Latin America Political Landscape

Many countries in Latin America are going through significant social changes, raising concerns about the general political stability of the region as a whole. Major recent events include: anti-government protests in Venezuela and Paraguay, recurring unrest in Brazil, mounting tension in Peru, and a bitterly contested presidential election in Ecuador.  We highlight some of Latin America’s political pressure points, as well as potential bright spots.

Venezuela

Social unrest and political instability is highest in Venezuela, where a steep economic crisis has plagued the nation due to low oil prices, government corruption, and high foreign debt. The government has been unable to provide adequate basic services, and the population is experiencing widespread shortages. This has led to daily protests against President Nicolás Maduro, which intensified after a Supreme Court decision stripped the opposition-controlled National Assembly of its powers, a move that was quickly reversed after significant domestic and international pressure. More citizen protests ensued when the government barred the opposition party’s best-known leader, two-time presidential candidate Henrique Capriles, from holding public office.

The economic landscape is not much better. The government has controversially used their limited resources and foreign reserves to avoid a default on its debt; however, that may not be possible much longer. Foreign currency reserves are estimated at approximately US $10 billion, down considerably from previous years (US $30 billion in 2011). Further, it is believed that a majority of the remaining reserves are in gold bars, which poses significant liquidity problems. Moreover, last week General Motors became the latest in a number of international companies that have left, or suspended operations in, Venezuela; a list that includes the likes of Coca-Cola, Bridgestone, Clorox, Ford Motor, General Mills, Kimberly Clark and Procter & Gamble.

Brazil & Peru

In Brazil, political uncertainty continues to mount as President Michel Temer pushes ahead with unpopular austerity measures and as the corruption investigation “Operation Car Wash” enters its third year. Faced with low public approval ratings and a lack of support in Congress, President Temer is relying on cabinet support to help push reforms through Congress that the administration considers vital to economic recovery. Without the reforms, the country faces obstacles from inflation, interest rates and low wage growth. Investors will closely monitor the government’s ability to pass such reforms, including a bill to cap pension outlays that is expected to increase government coffers, investor confidence and growth.

Simultaneously, many senior political figures, including one third of President Temer’s federal cabinet, are preparing to face trial for crimes related to Operation Car Wash, such as corruption and money laundering. Allegations involve government officials taking kickbacks from Brazilian conglomerate Odebrecht, receiving illicit campaign donations, and laundering millions of dollars over a period of years. Over a third of the Senate also stands accused, as well as three state governors, one federal court minister, 24 senators, 39 federal deputies and 23 other individuals at federal, state and municipal levels. The investigation is expected to have a marked effect on the 2018 presidential election, given politicians from the country’s three main political parties are involved.

Other Latin American countries, such as Peru, Venezuela, the Dominican Republic, Panama, Argentina, Ecuador, Guatemala, Colombia and Mexico, are also implicated in the graft scandal after Odebrecht admitted that it paid brides to win concessions throughout the region. In Peru, the company paid US $29 million between 2005 and 2014 to secure contracts. Initial investigations have led to the arrests of five people, and, in February, an arrest warrant was issued for former president Alejandro Toledo. Prosecutors are also investigating both of Mr. Toledo’s successors, Alan García and Ollanta Humala. All three ex-presidents have denied wrongdoing. The revelations have created a firestorm for current President Pedro Pablo Kuczynski, who is also dealing with the recent devastation caused by the El Niño weather cycle that has forced the government to post a greater-than-anticipated fiscal deficit of 2.8% of GDP. With President Kuczynski’s approval ratings in jeopardy, the government passed new anti-corruption laws and told Odebrecht to pull out of Peru. 

Ecuador

Official results from Ecuador’s April 2nd presidential election showed conservative candidate Guillermo Lasso, whom polls had favored leading up to the election, lost by less than three percentage points to President Rafael Correa’s handpicked successor and leftist candidate Lenín Moreno. However, Mr. Lasso refused to concede defeat, citing fraud claims. His supporters quickly took to the streets, picketing the country’s electoral council headquarters in Quito and Guayaquil. Although international observers, including the Organization of American States (OAS), found no discrepancies between the tallies and the official results, the National Electoral Council granted a recount of all ballots contested by both parties (about 10% of the total vote). After recounting over 1.2 million votes, on April 18th, Mr. Moreno was confirmed as the official winner. He obtained approximately 51.2% percent of valid votes, while Lasso had nearly 48.8%. Mr. Moreno will be inaugurated on May 24th. Early on, the new president has promised to triple poverty relief, fight corruption and adopt a more liberal approach to press freedom. However, he faces challenges, particularly lingering social unrest and the economy. Mr. Moreno will have to reconcile a deeply divided population after the election left the country split. Meanwhile, the economy, which emerged from recession in Q4 2016, is struggling with heavy external debt, particularly to China.

Paraguay

Last month, Paraguay’s Senate secretly voted in favor of a highly controversial constitutional amendment that would allow President Horacio Cartes to be re-elected. Paraguay’s Constitution of 1992 forbids presidents from serving more than one five-year term as a safeguard against dictatorship. Shortly after the vote, rioters converged in Asunción and set fire to the nation’s Congress building. The unrest coincided with the annual meeting of the Inter-American Development Bank (IADB). Having expressed a desire to run for re-election in 2018, 25 senators from President Cartes’ party and others, including the left-wing Frente Guasú coalition of former president Fernando Lugo, proposed a constitutional amendment to allow re-election for former presidents. Since then, President Cartes has defused a constitutional crisis by deciding not to run in 2018 and replacing his top security officials and the interior minister after citizen backlash. Members of Paraguay’s lower House have yet to vote on the proposed amendment. Even if approved, President Cartes stated that he would not run for re-election in an effort to preserve the stability in Paraguay that has been a selling point for foreign investors.

Argentina & Mexico

Despite the region’s general uncertainty, Argentinian President Mauricio Macri’s reform-oriented agenda has earned praise from credit rating agencies, with S&P Global Ratings upgrading the nation’s sovereign bond rating to B from B- on April 4th, citing strengthened policy predictability and accountability. Argentina’s economy expanded in annual terms for the first time in almost 12 months in January. President Macri, who unexpectedly won the nation’s election in late 2015, inherited an economy riddled with wasteful subsidies, cut off from international credit, and suffering from currency controls and dwindling reserves. His administration has since: settled with foreign bondholders to restore access to global credit, dismantled currency controls, and raised interest rates to tackle an increase in inflation, a significant turnaround from the Kirchner administration.

In Mexico, with presidential elections scheduled for 2018, all eyes will be on populist candidate Andres Manuel Lopez Obrador. If victorious, Mr. Lopez Obrador would be Mexico’s most left-of-center president in decades. So far, Mr. Lopez Obrador has caused unease among investors because of his promises to boost social-welfare spending and his opposition to allowing private investors in industries that have traditionally been state-run, including oil. Although the future political landscape is hazy, the Latin American nation’s economic activity has shown more resilience than anticipated, in part thanks to the Mexican peso stabilizing. For months leading up to the 2016 general elections in the U.S., policy uncertainty caused Mexican consumer and investor sentiment to deteriorate. Since then, U.S. trade rhetoric toward Mexico has eased in recent weeks, alleviating some concerns of a potential imposition of trade tariffs by the U.S. government on Mexican exports.

Authored by: Lorena Reategui & Alex Trueba