RIO DE JANEIRO, BRAZIL – A report by The Economist alerting to the advance of populist alternatives in different Latin American countries included Argentina among the first places in terms of investor risk.
Only Venezuela, Haiti and Cuba score higher risk levels. The category where the country is ranked worst is economic risk, and specialists warn that “if macroeconomic imbalances are not corrected, there will be a strong monetary and inflationary adjustment.”
“In a year of major elections for Latin America, political risks are now clear. Political risk is high as voters oppose incumbents and demand policy change, resulting in thriving populist proposals.” This conclusion was reached by The Economist magazine following a report by its intelligence unit entitled “Populism and politics: the operative risk in Latin America.”
After year 2020, marked by the coronavirus pandemic, in which the region registered one of the highest mortality rates and recessions in the world, the most significant aspect will be changes in Latin American economic policy.
The report focuses on three aspects: political risk, economic risk and political risk of investments. In the majority of sectors analyzed by the British magazine, Venezuela is the country with the worst outlook for this year.
Political risk was examined in three main aspects: security, political stability and political efficiency. According to the intelligence unit, the coronavirus pandemic poses serious risks to both the security environment and political stability in the region. In addition, the lack of political efficacy “will hinder the ability of governments to meet these challenges.”
Latin America has been facing high levels of security risks for years as a result of organized crime, high rates of violent crime, and the prevalent influence of drug trafficking. Far from changing this reality, the pandemic “will create new opportunities for organized crime. Along these lines, as the technological revolution is rapidly growing, experts foresee a greater impact of “cybercrime.”
Meanwhile, the report emphasized the social unrest that broke out in late 2019 in several countries in the region, such as Chile, Bolivia and Ecuador, among others. Although these protests subsided in 2020 as a result of restrictions on movement due to the coronavirus, according to The Economist, the risk of new social unrest remains latent: “For the most part, none of the problems that have driven the deep discontent with the performance of the region’s governments – including security, corruption and economic malaise – have been addressed.”
In addition, another risk facing current Latin American governments is “that opposition groups could come to power and cause significant deterioration in business operating conditions.” “2021 is another important election year for Latin America, with presidential elections in several large economies such as Ecuador, Peru and Chile, and mid-term elections in key regional markets such as Mexico and Argentina.
“A few main trends seem to emerge in most of these elections: a clear increase in anti-incumbency sentiment, a demand for a greater role of the state in the economy (at least as long as the pandemic continues) and a growing preference for populist policy solutions among an increasing proportion of the population.”
Against this backdrop, the Latin American country with the worst index in terms of security risk, political stability and government efficiency is Venezuela. Among the worst are Guatemala, Mexico and Ecuador.
The Economist also suggested certain risk scenarios in some countries. In Panama, for example, it stated that the Covid-19 crisis “leads to an increase in corruption, undermining confidence in the government.” Meanwhile, in Peru, political stability was undermined after the government “abandoned the political consensus on economic convergence in favor of populism.” In the case of Mexico, the activities of organized crime expanded through drug trafficking.
All these demands for change highlighted by the report lead to “increased public spending to support populations that continue to struggle with the coronavirus impacts.” This falls under the second axis studied by The Economist’s intelligence unit: economic risk.
“To different degrees, governments in Latin America have implemented a combination of tax cuts, spending cuts, and loan guarantees to try to protect businesses and individuals from the effects of the pandemic.” According to the report, one of the main drawbacks facing the region’s leaders “is the lack of policy space to further strengthen fiscal support measures without creating solvency concerns that would later evolve into macroeconomic instability.”
When analyzing economic risk, the specialists assessed macroeconomic risk, financial risk, and foreign trade and payments risk, assessing if economic conditions are stable and predictable, if investors can move money in and out of the country, and if the financial system is adequate for businesses’ needs: “In all these areas, risks are growing, driven not only by last year’s sharp collapse in economic activity, but also by the ongoing large fiscal burden caused by the pandemic.”
Looking ahead to 2021, the British publication argues that “there will be ‘economic scarring’ due to losses in investment and human capital, and major sectoral shifts as some sectors advance at full speed while others struggle.”
Venezuela and Argentina present the worst outlook in macroeconomic and foreign trade risk studies. In the case of Argentina, The Economist warns that “if macroeconomic imbalances are not corrected, there will be a strong monetary and inflationary adjustment.”
In relation to political risk in investments, the specialists pointed out that “increasing fiscal pressure, post-pandemic demands for a greater role of the state in many key sectors, and the rise of political players and populist policy proposals suggest that there are political risks for companies, in addition to the macroeconomic risks highlighted above.”
In the four key areas assessed by The Economist – legal and regulatory risk, fiscal policy risk, labor market risk, and infrastructure risk – “it is clear that there are new risks on the horizon driven by pandemic-related changes in the political and regulatory environment.”
One such risk relates to the lack of incentives resulting from “growing resource nationalism amid increasing objections to projects in the mining, energy and agriculture sectors.” As an example of this, the publication recalled that last year the Argentine government tried to nationalize a soybean exporter in financial distress. It then had to backtrack due to the strong social, political and business unrest caused by the initiative.
The experts also argue that this year’s fiscal policy risk “will be high,” as governments will try to bridge fiscal gaps while “reluctant to cut spending.” “Wealth taxes are on the agenda, as already seen in 2020, and new indirect taxes, on digital services, among others, are also likely (partly because they are easier for regional governments to collect).”
“While our outlook for Latin America in 2021 is cautiously optimistic, investors will need to prepare for these emerging risks,” the report concludes.
Source: infobae