Inflation

Networked Notes - 15 March 2016

By Southern Pulse Staff and Network

Over the past week Southern Pulse’s correspondents have talked to the team of Brazil’s former President Lula da Silva concerning the possibility of him taking over a ministry in President Rousseff’s government. On Monday, 14 March 2016, the Brazilian media piled on, stating Lula would accept and take over the Institutional Relations Secretariat (which has no budget) or the Chief of Staff (Casa Civil--the most important position). No matter what, as soon as Lula takes his office, it will diminish the standing of President Rousseff as she competes for attention with the well-known former president. It also signals Lula will control the administration’s coalition building in Congress, to shore up Rousseff’s presidency. The news changed Brazil’s news cycle away from a historic protest on the previous day calling for Rousseff’s impeachment.

At the moment, other news drowned out the Wagner’s statement, leading to no reaction from markets. Brazil’s domestic debt--debt issued inside Brazil in Brazilian currency--represents approximately 95 percent of the total national debt, and the local tradition is to deal with this debt via inflation, avoiding internal defaults. However, that is no longer a political option, and the effects of a possible decision to use international reserves remain to be seen. 

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Two months into his term, Guatemalan President Morales remains such an unknown that there was uncertainty as to whether his new government would continue to support Taiwan or flip its support to Beijing. In the 2000s, the checkbook diplomacy between mainland China and Taiwan led to scandals in several countries. Costa Rica President Arias was questioned about projects that led to his decision to switch recognition to Beijing. El Salvador’s former President Flores faced investigations over money stolen from a Taiwan development agreement. The maneuvering between the two Chinas has toned down in recent years in Central America and the Caribbean. China has instead taken a different approach, showing a willingness to invest in countries that recognize Taiwan, most notably Nicaragua. 

Still, given the minimal information about which way Morales would lean, the new Guatemalan administration must have been a tempting target for Beijing’s consideration. There are often rumors in Central America that a government may flip sides when a new president comes to power, but the rumors have been growing stronger regarding Morales in recent weeks. With the visit of Taiwan President Ma Ying-jeou this week, President Morales’s government finally made a formal announcement that it is sticking with Taiwan for the coming four years, maintaining the current balance (or imbalance) of power in the region between the two sides.

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As the security situation in El Salvador worsens, ARENA and the FMLN are launching accusations against each other regarding negotiations with gangs. El Faro’s publication of video showing three ARENA politicians negotiating with gang members to organize votes prior to the 2014 election has blown open a key criticism the opposition party was making of the government. ARENA has spent the past few years criticizing the FMLN for the failed gang truce and has been calling for government officials involved in gang negotiations to resign. Meanwhile, President Sanchez Ceren and his administration are planning new mano dura measures to crack down further on the gangs. 

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The coming days will be a key test for Argentina’s politics. President Macri will put his financial proposals up for a vote to determine whether he can reach a formal agreement with the holdout bond holders (who the Peronists refer to as the vulture funds). Several weeks ago, a group of 17 Peronist members of Congress linked to Sergio Massa split from the Kirchner-dominated party. Nobody is certain which way that group of lawmakers will vote. Their votes will signal whether Macri has a working governing coalition in the legislature or if his policies will be blocked by the other branches of government.

February 2016 in Argentina

President Mauricio Macri is pushing forward with his agenda to change several government policies, especially with respect to economy. The Macri administration has been working closely with Mediator Daniel Pollack to resolve the holdout hedge funds problem and regain access to global financial markets. In February 2016, Argentina presented, for the first time, a formal offer to the “vulture funds” of US$6.5 billion -- the original amount claimed in 2010 when the dispute began, but 25 percent less than the US$9 billion ordered by New York Judge Thomas Griesa. 

Controversy Surrounding the Changes to Minimum Wages in Honduras

During the final weeks of 2013, the Honduran federal government and private sector businesses came to an agreement on minimum wages for the following three years. In 2014, the minimum wage was to be 7.5 percent and 8 percent in 2015 and 2016. However, under this arrangement, these rates were not permanent, but rather subject to inflation. The minimum salary rates would be revised if inflation exceeded 8 percent or fell below 4 percent. While the law appears simple enough and rather concrete, issues are bound to arise if official inflation rates differ from the black market rates. Should minimum wages be revised according to where the Central Bank’s inflation rates fall or according to the black market’s inflation numbers?