As Latin America’s rebound from Covid-19 surprises economists, emerging market investors and analysts remain fixed on a tense political climate amid a hectic election calendar.
In its latest World Economic Outlook published on Tuesday, the IMF upgraded its 2021 growth forecast for Latin America and the Caribbean from 5.8% in July to 6.3% as vaccination programmes have exceeded initial expectations. But the Fund lowered its prediction for 2022 from 3.2% to 3%.
“We are now entering a more difficult stage of the recovery,” said Nikhil Sanghani, Latin America economist at Capital Economics in London. “There’s been a lot of good news on the virus and vaccine front in Latin America, and economies have largely re-opened. But that initial boost will start to fade and policy is going to become a bigger headwind in the coming quarters.”
Central banks are tightening monetary policy as inflation numbers grow, while Sanghani said he expected fiscal policy to become far less accommodative in the Andean nations and Brazil, in particular.
These challenges will hit just as some of the largest economies in Latin America will choose new presidents. Chile will choose a new president in November, Colombia in May 2022, and Brazil next October.
Polarised polls
All three elections are expected to be highly polarised with centrist candidates struggling to gain ground, and market participants are already gearing up for volatility.
LatAm investors have already dealt with one election shock this year after far left candidate Pedro Castillo came from nowhere to win the Peruvian presidency, and left-wingers are leading polls in Colombia, Chile and Brazil.
Graham Stock, head of EM sovereign research at BlueBay Asset Management, said there was a “growing consensus” that it would be hard for left-winger Gustavo Petro to win in Colombia “because of the way the second round works”.
But Chile gives him more concern because the centre right candidate is losing ground, improving former student leader Gabriel Boric’s chances. “Boric winning while the new constitution is still being drawn up is a valid reason to be concerned, though it should be remembered that the debate in Chile happens further to the right of the political spectrum than in the rest of Latin America,” said Stock.
Sanghani agreed that a potential populist shift in the region was a “nuanced” story. “It can mean higher public debt risks, but on the other hand a populist can be good in the near term if fiscal support remains in place,” said the economist.
Even in Peru, where Castillo’s victory has shaken investors and the private sector, there are indications that investors’ initial fears may be overdone, as finance minister Pedro Francke has proven to be quite moderate.
Similarly, left-wing Mexican president Andrés Manuel López Obrador has proven to be the most austere of all LatAm leaders when it comes to fiscal stimulus to combat the pandemic.
“It’s a weird scenario now where the free market IMF is telling Mexico’s leader to do more public spending,” said Sanghani. “It’s rather surreal.”