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Latin America’s Moment

Latin America’s Moment analyzes economic, political, and social issues and trends throughout the Western Hemisphere.

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An illegal gold mining camp is discovered in Madre de Díos during a Peruvian military operation in 2019.
An illegal gold mining camp is discovered in Madre de Díos during a Peruvian military operation in 2019. Guadalupe Pardo/Reuters
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Illegal Gold Finances Latin America’s Dictators & Cartels. The United States Must Lead the Fight Against It.

by Will Freeman and Steven Holmes November 15, 2024

Four policy ideas to curb illegal gold mining in the Western Hemisphere.

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Politics and Government
Mexico’s Oil and Taxes
Over the last three decades, oil’s importance in the Mexican economy has diminished, with energy products shrinking from over three-quarters of all exports in 1982 to less than 15 percent in 2012. Still energy’s role in Mexico’s politics has not receded, in part due to the federal budget’s dependence on the sector—taxes and royalties comprise roughly a third of total inflows into government coffers. As the Congress negotiates the secondary legislation that will set the ground rules for opening up the energy sector in Mexico, the government will have to address this dependence as well, weaning itself from Pemex’s largesse. Mexico’s tax system is broadly made up of taxes on hydrocarbons, income, corporate profits, goods and services, as well as contributions for social security. According to the National Institute of Statistics and Geography (INEGI), an autonomous government agency, Mexico’s Tributary Administration Service (SAT) collected roughly US$200 billion in federal, state, and local taxes in 2012. Of the federal inflows, some $70 billion (pre gasoline subsidy) came from hydrocarbons, $58 billion from income taxes, and another $50 billion from the value-added tax (VAT). Source: INEGI “El Ingreso y el Gasto Público en México 2013” There are two basic ways that the Mexican Treasury can lower its dependence on oil. The first is to raise other taxes. At roughly 19 percent of GDP (including hydrocarbon revenues), Mexico’s tax burden is the lowest among the OECD’s member countries, where rates average closer to 34 percent. Within Latin America, Mexico is nearer to the regional median of 20 percent of GDP. Source: OECD Statistics The government started this process with a 2013 fiscal reform. The new law removed VAT exemptions along the U.S.-Mexico border (standardizing the rate at 16 percent), raised income taxes for high earners, and introduced a tax on dividends, among other measures. The government predicts that the reform will raise revenues by 2.5 percent of GDP by 2018, though only by 1 percent in 2014 (roughly $12 billion). Another avenue to fiscal solvency is better tax collection. A Global Financial Integrity study calculated that between 2000 and 2009, about $50 billion a year in illicit outflows were not taxed, nearly the amount collected in VAT or income taxes. Some of this $50 billion comes from illegal goods—drugs, contraband, and the like. But some of it stems from businesses avoiding taxes, reflecting one of Mexico’s most significant economic challenges: the immensity of its informal economy. Some 30 million Mexicans (six out of ten workers) are in the informal sector, not paying any taxes or contributing to social security. This tax loss adds up to an estimated 3 to 4 percent of GDP a year (some $35 to $50 billion). As Pemex shifts from a state owned enterprise to a state productive enterprise, the government would be wise to diversify its revenue base. This will require some mix of higher taxes and better tax collection. One is never popular, the other requires stronger institutional capacity; but both will likely be necessary to replace Mexico’s easy energy money.
Blog Post by Shannon K. O'Neil May 28, 2014 Latin America’s Moment
Immigration and Migration
Mexico as a Global Player
Last week, Foreign Affairs hosted a full day conference on Mexico, to talk about the country as a regional and global player. Panel topics included U.S.-Mexico cooperation, bilateral trade, regional immigration, and Mexico’s social inclusion and education system. You can find the full agenda here. The video starts with an introduction from Gideon Rose, the editor of Foreign Affairs, and then is followed by my conversation with Mexico’s Secretary of Foreign Affairs José Antonio Meade. You can watch the event below or read the transcript here. https://www.youtube.com/watch?v=E1lpzg8cgsU#
Blog Post by Shannon K. O'Neil May 20, 2014 Latin America’s Moment
Economics
S&P’s Brazil Downgrade: Why it Matters
In a widely expected move, the ratings agency Standard and Poor’s (S&P) downgraded Brazil’s long term debt from a credit ranking of BBB to BBB- on March 24, bringing the country’s sovereign bonds a step closer to losing their “investment grade status” (defined as BBB- or above) and becoming "speculative" or “junk bonds.” The rating stems from a combination of indicators—including GDP growth, inflation, and external debt—that S&P uses to measure a country’s creditworthiness and its fiscal, regulatory, and political risks. Since the turn of the twenty-first century, Latin America’s overall credit ratings have trended upward. By Fitch’s rating system, twelve out of fourteen Latin American countries have higher ratings today than a decade ago, one stayed put, and only one fell in the credit ranks. Chile sits at the top, reaching S&P’s AA- status (AAA status is the highest possible) in late 2012, on par with Japan and just above Israel. Mexico ranks next with a BBB+ rating (bumped up after its ambitious reforms passed); Peru too rates BBB+. At the bottom is Argentina with a CCC+ rating, improved from DDD after its 2001 default. Before the recent S&P downgrade, Brazil’s sovereign credit rating ranked roughly in the middle of the region, on par with Colombia and Panama. S&P justified the downgrade based on the country’s “fiscal slippage”, its controversial accounting mechanisms, and the low likelihood that it will tighten spending before the October presidential election. Does it matter? Many have questioned the importance of these scales, as well as the ratings agencies analytical independence. For Brazil, the downward shift had already been largely priced into domestic markets, and it seems to have had little effect in other nations. Further, the two other major agencies, Moody’s and Fitch, have yet to join their skeptical colleagues at S&P. But before the government waves away the opposition critiques, they should reflect on the costs. Where it can and may matter is for Brazil’s companies, as corporate credit costs often follow sovereign rankings (known as the “sovereign ceiling”). In the twenty-four hours after Brazil was downgraded, S&P also lowered the ratings for two-dozen banks including Banco Santander Brasil and Itaú Unibanco. And studies show that highly-rated companies reduce investment after sovereign credit rating downgrades (though it affects lower-ranked companies less). Dilma Rousseff may easily brush off any criticism and win a second term. Still, the downgrade could hinder her economic recovery plans. With Brazil turning increasingly to the private sector to fund much needed investments in ports, roads, and airports, a higher cost of capital for private domestic companies would give multinational firms a leg up over their Brazilian counterparts. And unlike in the recent past, Brazil’s public and development banks (BNDES and Caixa Econômica Federal) are unlikely to step in with abundant cheap loans, as they are already pulling back. The downgrade also gives fodder to those talking about the divide happening in Latin America, characterized alternatively as between East and West, between a politicized Mercosur and the new Pacific Alliance, or generally between countries embracing world markets versus those pursuing a larger state role in the economy. S&P’s analysis reflects where they believe Brazil is leaning.
Blog Post by Shannon K. O'Neil April 3, 2014 Latin America’s Moment
  • Economics
    A Primer: Mexico’s Energy Reform
    This past December, Mexico passed a historic energy reform that has the potential to fundamentally transform the country’s oil, gas, and electricity sectors. In this brief that I co-authored with James Taylor, founding partner at Vianovo, we lay out the importance of the soon-to-be-announced secondary legislation, provide an outline of the newly formed regulatory regime, and explore the types of opportunities that the reform will create. Mexico is the world’s 9th largest producer of oil and the third-largest in the Western Hemisphere (behind the United States and Canada and ahead of Venezuela). It has vast untapped shale oil reserves, estimated to be the 5th largest in the world, according to the U.S. Energy Information Administration. As the third largest supplier of crude oil to the United States (after Canada and Saudi Arabia), Mexico accounts for roughly 12 percent of its northern neighbor’s total imports. The lion’s share of Mexico’s crude oil exports (85 percent) head to the United States—all supplied via tanker, as Mexico does not have international oil pipeline connections. While Mexico has immense oil and natural gas supplies, it has been on a decade-long track toward becoming a net energy importer. Oil production has been steadily declining, falling by 1 million barrels per day since 2004. With limited domestic refining capability and strong demand, the country is already a net importer of refined petroleum products, such as lighter grade gasoline and diesel. And in natural gas, Mexico’s growing consumption needs (for power generation and to meet industry demand) outstrip its productive capacity, leaving the country as a net importer of the fuel. Mexico’s main supplier of natural gas is the United States, with imports arriving both as liquefied natural gas (LNG) and via an integrated and growing network of cross-border natural gas pipelines. You can read the rest of the brief here.
    Blog Post by Shannon K. O'Neil March 20, 2014 Latin America’s Moment
  • Americas
    This Year’s Presidential Elections in Latin America
    Earlier this week, Salvadorans headed to the polls to cast their ballots in a presidential runoff election, since on February 2 the candidates failed to reach the 50 percent threshold to avoid a second round. In the runoff’s lead up, Salvador Sánchez Cerén, a former guerrilla commander and the current vice president from the ruling party, looked poised for an easy win over his closest opponent Norman Quijano from the conservative Nationalist Republican Alliance (ARENA). But with the final ballot count separating the candidates by some 0.2 percent of the votes and with allegations of fraud, it seems that the protests and debates surrounding this election are far from over. The Costa Rican elections were also held on February 2 and similarly, were pushed into a run-off scheduled for April 6. With second place finisher Johnny Araya’s (from the ruling National Liberation Party) recent exit from the race, Leftist Luis Guillermo Solís’s (from the Citizens’ Action Party) victory is all but assured. While neither of these two elections are yet resolved, there are others on the horizon in Latin America. On May 4, Panamanians will elect their president for the next five years. Current President Ricardo Martinelli’s time in office is coming to an end, at least for now, given Panama’s restriction that presidents must wait two terms before trying again for office. Though Martinelli and his conservative Democratic Change (CD) party led Panama through a period of extraordinary 8 percent (on average) economic growth and declining crime, the country’s stark income inequality (which I talk about in this blog post) combined with shifting political alliances, could provide headwinds for the party’s candidate José Domingo Arias. On May 25, Colombians will head to the ballot boxes to decide whether or not to reelect President Juan Manuel Santos. As of now, Santos’s odds look fairly good—garnering 26 percent of the vote in a hypothetical “next-day election” scenario; 19 percent more than his nearest rival, Óscar Iván Zuluaga of the Democratic Center party, 18 percent more than Enrique Peñalosa of the Green Alliance party, and far above the more recent entrant to the race, Marta Lucía Ramírez from the Conservative Party. Santos  is staking much of his campaign on the peace agreement with the Revolutionary Armed Forces of Colombia (even as Colombians become increasingly pessimistic over its success), and he will also face tough questioning over his economic policies and subsequent handling of rural protests (that pushed his approval ratings down to 25 percent last August). Still, his popular support has rebounded—up to near 40 percent in March—and this momentum, without a strong challenger, will likely take him back to the Casa de Nariño. October brings presidential elections in Brazil, Bolivia, and Uruguay. In Brazil, most expect President Dilma Rousseff of the Worker’s Party (PT) to win reelection against Aecio Neves (from the PSBD party) and Eduardo Campos (from the PSB party). Still, with economic growth faltering, worries about the coming World Cup (with latest reports questioning both the sporting event’s expense and the country’s readiness), and still vivid memories of last summer’s widespread protests, a unified challenger could make the race interesting. That same day Bolivians will also be casting their ballots. Evo Morales is up for his third term, after a constitutional amendment in 2009 allowed for reelection and a 2013 constitutional court decision decided that his first term did not count toward the two term limit (since it began before the new Constitution). With twelve parties and a crowded race, no serious challenger has emerged to take on Morales. Still, questions remain whether the president’s Movement for Socialism (MAS) can gain an absolute majority—potentially frustrating any major policy changes. Uruguay’s famously spartan President Jose Mujica will bid goodbye to a presidential palace in which he never lived. The frontrunner for his position is former president and Broad Front colleague Tabaré Vázquez, who left office in 2010 with an approval rating of over 60 percent. A Vázquez victory would mean continuity for the country and a continuation of Mujica’s policies, such as the country’s marijuana regulation and renewable energy promotion.
    Blog Post by Shannon K. O'Neil March 13, 2014 Latin America’s Moment