Latin America’s Legion of Doomed
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There’s a SUCRE born every minute
As the Estadounidenses recover from their Fourth of July celebration, the Andean nations are preparing to observe the birthday of Simon Bolivar. The parties will likely start big and promising, but then degrade into gunfire and disillusionment.
Despite having popular electoral support, the nine Leftist regimes of the Bolivarian Alliance for the Peoples of our America (popularly known by its Spanish acronym ALBA) will probably crumble after Chavez’s death (and Venezuela will likely slide back into its junta past). Yet, this has not stopped the addition of economic powerhouse Haiti in February and applications from Suriname (run by the Chavez of the Guianas) and Saint Lucia (which will join anything).
ALBA’s quest promoting social justice as well as “bartering and mutual aid” has not gone well. As Bolivia tries to kick its nationalization habit, and violent crime spirals out of control in all its members (save Nicaragua – where the police have yet to be politicized by Ortega), the one ALBA initiative that still has merit is the creation of a regional currency, the SUCRE. With only a few virtual transactions since 2010 and press releases announcing Potemkin exchanges to tart up otherwise simple domestic subsidies and aid transfers to Venezuela's allies, the SUCRE is less a basket of currencies evolving into a monetary union than primitive mercantilism.
Earlier this year, Chavez was attempting to facilitate ALBA aid promised to Haiti through a SUCRE payment system. As he explained the system:
If a Venezuelan importer buys textiles from Bolivia, he does not need dollars he paid in bolivars here, in a Venezuelan bank that gives these bolivars to the Central Bank of Venezuela, that, as part of SUCRE, transfers these funds to the Central Bank of Bolivia. Thus, the Venezuelan importer has paid goods in local currency. It's wonderful!
Ecuador, the most functional member of ALBA (despite itself), is still enthusiastic as the earlier dollarization of its economy has hampered President Rafael Correa from implementing his full agenda using the country’s own oil profits. Perhaps Chevron (NYSE: CVX) can settle its recent lawsuit with Quito and pay the $18 billion fine in SUCRE – although the Ecuadorean action brought on behalf of 30,000 indigenous minorities in the Amazon jungle is finding new life in Canadian and Brazilian courts so exchange rates may be the least of the oil major's concerns.
Now, ALBA places their currencies in the basket…
The Alliance’s roster, half of which are island states, are not known for their economic prowess, and their budgets are a far cry from their sugar boom years (when in the early 1700s a single island could generate more revenue than all the North American colonies combined). Underscoring this historic reversal, the 2009 collapse of American, British, and Trinidadian insurance companies in the region had a devasting impact on the Caribbean states. Caribbean interest in ALBA aid is easy to understand as Prime Minister Ralph Gonsalves explained in February that in his country, St Vincent and the Grenadines, the liabilities left by the collapse accounted for 22% of the national economy. However, in late June with Sagicor's (LSE: SFI) purchase of BAICO's insurance activities, over two-thirds of the policyholders will have their policies restored by the fall, and the Caribbean governments also report other investors are likely to follow suit with the assets of CLICO (the other shattered insurance conglomerate) before year's end. Moreover, as most Caribbean economies are heavily underpinned by American tourism and remittances, they tend to avoid going along with ALBA's more aggressive moves, such as its recent resolution to expel USAID from their countries.
Furthermore, talk of China creating little Red Taiwans in the Caribbean is also overblown – and their activities have not made them popular. In Jamaica and Trinidad local business owners complain that Chinese aid which is largely structured as commercial contracts has destroyed their business since it brings Chinese companies in that not only get all the Chinese funded contracts, but then they also take all the other business as well. Local media reports are also replete with stories of poor and unsafe workmanship in Chinese construction. Moreover, US private investment in the region dwarfs Chinese and ALBA money. The new Baha Mar resort in the Bahamas is a good example. While the majority of the construction was commissioned by Americans and done by Chinese, the end product will be run by Hyatt (NYSE: H). Hyatt has recently decided to enter the luxury hospitality development scene in the Caribbean and recently completed its fourth resort through its subsidiaries in St. Kitts. Over the next year it plans to double its locations in the region and none of the new facilities in the pipeline are anywhere near an ALBA member.
Regardless, without robust returns from Venezuelan crude (and a motivated executive to sign the checks), the current ALBA plans have zero feasibility, and even then their excessive political cronyism and lack of management talent (most of which have emigrated) make accomplishing anything tangible unlikely. While Chavez, like other tyrants (popular and authoritarian), seems unlikely to die quickly, polls and illegal electioneering make it unlikley his challenger will unseat him in October. This has not deterred Chevron from inking a $2 billion deal to boost oil production at existing sites. However, from discussions with disaffected Venezuelan intelligence agents it is clear that the biggest threat to Chavez's Workers Paradise is the workers. Sabotage of the major facilities has increased in frequency and is tied to horrendous safety records and inadequate salaries (which are both irregular in their payment, and of decreasing value under the regime's currency controls).
Politics on all sides have prevented Cuba connecting to the fiber optic line that runs between Cancun and Miami (and passes just 20 miles off Cuba’s shore). Desperate for cash and still sleepwalking through its nightmare merger with Lucent, France’s Alcatel (NYSE: ALU) through its Chinese subsidiary won the contract to lay the ALBA-1 fiber optic cable connecting Cuba to Venezuela. Due to vastly superior technology (and possible bribery), Alcatel was able to edge out the Venezuelan subsidiary of China’s Huawei for the contract. Originally estimated at $55 million, the final price of $70 million is substantially higher than a slightly shorter fiber optic project proposed by the US military to connect Guantanamo Bay to the United States for $40 million. Although completed over a year ago, Cuban officials have yet to let the cyber-juices flow and posting a Tweet can still cost over a dollar. While it is popular to blame a fear of counter-revolution on the delay, some speculate that ministers are simply too venal or have no idea how to bring the bandwidth to market. (Meanwhile, Jamaica, which connected to the line three months after Cuba, has reported no problems with their connection.)
Nick Slepko has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.