Octavian Report: What are the macro political issues in South America driving risk and uncertainty at the moment?
Jorge Quiroga: Clearly Venezuela, with a cascading effect on Nicaragua, Cuba, and Bolivia, is number one. And number two would be the trade or migration tensions coming from the north in particular, the change of policies or the potential change of policies in the U.S. vis-a-vis Mexico, Central America, and South America. I think those are the two primary geopolitical drivers.
To go a little deeper into both of them: on the first, Venezuela has been under the same regime for 20 years. It is the single case in the history of the world where the richest country in the hemisphere — probably more endowed with natural resources than even the U.S. or Argentina — has been utterly and completely destroyed. And it’s now living through an economic debacle, a military catastrophe, and massive North Korea-style repression.
I think you’d be challenged to find a single other case of a country that has been so utterly destroyed and is not even in a war with another state or in a civil war (as is the case with Libya or Syria). Maduro’s report card is hideous: in about six years the economy has gone down to less than 40 percent of what it was when he took office. Oil production is down to about a quarter of what it was. Hyperinflation is higher than it ever was in Zimbabwe; it’s a world record. More refugees are fleeing on a monthly basis from Venezuela than were, at the height of the Syrian implosion, fleeing from that country. Scarcity is at Sudanese levels in Venezuela. They’re a petro power and they have people cooking with wood, they have children being buried in cardboard caskets, people eating out of garbage cans. Malaria is back, diphtheria is back, measles is back. It is utter, complete destruction.
How are they staying in power, given their economic and social record and the catastrophe that they created? The only thing they’re good at is repression. They have colectivos, armed gangs, that disperse crowds. That’s the first level of repression. The second is the FAES. What is their specialty? They are really death squads with uniforms. When things get a little bit out of control, when the government cannot control the crowd with just their gangs, then they send the death squads in. And then they have the third and the fourth levels of repression. For politicians, SEBIN, the Servicio Bolivariano de Inteligencia Nacional. And for military people that are questioning the Cuban authoritarian position, they have the DGCIM (Dirección General de Contrainteligencia Militar), as witnessed by the recent torture and death of a Navy captain.
What is even more worrisome is that at this stage it’s not just a domestic issue of complete economic social destruction with massive repression, it is that Venezuela has become occupied territory. Occupied by Cuba, by Hezbollah, by the ELN. And it is becoming a pure criminal state complete with “warlords” — either Cubans running the military or Hezbollah people running chunks of the territory or guerrillas running the gold exploitation or criminal gangs running the smuggling of gasoline.
So what happens in the next few months will be a major determinant of the future of Latin America. If Venezuela — and we’re working on it — can regain democracy and freedom, I’m sure we will see democracy and freedom in Nicaragua and eventually in Cuba. And we will then have a hemisphere that is free and democratic from top to bottom with political differences that can be decided amid free elections.
On the other hand, if Maduro stays and the regime stays, then chances are Ortega will stay entrenched in Nicaragua, Morales in Bolivia. The gerontocracy in Cuba will stay entrenched there as well. They’ll wait out this wave and then try to then extend back into Mexico, try to regain Argentina. And you will have a very mixed hemisphere with some democracies and lots of authoritarian, Cuban-like regimes.
On the question of trade and migration: in the U.S. there’s a lot of discussion on these issues. I don’t want to get into the personalities of who’s governing or arguing in the U.S. But suffice it to say that things have changed. Normally in Latin America when elections rolled around, we always wanted a blender. Generally speaking, Democrats were open to our people, not our products; Republicans were open to our products, not so much to our people.
I think there is now a broad swath of the political system in the U.S. that is not open to our people or our products. They’re changing trade agreements worldwide, not just with Latin America. They are also dramatically changing the migration framework. This goes well beyond economics: if the approval of the new Mexico, Canada, and U.S. Trade Agreement does not go through the U.S. Congress, chances are it can get stuck. If you know the history of Latin and Central America, nations there all copy/paste NAFTA. So if the agreement that has governed North American trade relations goes out the window, imagine that cascading down and having dramatic economic effects.
The same thing with migration. U.S. attention at the moment is clearly focused on Mexico and Central America, but I guarantee that if this Sunday they start doing deportations with ICE, they’re not going to knock on the door and say, well, you’re Peruvian or you’re Ecuadorian or you’re Bolivian — you can stay.
If a massive deportation starts, yes, they’ll be mainly Mexicans and people from the Central American triangle, but there’ll be all kinds of Latin Americans there and that xenophobia is contagious. I can tell you already that a lot of the Venezuelan refugees are being rejected in countries that used to welcome them with open arms. And if the U.S., the largest economy, can start doing deportations or building walls, that rejection of others and anti-immigrant position can then be very contagious.
OR: Are there any bright spots amid this somewhat dark picture?
Quiroga: I think, notwithstanding everything I mentioned, there’s been progress. Had you told somebody in Latin America 20 years ago that we were going to have three seats out of 20 at the G20 and that most of the discussions were going to center on the European crisis, they would not have believed you. We have reduced poverty almost to half of what it was 20 years ago. As a region, inflation in our countries is as low as in any European or developed country. And I would venture to say that our fiscal deficit and macroeconomic management is probably more solid. So that is on the positive side.
Beyond the things that were done right by a lot of countries in macroeconomics and management of fiscal deficits and current accounts, issuing debt in local currency and not foreign currency — beyond those things it is clear that the second very positive thing for South America is China.
South of the Panama Canal, we’re all Chinese. Central America, the Caribbean, and Mexico are clearly more under the influence of the United States in terms of remittances, access to manufactured products, tourism. But south of the Panama Canal, our number-one economic partner is — by far — China.
If you add China as a market and a buyer of our commodities to China loans to China investment — in particular in the Pacific Rim-based countries like Peru, Chile, and Ecuador — it is by far the number-one economic partner for South America. The reason is simple. South America is endowed with surplus food, energy, and minerals — and that’s what the Chinese have been buying at increasing prices at ever higher volumes. Whether it’s oil from Venezuela, coal from Colombia, copper gold, zinc, or tin from Andean countries, or soybeans and wheat and sugar and coffee from Mercosur countries. That has been broadly positive.
Within that sphere, notwithstanding the renewed protectionism from the U.S. and the demise of the Trans-Pacific and Trans-Atlantic Partnerships, there is clearly an impetus towards that good kind of integration. Probably the best integration mechanism that we’ve had the last few years has been the Pacific Alliance — Mexico, Colombia, Chile, Peru, now Ecuador — capitalizing on the importance of China and the Asian economic links that I’ve described.
I used to say that Mercosur only works in Barcelona. It’s the only place where people from Chile, Argentina, and Brazil play well together. So whether it’s the Pacific Alliance countries with Asia or the Mercosur countries with the Atlantic, I think it’s good for us from a regional standpoint to show that we are not standing still despite the protectionist waves coming from the north. We are strengthening the Pacific links that have been so useful for us this century. We are modernizing the trans-Atlantic links with countries that we have roots with.
Generally speaking, with the exceptions of Argentina and Venezuela, we have sound macroeconomic frameworks in the Latin American countries.
OR: What lessons does Bolivia have to teach the region?
Quiroga: When we were in government, we were in the pre-China bonanza days. The Chinese bonanza for South America started around 2004 or 2005. And every South American country enjoyed that boom. Everybody quadrupled or quintupled exports. In the case of my country, we were able to reap the benefits from a lot of the work we had done. And I think that beyond a lot of the domestic internal issues that we had to deal with — education reform, health issues — we pressed two things that were very beneficial.
Bolivia in the ’80s and ’90s was a deadbeat when it came to credit. We couldn’t pay our commercial loans. We couldn’t pay our bilateral debts. We had trouble paying our multilateral debts. But we had a very aggressive program of debt reduction. And I would venture to say that we are probably the only country on the planet that was able to take our three “credit cards” — commercial, bilateral, and multilateral — and drive down the balances to zero on all three.
Yes, our debt was not of the magnitude of Argentina or Brazil, but we took all our credit-card balances down to zero. The commercial debt, the first one, was bought back at 11 cents on the dollar through the late ’80s until the mid ’90s. All the bilateral debt and the Paris Club arrangements — we went there like the Rocky movies, one, two, three, four, five, six, seven times until we finally reduced all that bilateral debt. And the proscribed territory for debt reduction was supposed to be multilateral, but in the year 2000 there was impetus from the Pope on the Jubilee debt reductions for a lot of African countries and a few in Latin America — Honduras, Bolivia, Guatemala — and we were able to take the lead role in that. We did three rounds in the year 2000. There was a legacy round in 2005 or 2006. But the only requirement for the last legacy round was to have participated in the first two. So that was a no-brainer.
Between those three, by March 2006 we owed zero to the IMF World Bank and zero to the Inter-American Development Bank. The timing was outstanding, because when times were tough in the ’90s and the early 2000’s we were able to again wipe our credit cards clean and eliminate them all down to zero. That allowed us to enjoy and reap the benefits of the Chinese bonanza, which manifested itself particularly in energy and minerals in my country. We sold a lot of minerals and gas. We don’t sell gas directly to China, we’re landlocked. But we’re the energy provider for the ones that furnished China all the commodities: Argentina, Brazil. And that allowed us to do very aggressive poverty reduction programs in rural areas, to make sure there were more teachers, more nurses.
The second big thing was gas. It would be extremely selfish and untrue to say it was my government. But it was a longstanding work that we were able to crystallize in the late ’90s and early 2000’s in terms of having my country become the vital gas heart of South America. We re-engaged Argentina, a longstanding customer that had stopped buying from us, and when they fixed their economy we were able to sell back to them again. We built a pipeline: the biggest single project in the history of my country was the pipeline from the the gas fields in the south of Bolivia all the way to the San Pablo market. That was a very large enterprise, a multi-billion dollar enterprise. We opened the valves in 1999 on a 20-year contract. Bolivia had the best economic run of its life between 2005 and 2015 thanks to the pipelines and gas reserves and contracts and tax legislation that we put in place.
Fast-forward to the present day. I forget who it was who said that time and circumstances are unbeatable enemies. But here we are and who benefitted most from everything that I described?
He took over the government in 2006, having badmouthed everything we had done in terms of reductions, development of gas fields, pipelines, contracts. Lo and behold, over the course of his first 10 years he was able to sell five times the volume of gas at almost five times the price, bringing in almost 25 times the amount of gas revenues, with high fiscal taxes (up to 50 percent) on gas. That brought about a bonanza. Morales at the apex of the gas boom had eight times the fiscal revenues that we had before he got here. Why? Because he didn’t have to worry about debt service or infrastructure or contracts.
Gas prices when from $1.20 to $2.50 to $3.00 to $4.00 to $7.00 to $8.00 to $9.00 to $10.50 for a million BTUs. The volumes when we opened the pipeline to Brazil used to be 6 million cubic meters a day. Argentina was zero; then we got Argentina reengaged. Next thing you know, Morales was able to sell over 50 million cubic meters a day.
That’s a once-in-a lifetime boom. And then what does Evo Morales do? He buys a jet for himself, a jet for the Vice President. A new palace for himself, a new palace for the Vice President. They bought satellites. A lot of corruption, a lot of no-bid acquisitions. A lot of plants that are not working, a lot of airports in places that are not being used — all driven by corruption.
OR: Are you generally optimistic or generally pessimistic about the region?
Quiroga: About the region, generally speaking, I’m optimistic. I think Venezuela is going to turn out okay. We will be able as a region to advance and integrate with Europe, across the Atlantic, towards Asia, across the Pacific. If we have a democratic Venezuela then we’ll have great positive contagion effects in Nicaragua, Cuba, and Bolivia.
However, my country’s prospects short-term are not pretty. Why? Our 20-year gas contract runs out this year. Brazil, as you know, has developed its own reserves and Argentina has developed its own reserves. Our captive markets have developed their own energy reserves. In the case of Argentina, some of their fields are better than Bakken or Eagle Ford in Texas in terms of the energy potential that they have. Argentina is not only going to stop being a captive market, it will become a competitor.
So the gas bonanza that drove a lot of the great economic times we have had since 2005 is about to run out. And then mistakes that were made by the current government, such as doing away with the exchange-rate-crawling peg that was put in place in place in ’85 and that was working wonderfully well at avoiding massive currency fluctuations, will come back to haunt them. Those types of things only work if you have dollars raining in, which they did for a while. But now the dollars are not going to be raining in. You know what problems can ensue when you have a fixed exchange rate at an overvalued exchange and you run out of dollars because gas sales are not quite there yet or Chinese mining prices have have abated.
But long-term I am optimistic because I think if a democratic wave in Venezuela and Nicaragua comes around we will also regain democracy and not have the semi-authoritarian Maduro-like clown that we have here with Evo Morales.
I’m also optimistic because the way the world is going, electric cars are going to dominate the world as cell phones do now. Close to 80 percent of the world’s lithium reserves are in a triangle between Bolivia, Argentina, and Chile. Of that almost 80 percent, about half is in my country. So if the world keeps going the way it’s going and some smart guy in Silicon Valley doesn’t split oxygen atoms and lithium becomes dominant in technology for cars and small planes and buildings — then my country can become the lithium battery capital of the world. That requires a radically different government. One that can leverage the incredible opportunities of an interconnected, clean-energy world.