Yesterday’s News: disaster, debt, and the Trump effect

Hurricane Matthew

Hurricane Matthew made landfall in Haiti nearly a week ago, but the extent of the damage has yet to be fully revealed. United Nations Secretary-General Ban Ki-moon commented on the disaster: “Hundreds have died. At least 1.4 million people need assistance at this time. Some towns and villages have been almost wiped off the map. Crops and food reserves have been destroyed.”

In Southwestern Haiti, the hurricane destroyed 90 percent of the crops. As ABC News reports, this region is the country’s “bread basket.” This recent disaster is on top of a year characterized by “the worst drought in 50  years.”

In the coming days and weeks, the damage estimates will continue to be revised higher. Given the extreme levels of poverty and rates of subsistence agricultural practices, reviving the agricultural sector throughout the affected areas will be critically important.

Fiscal Policy


President of Brazil Michel Temer continues to press for a constitutional amendment to freeze public spending, reports Reuters. If passed, Mr. Temer’s proposal would freeze federal spending and limit increased spending to the rate of inflation for at least 10 years and eliminate minimum spending requirements on education and health care.

Mr. Temer and his supporters argue that the measures are necessary to rein in Brazil’s budget deficit, which is currently 10 percent of gross domestic product or 613 billion reais (approximately US$191 billion).

Opponents to Mr. Temer’s proposed constitutional amendment include the Office of the Prosecutor-General, reports Reuters, who question the constitutionality of the measure and worry about the effects on the judiciary. “The proposal invades the judicial system budgeting competence drastically, risking to impact the exercise of its constitutional and institutional functions,” said a statement from the Office of the Prosecutor-General.

On October 10 the Wall Street Journal reported that the Chamber of Deputies voted 366 to 111 in favor of the constitutional amendment. The issue now goes to the Senate.


Wanting to avoid a fiscal crisis similar to Brazil, countries in Latin America, such as Chile, are enacting austerity measures. Except for Paraguay that is.

Public debt in Chile and Paraguay (25.2 and 22.5 percent of gross domestic product respectively) is still much less than in Brazil (70 percent of GDP). However, Chile and Paraguay are embarking down very different paths. Whereas Chile is pursuing austerity to avoid a future fiscal crisis, Paraguay is on track to pass a budget that would expand public debt from US$ 6.12 billion to US$6.70 billion. A key driver of public debt comes from a set of just four projects.

Law 5074/13, known as “llave en manos” (turnkey), fincances four infrastructure projects for approximately US$2 billion. As reported by Ultima Hora, these projects include a bridge connecting Paraguay and Brazil; improving the Transchaco highway, which goes from Asuncion to the Bolivian border; the Bi-Oceanic Corridor, a railway system which will connect the ports of Santos, Brazil and Callao, Peru; and a sewage works project.

Proponents of llave en manos argue that it is necessary to improve the Paraguayan economy and attract investment. As reported by the Wall Street Journal, the president of the central bank of Paraguay, Carlos Fernandez Valdovinos, argues that such infrastructure projects will improve the structure of the Paraguayan economy.

Additionally, as reported by ABC, the executive branch under President Horacio Cartes argues that “the real level” of public debt is 15 percent of GDP, not 22.5 percent. Therefore the increased spending would raise public debt to 22 percent of GDP.

Opponents argue that it simply costs too much. Senators Desiree Masi and Arnoldo Wiens have raised concerns over the cost of interest payments on the debt incurred to finance the llave en manos projects.

Exchange Rates

The presidential election in the United States and the value of the Mexican Peso were in the news again. As Bloomberg reports, during the second presidential debate, the peso lost most of the gains it made earlier in the day. However, the spot price ultimately closed stronger at approximately 19 pesos per US dollar.

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