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Finance: Latin America's Mortgage Market BY LUIS CUBEDDU, CAMILO TOVAR AND EVRIDIKI TSOUNTA Since 2003, mortgage credit in Latin America has expanded at an annual rate of 14 percent (adjusted for inflation)—well above rates observed in emerging Asia but below the exorbitant rates seen in emerging Europe before its housing bust. The region’s credit expansion has been accompanied by burgeoning real estate prices and construction activity—now representing more than 6 percent of GDP, higher than in emerging Asia or Europe. Mortgage growth has been particularly strong in Brazil, where the five-fold increase in mortgage credit since 2007 has been accompanied by a near tripling of house prices in the main metropolitan areas. Despite the recent growth, the mortgage market in most Latin American economies (except Chile) remains relatively small by international standards. [SEE CHART] In the six most financially open Latin American economies (Brazil, Chile, Colombia, Mexico, Peru, and Uruguay), mortgages average just 7 percent of GDP, compared to over 20 percent in emerging Asia and over 65 percent in the United States. Moreover, the bulk of mortgage credit in Latin America continues to be provided by commercial banks, funded primarily through domestic deposits, with only a small share securitized. This is in sharp contrast with emerging Europe in the run-up to the recent crisis, where the mortgage expansion involved non-banks and was financed increasingly through wholesale and cross-border funds. While some further deepening in mortgage and overall credit would be natural in the future, the rapid expansion of credit deserves closer monitoring to avoid a buildup of vulnerabilities and a repeat of the boom-bust credit cycles that have plagued the region in the past. Our recent research, Latin America: Vulnerabilities Under Construction?, suggests that in a few countries (notably Brazil and Peru) mortgage credit and housing prices may be growing at a faster pace than can be explained by past trends and economic conditions. That said, the rapid expansion of mortgage credit may be partly explained by factors not captured in standard models, as in Brazil, which recently introduced the government-sponsored housing credit program, Minha casa, minha vida. Other indicators suggest that housing-related vulnerabilities are contained. Mortgages, at about 20 percent of total bank loans, remain a small share of bank portfolios. Non-performing mortgage loans remain relatively low (around 3 percent of total mortgages), and household indebtedness indicators are manageable—hovering near 35 percent of disposable income, versus 60 percent in emerging Europe. But caution is warranted in drawing firm conclusions, because the limited information available for the housing sector hinders a proper risk assessment in most Latin American countries. Data on housing prices are only available for six countries, and, even when available, price data often cover limited time spans and/or specific metropolitan areas. For example, Brazilian house price data are only available since 2008; Colombia and Peru have the longest time series (dating back to the 1990s), but coverage is limited to metropolitan areas. Information on the stock and flows of housing, as well as on construction activity, is also patchy. Latin American countries should prioritize gathering more information and strengthening oversight of the housing sector. These efforts should be complemented by reforms to improve credit registries and increase consumer financial literacy. In countries where mortgage credit growth is too rapid, macroeconomic policies should be adjusted to control credit risks. The global financial crisis of 2008 has made clear that mortgage markets can have broad effects on the economy. In the U.S., the subprime mortgage market, which represented just one-eighth of the mortgage market, was enough to trigger a financial disaster. Credit-driven asset price bubbles in segments of the economy build slowly. But they can sour quickly, especially in new markets with significant data gaps. Given Latin America’s long history of credit booms gone wrong, it is thus best to be vigilant and prepared. Back to top Human Rights: New Threats in the Hemisphere BY RODRIGO UPRIMNY YEPES AND NELSON CAMILO SANCHEZ In her novel, In the Time of the Butterflies, Julia Álvarez describes an international mission to visit the Mirabal sisters when two of the four women were in jail for opposing the Rafael Trujillo regime in the Dominican Republic. Three of the sisters were later assassinated on November 25, 1960—a date later designated by the United Nations as the International Day for the Elimination of Violence Against Women. That mission was an historic landmark in the Americas: the first on-site visit carried out by what became the Inter-American Commission on Human Rights (IACHR). From its ambitious creation in 1959 as an autonomous organ of the Organization of American States (OAS), with seven independent individual members, the IACHR has grown into a forceful advocate of the rights and freedoms of citizens in the face of government abuses. It has denounced serious and systematic violations in countries such as Argentina, Chile, El Salvador, and Cuba, and it played an important role in ushering in the region’s return to democracy in the 1980s. Since its first official mission in 1961 to investigate the human rights situation in the Dominican Republic, the IACHR has conducted approximately 70 visits to 23 OAS member states to investigate general human rights situations or specific cases. But today, the IACHR is faced with a serious (and arguably extra-legal) challenge that could reverse five decades of achievement in the hemisphere’s human rights system. The challenge was sparked by Brazil’s decision in May 2011 to suspend relations with the IACHR after the human rights body requested that it suspend construction of the Belo Monte Dam in the Amazon rainforest on the grounds that it threatened Indigenous rights. In August 2012, a federal appeals court agreed with the decision to stop construction until Indigenous groups were properly consulted. Brazil’s move against the IACHR was supported by the Bolivarian Alliance for the Americas (ALBA), which formed a working group in the OAS to “reflect” on how to adapt the IACHR to “new times.” In December 2011, five months after its first meeting, the special working group proposed a series of recommendations to reform the system by consensus of the region’s 34 states. The proposals focused on four main areas. The first would limit the granting of precautionary measures—the mechanism used by the IACHR to stop the Belo Monte Dam construction, as well as to provide protection to threatened, at-risk human rights activists. According to the working group, the granting of such measures lacks sufficient regulation and rigor. A second proposal would block the IACHR from producing more detailed analyses about states with the worst human rights conditions in its annual report, on the grounds that singling out individual states is discriminatory. Third, the working group calls for lowering the profile of the IACHR’s special rapporteur for freedom of expression, whose defense of the free press has made the governments of countries such as Ecuador and Venezuela uncomfortable. A fourth set of recommendations would curtail the IACHR’s independence by prohibiting it from soliciting its own funds—a necessary task, since OAS member states do not provide adequate funding—and from retaining its independent budget oversight. Once these governments realized that they had enough strength to set their campaign in motion, they fine-tuned their strategy. Ecuadorian President Rafael Correa traveled in June 2012 to the OAS General Assembly in Cochabamba, Bolivia, to personally lead the crusade against the “international bureaucracy.” As a result, the General Assembly went from proposing some “recommendations” for the IACHR to proposals that will have to be implemented not by the IACHR itself, but by a special session of the OAS General Assembly in March 2013. This means that one of the region’s oldest and most effective instruments for strengthening democracy could be radically transformed without citizen or IACHR participation in the approval process. When the American Convention on Human Rights was adopted in 1969, the drafters were already conscious of the possibility that states could band together to destroy oversight bodies with which they were bound to disagree. For this reason, a safety mechanism was established: reforms to the statute establishing the IACHR could only be considered by the General Assembly when based on a proposal from the IACHR itself. Nevertheless, the governments pushing the reform are sidestepping this restriction, and defending a dubious theory of state sovereignty to impose their reform on the inter-American system. For these states, putting the reform of the IACHR statute on the OAS agenda is relatively easy—getting them that much closer to their goal of weakening the body. Under OAS rules, a temporary majority of just 18 votes is enough to approve a measure to reform the IACHR. So far, there has been no strong opposition within the OAS. If the reforms pass, the IACHR’s allies will have given in without a fight to the ALBA coalition and their supporters in this effort. It must be stated clearly: while Venezuela and Ecuador have been the strongest champions of this move, they have only been able get this far with the tacit support of states such as Brazil, Colombia and Argentina. At first glance, the arguments of the reform supporters may seem reasonable: modernizing the use of precautionary measures; eliminating discrimination against certain states in the IACHR’s reports; reforming the IACHR’s rapporteurs; and reinforcing the financial base of the system. But the fact is that the proposals would undermine the IACHR. They would render precautionary measures inoperable and weaken the IACHR’s ability to call attention to the countries with the worst human rights conditions, such as Colombia. At the same time, they would plunge the inter-American system of human rights protection into a financial crisis. If member states really wanted to improve the regional system for protecting human rights, it would be best to let the IACHR fix the system through its internal reform process. The insistence that a General Assembly of states administer the reforms shows that the objective is to weaken the system. We have arrived at a point that is ironic as well as tragic. The inter-American system was developed when the region suffered under some of the globe’s most infamous dictatorships. Now it faces destruction at the hands of democratic governments—many of which call themselves leftist or progressive—and whose existence was made possible only by the sacrifice and commitment of people such as the Mirabal “butterflies,” who gave their own lives to protect human rights. Back to top Infrastructure: Brazil, the World Cup and Olympics BY LISA GENASCI With the 2012 London Olympic Games over, attention has shifted to Brazil as host of the 2014 World Cup and the 2016 Summer Olympics. But a worrying amount of work needs to be done. Brazilian officials have promised that public works projects such as overhauling urban transit, airports and ports, building new roads, sports stadiums and hotels, and upgrading communications and the energy grid, will be completed on time. But there’s reason to be skeptical. Five years after the International Federation of Association Football (FIFA) awarded the World Cup to Brazil, and three years after Rio de Janeiro won the International Olympic Committee (IOC) bid to host the Summer Olympics, delays, cost overruns, lawsuits, and corruption have dampened the celebrations. More than half of the planned World Cup–related infrastructure projects were expected to be ready by the end of 2013. But as of May 2012, just 5 percent of the projects had been completed and ground had not been broken for an additional 41 percent needed for the World Cup, according to Sports Minister Aldo Rebelo. Among the remaining planned projects, 17 percent were still in the public bidding process, and 15 percent had yet to even reach the bidding phase. The lack of progress prompted FIFA Secretary General Jerome Valcke to say in March that a “kick up the backside” was needed to move things forward. By August, Valcke had changed his tune: “No stadium is behind schedule. All the projects are proceeding well and we have reached cruise speed.” Hopefully, his more recent optimism is substantiated. As much as $1 trillion in public and private funds are being spent on public works in preparation for both events, according to government estimates. Public expenditures alone are estimated at $31.3 billion. Recognizing the potential long-term multiplier effects, President Dilma Rousseff is pushing through the sale of infrastructure concessions to public-private consortiums. Major airports in São Paulo, Brasilia and Campinas were auctioned in February, with three separate private consortia winning the concessions to operate and upgrade each airport. In mid-August, Rousseff announced the sale of 133 billion reais ($66 billion) in concessions for 7,500 kilometers (10,900 miles) of toll roads and 10,000 kilometers (6,200 miles) of railways. About half of the money is to be spent over the next five years. In 2009, Infraero, the government airport management agency, estimated that 5.3 billion reais ($2.6 billion) would be needed to upgrade the country’s 31 airports to accommodate the 600,000 foreign and 3 million local tourists expected during the World Cup—with much of the tab to be picked up by private investors. Still, work has started on just 18. In fact, about 45 percent of the major transportation projects planned, including airport renovations, have not yet begun—a concern since the World Cup will take place in 12 cities. Hotel space is another challenge. Today, Rio can accommodate only 52,000 tourists. Beyond building more hotels, the gap will be partly covered by berthing six cruise ships—adding 10,000 rooms—in the port during the World Cup. But to accommodate the ships, the port must be revamped, which is not expected to be ready until May 2014—just ahead of the opening match. The Porto Maravilha redevelopment—a $7 billion public-private partnership that began in April 2010 and is aimed at revitalizing 5 million square meters (54 million square feet) of central Rio’s waterfront—is a flagship initiative of Rio’s urban renewal program. The project includes: construction of three sewage treatment plants as well as 700 kilometers (430 miles) of sewage, water and drainage works; demolition of a 4-kilometer (2.5-mile) elevated roadway; renovation of 4 kilometers (2.5 miles) of tunnels; and construction of 70 kilometers (43 miles) of roads, 650 square kilometers (250 square miles) of sidewalks and 17 kilometers (11 miles) of bike paths. That ambitious undertaking has been accelerated by pressing infrastructure demands. One of the most important Olympics transportation projects is now unlikely to be finished until 2019—well after the athletes have gone home. Bidding for a 500-kilometer (310-mile) bullet train line connecting São Paulo and Rio de Janeiro, with an estimated price tag of 60 billion reais ($29.5 billion), was to begin in 2009 and has been pushed back to late 2012. On the positive side, construction on light-rail projects in eight of the World Cup host cities is under way, or is expected to be completed by the opening. Rio will expand its metro, adding a third line to its two existing ones that will reach into Barra de Tijuca—the site of most of the Olympic events. One of the three additional Bus Rapid Transit (BRT) lines is already functioning. In total, of the estimated 235 planned infrastructure projects for the Olympics, only 66 were finished or nearing completion by late summer 2012. The IOC requires that all sports venues be ready between mid-2015 and early 2016. Odebrecht, with building projects that include four World Cup stadiums and the Olympic Park, is optimistic that the Olympic venues will be completed. “The projects at the heart of the Olympics are in motion,” according to Benedicto Barbosa da Silva Junior, the CEO for Odebrecht’s Brazil infrastructure unit, in an August 2012 interview. Still, the odds of meeting this deadline have been complicated by ongoing legal disputes and the logistical challenge of building so many projects at the same time. Adding to the problems: initial estimates for repairing and upgrading stadiums have ballooned from 2 billion reais ($981 million) to 6.9 billion reais ($3.4 billion), with most of it public money. The centerpiece is a $600 million refit to Rio’s famed 80,000-seat Maracanã stadium, which will host the World Cup final as well as the opening and closing ceremonies for the Olympics. Bidding on the Olympic Park, which will host the athletes and nine events, has been delayed by lawsuits brought by families who face eviction as a result of the 1.4 billion reais ($677 million) project. Moreover, construction of the Olympics golf course—located just 5 kilometers (3.1 miles) from the Athletes’ Village—has been snarled by a land dispute now under review by Brazil’s Higher Court of Justice. The IOC has responded diplomatically, but firmly, to the delays. While praising the work done so far, it has reminded organizers that the deadlines are getting tighter and the workload is increasing.