For investors, LatAm politics is about more than left vs right
Signs of pragmatism from Chile's Boric are encouraging despite anti-market stances
It would be easy to see Gabriel Boric’s comprehensive victory in Chile’s presidential election as part of the narrative of Latin America again lurching to the left and putting at risk the gains made by investor-friendly governments.
A decade ago, the Pacific Alliance countries — Chile, Peru, Colombia and Mexico — were financial markets darlings, used to extol the virtues of orthodox economic policymaking. After Boric’s win on Sunday, three of these countries have presidents with sometimes radical left-wing convictions. In Colombia, the only outlier, former guerrilla Gustavo Petro is leading polls ahead of next year’s election.
Whether you side with those who can’t believe that Chile is throwing away the free-market model that has transformed it into Latin America’s strongest economy, or you agree with Chileans who say that it is time for greater state intervention to ease inequality, it is clear that Latin American bond investors need to remove themselves from the left-right dichotomy.
As creditors fret over post-pandemic debt burdens, it is Mexico’s left-wing Andrés Manuel López Obrador (Amlo) who has proven to be LatAm’s most frugal leader. Brazilian conservative Jair Bolsonaro, whose victory in 2018 brought euphoria to markets, has spent like there’s no tomorrow — and still growth is underwhelming. Moreover, the hot-headed Bolsonaro’s populist, iconoclastic streak is leaking into fiscal policy. He already gave investors a fright with the removal of Petrobras’s CEO early in the year, and now wants to dodge constitutional spending limits. Brazil bonds have had a terrible time.
This is nothing new. Famous left-wing presidents Lula (Brazil) and Ollanta Humala (Peru) were nowhere near as destructive for fixed income performance as the election-time collective meltdown would have foreseen. More recently, Lenin Moreno — Rafael Correa’s anointed successor in Ecuador — won the presidency and after a while realised that he needed a market-friendly finance minister. This did make him unpopular with Correa and his base, but it granted ample bond market access. Even as Ecuador restructured during the pandemic, the issuer earned plaudits for its approach.
What causes this? A romantic might argue it is respect for a nation’s institutions or a willingness to work for the greater good. But often, it’s self-preservation.
Moreno realised that his predecessor’s economic policy had an expiry date, and he needed change to continue to access funding. Some of Amlo’s policies may disgust market participants, but he knew from the start that he could not attempt them without limiting disarray in capital markets. Cancelling a new airport when it was a third built seems a terrible decision, but Amlo found a way to keep paying the airport’s bondholders.
In this sense, early signs from Boric are encouraging. His shift to the centre to earn votes suggests a willingness to moderate and indicates he understands the need for manageable governance. If he keeps up this pragmatism, expect the proposal to do away with Chile’s famous private pension system to be watered down into something far less destructive for capital markets.
Ultimately, a leader’s ability to be pragmatic matters more than his political stripes. Antagonising bond markets rarely makes sense for a president — even Venezuela's Hugo Chávez had an impeccable bond repayment record.
This is food for thought ahead of what could be one of the most crucial calls of 2022 for EM bond traders. Will El Salvador’s president Nayib Bukele take a pragmatic turn and realise — in time for a January 2023 maturity payment — that having financial markets onside and cheap funding from the IMF is likely to make his life easier, or will he remain in the thralls of his crypto dude personality cult as he appears to be today?