Getting friendly in South America
A dramatic political shift towards more market-friendly governments in South America is creating huge investment opportunities for foreign firms but it is not yet certain if the public will accept deep structural reforms that would put the region’s main economies on a firmer economic footing.
During the past year, Latin America’s move to more left-leaning regimes – the so-called ‘pink tide’ – has swung in the other direction.
The biggest surprise took place on November 22 last year, when the former mayor of Argentine capital Buenos Aires, Mauricio Macri, was elected the country’s president (he is politically right of centre and represents the Cambiemos political coalition). He has already embarked on a series of market-friendly reforms, which are starting to turn Argentina into the ‘hottest’ country in the region for foreign investors.
But other nations have also seen important shifts. Cuba is undergoing a rapprochement with the United States. In January, Venezuela’s right-wing opposition took control of the country’s Congress for the first time in 17 years.
And in one of the most significant developments in the continent, Michel Temer – who stands for the centrist party, the Brazilian Democratic Movement Party – took over as the country’s president on an interim basis, as formal impeachment proceedings started against his predecessor, the socialist Dilma Rousseff.
Those should be completed at the end of August and Temer is likely to remain president until new elections at the end of 2018. He has appointed a markets-friendly economics team and investor confidence has been lifted dramatically, despite dire economic data coming out of Brazil.
In February, the left-wing firebrand, Evo Morales, the president of Bolivia, lost a referendum that would have cleared the way for him to run for a fourth term in 2019. Pedro Pablo Kuczynski, an Oxford and Princeton-educated, former co-chairman of First Boston in New York City, assumed the presidency in Peru in July.
PPK, as he is known, represents the centre-right, Peruvians for Change, political party. Peru was already one of the most market-friendly countries in Latin America but experts now expect public-private partnerships to be extended to infrastructure projects – including new hospitals, prisons, railways and airports – throughout the country.
With a centre-right government already in place in Colombia and markets-friendly centre-left parties in charge in Mexico, Chile and Uruguay, the political complexion of most of Latin America has taken a decisive turn to the right. The only middle-ranking country where the Left remains firmly in control is Ecuador, where socialist Rafael Correa has been in power since 2007 (he wants to hold a referendum that would enable him to stand for re-election for a fourth time next year).
“All these big political changes took place without any violence,” says Juan Sartori, chairman of Union Group, a Montevideo, Uruguay-based private equity firm, backed by the Canadian billionaire, Ned Goodman.
“That never used to happen in Latin America and that is great news for foreign investors. No one expected Macri’s victory in Argentina and within weeks he had lifted foreign exchange controls.”
However, Joydeep Mukherji, a managing director in the Latin America and Caribbean sovereign ratings group at S&P, cautions that the shift taking place might not be as great as people perceive.
“A swing in the political pendulum is occurring in Latin America,” he says. “But it no longer swings as far as before. It kind of hovers in the centre. The region’s Right has learned it must maintain minimum social standards or it will never get elected. The Left has understood that populism can really hurt you electorally and that poor fiscal policies normally lead to hyperinflation.”
The region’s move to more markets-friendly governments is occurring for several reasons. Until recently, a slowdown in the Chinese economy during the past few years has put downward pressure on global commodities prices and, as one of the world’s major producers of raw materials, Latin America suffered. The bonanza years – when high prices meant that populist governments could pamper the poor – have ended (Venezuela is the greatest example of this: it has seen economic growth rates of up to 6% turn into a decline of 5% this year, according to the International Monetary Fund).
This change has been one of the main factors behind substantial rises in unemployment in some countries (in Brazil it has shot up by 2.5% to 11.2% today in the space of only two years). Latin America has been forced to become more ‘lean and mean’ and the public seems to have come to the conclusion that governments that follow more orthodox economic policies lead to higher living standards in the long term.
China’s shift towards a different economic model based more on middle-class consumption and developing its knowledge economy is also likely to have a profound impact on Latin America. According to the Organisation for Economic Co-operation and Development, graduates of tertiary education will multiply by four times in China (from 50m to 200m) by the year 2030, whereas in Latin America they will only double (from 50m to 100m).
China is expected to account for more than one-third of all global economic growth. The trends mean that the relationship between China and Latin America is likely to pivot increasingly around services rather than commodity exports. Latin American countries with more markets-orientated policies are likely to see – and exploit – these opportunities first, although the state has a role in developing national strategies towards China and India.
The countries in Latin America that seem most aware of global economic trends are all members of the Pacific Alliance, the trade bloc made up of Mexico, Chile, Peru and Colombia. In June, Argentina became an official observer of the organisation and has expressed interest in joining it one day.
Argentina’s investment climate has improved markedly since Macri came to power. In April, the sovereign sold US$16.5bn of debt in its first international bond issue since its record 2002 default. It was four times subscribed and a major proportion of the issuance will go towards finally setting with outstanding bond holders originating from 2002.
Since foreign exchange controls were lifted, the Argentine peso has dramatically devalued, helping the country’s exporters. A large number of agricultural tariffs on soya beans, wheat and beef have also been removed. An easing of electricity subsidies is also taking place, though this in turn had pushed up inflation. It is now running at an annualised rate of 47%, according to the Buenos Aires province inflation series (which is seen by most economists as reflective of the national economy).
However, some experts are concerned that Macri has not yet committed himself fully to stamping out the corruption curse that has blighted the nation for decades.
“Corruption is an enormous challenge in Argentina,” said Michael Shifter, president at the Inter-American Dialogue, the Washington DC-based think tank. “I think one big test now will be whether corruption cases during the past decade are dealt with in a professional and clean way by the country’s judges. If they are, that would be a big boost to international investors’ confidence in the credibility of the country’s rule of law.”
Edward Glossop, an emerging markets economist at Capital Economics, a London-based economics consultancy, agreed. “The Kirchner administrations appear to have been highly corrupt. We have to see how things improve under Macri.”
The Kirchners – first Nestor and then his wife, Cristina – were presidents of Argentina between 2003 and last year. Lazaro Baez, a prominent Argentine businessman who was close to the couple, is now in prison and facing money-laundering charges.
Glossop added that one of the continuing issues in Argentina is the high fiscal deficit – estimated at 5% of GDP.
“It has to be dealt with,” he said. “It is putting off foreign investors and its reduction would be a very good signal that the country will not go back to the Kirchner ways.”
Meanwhile, economists are becoming much more optimistic about Brazil since the interim government of Temer took charge. Bruno Rovai, an economist at Barclays, said his confidence in the country’s economic future has shot up from four out of 10 just a few months ago to seven out of 10 today.
“Already Brazil seems to have put the worst of the recession behind it and is in recovery mode. The new government is developing a policy agenda focused on public-private partnerships. Brazil is the size of a continent and huge opportunities for foreign investors exist once that agenda is fully implemented. We could see the partial privatisation of a number of airports, for example.”
Like Argentina, a key test for the country will be putting a cap on public expenditure growth. Last year, it had a primary fiscal deficit of up to 2.5% of GDP. In October, the country’s Congress is expected to vote on new controls to limit the deficit.
“Investors are starting to get more visibility about Brazil’s future economic direction,” said Joao Pedro Resende, an economist at leading Brazilian bank Itau.
The political shift in South America appears deep seated. The continent’s main economies are already either friendly towards the markets or moving in that direction fast. The region’s courts also seem to be dealing with corruption cases in a thorough way, which should improve Latin America’s credibility in investors’ eyes.