The Pacific Alliance’s Split Loyalties

Stock markets in Pacific Alliance members Chile, Colombia, Mexico and Peru trimmed losses as they forged a free-trade pact well before broader TPP negotiations with the North American and Asian partners were concluded, as the US Congress debates fast-track single-vote treaty ratification and labor and environmental groups attempt to block momentum. Mexico’s addition to the three countries already joined under the MILA equity cross-trading platform supplemented its structural reform luster with the passage of landmark fiscal and oil opening laws under President Pena Nieto recently culminating in a Moody’s sovereign rating upgrade to “A3.”  However private sector energy implementation provisions may be prolonged with new contracts delayed until well into 2015 as GDP growth otherwise disappoints on sagging manufacturing exports and domestic demand. The peso too has taken a beating with large emerging market flight and sent inflation above the target range to almost 5 percent in January as tax hikes likewise stoke costs. The central bank will likely stay on hold but may have to hike in the near-term given the currency’s borrowing and hedging popularity, and mixed economic signals from the US cast doubt on cross-border recovery strength. Chilean President Bachelet will assume a second term in office in March with a similar tax raising agenda to cover higher education and social spending, as the mining sector comes under pressure from slacker global commodities appetite. The current account deficit should drop under 3 percent of GDP with modest rate cuts expected to keep growth in the 3-4 percent range. The peso should settle around 550 to the dollar as private pension fund portfolio repatriation extends support. Geographic clashes continue to vex relations as a land claim was decided by an international tribunal with Peru, but a Canadian-owned metals project with Argentina is the subject of conflicting rules and timetables.

Colombia’s growth has surprised at near 5 percent on good construction, retail sales and infrastructure activity, as resilient FDI bolsters the capital account during the election period. President Santos is ahead of his closest challenger, former Finance Minister Zuluaga of the Uribe party, despite slow progress in peace talks with guerrilla rebels. The dollar buying program is phasing out under current conditions with inflation under control, and an environmental dispute with a foreign coal miner which has marred the investment climate may soon be resolved. Peru’s GDP increase at the same pace in 2013 lagged previous trends, as community opposition continues to stymie cooper and gold ventures and macro-prudential limits were imposed on foreign currency consumer lending. A new fiscal responsibility law was approved, and the central bank has intervened heavily on behalf of the sol with $1 billion in January dollar sales. Authorities are wary of mismatches with USD corporate credit accounting for half the total given historical experience with fair weather allies.