Regional Pulse: 16 May 2023

Southern Pulse’s weekly review of need-to-know events curated for people who work in Latin America.

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KEY DEVELOPMENTS

ARGENTINA

• First stage of new Néstor Kirchner gas pipeline complete
• Ministry of Energy removes restrictions on new green energy projects
• 20 financial entities raided over illegal dollar import scheme

BRAZIL

• Over 30,000 companies affected by bankruptcy of retailer Americanas
• Spike in illegal Amazon mining violence linked to criminal organizations
• Possible Braskem sale reignites concerns over 2018 mining accident

CHILE

• Bill to establish National Lithium Company will go to Congress in the second half of 2023
• More than half of Chilean businesses affected by climate change
• Chilean Senate approves new maximum tax rate for large-scale mining

COLOMBIA

• Conflicts in oil-producing regions increased fourfold between 2016–2022
• Central Bank argues labor reform will increase informal jobs
• Bill to legalize cannabis commercialization underway

ECUADOR

• President Lasso officially called to impeachment trial
• Free trade agreement with China signed
• USD 1.2 billion Amazonian oil field Yasuni will be subject to referendum

MEXICO

• Legislators seek referendum for possible Supreme Court changes
• US-Mexico border calm after Title 42 ends
• Government offers incentives for investors in new business corridor

PERU

• Arequipa regional government moves to annul USD1.3 billion copper project
• Congress shoots down renewable energy bill
• Peru wants to join OECD by 2026

KEY DEVELOPMENTS IN FULL

ARGENTINA

First stage of new Néstor Kirchner gas pipeline complete

On 12 May 2023, Argentina’s government completed the first stage of the new Néstor Kirchner gas pipeline. The government predicts it will save the country USD2.2 billion per year. With a capacity to transport 11 million cubic meters of gas per day (MMm3), the new 573-kilometer pipeline will become operational on 20 June. It will carry gas from the Vaca Muerta gas treatment plant in the southerly Neuquén province to the densely-populated province of Buenos Aires. Finance Minister Sergio Massa confirmed the project will receive a total of USD540 million from the CAF Development Bank of Latin America. It will also seek financing from the Brazilian Development Bank (BNDES) and the private sector to complete the second phase.

Ministry of Energy removes restrictions on new green energy projects

On 10 May 2023, the Ministry of Energy published a resolution that removes restrictions on new renewable energy projects. Experts calculate the change will expand Argentina’s renewable generation capacity by 40%. Previously, green energy projects could not be approved unless transmission nodes were available to receive 100% of the energy the green plants produced — at all times, and under all conditions. The stipulation led to many new projects being rejected. The relaxation of restrictions means the plants can add at least 1000 MW of renewable power in the next 18 to 24 months.

20 financial entities raided over illegal dollar import scheme

On 9 May 2023, local customs officials and police raided 20 financial and banking entities as part of an investigation into the illegal import of USD5.3 million. The scheme allegedly uses shell companies and falsified documents to import US dollars from Florida at the lower official exchange rate. These companies then resell the dollars in Argentina at the higher “blue” rate. The operation is looking into 46 companies and 13 individuals that allegedly made these illicit transfers. The scheme takes advantage of Argentina’s currency crisis, marked by a boom in the black market for US dollars.

BRAZIL

Over 30,000 companies affected by bankruptcy of retailer Americanas

On 10 May 2023, a Central Bank report said thousands of Brazilian businesses and some banks had been affected by the bankruptcy of retailer Lojas Americanas in January. However, the Central Bank concludes the risk is minimal, as the banks have an exposure of a little more than USD100 million to the affected businesses. This is far less than the USD4 billion Lojas Americanas owes. About 30,500 companies relied on the now-bankrupt retailer. Of those businesses, 124 relied on Americanas for half of their revenue, and 2,000 for a quarter of their revenue.

Spike in illegal Amazon mining violence linked to criminal organizations

On 9 May 2023, Brazilian outlet Nexo Jornal reported the causes of rising violence between illegal miners and indigenous communities in the Yanomami indigenous reserve in the Amazonian state of Roraima. The investigation comes as 14 people died last week alone, most of them illegal miners. The investigation links the spike in fatalities to the involvement of criminal organizations like the São Paulo-based Primeiro Comando da Capital (PCC).

Possible Braskem sale reignites concerns over 2018 mining accident

On 8 May 2023, a hearing about the possible sale of Latin America’s largest petrochemical company, Braskem, started. The hearing focuses on the company’s alleged responsibility for a mining accident five years ago in Maceio, Alagoas — Brazil’s second poorest state. In March 2018, more than 60,000 people were forced to flee their homes there after Braskem’s salt mining exploration caused their neighborhood to sink, with houses crumbling. The Alagoas state government is now concerned over who will take responsibility for the accident, as well as the size of payouts affected families would see if the sale goes forward. Braskem operates in Brazil, the US, Argentina, Mexico and Germany.

CHILE

Bill to establish National Lithium Company will go to Congress in the second half of 2023

On 12 May 2023, Mining Minister Marcela Hernando confirmed the advancement of a bill to create Chile’s National Lithium Company. It will be presented to Congress in the second half of this year. The minister signaled hope that Congress and the nation would reach a consensus over the government’s lithium strategy. The government hopes their national lithium strategy will foster future public-private action efforts, increase national production, attract new players and expand the industry through joint initiatives. Conservative opposition parties do not support nationalization.

More than half of Chilean businesses affected by climate change

On 9 May 2023, a Central Bank report showed that 58% of the Chilean businesses it surveyed have seen adverse effects of drought, wildfires, and heatwaves in the last five years. More than a third of these companies have seen their costs rise due to changing weather conditions. Sixty-nine percent of the businesses surveyed reported fearing that climate events will cause supplies, insurance and prices to increase over the next five years. Actions taken by the businesses to mitigate the negative impact include investments, modifying the products or services offered, and changing suppliers or means of distribution. Thirteen percent of businesses reported they may be unable to adapt and could permanently close within the next five years.

Chilean Senate approves new maximum tax rate for large-scale mining

On 9 May 2023, the Senate approved a new upper tax limit of 46.5% for large-scale mining, which now has to be sanctioned by the lower house. A differentiated rate of 45.5% for mining operations with production between 50 and 80 thousand metric tons of copper per year was also approved. The government and opposition parties have been negotiating over the rate of royalties for mining since the new administration took office. The motion also plans to create a USD55 million fund for communities neighboring large mines, with special considerations for those affected by or at risk of environmental liabilities.

COLOMBIA

Conflicts in oil-producing regions increased fourfold between 2016–2022

On 11 May 2023, the Colombian Petroleum Association (ACP) published new data revealing that conflicts in four oil-producing departments (Casanare, Meta, Putumayo, and Santander) had increased fourfold from 2016 to 2022. These conflicts accounted for 67% of national road blockades during that period. Oil production in the departments of Arauca, Putumayo and Santander represents around 16% of the country’s total, with daily sales generating about USD8.6 million. ACP’s president highlighted that social conflict has worsened, with an increase in blockades under the current government. Although the government has tried to reactivate suspended contracts, security challenges remain for project operators in some of these areas. This requires significant support from the interior and environment ministries, according to the ACP president.

Central Bank argues labor reform will increase informal jobs

On 10 May 2023, the Central Bank’s Group of Labor Market Analysis (GAMLA) presented an analysis on the impacts of the proposed labor reform bill. If passed, the bill would increase average labor costs, potentially leading to the loss of about 450,000 formal jobs in three to four years and increasing informal work by 2.1%. The average labor cost increase could range from 3.2% to 10.7%, and the cost of unfair dismissals could increase between 1.2% and 1.9%. President Gustavo Petro disputed these findings, suggesting that the report used an outdated economic theory. The reform was presented in March 2023 and is currently being debated within Congress’ constitutional committee.

Bill to legalize cannabis commercialization underway

On 9 May 2023, the lower chamber of Congress passed a bill to legalize the distribution, sale and commercialization of cannabis and its derivatives. It will now have to be approved in the Senate, before June 20, to become law. Lawmakers supporting the bill argued that it could provide an estimated USD770 million in tax revenues due to the increased investment that would come from commercializing cannabis. Cannabis is currently legal for medicinal and personal use, and provides an estimated USD215,000 in tax revenues.

ECUADOR

President Lasso officially called to impeachment trial

On 11 May 2023, Congress notified President Guillermo Lasso that the motion to hold his impeachment trial had been approved by 88 of 137 legislators, and will be going ahead. Congress now has to arrange a date for the trial. In order to impeach Lasso, the motion must have 92 votes in favor — four more than those received for the request for his trial. For this reason, foreign investors such as Santander and Barclays believe that Lasso will not be impeached. Lasso is facing embezzlement charges related to irregularities in a contract between the state oil fleet (FLOPEC) and the Amazon Tanker Pool Company.

Free trade agreement with China signed

On 10 May 2023, Ecuador signed a commercial treaty with China that eliminates tariffs on a number of goods for a period of up to 20 years. It is expected to come into effect next year if it receives the approval of the Constitutional Court and Congress. The agreement covers the main Ecuadorian exports to China — bananas and shrimp — as well as industrial machinery imported from China. The treaty excludes Ecuador’s textile industry, which is mainly destined for local consumption and accounts for 6% of GDP. China has become Ecuador’s largest trading partner of non-oil products ahead of the US, with more than 60% of its exports going to China. The agreement is expected to double the value of exports to USD12 billion by 2030.

USD 1.2 billion Amazonian oil field Yasuni will be subject to referendum

On 9 May 2023, the Constitutional Court approved a referendum on whether to exploit the Yasuni oil field (Bloc 43) in the Amazonian provinces of Orellana and Pastaza. The collective Yasunidos, a non-governmental organization (NGO) opposing oil extraction in the area, had been campaigning for this motion since 2013 when the Constitutional Court first shelved the case. But the Court has now reversed its decision, requesting that the electoral council hold a referendum within the next two months. The current government has requested the proposal be shelved due to contractual links, but the Court has rejected the government’s argument. The field, operated by state oil company Petroecuador, produces about 55,000 barrels per day and generated approximately USD1.25 billion in 2022.

MEXICO

Legislators seek referendum for possible Supreme Court changes

On 14 May 2023, the ruling MORENA party announced it would implement a referendum to see whether citizens agree with the president’s proposed reform of how the country selects its 11 Supreme Court ministers. President Andrés Manuel López Obrador’s initiative proposes electing Court judges by direct vote and allowing them to face impeachment if necessary. It also aims to considerably reduce the Court’s funding and number of offices. President López Obrador promoted this initiative after the Supreme Court overturned his proposed reforms on electoral matters, which sought to permit government officials to use public funds for political advertising. When the party would organize the public consultation is unclear.

US-Mexico border calm after Title 42 ends

On 11 May 2023, the US lifted the migratory restrictions established during the COVID-19 pandemic known as “Title 42.” This previously led to a considerable increase in illegal crossings and political tensions with Mexico. Officials on both sides of the border initially feared that a surge of migrants would attempt to cross the border one last time, which could have impacted binational trade. However, tensions eased after President Andrés Manuel López Obrador promised to send National Guard units to reinforce its border with Guatemala. Separately, Foreign Secretary Marcelo Ebrard ruled out a massive return of migrants to Mexican cities. He agreed to receive one thousand migrants seeking asylum each day for humanitarian reasons. They would be placed in refugee centers in Mexican border cities, such as Tijuana and Ciudad Juárez.

Government offers incentives for investors in new business corridor

On 8 May 2023, Economy Secretary Raquel Buenrostro announced that the government would offer incentives for companies seeking to establish operations in the first six of 10 “development poles” that would make up an interoceanic business corridor on the Isthmus of Tehuantepec (CIIT). The Isthmus of Tehuantepec connects the Pacific Ocean to the Gulf of Mexico. The government promotes the region as a possible industrial corridor that could foster economic growth in the southeastern part of the country. Tax incentives for investors setting up operations in the corridor include a 100% income tax (ISR) discount for the first three years of operation, and up to 90% discount for three years after. Another perk includes a value added tax (VAT) exemption for four years. Interested companies can participate in public biddings and, if selected as winners, would receive water and land concessions from the government.

PERU

Arequipa regional government moves to annul USD1.3 billion copper project

On 11 May 2023, the regional government of Arequipa started the process of revoking the land-use rights belonging to mining firm Zafranal. The rights encompass 12,207 hectares of land where the company planned to mine copper. The land makes up 85% of Zafranal’s proposed mine, which has 440.7 million tons of copper reserves. This renders the USD1.26 billion project unfeasible. Arequipa made the decision after an internal report by the government entity overseeing land and water use (AUTODEMA) found irregularities in the land concession process. Zafranal’s copper mine was in the final stages of its environmental impact assessment and scheduled to begin construction next year. The company is partly owned by Canadian firm Teck Resources (80%) and Japan-based Mitsubishi Materials (20%).

Congress shoots down renewable energy bill

On 10 May 2023, Congress blocked a government bill that sought to introduce more competition from renewable energy sources (RER) such as wind and solar power in the regulated electricity market. Hydroelectric and thermal power plants dominate the electricity market, with RER only representing 5% of production. The bill’s objective was to reduce electricity prices across the supply chain and encourage more investors to build RER platforms. The bill has been rejected in Congress by the conservative parties Fuerza Popular, Avanza País and Renovación Popular. After China Southern Power Grid (CSPG) acquired Enel in April 2023, 70% of the country’s electricity has been produced by Chinese state-owned companies.

Peru wants to join OECD by 2026

On 9 May 2023, Economy and Finance Minister Alex Contreras announced that Peru aims to become a member of the Organization for Economic Cooperation and Development (OECD) by 2026. The Minister presented his project to a special congressional committee, stating that the country has already tackled difficult issues such as fiscal balance and achieving macroeconomic stability. He argued that while the remaining issues are complex, they are not difficult to overcome within a three-year time frame. The OECD is an international organization with 38 member countries, led by the United States, that promotes the coordination of economic and social policies. This move signals the Peruvian government’s preference to align with the US over blocs such as the BRICS (Brazil, Russia, India and China).

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