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Monday, May 14, 2007
Perspectives

Thinking Out of the Box

Border conflicts are rife in Latin America, and they could become a disruptive force in the region.
Venezuela last year spent $3 billion for a fleet of new Russian MiG-29s and Su-30s. It also purchased 33 Mi-17 helicopters and 100,000 AK-47 assault rifles, the author points out. (Photo: ABN).

BY WALTER T. MOLANO

Investors often ask, “What can go wrong in Latin America?” In general, the region is benefiting from the realignment of the global economy. The new premium for commodities, the abundance of skilled labor and capital, are ideal for most of the Latin American countries. However, something can go wrong. Indeed, something always goes wrong. What can it be? The countries are impervious to changes in political leadership. Governments from the left and right were equally endorsed by the market. Macroeconomic management is not so important when commodity prices are booming and the world is awash in liquidity. Therefore, the shock must come from the unimaginable. There is an infinite array of scenarios that could appear, from natural calamities to epidemics, but one scenario is within the realm of possibilities. Border conflicts are rife in Latin America, and they could become a disruptive force in the region.

Just about every Latin America has a major border dispute. Some of them are more pressing than others. Chile versus Bolivia and Peru, Argentina versus Chile, and Ecuador versus Peru are the most noteworthy. Other neighbors just don’t get along, Colombia/Venezuela, Bolivia/Paraguay and Argentina/Brazil. Latin American countries have come to blows, or almost came to blows, on several occasions. Some examples are the War of the Pacific, The War of the Triple Alliance, the Gran Chaco War and the Cuasi-War of 1978 and the Cenepa War. Many of these conflicts are imbued in the national psyche. Political leaders often use them to fan nationalism and foster political support. These rivalries are still alive, lurking just below the surface. The problem is that some of the fiscal windfall appearing on the national accounts is manifesting itself into new armament and procurement.

VENEZUELA BOOSTS SPENDING

In 2006, the Venezuelan government spent $3 billion for a fleet of new Russian MiG-29s and Su-30s. It also purchased 33 Mi-17 helicopters and 100,000 AK-47 assault rifles. During the Lagos Administration, former Defense Minister (now President) Michelle Bachelet overhauled the Chilean military—purchasing new F-16 fighters and submarines. Colombia is another country which is constantly spending huge sums in men and equipment. Chile and Colombia are the regional leaders in military spending, dedicating 3.5 percent of GDP to military outlays. Venezuela allocates about 3 percent of GDP to military spending, Argentina 1.13 percent and Mexico 0.43 percent. Mexico settled its border disputes more than a century ago, and it has zero chance of ever recovering the lost territory. Therefore, what’s the point in trying? The small amount of funds dedicated to the military is the reason why the drug industry is having a relatively easy time infiltrating Mexico. Most of Argentina’s military equipment is outdated, vestiges of the buildup that occurred almost three decades ago. However, there are signs that the Kirchner Administration is ready to redirect some of the fiscal surplus into new arms and equipment.

The procurements are being incorporated to meet the strategic needs that were in place for almost two centuries. The battle scenarios are well known in each of the Latin American countries. All that is needed is the match to light the fuse to the powder keg. The problem is that a bilateral confrontation between two countries could quickly spread into a continental conflagration. A conflict on one border could provide an opportunity for a neighbor on a distant border to use the distraction to deliver an unexpected blow. The fur ball could quickly affect the major economic and urban centers, disrupting economic activity and trade. Such a scenario is remote, but it becomes more plausible as the governments rearm and look for reasons to stir national and political support.

Walter Molano is head of research at BCP Securities.

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From: Sam Taliaferro

Panama
As an investor, as well as living in Panama, I often consider various matters that Mr. Molano brings to the table. One of which is feisty neighbors. Fortunately for Panama, ours are probably the only real secure borders in all of Latin America. With docile (no military) and Eco friendly Costa Rica to our north we have little to fear there. Colombia to our south. may as well be 10,000 miles away as the impenetrable Darian Jungle lies between them and the canal with no roads. Then we have the big ditch which is important to everyone especially the good ole U.S.A.. We're just like Switzerland without the snow and chocolates!

From: Don Winner

Panama City, Panama
Walter Molano is the worst "chicken little" I've ever encountered. In late September 2006 he warned Panamanian government officials were "in a panic" before the referendum on the Panama Canal expansion and "the bubble could burst." And now we should all fear border conflicts. Molano is a serial bearer of bad news designed to get his name in print. (Don Winner is the owner of www.panama-guide.com.)

From: Gary James

Panama City
I have read Walter Molano newletters from BCP for years and found his writings, forcasts and point of view to be very accurate and informative. Panama's current residential real estate market is the bubble that will burst first bringing the banking and real estate investment sector into deep trouble.

Yes, in Panama I often hear the phrase "it doesn't happen here" but trust me it will. I have seen it all before and Panama is not immune to economic cycles, earthquakes, and windstorms (hurricanes). Mr. Molano discusses all sides of the issues and his caution and concerns are not welcome in an enviroment blind to risks.

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