Heightened political risk in several emerging market countries may become an obstacle to economic reforms in in the coming months. Latin America is a good example where a daunting list of elections may lead to increased tensions and volatility, with uncertain consequences on the markets.
Venezuelans kick off a long election season today to renew the country’s 23 governors amid a mounting political and humanitarian crisis. This will be followed by legislative elections a week later in Argentina, where President Macri’s orthodox policies will be challenged by the opposition. “There is a risk that he loses seats to left-wing parties — including ex-president Cristina Kirchner’s new party. That could lead to fiscal slippage, a rise in bond yields and a further drop in the currency. A heavy defeat could trigger a renewed crisis,” said Edward Glossop, economist at Capital Economics, a consultancy.
Then as many as four presidential elections are being scheduled within a year, including in Brazil and Mexico, the region’s largest economies, as well as Chile and Colombia.
“Mexico is a case in point where the anti-establishment candidate [Andres Manuel Lopez Obrador] is leading the opinion polls. In Brazil as well, but the candidate [former president Lula] may not be allowed to run,” said Mario Mesquita, chief economist at Itaú, a Brazilian bank.
“We are being fairly constructive on three of these countries, and the fourth one, which is Mexico, could also go that way,” said Blaise Antin, head of sovereign research at TCW.
“But Mexico is the one that has the most uncertainties. Anyone investing in Mexico today has to be obviously concerned about how the Nafta talks evolve and about the outcome of the July 2018 presidential election,” he said.
In Brazil, policy continuity will also be at stake in October 2018, two years after the impeachment of Dilma Rousseff. The government of Michel Temer has since implemented orthodox policies that have managed to pull the country out of recession, but the future remains unclear as the government does not yet seem to have a popular candidate to champion such policies.
“Uncertainty will have an economic impact. It’s hard to predict the electoral outcome, but reforms need to proceed,” said Krishna Srinivasan, deputy director of the IMF’s Western hemisphere department.