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Chile’s New President Faces Challenges

Chris Kuehl, Ph.D.

The victory scored by Sebastián Piñera in Chile’s presidential election was significant. It was the largest margin of victory scored by a right of center candidate in Chile in decades. The challenge, however, is that his support in the legislature remains fragmented.

That is going to complicate his efforts to roll back the reforms that were put into effect by Michelle Bachelet—his left of center predecessor. His efforts will be further complicated by the adoption of a system of proportional representation.

This will essentially eliminate the old system of dominance by one of the two major parties. There is already a strong third-place showing for the more-leftist Frente Amplio party. If it allies with Bachelet’s socialists, it will be able to block legislation.

Piñera set several goals during the campaign. These will be the ones that investors and business people will demand that he push. They include more deregulation—especially over the mining industry so that it can start to grow again.

There was also deep concern over the size and growth of the deficit. He wants to see both spending cuts and tax adjustments. At the same time, he wants to cut the corporate taxes that have been imposed under Bachelet. These are now some of the highest in Latin America, and some business is leaving.

None of these changes will be easy as the legislative support is just not there unless he finds a way to peel some of the centrists away from Bachelet and the Socialists.

Peru in Political Crisis

The position of the president, Pedro Pablo Kuczynski, looks tenuous after opposition lawmakers called for his resignation on Dec. 13, in the wake of new information coming to light about his ties—which he had previously denied—to a Brazilian construction firm, Odebrecht, that has admitted to paying bribes to governments across the region. Mr. Kuczynski will give testimony to a congressional commission investigating the Odebrecht scandal on Dec. 22. However, irrespective of his testimony, the president appears increasingly unlikely to serve out his term in office, which runs until 2021. These developments will not only heighten political instability, but also significantly threaten economic prospects in the short term.

According to a document sent to Congress, Odebrecht, which is at the center of Latin America's largest-ever corruption scandal, had made payments totaling US$782,000 to Westfield Capital, a consultancy firm owned by Mr. Kuczynski. About US$60,000 of the sum was paid to Westfield Capital during Mr. Kuczynski's tenure as economy minister (2004‑05) and prime minister (2005‑06) in the administration of Alejandro Toledo (2001‑06). The revelations prompted Mr. Kuczynski to agree to testify before the congressional commission investigating the Odebrecht scandal. Even under the presumption of innocence, Mr. Kuczynski will find it difficult to undo the damage done by his backtracking on previous denials of ties to Odebrecht.

Under Fire

The disclosure of Mr. Kuczynski's direct links to Odebrecht will have severe consequences. On Dec. 14 a special anti-corruption team, which is part of the broader Odebrecht investigation, launched a preliminary investigation into the ties between Westfield Capital and Odebrecht. It will also be looking into payments of about US$4m made to another consultancy firm, First Capital, which belongs to a close associate of Mr. Kuczynski, Gerardo Sepúlveda, between 2008 and 2012. This could further implicate Mr. Kuczynski, who on Dec. 9 admitted to having worked as a financial advisor on behalf of First Capital for an irrigation project undertaken by Odebrecht.

As a serving president, Mr. Kuczynski is immune from prosecution but could still be ousted from office through impeachment by Congress. Thus far, Mr. Kuczynski has maintained that he will not resign from the presidency. In a statement put out on Dec. 14, Mr. Kuczynski claimed that the information disseminated by the congressional committee was false. He argued that although he did have legal ownership of Westfield Capital, he was not involved in the management or administration of the company while he held public office. He also stated that of all the payments made to First Capital, the only one that involved him was indeed legitimate. Mr. Kuczynski also agreed to co-operate fully with the congressional investigation so as to clear his name.

The Opposition's Response

Fuerza Popular (FP), the dominant opposition party, which holds 71 of the 130 seats in the unicameral legislature, was the first to call for Mr. Kuczynski's resignation. In the past, FP has used its majority in Congress to force the resignation of several ministers in the current administration. However, it has yet to begin impeachment proceedings against Mr. Kuczynski, as it may not wish to be seen as forcing him from office. Such action could evoke comparisons with the former president, Alberto Fujimori (1990‑2000), who was impeached on the grounds of moral unfitness, and could therefore be problematic for his daughter, the current FP leader, Keiko Fujimori.

However, as other parties in Congress join calls for Mr. Kuczynski's resignation, the likelihood that FP will initiate impeachment increases; it could then be presented as a united move by the legislature, as opposed to politicking by FP. Members of both the Partido Aprista Peruano and the Frente Amplio have already called for the president to step down. Press reports also indicate that Mr. Kuczynski stands to lose support from his own camp, as members of his own cabinet have allegedly indicated that they do not believe he can survive the scandal.

What Happens Next?

Given that Mr. Kuczynski's party, Peruanos Por el Kambio, holds only 17 seats in the legislature, it will be difficult for him to stave off impeachment proceedings for long. Mr. Kuczynski will fight to delay an impeachment vote until after he is given a chance to testify before the congressional commission and present his side of the story. However, given that the political calculus is not in his favor, The Economist Intelligence Unit believes that there is a strong chance that Mr. Kuczynski will resign from office in the coming days.

If the president tenders his resignation, it will be the duty of Congress to convene a plenary session to approve the resignation and appoint a new head of state. According to the line of succession, Mr. Kuczynski would be replaced by the first vice president and current ambassador to Canada, Martín Vizcarra. However, there is a distinct possibility that Mr. Vizcarra would choose not to assume the presidency, given that the FP forced him out of his position as transport minister earlier this year. In that event, it would be incumbent on the second vice president and current prime minister, Mercedes Aráoz, to take up the position; this outcome is likely to be more palatable to the opposition. Nevertheless, the tenability of a new presidency in these circumstances is a matter of concern. Hostile members of Congress will probably denounce the new administration as illegitimate and push for new legislative and presidential elections, as occurred after the impeachment of Mr. Fujimori in 2000.

A Bleak Outlook

The latest news has had an immediate impact on market sentiment, as evidenced by the 3.5% drop in the Peru Select Index, which measures the performance of the largest and most-liquid stocks in the Lima Stock Exchange. This was the highest daily percentage drop in the index in over two years. A prolonged period of political uncertainty is likely to have a seriously detrimental impact on both consumer and investor confidence in the short-to-medium term. Furthermore, investigations into high-ranking public officials of other parties are likely to sustain high levels of political risk. The ensuing instability will pose a serious downside risk to our economic growth forecast for 2018. This is currently at 4%, but is extremely likely to be revised down in coming weeks.

Reprinted with permission from The Economist Intelligence Unit.

U.K. Launches Late Payments Complaint Service

In its latest move to combat late payments to business-to-business (B2B) suppliers, the U.K. has launched a website through which small- and medium-sized businesses (SMBs) can file complaints about late-paying customers.

Reports in Startups.co.uk Wednesday (Dec. 20) said the service has gone live following the appointment of Paul Uppal to the position of small business commissioner earlier this year. The government created the role to address complaints among small businesses.

In addition to facilitating the filing of complaints, the website also provides guidance to SMBs that face challenges in getting paid. The commissioner advises small businesses to “check, chase and choose”—check that the right information was given, chase late payments and choose how to take action if delayed payments continue.

The U.K. has taken several steps to combat the issue of late payments, which, according to reports, has led to cash flow problems for 20% of the U.K.’s small businesses.

“Having run my own small business for over 20 years, I am well aware that integrity and trust are key to running and building a successful business,” Uppal said in a statement. “My mission is to help all small businesses nurture positive and lasting relationships with their customers that work in the best interests of both. Today, I am launching a new website so small businesses know their rights, as well as how to contact me if they need further action to be taken when the larger businesses they supply owe them money.”

According to small business minister Margot James, the value of outstanding invoices owed to small businesses has more than halved in the last five years.

“Today’s  Small Business Commissioner service will empower small businesses to take action if they are paid late,” James said in another statement, “potentially delivering a £2.5 billion [about $3.6 billion USD] annual boost to the economy.”

Printed with permission from PYMNTS.com.

Global Roundup

Spain's crisis re-ignited as Catalan separatists win vote. Separatists looked set on Dec. 22 to regain power in Catalonia after voters rejected Spanish Prime Minister Mariano Rajoy’s attempt to neuter its independence movement, instead re-igniting the country’s biggest political crisis in decades. (Reuters)

Temer warns pension reform failure will hurt Brazil's credibility. Brazil’s President Michel Temer warned on Dec. 22 the country would face economic volatility and loss of international credibility if a bill overhauling its costly social security system is not passed by Congress early next year. (Reuters)

From Angola to Zimbabwe: Guide Africa's key markets in 2018. For bond investors, Africa’s been a happy hunting ground this year. Its local currency and dollar securities easily outperformed those of emerging markets overall as investors piled into a continent offering high yields and starting to recover from the commodity bust of three years ago. But risks abound, among them policy tightening in advanced economies, local and global politics, weakening currencies and another fall in oil prices. And then there is credit risk. (Bloomberg)

Saudi sees non-oil economy rebounding on state spending. Saudi Arabia expects its economy to rebound in 2018, a crucial year for Prince Mohammed bin Salman’s blueprint for the post-oil era, as authorities ease an austerity drive that hurt growth. (Bloomberg)

U.S. vetoes UN resolution on Jerusalem. The United States on Dec. 18 vetoed a resolution supported by the 14 other UN Security Council members that would have required President Donald J. Trump to rescind his declaration of Jerusalem as the capital of Israel, a vote that showed the depth of global opposition to the U.S. move. (Associated Press)

EU and Mexico fail to conclude political agreement on trade deal. There will be no modernized trade deal for Mexico and the EU on Dec. 25. Despite having spent three days in Brussels, Mexican economy minister Ildefonso Guajardo hasn’t managed to break the deadlock over the contentious outstanding issues, geographical indications and investment protection. (EurActiv)

South American trade bloc gains strength, misses EU deal. Leaders of the South American trade bloc Mercosur met on Dec. 21 in greater political unity following the expulsion of Venezuela, but their biggest aim of a free trade deal with the European Union still eludes them. (HSN)

U.K. turns on the charm, makes £1.4bn deals with China. The U.K. and China made a raft of new agreements the week of Dec. 18 to the tune of around £1.4bn-worth of commercial deals; the U.K. turns on its charm offensive to boost trade between the two countries as it prepares to leave the European Union. (Global Trade Review)

U.S. net neutrality rollback may spur long-term change. The U.S. Federal Communication Commission's (FCC) Dec. 14 decision to roll back current net neutrality rules should not have any near-term financial impact for larger media content providers, but over the long term preferential treatment may hurt smaller providers, says Fitch Ratings. (Fitch)

Cyril Ramaphosa prepares to confront South Africa's bleak future. Among all the remarkable turns in African politics this year, one of the most momentous was December’s ANC party congress in South Africa, where the party chose a new president: Cyril Ramaphosa, who narrowly bested Nkosozana Dlamini-Zuma. Yet simply getting rid of Zuma won’t rid the ANC of its culture of patronage. (EconoTimes)

Bitcoin plunges 30% as Wall Street prepares to trade the cryptoasset. Bitcoin has fallen for six-straight days, its longest losing streak since September, just as the Wall Street financial machine appears to be slowly gearing up to embrace the digital asset. A slew of other cryptoassets like litecoin, bitcoin cash and ether also fell during the morning hours in London on Dec. 22, as the overall value of the crypto-universe declined. (Quartz)

Smart shipping container technology arrives in North America. SecureSystem GmbH, the German provider of smart shipping container solutions, has announced the launch of its U.S. subsidiary, SecureSystem US, Inc. This step accelerates SecureSystem’s ability to deliver its patented industrial Internet-of-Things technology that transforms standard shipping containers into “smart containers,” saving time, increasing profitability and enhancing security. (Global Trade Magazine)

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations