Colombia’s Rebellious Referendum Rumblings
Colombian shares stayed ahead double-digits on the MSCI Index despite stagflation signs as the 4-year negotiation slog with FARC rebels was concluded, with a demobilization in exchange for rural development agreement to be scheduled for national plebiscite. The definitive text, following a June ceasefire, would end decades of civil war but is opposed by President Santos’ predecessor Uribe and his party with strong representation in parliament. The President’s opinion approval is just 20 percent as GDP growth limps along at 2 percent on almost 9 percent inflation, which may spur further monetary tightening. His elite background and lack of charisma also create distance from average voters, who must be convinced of the deal’s merits and the ability to afford generous disarmament payments. The fiscal deficit is already 4 percent of GDP with oil earnings decline, pending long-promised tax reforms such as a VAT hike which will dent the government’s popularity more ahead of the 2018 election cycle. External accounts are also in questionable shape, with the current account gap at 5 percent despite monthly trade balance improvement on sluggish commodity-related FDI. Labor and credit conditions have worsened recently, but Finance Minister Cardenas has insisted the corrections are cyclical and should soon run their course, and that referendum uncertainty should not inhibit domestic confidence and investment. However officials now warn of another security crisis as hundreds of thousands of Venezuelans pour across the border in search of basic provisions, with a spike in refugee status claims.
Food, medicine and power shortages and a court ruling that a recall vote on President Maduro could proceed with qualified signatures have prompted an army crackdown and coup rumors. State company employees listed on the petition will be summarily fired, and the regime will not relent on arrested opposition party leaders to allow participation in the removal effort. Oil monopoly PDVSA must repay $725 million on external bonds in August as executives openly explore swap operations to lighten the near-term load, including on Chinese debt. The economy is in depression and hyperinflation, with Q2 contraction estimated over 10 percent and the parallel exchange rate as an inflation proxy spinning toward 1000 bolivar/dollar versus the official 10 for unavailable essential goods. The year-end CPI increase is conservatively estimated at 500 percent in the absence of current statistics, and wealthy Venezuelans unable to park money offshore have reportedly switched to gold for asset preservation, mirroring the central bank’s previous reserve management strategy which left it illiquid. Investment banks have been in discussion on loans against gold collateral but worry that their book is otherwise compromised by potential sovereign and quasi-sovereign default or restructuring.
The Caracas meltdown has battered Cuba a year after embassies were reopened in Havana and Washington. Venezuela’s supplies half its energy on barter terms for Cuban medical and security services, and President Castro recently ordered a halt in non-essential spending with the crunch. Oil deliveries are down an estimated 20 percent and the economy may linger in recession through 2017. Power cuts would otherwise hit tourism, but the US rapprochement has sparked new demand. The President promises to maintain residential output for social calm and the operation of small private business in homes as a revolutionary concept.
