Venezuela’s Refugee Wave Window (Financial Times)

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Emerging market fund managers still investing in Venezuela are no longer just focused on debt restructuring scenarios heading into May elections in the wake of self-inflicted economic collapse, as over 1 million migrants and refugees have already fled to neighboring countries to roil their financial markets with prospects of millions more to come, according to a study by the Washington-based Center for Strategic and International Studies. Over 500,000 Venezuelans are in Colombia in advance of the presidential race there, 250,000 each are in Ecuador and Panama, and 150,000 in both Chile and Peru, and 50,000 in Brazil. Latin American stock markets outperformed rival regions on the MSCI index through the first quarter, but the influx’s humanitarian and fiscal costs have yet to fully register.

The UN refugee agency officially declared a crisis and called on regional governments and international development lenders to exercise individual protection and share the funding load. The Inter-American Development Bank and World Bank are gearing up for infrastructure and social support, but established  public-private sector arrangements like the cross-border Latin America Integrated Market (MILA) stock exchange between Colombia, Chile and Peru could also create specific capital market instruments to foster refugee employment and business creation upon arrival.

Colombia has an estimated 50,000 Venezuelans daily pouring into border towns like Cucuta to meet daily food and health needs or to stay indefinitely. In addition, it has an unresolved legacy of internal displacement as the peace accord negotiated by outgoing President Santos with the guerilla FARC goes into effect, under the general principle of exchanging army demobilization for peaceful civilian return with promised job training. However the fiscal rule in place limits the deficit to 3% of GDP this year, and the front-runner in the end-May presidential contest, Ivan Duque from ex-President Uribe’s party. has signaled a harsher stance toward former rebels. The current account gap is at the same level placing pressure on the sovereign rating, despite higher foreign direct investment in the oil industry. Growth and inflation are in the 3% range, as central bank easing is set to continue. A second round runoff is predicted with more centrist opponents who have tried to co-opt Duque’s business-friendly platform, and forced migration will be likely sidetracked as a priority during the leadership transition as headline movements demand action.

Chile is host also to Haitians who fled the poorest nation in the hemisphere after the 2010 earthquake and subsequent hurricanes, and moved further south after deportation efforts in Brazil in particular. It has traditionally attracted seasonal low-wage workers from neighboring countries, but a permanent presence has posed cultural and labor market challenges. President Pinera, in his second term, promises to revamp the economic model in a free-market and socially-responsible balance, in part to salvage his popularity which previously suffered under an image of wealthy elitism. Refugees outside Santiago seek employment in the copper mines with keen competition and few protections, and like the middle-class students protesting under the previous administration seek wider university access for advanced education and skills. With 3.5% predicted GDP growth and negligible inflation, the solid investment-grade credit rating is intact, but Chile will be a test case for a future “melting pot” demographic and productivity engine.

Peru was the Andean stock market champion with a 10% first quarter gain as President Kucyzynski, implicated in the continent-wide Odebrecht scandal, resigned and was replaced by a technocrat successor and cabinet. Amid the political jockeying before his departure, plans to deepen MILA exchange ties, originally described to MSCI when it threatened frontier index demotion, were shelved and asset managers expect new President Vizcarra and his team to restore momentum. Ecuador takes in the Pact’s largest Venezuelan group after Colombia, and intends to reenter the MSCI frontier gauge and consider new local and global financing sources as President Moreno breaks with his socialist predecessor on fiscal discipline and investor compatibility. He plans to again tap global bond markets and renegotiate Chinese debt terms, and may even consider an IMF program to smooth fundamental and structural shifts including on refugee absorption.

As the international aid and diplomatic communities mobilize to address the systemic Venezuelan exodus, financial markets looking for fresh impetus could act with the same urgency to adapt solutions. On the MILA, listed companies could readily issue securities aimed at local and overseas buyers to expand refugee-related capital, hiring and supplier relationships benefiting host economies. Unlike governments and development lenders, this platform could  generate longer-term commercial flows so far absent in the” burden-sharing” mix, and offer a more optimistic prosperity prescription to shape the regional debate

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