From a distance, Latin America shows a tempting array of positive indicators. In most of the region’s economies, the painful slowdown triggered by the 2014 collapse in commodity prices has largely ended. Economic growth across the continent is expected to expand from 1% in 2017 to 2.4% in 2018. Commodity prices have stabilised and consumer demand is picking up.
Latin America is also benefiting from a friendlier external environment, including a renewed thirst for yield in the richest nations, which should drive increased capital inflows. This favourable atmosphere has reduced inflationary pressures and allowed most central banks to slash interest rates, with the notable exception of Mexico.
"Investors heaved a sigh of relief that Donald Trump might not be as disruptive to the region as originally feared…"
Increasing demand in the largest markets will provide a boost in the consumer goods, pharmaceuticals and automotive sectors, to name a few. Resource-based opportunities will flourish, from major oil and gas deposits in Guyana to the lithium triangle in Chile, Argentina and Bolivia.
This trend of economic recovery has also been supported by some decreasing geopolitical risks. Investors have heaved a sigh of relief that Donald Trump might not be as disruptive to the region as originally feared, though prudence dictates keeping a highly watchful eye on negotiations between the US, Canada and Mexico over the North American Free Trade Agreement (NAFTA).
Latin America goes to the polls
Still, a full retreat from political risk remains far from assured. Uncertainty will continue to act as a brake on investor enthusiasm. One major driver of uncertainty is public dissatisfaction with mainstream political parties. Across the region, voters feel increasingly disconnected from their representatives. Economic mismanagement, incompetence, corruption – and often a combination of all three – have driven a wedge between the electorate and the elected. Anti-corruption enforcement trends from Argentina to Mexico have exacerbated hostility towards public officials. In Brazil, no major political party can claim to have benefited from recent corruption scandals; all have been tainted to some degree by the “Car Wash” investigation. The fact that newer parties have failed to gained traction has further compounded the issue.
Four major economies head to the polls in 2018, sharing an unusual level of political unpredictability.
Leading the pack is Brazil, facing its most unpredictable election cycle in recent history. The two-party race that has characterised most presidential elections over the past two decades is already a distant memory. So far, there is no indication as to what will replace it – other than an unprecedentedly large number of pre-candidates. A wave of corruption scandals has shattered the reputation of all the country’s major political parties, fostering a profound mistrust of political elites and ultimately increasing calls for a populist alternative. The country will also test new campaign financing rules following the Supreme Court’s 2015 decision to ban corporate donations. Last but not least, while investors are hoping that the new government will lead on implementing austerity measures to rebalance public finances, it is unclear whether such a mandate will be popular among voters. Investors willing to benefit from Brazil’s economic recovery – GDP is expected to grow by 2.4% in 2018 – will have to monitor political risks closely.
In Mexico, the populist rhetoric of leftist leader Andrés Manuel López Obrador has made him the frontrunner in most opinion polls ahead of the July 2018 presidential race. However, a lack of unity among opposition parties – and a rise in the number of independent candidates – is likely to dilute the ballot. This will favour the ruling Institutional Revolutionary Party (PRI), which is likely to fully exploit its intricate network of established institutional power in the run-up to the elections. Nonetheless, the PRI has a steep mountain to climb, with public approval ratings for President Enrique Peña Nieto at historic lows and top party members facing persistent allegations of corruption.
The renegotiation of NAFTA will similarly have an important electoral impact. If developments in trade talks trigger rising nationalist or anti-US sentiment, left-leaning parties would pounce. Meanwhile, the security environment will continue to deteriorate across the country, with significant levels of violence in several regions.
The general elections in Colombia will also be contentious and polarised, with implementation of the peace agreement with the leftist guerrilla Revolutionary Armed Forces of Colombia (FARC) at the centre of public debate. The 11th of March vote for the legislature will mark the FARC’s inaugural electoral contest. A wave of corruption scandals have eroded support for traditional parties and will provide ammunition for ample mud-slinging and finger pointing. A field of more than 12 candidates running as independents, each with a long history of public service, will provide mud to spare.
With so many names in the mix, there is no clear front-runner for the presidency. But no matter who wins the election, there will be no significant policy changes. The next administration will continue orthodox macroeconomic management and preserve Central Bank positions on monetary policy and inflation. Even in the event of victory for the opposition Democratic Centre (CD) party, the overall structure of the peace agreement, while modified, would remain in place. Additionally, an opposition win would be unlikely to deviate from current economic policies. Promoting foreign investment will remain a priority for any new government.
With unscheduled elections now set to be held in April at the governments behest Venezuela will figure prominently in 2018. The Chavista regime is likely to cling to power despite being deeply unpopular. It will do this by changing laws and the constitution to suit its needs through an all-powerful Constitutional Assembly, dominated by President Nicolás Maduro, and by retaining support from the military. Venezuela’s economic freefall will accelerate and the country will move further into default territory.