Aurelia Butler

NEW YORK/BUENOS AIRES (Reuters) – Labor activist Alejandro Bodart marched down the Buenos Aires streets two decades ago to protest against the International Monetary Fund, which many then blamed for austerity measures that sharpened Argentina’s worst ever economic crisis.Now Bodart is on the war path again, worried that a new deal to roll over $45 billion Argentina cannot pay, seemingly inching closer, will mean further belt tightening in the South American country where more than one in four live in poverty.”There will be social resistance,” Bodart, secretary general of the Socialist Workers Movement (MST), told Reuters.”We do not see the possibility of a viable country within the framework of an agreement with the IMF, so we believe that it should be rejected.”Bodart’s view is on one extreme end of the scale, but it underscores the challenge facing the IMF and center-left President Alberto Fernandez as they look to hammer out a deal that balances fiscal responsibility and the need for growth.Argentines fear the potential impact of a deal on public spending, which has been key to helping prop up growth this year, while the government could take a political hit from any austerity ahead of presidential elections in 2023.An Argentine economic team traveled to Washington over the weekend to push forward talks with IMF officials, with many analysts seeing the chances of a deal rising – despite gaps between the two sides over how to fund fiscal consolidation.”Not agreeing is not an option, because it is worse for the country,” said Hernán Lacunza, finance minister under the previous conservative government of Mauricio Macri, which the ruling Peronist coalition blames for striking a hasty deal with the IMF in 2018 and burdening the country with debts.But he said there needed to be real progress soon, because the uncertainty was having an impact on the country’s currency, foreign reserve levels and weighing down bond prices.”They have been talking for a year and a half, without concrete progress. Time is not indifferent, since uncertainty costs resources,” Lacunza said.(Graphic: Argentina quarterly IMF schedule of payments, https://graphics.reuters.com/ARGENTINA-IMF/PAYMENTS/dwvkrzadnpm/chart.png) BELT TIGHTENING?Fernandez and his economy minister, Martin Guzman, have said a new deal must avoid fiscal adjustments that would hurt the economic recovery after years of recession and the COVID-19 pandemic.A government source told Reuters in November that the key sticking point with the IMF was how to reduce the fiscal deficit without a “contractionary spending policy.” The government instead wants to improve tax collection and find funds from other lenders.Fernandez also faces an uphill battle to win back voters ahead of the 2023 presidential election after a bruising midterm defeat, which saw the Peronist coalition lose its majority in the Senate for the first time since 1983. Those political demands could put to the test any policies to lower public spending, especially with powerful Vice President Cristina Fernandez de Kirchner openly critical of the IMF and pushing for greater public spending.”Both by ideology and political necessity it’s hard to imagine any sort of orthodox, disciplined approach to fiscal and monetary policy, no matter what is written in an IMF agreement,” said Benjamin Gedan, deputy director of the Latin America Program at the Wilson Center in Washington.He is, however, confident a deal will be struck, with the government aiming to push a multi-year economic plan to Congress this month with the IMF’s blessing, which would be a key plank in finalizing a new program.”Things are supposedly on the right track, but we will have to wait,” said a government source who asked not to be named, about the possibility of a deal being struck this year.An economic plan with IMF approval would likely involve targets for the fiscal balance, building up depleted currency reserves, plans to reduce inflation that is running at over 50% and to ease strict capital controls that have created widely-diverging exchange rates.Edward Moya, an analyst at currency broker OANDA, said a new deal would likely involve Latin America’s third-largest economy having to take some tough medicine.”Argentina is still battling a terrible debt problem, a currency crisis, and a lack of reserves, which is why they don’t have the money to repay the IMF,” Moya said.”This movie probably won’t end well for Argentines as the IMF will require major cuts with public spending.” More

“A target of above 5% leaves a certain room of leeway, which is a relatively prudent call. It would also allow all parties to focus on promoting reforms and innovation and pushing for high-quality development,” Li Xuesong, a researcher at the Chinese Academy of Social Sciences (CASS), told reporters. The world’s second-largest economy is likely to grow around 5.3% in 2022, according to an annual blue book issued by CASS at the briefing, although the report cautioned that the forecast could be adjusted lower depending on the COVID-19 situation.Advisers to the government will recommend that authorities set a 2022 gross domestic product target lower than the target set for 2021 of “above 6%”, Reuters reported, amid growing headwinds from a property downturn, weakening exports and strict COVID-19 curbs that have impeded consumption. [nL4N2SM2GL]The thinktank is also recommending the government set a target of around 5.5% for urban jobless rate and a target of around 3% for consumer inflation next year. On policy recommendations, CASS suggests that monetary policy could be relaxed marginally next year to cope with the downward pressures and the central bank should guide interest rates lower to aid small firms grappling with high costs before the U.S. Federal Reserve moves to taper. The economy is expected to have expanded by about 8% this year, according to CASS. The thinktank also warned that the property downturn was likely to persist and weigh on the expenditures of local governments next year.It urged the central government to proactively engineer a soft landing for the property sector, to avoid failed land auctions in big cities and to fend off risks of quickly falling property prices in smaller cities, the report said. More

Good morning and welcome to Europe Express.Winter holidays are fast approaching and the uncertainty surrounding the Omicron variant, combined with renewed Covid-19 restrictions (which saw Brussels’ European quarter descend into scenes of violence yesterday) risk damping down not only festive spirits but also economic forecasts. Eurozone finance ministers are gathering in Brussels today and we’ll take a look at the agenda.Meanwhile, on the foreign policy front, the Financial Times reports that weeks of sustained US diplomatic engagement and the sharing of intelligence normally reserved for Washington’s closest allies have helped convince some previously sceptical capitals, including Berlin, that Russia could soon invade Ukraine. US President Joe Biden will warn Russia’s Vladimir Putin against any invasion in a video call tomorrow, with the full backing of Nato and the EU for retaliatory measures.Over in Turkey, the leader of the opposition Republican People’s party spoke to the FT and we’ll unpack here why a regime change in Ankara may not be as straightforward as some in the EU think.And in digital regulation news, a lobby group representing luxury, apparel and toy brands has called for tougher measures against online platforms selling counterfeit goods.A murkier outlook The Omicron variant doesn’t appear on the formal agenda of eurogroup meetings being held today, but the virus will nevertheless hang heavily over proceedings, writes Sam Fleming in Brussels. It will be the group’s first formal get-together since the emergence of the variant less than two weeks ago. The gravity of the upsurge was underscored on Friday by IMF chief Kristalina Georgieva, who said she already expected the fund’s October growth forecasts to be downgraded because of the outbreak. “A new variant that may spread very rapidly can dent confidence, and in that sense, we are likely to see some downgrades of our October projections for global growth,” Georgieva said at a Reuters conference. Georgieva will be in Brussels today on her first official visit to the EU since the beginning of 2020, where she will present the fund’s preliminary assessment of the euro area economy. The fund’s concern about the economic impact of the new variant is widely shared — and understandable given the renewed lockdowns that are being seen around the world and in Europe. As Laurence Boone, chief economist of the OECD, told the FT last week, the variant was “adding to the already high level of uncertainty and that could be a threat to the recovery, delaying a return to normality or something even worse”.Already in November the European Commission was listing the threat of fresh Covid-19 outbreaks among the downside risks to its otherwise buoyant growth forecasts, as it warned of mounting “headwinds” to the outlook. Now it appears that one of those risks is crystallising, triggering violent gyrations in financial markets. All this could have implications for the outlook for euro area fiscal policy, given talk has begun to shift towards ways of cautiously exiting the massive stimulus programmes that have been rolled out since last spring. But the reality is that it remains too early to draw strong conclusions about the economic repercussions of Omicron. While the strain displays a plethora of genetic mutations that could make it more transmissible and likelier to bypass vaccine protections, scientific evidence about its attributes remains partial. Anthony Fauci, Biden’s chief medical adviser, sounded a cautiously optimistic note yesterday, saying that while it was wrong to jump to conclusions, the early signals in terms of severity were “a bit encouraging”. What’s more, lockdowns have become progressively more targeted and less punishing during the successive waves of Covid-19, lessening the resulting economic damage. Booster campaigns are finally gathering pace in the EU, where two-thirds of the EU population is fully vaccinated, which may help governments avoid the need for draconian virus containment measures. Indeed, while US Federal Reserve chair Jay Powell acknowledged Omicron as a risk to growth last week, he spent far more time talking about the need to keep a lid on inflation. Some in the European Central Bank also worry that inflation will display greater staying power than expected. Omicron is heaping new uncertainty over the euro area’s economic prospects. The one confident prediction ministers can make is that the virus will continue to surprise them. Chart du jour: Europe in the leadMBA and executive MBA programmes taught in Europe dedicate a larger part of their courses to environmental, social and governance subjects compared with schools in the rest of the world. The average proportion of core MBA teaching hours dedicated to ESG in Europe is 75 per cent higher than the rest of the world, where only 12 per cent of the degree is related to ESG topics. (More here)Devil you knowThe EU has been clashing with Turkey’s Recep Tayyip Erdogan for years, but a regime change would not necessarily be straightforward for the bloc, writes Laura Pitel in Ankara. An unlikely alliance of anti-Erdogan parties is convinced that it can topple the Turkish president in the next national vote, which is scheduled for 2023 but could be called earlier. “A large segment of society has embraced the idea that these people are on their way out,” Kemal Kilicdaroglu, the leader of the Republican People’s party (CHP), told the FT in an interview this weekend.Diplomats posted in Ankara say, however, that there is often naivete back home about what a post-Erdogan government might look like — especially when it comes to foreign policy. Kilicdaroglu insists that his party doesn’t believe in “using the outside world as a tool of domestic politics”. Yet at times the CHP has tried to outflank Erdogan. When the government sought to dial down tensions in a dispute over gas in the eastern Mediterranean in 2020 by calling a Turkish drillship back to port, Kilicdaroglu attacked the government for making a “concession”.Even more contentious is the party’s Syria policy, forged against the backdrop of strong anti-refugee sentiment among the general public.The CHP has said that, if it comes to power, it will send home the roughly 3.6m Syrians who fled to Turkey after the eruption of civil war in their country.“Of course no one will be forced to go,” Kilicdaroglu insists. Under his proposal, Turkey would restore diplomatic relations with Syrian president Bashar al-Assad and then help to rebuild the war-torn country. Ankara would obtain reassurances from Assad that returnees and their property would be safe, Kilicdaroglu says. He would seek EU funds in support of this plan, even though European officials say that, without a political transition in Syria, that idea is a no-go.Kilicdaroglu rightly argues that many Syrians in Turkey live difficult lives marred by exploitation and low pay. But the plan he describes is seen by experts not just as a fantasy — but also a dangerous one that risks imperilling the safety of millions of Syrians.The CHP leader dismisses the notion that his policy is unrealistic. “Why would you, as a person provided with social security, a regular monthly wage, a job in a factory, and security for yourself and your property in Syria, stay and work in Turkey for half the minimum wage?”Knock-off threatAn organisation representing large companies including LVMH, Nike and Lego has ramped up its lobbying in the EU arguing that a key piece of digital legislation misses out on enforcing strong rules against counterfeit goods, writes Javier Espinoza in Brussels.EU regulators are ironing out details of upcoming pieces of legislation aimed at Big Tech. The Digital Services Act, aimed at setting clear rules on how large online platforms should police the internet, is particularly in the spotlight because lawmakers cannot seem to agree on a position to defend before member states and the European Commission next year.“It’s like everyone wants to put all the illnesses of the world in the DSA,” a lobbyist said.Europe Express has seen a letter signed by TAC Alliance, an anti-counterfeiting group representing large companies, flagging several shortcomings they perceive in the upcoming legislation. “As they currently stand, the limited scope and content of several obligations would not sufficiently prevent illegal goods or services, such as counterfeit or unsafe goods, from reaching consumers,” the letter reads.The current draft has a series of exemptions for smaller online platforms in a bid to shield them from unjustified costs, which TAC warns will be exploited to become a lucrative backdoor for the sale of knock-off goods. “Not only is this provision based on the false assumption that they would not have the means to implement those measures, but we believe it is also unfair and unjustified to protect small and medium platforms, when the majority of EU SMEs are in fact brick-and-mortar shops . . . who particularly suffer from significant revenue losses due to the increasing number of illegal products being sold online.”One country where this lobby has had an effect is France. Last month, the French government ordered search engines to ban Chinese ecommerce platform Wish from their result pages, due to the large number of unsafe goods allegedly sold on the website. Google, Apple and Microsoft complied and delisted the site from searches and app stores. What to watch today IMF managing director Kristalina Georgieva takes part in the eurogroup of finance ministers in BrusselsEmployment ministers seek to reach a common position on the minimum wage directive. . . and later this weekUS president Joe Biden holds a conference call with Russian president Vladimir Putin on Ukraine tomorrowTransport ministers discuss ways to ensure a level playing field for sustainable air transport and support for alternative fuels infrastructure on ThursdayJustice and home affairs ministers meet Friday on hybrid attacksNotable, Quotable

Hybrid warfare: The FT’s Big Read is exploring how migration is increasingly being used as a way of exploiting EU’s deep political divisions and public fears over uncontrolled immigration. The phenomenon is driving a further hardening of attitudes, with member states seeking new ways of strengthening their borders and deterring displaced people.Taking on Macron: The French centre-right Les Républicains party has nominated Valérie Pécresse as its presidential candidate. Pécresse, who heads the Ile-de-France regional council, is the party’s first female candidate. German anti-model: Berlin’s long-delayed new airport shows the new German government how not to finance growth, writes Patrick Jenkins. The coalition agreement spells out that private sector money should be used to support investment, but there is insistence that the country’s “debt brake”, which limits Germany’s structural deficit, be maintained.Electric warning: Half a million jobs would be at risk under EU plans to effectively ban combustion-engine cars by 2035, according to European automotive suppliers, the latest in a series of stark warnings about the costs of a rapid transition to emissions-free technology. The Global BoardroomJoin us on December 7-9 at the Global Boardroom, where more than 100 speakers will discuss the challenge of building sustainable growth in a world transformed by crisis. Listen to and engage with leaders including the US Treasury secretary, the prime minister of Finland and a commissioner of the US Securities and Exchange Commission. Register free here today.Recommended newsletters for you More

New Zealand’s runaway house prices could be brought back to earth by low net migration if the coronavirus pandemic keeps the country’s borders closed, according to the central bank’s deputy governor.Geoff Bascand told the Financial Times that if house prices cooled down faster than expected, it could affect the Reserve Bank of New Zealand’s forecast for rapid interest rate rises next year.If New Zealand was slow to reopen its borders and more of its residents moved abroad, that could put a check on population growth and reduce demand for housing, he added.Bascand’s comments highlighted the challenge for central banks in forecasting inflation as reopening from pandemic lockdowns affects supply and demand for goods.“If population growth stays very slow, the housing market could correct a bit faster,” said Bascand, who is expected to step down from his role in January after almost a decade as deputy.Faster cooling of house prices would factor into the RBNZ’s decision-making on interest rates, along with the global economic outlook, the strength of domestic demand and capacity pressures from tight labour supply, he added.

The Omicron coronavirus variant poses an additional risk for inward migration if the government delays easing border restrictions. The RBNZ raised interest rates in November by 25 basis points to 0.75 per cent, its second rate rise in as many months as the economy started to overheat. The bank has projected that rates will reach 2 per cent by the end of 2022 and peak at 2.6 per cent by December 2023.The RBNZ also forecasts net migration will gradually increase to about 24,000 people a year as border restrictions ease, but that would depend on a reopening to international travel. Net migration is currently slightly negative.Lower migration would reduce demand for housing but it would also reduce the supply of labour. “How that plays out exactly in terms of inflation pressure will be interesting to see,” Bascand said.For the first time in decades, New Zealand’s housing stock is expected to be balanced once current building projects are completed, making net migration all the more important.The central bank has forecast annual house price growth will slow to 6 per cent by the end of 2022 from 30 per cent at the end of 2021. From late 2022, it expects house prices to fall modestly.On a two- to three-year horizon, Bascand said it was hard to see what would hold house prices up given rising interest rates, slow population growth and continuing housebuilding.New Zealand house prices have risen sharply in the last two years, increasing 28.4 per cent in November year on year, according to CoreLogic’s house price index. Price gains have continued despite the government introducing stricter tax policies on rental income and on capital gains, and the RBNZ tightening loan-to-value restrictions back to levels previously imposed in 2016-2017.

The RBNZ regards the current levels of house prices as unsustainable and a threat to financial stability. It is consulting on new residential mortgage restrictions, which will consist of two tools: limits on debt-to-income ratios and a floor on the interest rates banks must use to test whether a borrower can afford a mortgage.It plans to use the interest rate floor as a transitional tool if needed, because the DTI limits would take longer to implement. Bascand said the interest rate floor could be implemented “relatively quickly, potentially in three to four months”.Even with headline inflation in New Zealand running close to 5 per cent, the RBNZ believes public expectations of future inflation are well-anchored and insists it has low appetite for any policy that would put that at risk.Signals the public was starting to expect higher inflation “would be a significant factor in our decision-making”, said Bascand. “If we thought [expectations] were becoming unanchored, it would be a worry.”Bascand acknowledged the risk that high inflation could affect public expectations. “We think there’s a risk that wage and cost pressures might rise and lead people to think there will be more inflation,” he said. However, rising mortgage rates would offset that concern, as they start to bite in the housing market. More

The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’China’s surprisingly rapid slowdown is eliciting familiar warnings that, as China goes, so goes the global economy. Only China may not matter as much as it once did.Not so long ago most economies were growing in close step with China. But in recent years those links weakened, then collapsed during the pandemic. Most dramatically, the correlation between gross domestic product growth in China and other emerging markets fell since 2015 from nearly perfect (over 0.9) to barely visible (under 0.2). In the second quarter this year, China grew significantly slower than other emerging markets for the first time in three decades, which may be a sign of things to come.Beijing is locking down to contain the pandemic and cracking down on economically critical sectors and high corporate debt with an aggression unmatched by any other government. This goes a long way to explain why China is slowing so fast now, when the rest of the world is not. But the link between growth in China and other economies started to loosen about five years ago, so this moment may reflect deeper forces in play. One is the new commercial cold war. China has been turning inward, replacing a growth model driven by trade to one driven by domestic consumers. Exports have fallen as a share of China’s GDP from above 35 per cent before 2010 to less than 20 per cent today. In 2015 Beijing launched Made in China 2025, a campaign to become more self-sufficient by buying more supplies and developing more technology at home.The US responded under Donald Trump by working to “decouple” from China. Since then President Joe Biden and many of Trump’s critics in Europe have taken a similar stand — and ramped up those efforts during the pandemic. That has meant buying more supplies from China’s commercial rivals such as Mexico, Vietnam and Thailand. China accounted for about 35 per cent of global GDP growth in the years before the pandemic, but that share plummeted in 2020 and is now about 25 per cent. China was still growing twice as fast as the average for other emerging markets five years ago, but that gap has narrowed. Facing the drag of a shrinking population and its massive debts, China is likely to grow more slowly than other emerging markets in coming years.Meanwhile other global growth drivers are gaining momentum, each lifting a different set of countries in significant ways. The digital revolution is raising demand for semiconductors and other high-tech products, boosting exports out of advanced emerging markets such as Taiwan and South Korea. Rising data flows are defying the slowdown in global trade and in China. Mobile internet technology is transforming the economies of larger, less-advanced markets, including Indonesia and India, where digital revenue has more than tripled as a share of GDP in just the past four years. India is one of the countries where trade with China is falling as a share of the economy. Much of this boost comes from online services, which grow rapidly and simultaneously in all emerging markets, regardless of what happens in China. Worldwide, mobile technology accounts for about 10 per cent of cumulative income growth and these gains are expanding faster in emerging markets.Efforts to contain global warming are causing “greenflation” in commodity prices by limiting new supply of raw materials and raising forecasts of demand for “green metals” such as aluminium and copper. Rising prices are a big boost for exporters of green metals, which come mainly from emerging markets such as Peru and Chile.The global decoupling from China may endure. The digital revolution, the fight against climate change and the new cold war are likely to outlast the effects of the pandemic and could herald a new era of growth in the emerging world. During the last golden age for emerging markets, after the turn of the millennium, many prospered mainly by supplying parts or raw materials to China — then the rising “factory to the world”. Now, they have more options.To say China matters less is not to say it doesn’t matter. China is still the leading trade partner for more nations than any other and the main global buyer of commodities. Should, for example, its campaign to reduce massive corporate debts, particularly in the property sector, end in a meltdown, the effects will be global and inescapable. But lesser tremors may no longer be so consequential. It may be that when China stumbles, the world no longer falls with it. More

Monday’s figures from Australia and New Zealand Banking Group Ltd showed total job ads climbed 7.4% in November from October, when they had already gained 7.5%.That left adds 52% higher than a year earlier at 222,093, and a lofty 44% up on pre-pandemic levels.ANZ senior economist Catherine Birch said the report indicated a sharp rebound was likely in official employment figures following a surprise 46,300 drop in October and a rise in the jobless rate to 5.2%.”Job ads suggest the unemployment rate should drop back below 5% in the near term, and we expect it to fall to around 4% by the end of 2022 and even further in 2023,” said Birch. “Underemployment is also likely to be much lower.”The Reserve Bank of Australia is seeking to drive unemployment down to 4% or even lower in the hope of finally lifting wage growth after years of tepid gains.The central bank holds its December policy meeting on Tuesday and is widely considered certain to keep its policy interest rate at a record low of 0.1% and to reiterate the outlook for no hikes until at least 2023. More

Taiwanese diplomats are on a rollercoaster. While they revel in avowals of support from Japan and the west, they worry over Honduras’s allegiance — one of the few countries to maintain diplomatic ties with Taipei in defiance of China.Xiomara Castro, the leftist politician elected president of the central American country last week, pledged during her campaign to establish diplomatic relations with China, which would reduce Taipei’s diplomatic allies to just 14.A coalition partner and an aide to Castro have subsequently walked back on that commitment but many observers believe Honduras will eventually side with China. A tug of war between the US and China for influence in Central America — a region Washington has long dominated politically and economically, and views as its strategic backyard — hangs over the shifting relationship.“The end of a diplomatic truce between Beijing and Taipei, financial needs of Central American governments, the increasing economic importance of China, and vaccine diplomacy are all pushing these countries away from the US and towards China as a partner,” said Evan Ellis, a professor at the US Army War College who researches Latin America’s relationships with China. “Another reason is the resurgence of populist leaders in the region.”In the past five years, Beijing has already poached three of Taipei’s allies in Central America and the Caribbean: El Salvador, Panama and the Dominican Republic.

4%

External debt Honduras owes to China compared with 0.01% to the US

But since El Salvador made the switch in 2018, the US has pushed back. Washington recalled its ambassador and put Salvadoran officials it accused of corrupt and undemocratic practices in support of Beijing on a sanctions list. Some analysts believe the US will do anything to keep Honduras from getting close with China. Washington has had to handle large migration flows from the country. Almost 320,000 Hondurans were encountered by US law enforcement at the southern border between October 2020 and September 2021, equivalent to over 3 per cent of the country’s population.Honduras is also strategically important to the US, as it hosts the Joint Task Force Bravo air base, Washington’s most important military unit for fighting Latin American drug networks.“The US will not let Honduras go because it is crucial for homeland security,” said Antonio Yang, a Taiwanese Latin America expert and honorary professor at the National Defence University in Tegucigalpa. Brian Nichols, the US assistant secretary for western hemisphere affairs, made a last-minute trip to Honduras just before the elections and met Castro — an encounter analysts say was partly used to discourage her from embracing China. A spokesman for Castro did not respond to a request for comment. The US remains a crucial partner and the largest market for Honduras, a fragile democracy threatened by drug trafficking, corruption and gang violence. Its economy contracted by 9 per cent last year. A fifth of the country’s gross domestic product comes from remittances, mostly from the US, and almost a third of exports, which include coffee, bananas and sugar, go there.

Honduras is strategically important to the US as the host of Joint Task Force Bravo, Washington’s most important military unit for fighting drug networks in Latin America © Orlando Sierra/AFP via Getty Images

But China has become ever more active. Last year, state companies completed construction of a 105MW hydropower dam in Honduras. According to World Bank data, the country owes 4 per cent of its outstanding external debt to China and only 0.01 per cent to the US.“Chinese local-level engagement is extensive, like across all of Latin America, including trade promotion and sister-city activities,” said Margaret Myers of the Inter-American Dialogue, a Washington-based think-tank. “We also see activities from the Chinese Communist party’s international liaison department intended to facilitate a formal relationship.”Castro said during her campaign that a switch to relations with China would give Honduras access to economic opportunities, Chinese-made Covid-19 vaccines and low-cost medicine.But much of Honduras’s business elite is keen to maintain ties with Taiwan, fearing damage to a US relationship they see as essential. Luis Larach, who has businesses in tourism, energy and real estate, thinks Honduras should focus on nearshoring — trying to attract US companies to move factories to the region from Asia — to drive economic growth. “You don’t need to have a lot of information to figure out that our big potential for development is with the United States,” he said. “The historic diplomatic relations with Taiwan have been good for our country and our region and, I think, should continue.”But Taiwanese analysts worry over Beijing’s growing economic clout.“Of course, US influence is waning and China’s increasing,” said Antonio Hsiang, a Taiwanese professor at the National Academy of Political and Strategic Studies in Chile and editor of a new book on Taiwan’s relations with Latin America. “Even though the US is a major aid donor to Honduras, corruption is so severe that the Honduran people do not see much of that.”

Some believe history could help sway Castro. Her husband, Manuel Zelaya, was ousted as president in a 2009 coup that many analysts believe the US tacitly supported. “Castro is certain to remember that, and Taiwan may have to pay the price,” Hsiang said.Honduran academics play down that and stress that the relationship is likely to remain strong, given the US need for reliable allies in the region.“It’s really hard to know what’s going to happen,” Julio Raudales, vice-rector of the National Autonomous University of Honduras, said. “It’s going to depend on how effective the negotiations with the US are.”Whatever the final decision, analysts believe, it is in Castro’s interest to drag out discussions.“Their recognition of Taiwan is a useful point of leverage to attract support, or at least a lesser degree of criticism, from Washington,” Myers said. “Honduras’s importance to China will diminish once diplomatic relations are established. This is the only leverage they have. Once they use it, it is gone.” More