In Business Trends & Strategy, Eco-political analysis

Latin American voters often tolerate bad government, but everyone has their limits.  The mismanagement of the COVID crisis by most Latin American administrations has proven to be a bridge too far for voter resilience. In nine major trips to the polls in 2021, voters rejected or weakened incumbent parties, sometimes electing disruptive new faces and political parties to office. Some analysts have signaled a pendulum swing to the left. A more accurate summation is that Latin American voters are “mad as hell and aren’t going to take it anymore.”

Below we break down how we have seen that attitude play out recently:

What Went Wrong

To be fair, many — AMI included — predicted that Latin America was worse prepared than any region to take on a pandemic. With an older and more urbanized populace than most developing markets, Latin America was bound to suffer rapid viral contagion. With depressingly low hospital and ICU bed counts, many predicted that hospitals would be easily overrun. With some of the highest rates of diabetes, obesity, heart disease, hyper-tension, and HIV of any region in the world, Latin America was demographically vulnerable. And with three generations under one roof in many households, it seemed that lockdowns were the only viable policy response.

With the odds stacked against them, perhaps no democratically elected government in Latin America could survive COVID unscathed. But some policy decisions were truly disastrous and have reversed the tenable progress of Latin America in crucial areas like income disparity, household savings, literacy, investment, and employment.


The Top Selling Products in Latin America

The Top Selling Products in Latin America

Data on purchase patterns and product preferences


The most damaging of all policy decisions was the length and severity of lockdowns which unintentionally targeted the poorest 60% of the population —those who work in the informal sector and whose jobs could not pivot to an online capacity. Nearly 40 million people were driven into poverty by lockdowns and job losses. Another 460 million Latin Americans continue to earn less today than they did in 2019. The region’s admirable 30-year history of poverty reduction lost 15 years of progress in 2020 alone. Most galling for the informal sector who was told they were not allowed to work was that such orders came from government bureaucrats who continued to receive their full paycheck, while working from home. Even more frustrating was that these orders were given arbitrarily because no government in Latin America ever developed enough testing infrastructure to accurately measure infection levels.

If that was not enough to enrage voters, throughout the last two years, frequent scandals revealed cases of corruption as governments overspent on medical supplies, channeled monies and cheap loans to cronies, and politicians jumped to the front of the vaccination line or broke their own quarantine rules. What little faith and trust that Latin American voters had in their governments was shattered.

COVID Crisis Phase III — The Political Crisis

Why does this matter? Surely the democratic changing of the guard is healthy. Yes, and most countries are better off uprooting their political leadership versus sticking with the sandinistas (Nicaragua) and chavistas (Venezuela), the two elections in 2021 that did not produce anti-incumbent results. However, when voters lose faith in the entire political class, one of two unfortunate scenarios is likely to occur:

  1. Voters elect new and inexperienced politicians who form governments that prove inept, and, at best, an entire political cycle passes with no progress. Or a more likely scenario results: declining investor confidence leads to capital flight and growth decline (e.g., Castillo in Peru)
  2. Voters elect a populist who exploits discouraged voter confidence by weakening the institutions that can limit his powers (e.g., Bukele in El Salvador).

We are in the early stages of the third (and longest lasting) phase of the COVID crisis — the political crisis, which followed the healthcare crisis (now mostly receded) and then the economic crisis (still ongoing). In most countries, COVID provoked a serious fiscal shortage, depriving government coffers of service sector sales tax revenue during lockdowns and adding new costs in healthcare, unemployment support and direct payments to the poor and small business.  Over 20 downgrades of sovereign debt ratings have already occurred in the region since the pandemic began and more will happen in 2022. That will raise lending costs to regional governments. Most governments prefer to raise taxes rather than face additional voter wrath over cutbacks to essential services and direct payments that continue to prop up millions of households just above the poverty line. Rather than levy taxes in a way that minimizes economic damage, politicians choose the path of least political resistance. That means taxing successful economic sectors: mining, e-commerce, energy, and agriculture — the very sectors that could otherwise attract investment and create jobs right now.

Over the next 24 months, new governments in Colombia, Chile, Peru, and Brazil will evolve from some of the most ardently pro-investor LatAm administrations pre-COVID into something no one can yet predict. Add in Mexico and Argentina, two poorly governed countries, and a year from now, Latin America’s six largest markets, representing over 80% of the region’s GDP, may be in the hands of governments that either ideologically or, out of political survival, are anathema to foreign investors. 

Congress to the Rescue

Historically derided as corrupt and inept, in several countries the legislative branch may prove to be an unlikely hero during the next political cycle of Latin American disruptive governance. In Argentina, during 2021 mid-term elections, the Peronists lost control of congress and have already pivoted on several policy fronts, to the relief of investors. In Peru, Castillo redrew his ministerial roster when he realized that the right-of-center congress would not work with a government of untested party radicals. Though blessed with a strong election mandate, Chilean President Boric still faces off against a centrist congress. Though laden with rebellious representatives, the Chilean constitutional assembly nonetheless needs a two-thirds vote threshold to change the constitution, a fundamental institutional stopgap against radical transformation. Many predict that Gustavo Petro, a M-19 guerrilla and disastrous Bogotá mayor, will ruin two decades of pro-investor policy progress in Colombia as its next president. But Petro will face a mixed congressional make-up and judiciary that defends the establishment. In Brazil, the potential return of President Lula to power worries some investors. However, Brazil’s powerful congress will likely retain its pro-business make-up. Furthermore, the country’s fiercely independent judiciary and prosecutorial authorities will continue to limit presidential overreach.

Despite the pessimism befalling Latin America today, there is no question that democracy in the region’s biggest economies is stronger today than during previous economic crises. The digital age has weakened privacy, but it’s also weakened the secrecy that political abuse relied upon in the past. Latin American voters are more aware than ever of policy mistakes. That angers them, but it also spurs them into action, which in the long run makes for better governance. 2022 will reveal many new faces on the political stage in Latin America, an unsettling image to investors who prefer the familiar. But the institutional checks of power that Latin American constitutions were designed to provide are proving to be surprisingly resilient and vital, a fact that should lower some of the unease.  

Next Steps

You can find out more about what to expect as 2022 unfolds by downloading our 2022 Latin America Forecast, a free report. Contact us if you are interested in a study on political risk in your market/industry of interest. Our team is specialized in this area and can help you understand the challenges that could face your business and how to mitigate or avoid them. Also contact us if your needs are focused on growth rather than risk: we specialize in opportunity benchmarking, market sizing and strategic planning advisory. You can see our case studies of previous projects here.

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