For this years’ edition, we decided to add some quantitative backing to the tortuous separation of Latin America’s “Good, Bad, and Ugly” markets. We began by considering the region’s 20 largest economies, and then measured a series of data points that reflect the growth opportunities, debt challenges, and investor risks found in each market. In all, we considered eight data points in what we hope will become a useful annual benchmark that our clients and readers can use for their own planning purposes.
The specter of continued high interest rates (for another 1-2 years) at both the US Fed and domestically in Latin American markets puts in sharp focus the issue of fiscal management for regional governments and corporations. Even while analysts expect a positive change in the political makeup following October elections in Argentina, at 80% of GDP government debt levels, any new government will be unable to make essential investments needed to accelerate growth. In contrast, the political dysfunction today in Peru paints an ugly picture. But with only 35% of GDP government debt and a similar level of foreign debt, Peru remains a country where government does not get in the way of growth.
Another issue of genuine concern is the ascendancy of populist governments. Left vs right is not the issue but rather the tendency of populists to legislate policies that undermine transparency and competition by weakening institutions and trying to bring “fairness” to a market economy with price controls, subsidies, regulatory interference, and/or government-funded competition. These are politically motivated decisions designed to consolidate government power and weaken any corporate sector that can fund a political opposition. Such actions send private investors and their monies scattering and increase corruption. Populism is a risk to at least some sectors today in Mexico, Brazil, Colombia, Chile, Argentina, Venezuela, Nicaragua, El Salvador, and Guatemala, among others.
TAKE NOTE: At the end of the day, comparing countries broadly has limited utility to investors. Enormous opportunities in select sectors can be found in even the least appealing countries. The same sectors may face ominous threats in seemingly promising countries. Market due diligence, when properly conducted, looks at many factors from country risk to regulatory/legal/political risk to competition and of course customer demand. This is precisely how we help our clients at AMI—helping them assess on a macro and micro level their business prospects in Latin America.
The Good (and Excellent)
As our scoring indicates, Guyana stands head and shoulders above its peers. The little country that struck oil is the fastest-growing economy in the world and will expand close to 50% over the next two years. Amid an oil bonanza, Guyana has almost no debt and generates Asian levels of investment, particularly from foreign sources. But Guyana is also a country dominated by a tiny cabal of business and political leaders where the rules of engagement can be opaque. Successful foreign ventures in Guyana require the right local partner and robust government relations with both dominant political parties.
The election of Gabriel Boric—a self-described disruptor—and a truly disruptive constitutional convention triggered massive capital flight that weakened the Chilean peso by as much as 20% in 2022. Wealthy Chileans momentarily gave up on their country. Global mining companies quietly put their Chilean investment plans on ice. But the massive voter rejection of the newly proposed constitution reminded us of all of the inimitable pragmatism of Chileans, the very cultural foundation of that country’s competitiveness. With China rebounding, copper prices lifting, and investor confidence returning (albeit hesitantly), the Chilean peso is gaining against the greenback and consumer spending is growing robustly. Chile must still find a way to build a more equitable society through constitutional reform but for now will opt for incremental change, a relief to investors.
President Luis Abinader is credited with loosening COVID restrictions 6-18 months ahead of several Caribbean tourism competitor destinations (Jamaica, Bahamas, Aruba, Cuba, Trinidad & Tobago), thereby stealing Caribbean tourism market share. His government has doubled down on the DR’s commitment to mining, which is the 2nd largest source of corporate income tax, after tourism. The result is an economy which will outperform most of LatAm in 2023, growing 3.9% versus 2022.
The Abinader (PRM) administration has also cracked down on tax eviction and tax fraud, both of which purportedly flourished under previous PLD administrations. But the DR’s fundamental competitiveness hurdles remain untouched:
- Human capital: The DR needs more effective education and training of its workforce
- Government spending: Continues to include several wasteful programs
- Energy: A sweetheart deal for private sector power generators signed two decades ago when the sector was in crisis, continues to cost the government a sizeable chunk of the annual budget
Those who think Peru’s political violence is owed to the battle between the executive office and congress are missing the bigger picture. Peru is one of Latin America’s most divided nations. An elite class of mostly white Peruvians dominate commerce and politics, governing over a mestizo and indigenous majority. Limeños enjoy far higher incomes than the interior of the country. The unfair differences known to all Peruvians were tolerable so long as growth was strong, and the distribution of incomes improved — which they did for three decades. COVID— and more precisely, COVID quarantines, some of the strictest in the world—changed that fragile equilibrium. With 70% of working Peruvians toiling informally (for cash), quarantines put them out of work and shattered the uneasy peace between Peru’s divided populace. Peru has been a political mess for close to a decade, but it did not seem to matter, as the private sector continued to invest in an expanding middle class, underwritten by stable inflow of dollars thanks to Peru’s world class mining industry. For the first time in a generation, Peruvian investors are worried by the idea that the nation’s divisions cannot be healed any time soon, leading to more populist politics and the unraveling of pro-business laws and regulations. If and when cooler heads prevail in Lima, Peru has the potential to grow again at enviable rates thanks to low debt levels, strong resource prices and a healthy financial system.
Politics in Latin America always matters in the long run but rarely impacts in the short term. A decade of destructive policies under Chávez were masqueraded by rising oil prices…until they collapsed, and with it, the Bolivarian revolution façade also came crashing down in 2014. Colombia should be booming thanks to soaring coal exports and high oil prices. Instead, the nation’s internal economy is struggling as Colombia’s elites race for the exits. Gustavo Petro is turning out to be the very wrecking ball that the business class feared he would be. After pushing through a watered-down fiscal reform, Petro now wants to upend Colombia’s reasonably well-functioning healthcare and pension systems. Next is labor reform, which promises to further burden an over-regulated private sector which struggles to formerly employ 25% of working Colombians (70% work informally, another 5% in government). Self-confident and highly intelligent, Petro is also arrogant and inflexible. The political and legal battles ahead will pit Petro against the establishment and will further rattle investors and erode the Colombian peso as capital flees. Some of Colombia’s sectoral systems desperately need reforming, but Petro’s combative style makes him few allies and many powerful enemies. History tells us that such a leadership agenda and manner rarely succeed.
From the outset, critics of President López Obrador (AMLO) predicted that his policies would bring the slow death of a thousand cuts to Mexico’s institutions and governance. Sadly, such fears have come to life over the last four years. Mexico ought to be growing robustly right now, with sustained demand from its largest customer, the US, the mass migration of Chinese assembly to other manufacturing hubs, a competent central bank (the most important institution holding its own), low debt levels and favorable demographics. Mexican exports will grow 4.3% in 2023 in spite of the fact that FDI levels are expected to drop 7.6% versus 2022 and domestic gross fixed investment remains 10% below levels achieved under President Peña Nieto, a direct result of steady capital flight since AMLO was elected in July, 2018. Domestic consumption will grow a meager 1.2% in 2023. Under AMLO, Mexico’s economy is a one-trick pony, manufacturing exports to the US, driven by American demand and Chinese assembly migration.
During the January 2023 ‘Three Amigos’ summit in Mexico City, US (and other foreign) energy investors hoped to see some progress made on Mexico’s legally questionable interference in the sector that has crippled private investment in natural gas power generation, green energy, and even smaller scale distributed generation projects, all needed to power Mexico’s appetite for near shoring demand. As so often has been the case in Mexican-US bilateral negotiations, the tail (Mexico) wagged the dog (US). Mexico reportedly promised to better control the entry of non-Mexicans who arrive for the sole purpose of crossing illegally into the US. The rise in illegal immigration across the border during the Biden administration is a major political handicap working against Biden’s re-election aspirations. In return, Biden’s team decided not to apply pressure on the energy file, a sector concentrated in US states (Texas, Oklahoma, Dakotas) where no Democratic presidential candidate is likely to win. AMLO’s administration dodged a bi-lateral trade dispute bullet, until after both countries install new governments in late 2024/early 2025.
Lula is a political street fighter with few equals. Where Bolsonaro’s government was weak – poor foreign relations, sloppy public relations, divisive social policies, Lula is a far more effective leader. Punishing the image of Bolsonaro and what he stood for got Lula elected and will continue to serve him politically as he milks the fallout of idiotic moves led by Bolsonaro supporters after their election defeat. But in his zealous remaking of Brazil, Lula will also try to unwind some of the very important economic advances made under the Bolsonaro administration: reforms, privatizations, and new regulations engineered by former Finance Minister, Paulo Guedes and legislated under the deft leadership of Brazil’s congressional centrist leaders.
Brazil’s international and democratic standing is improved by the election of Lula, but its economic weaknesses will be further exposed by an executive branch both laden with ideology and lacking in talent and experience in the realms of economic policy. Rising interest rates internationally and more than matched by Brazil’s central bank deliver some serious blows to Brazil’s short term future. Brazil’s government debt/GDP ratio stands at 79% and will rise as debt is refinanced at much higher rates, limiting Lula’s ability to spend on the programs dear to him, and likely pushing him to raise taxes, particularly on the middle and upper classes as well as the corporate sector. The private sector, who for the first time in decades under Bolsonaro could borrow money at viable rates are already seeing credit dry up as banks choose to lend to the government, rather than private enterprise.
Lula is a savvy politician and with the right counsel will pivot towards a friendlier (for investors) policy framework once he sees the writing on the wall. But for now, he has a chip on his shoulder, placed there by the political and business establishment who pushed (rightly) for his incarceration. In the time it takes for him to rediscover his once admired humility, his government will continue to choose a policy path that runs counter to the needs of Brazil in today’s high interest rate environment. That collision course will trigger capital flight, weaken the Real and oblige the central bank to raise rates further.
On a brighter note, the reopening of the Chinese economy helps stimulate global demand for many of Brazil’s leading exports. Industrial metals and agriculture products will bring much needed foreign exchange to Brazil’s terms of trade. But at the end of the day, Brazil’s GDP, more than any other Latin American country, is driven by its domestic economy, which in turn is strongly influenced by the policy decisions made in Brasilia.
An enormous level of investor hope accompanied the election of President Lasso, who promised to bring a banker’s scalpel to an historically mismanaged fiscal economy. For the first six months of his tenure, Ecuadorian bonds were some of the best-performing in the world. However, the honeymoon was over soon after as the scrum of Ecuador’s bitter politics proved too opposing for Lasso, whose party controlled a minority of seats in the legislative branch. That political hurdle eroded investor confidence. As a result, private investment levels have since declined. As the largest dollarized economy outside of the USA, Ecuador’s executive has fewer levers than most to manage the economy. A rising country risk placed on its debt has left Ecuador few options but to seek IMF relief and accept IMF austerity conditions. Ecuador is caught between a rock and a hard spot, dependent upon IMF relief and forced to abide by highly restrictive fiscal measures with little faith from private investors to rescue a stalled economy. On the plus side, Ecuador’s defueled economy will suffer the lowest inflation in the Americas in 2023 at barely 2.5%. Growth will be anemic for the next two years but with healthy oil and food prices, Ecuador should be a robust economy again by 2025.
Investors are biding their time, hoping to see the Peronists sent packing from the presidency later this year when elections are scheduled. But a change in government may not prove the panacea that business leaders are anticipating. The rising international cost of capital has further eroded investor interest in Argentine assets, accelerating the peso’s devaluation. Unwinding the spiraling effect of peso devaluation and inflation becomes that much more challenging in a global climate of high interest rates where capital sits happily in European and US bond markets earning positive real interest returns. If the talented government of Macri could not stop the bleeding in a more accommodating global environment, the next government is unlikely to fare better.
Argentine exports of grains, energy, metals, and chemicals have all benefited from the supply displacement of the Russia-Ukraine war. But these and other industries continue to fail to attract enough foreign investment, thanks mainly to the regulatory complexities of operating in Argentina, a direct result of Peronist economic meddling as the government resorts to taxing Argentina’s most competitive sectors in order to balance budgets. Such policies will be difficult to reverse in light of the massive government debt and mounting interest costs that will be inherited by the next government. The Peronists have perfected the process of handing over a broken economy to the opposition, who has no choice but to apply drastic measures to resuscitate the investment climate, measures that inevitably hurt the underclasses who yearn again for the economy-destroying subsidies of the Peronists—a vicious cycle that keeps Argentina seemingly forever in the Ugly column.
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