforms are necessary,” he said.
“If not, we will see significant instability that will hurt employment, that will hurt the recovery, will hurt social indicators. It’s a very difficult landscape.”
Ex-head of Canada’s largest pension fund joins Singapore VC firm
The former head of the Canada Pension Plan Investment Board is joining a Singapore-based venture capital group, in his first role since quitting the fund after his decision to fly to the Middle East to receive a Covid-19 vaccine prompted a national backlash.
Mark Machin, who resigned as chief executive of the $356bn fund in February, will join the board of Serendipity Capital on August 1.
Serendipity, a venture capital group founded in 2020, invests in financial services, technology and climate-focused companies and has filed in the US to raise up to $250m from an Asia-focused Spac.
“All journeys must come to an end,” he wrote in an email to CPPIB staff and seen by the Financial Times. “It has been said that it is better to travel well than to arrive. And we have traveled well.” Machin’s term at the fund officially ended last Tuesday.
Machin travelled in a personal capacity to the United Arab Emirates for a Covid-19 vaccine in February, a period of strict travel controls in Canada. The trip prompted outrage, including a rebuke from Chrystia Freeland, Canada’s finance minister. “Canadians place their trust in the CPPIB and expect it to be held to a higher standard,” she said at the time.
Canada’s largest pension fund has delivered average annual returns of 11 per cent since Machin took the helm five years ago, pushing up total assets from $280bn to almost $500bn.
The financier’s move to Asia follows a nearly decade-long stint in various roles at CPPIB and marks a return to the region where he spent much of his career.
Machin trained as a doctor before joining Goldman Sachs, working for most of his two decades with the bank in Asia, where he became head of investment banking and vice-chair for Asia ex-Japan.
He left Goldman in 2012 for CPPIB, which manages the investments of the Canada Pension Plan, a pillar of the country’s retirement system with more than 20m contributors.
Machin will serve as a non-executive director at Serendipity and “help drive the strategy and governance of the company”, said Robert Jesudason, chief executive.
Serendipity has invested in companies including UK-based Cambridge Quantum Computing, which will soon form a joint venture with the quantum computing business of Honeywell, the US conglomerate, as well as climate change advisory and investment firm Pollination.
“Clearly [Machin] brings enormous investment management experience, and he understands the trends in that industry,” Jesudason said, adding that Machin also “brings deep relationships and perspective in Asia Pacific”.
Singapore has invested heavily to position itself as south-east Asia’s tech and start-up hub, attracting a growing number of investors. The city state is home to more than “200 venture capitalists”, according to the government, and accounts for the bulk of south-east Asia’s venture investments.
Investors poured S$5.5bn ($4.1bn) into Singapore-based start-ups in 2020, almost three times the amount invested five years ago.
Additional reporting by Stefania Palma in Singapore
Cuba’s homegrown Covid vaccine shows promise
One of Cuba’s coronavirus vaccines has shown 62 per cent efficacy in late-stage trials, using just two out of the three recommended doses.
Phase 3 interim results presented over the weekend for the Soberana 2 vaccine, named after the Spanish word for sovereign, surpassed efficacy thresholds required for approval by regulators and health agencies worldwide, including the World Health Organization.
Vicente Vérez Bencomo, director-general at the country’s Finlay Institute of Vaccines, said it was a very encouraging result “obtained in a scenario of viral variant circulation”.
Last month, Cuban officials indicated the Beta variant, first identified in South Africa, had become dominant in the country. That variant has shown the greatest degree of immune escape — or lack of response — across vaccines, though the Soberana 2 results appear to offer hope.
Vérez Bencomo told reporters he expected late-stage results of the three-dose regimen to “of course be superior”. The 62 per cent figure refers to a two-dose regimen.
Cuba has several vaccine candidates in development, and has begun deploying two: Abdala and Soberana 2. All the vaccines are protein-based, meaning a part of the virus’s spike protein has been deployed to train the immune system to fend off the virus. These types of vaccines are usually cheaper and easier to manufacture.
Officials told reporters they expected to be able to apply for full emergency approval from the country’s drug watchdog in the coming weeks. A preprint and full results were not yet available, though that has been a common occurrence with interim analyses of other vaccines during the pandemic. Health officials said the data were analysed by an independent group of experts.
WHO, which is the early stages of assessing Cuba’s vaccines as part of its emergency use listing process, welcomed the news. Soumya Swaminathan, the health body’s chief scientist, said she looked forward to seeing the complete data.
“Vaccines with good efficacy and safety profiles that meet WHO benchmarks are welcome. The world needs more supplies and vaccines that have easier storage conditions, are easy to manufacture and scale and affordable are welcome,” she told the Financial Times.
“Technology transfer of the most promising candidates to manufacturers across the world is the best way to increase supplies to meet global demand.”
Global health officials have said a wide range of vaccinations is needed to ensure the pandemic can be stemmed.
Cuban officials have said they would be open to licensing the intellectual property around the vaccines with a small profit margin to subsidise the country’s universal healthcare system.
Cuba, which has been an exporter of vaccines for years, remains under US embargo, with dire consequences on its economy and health system. It has developed other coronavirus drugs, such as Jusvinza, which is used in patients hospitalised with Covid-19 who are critically ill.
There have been 166,368 confirmed cases to date in the country, with 1,148 deaths, according to data compiled by the Johns Hopkins University.
Latin America isn’t booming, but that could change
The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’
For all the Marquezian dramas of civil and class war, colonialism and corruption that have wracked Latin America, history shows that its economic fate rises and falls with just one thing: the prices of oil, iron ore, copper and other commodities.
Now, despite a recent dip, commodity prices are up sharply since early last year, but Latin economies are not. They are expected to shrink by 1 per cent this quarter as the global economy expands by 5 per cent. Plot commodity prices against Latin American GDP growth and lines that moved together for decades have suddenly parted ways. Why? The pandemic and populism.
Seven of the world’s 10 highest Covid-19 death rates are in Latin America. The toll is fuelling support for anti-establishment politicians in an unusually busy campaign period, with 11 Latin countries holding elections this year. Brazil and Colombia follow next year. In many cases, the right was in power when the pandemic hit, so rising discontent is benefiting candidates on the left or the far left.
A Marxist-Leninist is poised to become Peru’s next president. A communist is among the frontrunners to replace right-of-centre Sebastián Piñera in Chile. Violent protests against Colombia’s government are improving prospects for its leftwing rivals. In Brazil the posturing of rightwing populist Jair Bolsonaro is helping his radical alter ego, ex-president Luiz Inácio Lula da Silva, establish a lead in the polls.
Fear of what comes next is holding back investment at a vulnerable time. The 2010s were a lost decade. Growth was undermined by falling prices for commodities, which make up more than half of exports in most of the region’s economies. Foreign investors started to shy away from Latin American stocks and bonds when commodity prices collapsed, and have yet to return. Pessimism shrouds the continent.
Over the long term, commodity prices rise no faster than inflation, and that has left resource-dependent Latin America essentially dead in the water. My research shows that Brazil, Chile, Mexico and Colombia are no richer in per capita income, relative to the US, than they were in 1850 (when comparative records begin). Argentina, Peru and Uruguay are significantly poorer. The average Argentine income is now 33 per cent of the average American income, down from 55 per cent in 1850.
Nonetheless, in decades when commodity prices boomed, so did Latin America. When prices rose sharply in the 1970s and 2000s, so did the pace of growth, and the number of the region’s economies growing fast enough to see their average incomes converge with the US. In decades when commodity prices stumbled, so did Latin America, most recently in the 2010s.
Given the cyclical nature of commodity prices, however, a bad decade was often the harbinger of a better one to come. In the 2010s weak prices discouraged investment in oilfields, mines and other raw material production worldwide. Supplies are tight, inventories are low. As the global economy rebounds, demand is rising for commodities of all kinds, particularly those required in electric cars and greener homes and buildings.
Recent wobbles aside, commodities appear to be entering a new “supercycle” of rising prices. Latin American countries, as major exporters of soyabeans, green metals and other commodities, should benefit more than most. Peru and Chile alone supply 40 per cent of the world’s copper.
The hope for the region is that the commodity boom proves strong and long enough to overcome doubts about the new wave of populists. Financial crises have a way of moderating the behaviour of even the most committed radicals.
Lula took office after the crises of the 1990s and surprised many by focusing, at least in his early years, on keeping inflation in check and controlling his spending impulses. In Mexico, President Andrés Manuel López Obrador has borne out investor fears in many ways save for a critical one: budget discipline. His refusal to spend heavily on pandemic relief has alarmed some but left Mexico less indebted than many other emerging nations.
The current crop of socialists and communists could prove less successful at the polls or less radical in office than widely feared. If the political dramas do recede, Latin America would be free to be itself; a region of commodity dependent economies, rising with global prices, so long as the upward swing lasts.
Brazil’s Covid inquiry puts Bolsonaro on the back foot
For the third time in a little over a month, Brazilian President Jair Bolsonaro this weekend rallied thousands of his conservative support base in a noisy motorcycle demonstration dubbed “accelerate for Christ”.
Observers had little doubt about the populist leader’s motivation: he needed to show strength. Over the past two months, the former army captain’s reputation has been battered by a stream of revelations over his government’s handling of the Covid-19 pandemic, which have emerged in an official congressional investigation known as the CPI.
The CPI has cast the Brazilian government’s response as woefully inept and even hazardous to public health: from the president’s emphatic support for discredited remedies, such as chloroquine, to allegations that the government ignored dozens of emails regarding vaccine supply from Pfizer and even ran a parallel health ministry within the executive office.
“We had the time, we had the tools — an enviable primary healthcare-based system — but we delusionally insisted on the wrong paths,” said Luana Araujo, an infectious disease specialist, who testified at the hearings in Brasília. “Part of us still does. We chose to ignore the experience from the rest of the world, and this combination of arrogance and ignorance is far too dangerous.”
Almost half a million Brazilian have now died from Covid-19, and the daily death rate remains at above 2,000. Meanwhile, the rollout of vaccines has lagged and is only now beginning to gather steam. Some 26 per cent of the population have received their first dose to date.
Since the CPI began in April, the testimonies from the Senate committee rooms have dominated headlines and gripped viewers, who have watched on TV or streamed online.
While most of the high-level witnesses — including several former health ministers — have maintained their composure, squabbling and name-calling has been rampant between the lawmakers, who have seized their chance on the political soapbox.
Among the most damaging early documents to emerge were a batch of emails showing the federal government had not responded to 53 out of 81 communications sent by Pfizer, which resulted in extensive delays in the purchase of vaccines.
“Counting the communications ignored by the government that offered vaccines is like counting the lives we lost to Covid-19. It’s tragic, painful,” said Randolfe Rodrigues, an opposition senator who is vice-president of the congressional probe.
The probe also revealed that the government had attempted to modify the documentation of antimalarial drug chloroquine to state that it was effective against Covid-19. Some senators have also claimed that evidence shows the government set up a “parallel cabinet” of health advisers, many of whom espoused unscientific solutions to the pandemic, in the presidential office.
The inquiry is currently scheduled to end in August, but may be extended to October. At the conclusion, the inquiry’s rapporteur will recommend actions, potentially including a request for impeachment or criminal proceedings.
The question now is what it will mean for the political future of Bolsonaro, who has repeatedly played down the seriousness of the pandemic and refused to take basic health precautions at large events. The president is up for re-election next year, and the race has been thrown wide open by the return to the political fray of leftist former president Luiz Inácio Lula da Silva.
“Voter memory is not that weak, as deaths directly affect people. As the number of mortalities has soared, people have recognised how much better this pandemic could have been if the government had taken the necessary steps,” said Maria do Socorro Braga, a professor of political science at the University of São Carlos.
Matias Spektor, a professor of international relations at the Getúlio Vargas Foundation, said the hearings had “exposed Bolsonaro on the TV news everyday, and the broadbase consensus is that the administration bungled the pandemic response in a major way”.
But he cautioned that the rightwing president’s popularity rating has remained relatively stable, with his core voter base of 20 to 30 per cent of voters still appearing loyal to him. Moreover, the hearings have not yet prompted any of Bolsonaro’s congressional allies to abandon him, meaning his political power remains firm.
“All in all, the CPI has been bad news for Bolsonaro — it has exposed the atrocities that are recurrent in the administration in terms of managing the pandemic. But it doesn’t look like the end of Bolsonaro.”
One politician keenly aware of the potential for gain out of the hearings is Lula, who is primed to contest next year’s polls after Brazil’s supreme court recently annulled his convictions for corruption.
Charismatic and wildly popular in Brazil’s poorer regions, Lula has emerged as a potent opponent, slamming Bolsonaro at every juncture on social media. He is, however, still reviled by many in the centre and on the right for the deep corruption that permeated Brazilian politics and business while he was in office between 2003 and 2010.
Lucas de Aragão, a partner at political consultancy Arko Advice, said that Bolsonaro is unlikely to face impeachment or criminal proceedings as a result of the inquiry. But it will keep the pandemic in voters’ minds as the country enters the election cycle next year.
“These investigations are made to create embarrassment and generate discussion that tends to be negative for the government,” said Aragão.
Additional reporting by Carolina Pulice
Brazil moves to tame inflation with third interest rate increase of 2021
Brazil’s central bank on Wednesday raised its benchmark interest rate for the third time this year as authorities in Latin America’s largest economy move aggressively to tamp down on rising inflation.
The 75 basis point increase by the Banco Central do Brasil, or BCB, brings the Selic rate to 4.25 per cent, up from a historic low of just 2 per cent earlier this year.
Mirroring several large emerging nations, inflation has emerged as a central concern for policymakers in Brazil as the economy picks up steam and appears to emerge from the worst of the pandemic-induced recession.
Earlier this month, official data for the first three months of this year showed that gross domestic product grew 1.2 per cent from the previous quarter, bringing the size of the economy back to where it was before the pandemic struck and prompting many economists to raise their annual growth forecasts to more than 5 per cent.
Consumer prices have also soared, increasing by more than 8 per cent in the year to May and forcing the BCB to move aggressively to keep both real and expected rates of inflation within its target range of 2.25-5.25 per cent.
The central bank’s own survey of market economists, however, suggests that the inflation rate will remain above the target to the end of this year.
“In short, it seems that the country will face difficulties in wanting to maintain a low inflation target if it starts to grow again, and we may have to see the Selic return to higher levels in the coming years,” said Sergio Vale, chief economist at MB Associados, alluding to Brazil’s historically high interest rate levels.
The real strengthened to less than R$5 to the dollar on Wednesday for the first time since December on expectation of the move.
In its guidance following the rate rise on Wednesday, the BCB signalled that another increase of 75bp was likely in its next decision in August.
“The persistence of inflationary pressure is greater than expected, especially among industrial goods. Additionally, the slow normalisation of supply conditions, the resilience of demand and the implications of the deterioration of the water scenario on electricity tariffs contribute to maintaining high inflation in the short term, despite the recent appreciation of the real,” the BCB said in its decision.
Luciano Rostagno, chief strategist at Mizuho Bank, said forecasts pointed to the Selic rate reaching 6 per cent by the end of the year.
Inflation has risen in almost all the large emerging economies this year as activity resumed. Policymakers also face pressure from rising bond yields in the US, which could push them into raising interest rates by more than they would wish in order to maintain their appeal to bond investors.
The US Federal Reserve released its latest economic forecasts on Wednesday, and its suggestion of tighter monetary policy ahead could add to that pressure.
Shilan Shah, senior economist at Capital Economics, puts Brazil alongside Russia in a small group of emerging markets where inflation has already spooked central banks, forcing them to tighten policy early to retain credibility.
He expects them to be followed by central banks in parts of east Asia, central and eastern Europe and Chile, where economic recoveries are progressing well, and some will begin to raise rates in the coming months.
But for much of the rest of Latin America, Africa and parts of south and south-east Asia, the pandemic will keep economies subdued for longer, holding back inflation and interest rates, Shah wrote in a report on Wednesday.
In Brazil rising prices combined with high unemployment have hit the nation’s poorest citizens, fuelling a surge in hunger that has complicated the Covid-19 crisis.
Additional reporting by Carolina Pulice
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