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Chile braces for unrest ahead of poll on constitution

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Shopkeepers shut their windows and authorities moved to protect targets of possible vandalism as Chile on Sunday prepared to mark the anniversary of the outbreak of rioting and social unrest last year.

The milestone comes a week before a referendum on October 25 in which polls predict about two-thirds of Chileans will vote in favour of drawing up a new constitution. This was one of the central demands of protesters angered by issues such as rising prices, inequality, meagre pensions and poor public services.

Many hope that a second wave of protests — with unrest already intensifying over the past week — will not be as disruptive as in 2019. Then, widespread arson, looting and vandalism caused about $4.6bn in damage to public infrastructure.

“An electoral tsunami is coming that will channel [much of] the energy and hope for change through the electoral process,” said Eugenio Tironi, a sociologist in Santiago. He pointed to presidential, congressional, gubernatorial and local elections due next year, on top of another vote to appoint a constituent assembly if the majority votes in favour of a new constitution next Sunday.

Mr Tironi expects most demonstrations to be peaceful, even if a frustrated radical fringe poses a continuing threat. “If the constitutional process is seen as legitimate and backed by the different political groups, it will help to calm things down, but not among the small violent groups. They will continue for sure,” he added.

Claudia Heiss, head of political science at the University of Chile, says that Chilean society is moderate. “This is not a moment of extremism. Most Chileans just want a state that is more present.

“What is at stake is putting an end to neoliberalism and moving towards a social democratic model. This would be something radically different, but not in the sense of abolishing capitalism or private property rights.”

Not only is a radical shift to the left not supported by most Chileans, but there would be strict limits on the contents of a new constitution, since all articles would need to be approved by a two-thirds majority of the constituent assembly. Even so, “the demand for change should not be downplayed”, warned Ms Heiss.

Protesters say the current constitution — drawn up in 1980 by General Augusto Pinochet — does not protect human rights or social welfare, concentrates power within an elite, allows the private sector too much economic control, and lacks legitimacy because it was forced on the country by the military dictatorship.

“Drafting a new constitution in Chile is all about trying to put the legitimacy of the Chilean [political] system on a new footing,” said Andrés Velasco, a former finance minister in Chile who is now dean of the school of public policy at the London School of Economics.

While Chile can claim many successes in the past 30 years since the end of the Pinochet dictatorship, one of its greatest weaknesses is the credibility of its institutions and a lack of trust in the country’s elite.

“The conservative establishment in Chile fails to see that if we don’t do something about the legitimacy of institutions and the poor performance of our politics, the economy is not going to do well,” Mr Velasco said. 

But critics say that a new constitution itself will lack legitimacy, given that it will have been forced into being by social unrest just as the current one was imposed on the country by the Pinochet regime. 

Detractors add that, in addition to the uncertainty likely to keep investment at bay during the constitutional process, which could last two years, the new document could generate greater spending pressures — for instance, by expanding access to healthcare. This, they say, could undermine Chile’s famed fiscal discipline and raise debt levels. 

Last week, Fitch Ratings downgraded Chile’s sovereign debt from A to A-, arguing that public finances had been dented by demands to ramp up social spending after the 2019 protests, and undermined by the economic downturn caused by Covid-19. 

Fitch forecast that the government debt burden would rise to 34 per cent in 2020, up from 28 per cent in 2019. It would keep increasing, the rating agency predicted, given the challenges to reining in spending amid social pressures and lower growth prospects, with the economy expected to contract 5.8 per cent this year, largely because of Chile’s lockdown. It would rebound by 4.5 per cent in 2021, according to Fitch. 

Eduardo Engel, one of Chile’s most respected economists, says that the country’s level of debt is low enough not to be a major problem.

“If it is a good social contract, it should bring stability for decades to come, and that should help investment in the long term,” he said, adding that despite Chile’s economic success over the past three decades, it was time for a change, including a significant redistribution of power. 

“The goose had already stopped laying the golden eggs. Now we need a new one to come out of the constitutional process. We couldn’t continue as we were.” 



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Emerging Markets

Latin American markets: shot in the arm required

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Latin American equity indices have trailed the rest of the world, including emerging markets, for the past year. Yet prices for the region’s important commodity exports remain high. Time to take advantage of undervalued stocks? Not so fast. Latin America’s markets lack the pull they once had.

The rise in competition from one of Latin America’s biggest export customers, China, has cut back emerging market investor interest in the region. Earlier this century, Latin American countries profitably exported raw materials to sate China’s voracious industrial appetite. By 2010, Brazil represented more than 16 per cent of the MSCI Emerging Market benchmark. Today it has only a quarter of that weighting, point out analysts at Tellimer, as more Chinese constituents join MSCI indices.

Chart showing that Latin American stocks are trailing the world. MSCI indices in $ terms (rebased), comparative of Latin America, the rest of the world and emerging markets.

Even so, with commodity prices doing so well, one might expect more demand for Latin American stocks. Copper, up by three-quarters in price over one year, made up 46 per cent of Chile’s export value pre-pandemic. In Brazil, soyabeans, iron ore and crude oil together accounted for almost the same proportion of exports.

The problem is deciding where prices go from here. There is no clear evidence that a new commodity supercycle has begun and China is attempting to temper further commodity price surges. No surprise that MSCI Latin America trails the broader emerging market index by 11 percentage points over one year.

Chart showing that Covid-19 deaths continue to rise in Latin America. Daily confirmed deaths, (%, by region, 7-day rolling average), Europe, Latin Americaand Caribbean, North America, Middle East, Asia and Africa, Q1 2020 to Q2 2021

Valuation presents an additional hurdle. Latin America’s price to book is more than 2 times — slightly higher than its five-year average. Brazil is no cheaper, and interest rates there are rising. Pandemic-induced goods shortages have led to prices increasing, up 6 per cent overall in the year to March. Brazil could also be the source of further regional Covid-19 cases given it shares porous borders with ten countries. Its vaccination effort has covered only about 3 per cent of its population, according to Financial Times data. The government of President Jair Bolsonaro has rejected calls for a lockdown.

Commodity prices should soon peak. This possibility, combined with the surge of Covid-19 cases, mean that it is too early to fill portfolios with Latin American stocks.

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Ukraine accuses Russia of blocking talks to ease military tensions

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Kyiv has accused Moscow of blocking attempts to begin talks aimed at calming military tensions sparked by the deployment of tens of thousands of Russian troops close to the Ukrainian border.

Ukraine’s president Volodymyr Zelensky has not received a response to his request for a telephone call with Russia’s Vladimir Putin, his spokesperson said, amid concerns from the US and other European powers that an escalation in military deployments could result in full-blown conflict.

More than 14,000 people have been killed in eastern Ukraine since 2014 in fighting between Russian-backed separatists and Ukraine’s army for control of Donbas, a region in the east of the country bordering Russia. The fighting first erupted after Moscow’s annexation of Ukraine’s Crimea peninsula.

“The request has been forwarded from the office of the president of Ukraine to the office of Vladimir Putin to have a conversation, a telephone talk. And we have not received an answer yet,” Zelensky’s spokesperson Iuliia Mendel said on Monday.

“The office of the president of Ukraine hopes that it doesn’t mean that Vladimir Putin refuses to have a dialogue with Ukraine,” she said, adding that the request was made on March 26.

Separately, Ukraine’s foreign ministry said on Monday that Russia had refused to engage “in consultations aimed at reducing security tensions” and boycotted an OSCE meeting on Saturday where the troop build-up was scheduled to be discussed.

Volodymyr Zelensky
Ukraine president Volodymyr Zelensky (above) made a request for a telephone call with Russian counterpart Vladimir Putin on March 26 © Gints Ivuskans/AFP/Getty Images

Putin’s spokesperson responded by saying that he was not aware of any recent requests for talks from Zelensky.

“In recent days, I have not seen any requests. I am not aware that there have been any requests in recent days,” Dmitry Peskov told reporters.

“In terms of defusing tensions and preventing a potential war, Vladimir Putin always has something to say,” he added, when asked whether Putin had anything to say to his Ukrainian counterpart. “We hope that political wisdom will prevail in Kyiv, and the matter will not take a serious turn.”

Mendel said Russia had stationed more than 40,000 troops on the eastern border area and sent another 9,000 to Crimea, in addition to the 33,000 troops already there.

That build-up, supplemented by tanks and other armed vehicles, has led to accusations that Moscow plans some form of military intervention. The Kremlin said it is permitted to station its soldiers wherever it likes, and that they are no threat to any other country.

Both Ukraine and Russian-backed separatists in Donbas accused the other side of sporadic violations of a ceasefire agreement over the weekend.

Kyiv says 28 of its troops have been killed so far this year, more than half the number who died over the whole of 2020.

Russian officials have dramatically increased their belligerent rhetoric towards Ukraine in recent weeks. Putin has warned that the situation could provoke a repeat of the 1995 Srebrenica massacre in Bosnia, while his deputy chief of staff said any escalation by Kyiv would be “the beginning of the end” for the country and provoke from Russia “not a shot in the leg, but in the face”.

Ukraine has responded by calling on Nato to speed up its membership application, while US president Joe Biden has pledged his support to the country.

In addition to the US and European powers, concerns over the military build-up have drawn in regional power Turkey, which lies across the Black Sea from Crimea. The Nato member has deepened ties with Russia in recent years but opposes Russia’s annexation of the peninsula and in 2019 sold military drones to Kyiv.

Zelensky on Saturday held talks with Turkish president Recep Tayyip Erdogan in Istanbul, who called for dialogue and for a peaceful resolution
in line with Ukraine’s “territorial integrity”. Those talks came a day after a telephone call between Erdogan and Putin, in which the Russian leader accused Ukraine of “dangerous provocative actions”.

Additional reporting by Ayla Jean Yackley in Ankara



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Technology will save emerging markets from sluggish growth

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The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’

Emerging economies struggled to grow through the 2010s and pessimism shrouds them now. People wonder how they will pay debts rung up during the pandemic and how they can grow rapidly as they did in the past — by exporting their way to prosperity — in an era of deglobalisation.

The freshest of many answers to this riddle is the fast-spreading digital revolution. Emerging nations are adopting cutting-edge technology at a lower and lower cost, which is allowing them to fuel domestic demand and overcome traditional obstacles to growth. Over the past decade, the number of smartphone owners has skyrocketed from 150m to 4bn worldwide. More than half the world’s population now carry the power of a supercomputer in their pockets.

The world’s largest emerging market has already demonstrated the transformative effects of digital technology. As China’s old rustbelt industries slowed sharply over the past decade, and ran up debts that threatened to explode in crisis only a few years ago, the booming tech sector saved the economy.

Now, often by adopting rather than innovating, China’s emerging market peers are getting a push from the same digital engines. Since 2014, more than 10,000 tech firms have been launched in emerging markets — nearly half of them outside China. From Bangladesh to Egypt, it is easy to find entrepreneurs who worked for Google, Facebook or other US giants before coming home to start their own companies.

As well as the so-called Amazon of China, there are Amazons of Russia, Poland, Latin America and south-east Asia. Local firms dominate the market for search in Russia, ride-hailing in Indonesia and digital payments in Kenya. 

By one key metric, the digital revolution is already as advanced in emerging economies as developed ones. Among the top 30 nations by revenue from digital services as a share of gross domestic product, 16 are in the emerging world. Indonesia, for example, is further advanced by this measure than France or Canada. And since 2017, digital revenue has been growing in emerging countries at an average annual pace of 26 per cent, compared with 11 per cent in the developed ones.

How can it be that poorer nations are adopting common digital technologies faster than the rich? One explanation is habit and its absence. In societies saturated with bricks-and-mortar stores and services, customers are often comfortable with and slow to abandon the providers they have. In countries where people have difficulty even finding a bank or a doctor, they will jump at the first digital option that comes along. 

Outsiders have a hard time grasping the impact digital services can have on underserved populations. Nations lacking in schools, hospitals and banks can quickly if not completely redress these gaps by establishing online services. Though only 5 per cent of Kenyans carry credit cards, more than 70 per cent have access to digital banking. 

The “digital divide” is narrowing in many places. Most of the big countries where internet bandwidth and mobile broadband subscriptions are growing fastest are in the emerging world. Last decade, the number of internet users doubled in the G20 nations, but the biggest gains came in emerging nations such as Brazil and India.

The digital impact on productivity, the key to sustained economic growth, is visible on the ground. Many governments are moving services online to make them more transparent and less vulnerable to corruption, perhaps the most feared obstacle to doing business in the emerging world.

Since 2010, the cost of starting a business has held steady in developed countries while falling sharply in emerging countries, from 66 per cent to just 27 per cent of the average annual income. Entrepreneurs can now launch businesses affordably, organising much of what they need on a smartphone. Lagos and Nairobi are rising as local fintech hubs, where leading executives vow to raise Africa’s “digital GDP” by widening access to internet financing.

It’s early days, too. As economist Carlota Perez has shown, tech revolutions last a long time. Innovations like the car and the steam engine were still transforming economies half a century later. Now, the fading era of globalisation will limit the number of emerging economies that can prosper on exports alone, but the era of rapid digitisation has only just begun. This offers many developing economies a revolutionary new path to catching up with the living standards of the developed world. 



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