Political Risk Looms in Latin America

This year will be one of high political risk in the region. The economic deterioration of the Latin America—the International Monetary Fund (IMF) expects a 0.3% contraction this year—has had, and will continue to have, political consequences. This can be seen in the presidential approval rates of the region’s major economies.  If we consider those of Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela, these have fallen, on average from 52% in 2010 to 27% in 2015. In some cases, the rates are reaching historic lows that are creating important challenges for the governments in power and increase political risk across the region.

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Venezuela is where the fat tail risk lies. The PSUV has not been able to recover Chavez’s 60% approval rate under Nicolas Maduro. The arrival of a less charismatic leader coincided with the implosion of Venezuela’s economy amid the oil price slump. Venezuelans experienced a 10% contraction of their economy last year and they probably will experience a similar contraction in 2016. According to the IMF, annual inflation will reach 720% this year and GDP will contract 8%, numbers that seem frivolous compared with the level of food scarcity. On December 6th, Venezuelans chose to depart from Chavismo and gave the opposition a super majority in the legislative. The question is if it was not too late to avoid a major crisis.

Another striking case is Brazil. In December, 2012 Inácio Lula da Silva left an impressive 83% approval rate to his successor Dilma Rousseff. Although she was not as popular—starting at a modest 47%—, any political capital she used to have is now lost. During Dilma’s term, Brazilians have witnessed corruption scandals that involved several top government officials. Even Dilma herself has been accused of using public resources for her presidential campaign. Moreover, Brazil is experiencing the worst economic crisis in a century. Its population is experiencing increasing inflation (now at 10.74% through mid-January) and 9% unemployment. No wonder, today only one out of ten Brazilians approves the performance of Dilma’s government. In this scenario, not only the PT is likely to lose the local elections for the state governorships this year, but the risk for Dilma’s impeachment remains high.

Cristina Fernandez’s government already had to pay the price in Argentina. Although she improved her approval rate in the last months of her administration, reaching one of the highest among her peers (40%), that was not enough to keep her party in the presidency. Argentines decided to hand over the presidency to Macri last November, ending the Kirchner era. Argentina’s new president will have to capitalize his honeymoon of 70% approval rate as soon as he can. His political capital is likely to deteriorate when Congress, where he lacks majority, resumes activities in March.

The current Peruvian government is the next to feel the consequences of a diminished political capital. Peruvians do not trust Ollanta Humala anymore after the media published his wife’s notebooks, linking the presidential couple to money laundry and corrupt activities. While the investigation is still ongoing, Peru approaches April’s General Elections wth Humala’s Partido Nacionalista Peruano having only 2% of vote intention. Keiko Fujimori of Fuerza Popular, with 27% of vote intentions, is likely to win next April, followed by the former President Alan García of Alianza Popular, who has 13%.

In Colombia, Juan Manuel Santos has lost approval progressively since he started in September 2012 at a level similar to his predecessor’s, Álvaro Uribe. Despite the robust economic growth rates of the country, the death of 10 soldiers in a conflict with The Farc and the long negotiations for a peace treaty with this group eroded Santo’s approval. The chance to recover his political capital in 2016 looks weak given that Santos is likely to face a challenging environment, with Colombia’s slowing economic growth combined with BanRep’s tightening cycle to curb mounting inflation.

Even in Chile, usually the star of the region, Bachelet registered in December her lowest approval rate of both terms combined. The discussion on free college education; the fact that Bachelet’s son used his political influence to acquire a $10M loan; and the public officials strike cut 20 points of the president’s approval rate. Only 36% of Chileans trust the president and think that she has the sufficient leadership to govern, making 2015 one of the hardest years for Bachelet. She will have to ensure Chile’s economic performance to recover some of the lost ground in the next 10 months—before municipal elections take place in October 23.

In Mexico, Peña Nieto represents a counteractive case. He also lost approval with the death of 43 students in Ayotzinapa, in the south of Mexico, and the corruption scandals that involved his wife and closest ministers. He even reached the 2015 legislative elections with approval rates lower to Cristina Fernandez in Argentina, but his party, the PRI, still managed to obtain the majority.  Part of the reason for this victory is that the opposition is fragmenting. Peña Nieto’s party is likely to secure more than half of the 13 state governorships at stake in the elections this year, but if the opposition remains fragmented, the PRI could get a perfect score. This would give it a considerable advantage towards the presidential election of 2018.

LATAM PM’S Take: It is now well know that this year will be one of economic recession in Latin America. However, it is equally important to keep track of regional political risk, which is also increasing. In some countries, such as Venezuela and Brazil, risk is mounting and shows no signs of improvement in the near term. This increases fat tail risks that could have important implications across markets. In other countries, like Argentina, political crises brought regime change and are bloating economic expectations. Follow closely political events, as they can have drastic effects in this delicate economic environment.