What are the political prospects for the region?

To say it’s been a marathon for elections is an understatement.

Five of the main Latin American countries have seen a change in leadership over the past year and a half – four through elections and one through a resignation.

Ring in the changes

In 2018, the three largest countries in Latin America – Brazil, Colombia and Mexico – held presidential elections. Chile, meanwhile, held elections in late 2017 that saw a more growth-focused president take office. 

In Colombia, a market-friendly hard-liner won the presidential election in May, while in July, Andres Manuel Lopez Obrador became the first left-wing candidate to win Mexico’s presidential election for decades.

With the spectacular collapse of Venezuela, and Brazil suffering its deepest recession in decades, we have seen a shift towards orthodox macro policies and structural reform agendas.Tom Smith

Despite early concerns that his policies could reverse energy and labour reforms in favour of more populist policies, he has so far expressed moderate views on economic policy. 

However, most of the attention has been focused on Brazil’s presidential election, where observers believed the outcome could affect the country’s investment climate for years to come.

In contrast to Mexico, the presidential election in Brazil has installed a far-right president-elect Jair Bolsonaro, with controversial views.

Eddy Sternberg, co-portfolio manager for emerging markets debt portfolios at Loomis Sayles, says while Jair Bolsonaro, who was the front-runner throughout the election campaign, may not have the most democratic credentials, financial markets may prefer him to his left-leaning opponent.

Michael Wang, fund manager for the global emerging markets and Asia team at Polar Capital, says the political landscape in Brazil is one of the most fractious and fluid in decades, making it unclear how the new political reality will allow difficult reforms to be undertaken.

“The unsustainable fiscal deficit in the country has been a major overhang for investors and the need to cut public expenditures, particularly on pensions, will be a major test for the next president. Nearly 40 per cent of Brazil’s government expenditure currently goes towards pensions,” he says.

Impact on markets

There is little doubt the political change in any country can influence financial markets, especially in a region like Latin America where politics often influences asset prices.

For much of the past 15 years, Latin American politics had shifted to the left of the political spectrum and this had an economic impact.

However, Tom Smith, co-head of emerging market equities at Neptune Investment Management, says this is beginning to reverse.

“With the spectacular collapse of Venezuela, and Brazil suffering its deepest recession in decades, we have seen a shift towards orthodox macro policies and structural reform agendas,” Mr Smith observes. 

He adds: “Structural reforms are at the top of the agenda as successive governments move away from the populist tendencies of the past and look to raise productivity and economic activity.”

Mr Smith believes 2019 will be a year of action for the newly elected leaders across Latin America as they execute their plans for reform and get to grips with their economic challenges. To that end, he believes Mexico’s president is a key uncertainty given his populist ideology, although his attempts to reassure businesses and the markets suggest a more pragmatic style of governing.

In Brazil, the investment climate has been tough in recent years with the recession on corporate earnings and the interventionist policies of the Dilma Rousseff government impacting business confidence and reducing visibility.

Investors like Mr Smith now anticipate the incoming government will pursue an agenda of reform that will reduce the size of the state and privatise public assets to stabilise the government debt burden and stimulate economic recovery. 

Looking ahead

To a large extent, analysts are sanguine when it comes to the outlook for Latin American politics.

Mike Ingram, chief market strategist at WH Ireland, points out: “There are country-specific issues, but aside from the final resolution of trade talks between the US, Canada and Mexico, nothing that seems likely to prompt regional contagion and overall it is politics as usual for Latin America.”

Meanwhile, Mr Wang says the region faces concerns from the US Federal Reserve raising interest rates, the US dollar strengthening, and the escalation of trade disputes between the US and its trading partners. 

However, he says: “In terms of what has historically deterred investors, it has been Latin America’s boom-bust cycles in macroeconomic policymaking in the past. In the good times countries over-spent and kept interest rates too low, which sowed the seeds for balance-of-payment and currency crises in the bad times when international liquidity conditions tightened.

“The good news is that this has largely not been the case this cycle, and most of Latin America is in good shape, with low external imbalances, robust foreign exchange reserves, moderate inflation and freely floating currencies.”

Geordie Clarke is a freelance journalist