In Eco-political analysis

October 2019 was a shockingly turbulent month for South America. On October 8th, President Lenin Moreno temporarily shifted the nation’s capital from Quito to Guayaquil to evade the violent protests over the announced end to fuel subsidies. The Ecuadorian military had to rescue 50 of its soldiers that had been taken hostage by protestors. On October 20th, with 85% of the vote tallied, Presidential election results in Bolivia showed 3-term President Evo Morales would face a run-off election against former President Mesa. Then the ballot counting ended suddenly for 23 hours. When it resumed, Evo had miraculously pulled ahead by a margin just over 10%, the threshold needed (short of an absolute majority) to claim a first-round victory. Bolivia’s cities erupted in riots and pronouncements of electoral fraud. Morales was then ousted as president and had to seek asylum in Mexico. In Santiago, Chile, student protests began on October 18th against a 30-peso (US five cents) hike in transit fares — in a country whose per capita income is US$17,500. The government was completely caught off-guard when the protests exploded into anarchy, with 78 metro stations torched in one day. The protests touched a nerve in more than 1.3M Chileans who marched a week later in Santiago, demanding constitutional change, which the government has now offered to provide with public input. Less explosive but still troubling is the constitutional crisis underway in Peru, where President Vizcarra, with the support of 80% of voters, dissolved the legislature and the congress countered with a lawsuit.

The October events in these four nations — along with unrest in Haiti and Honduras — have shocked the world and have undermined confidence in the resilience of Latin American democratic institutions. Chile is the region’s poster child of neo-liberal economic growth and progress, home to both the highest income and the lowest levels of poverty, a country that has embraced centrist politics and sensible electoral transitions since a return to democracy in 1990. If Chile is vulnerable to such anarchy and voter angst, surely the whole region must be.

Three different narratives

There are three narratives at play trying to make sense of what happened. Local right-wing press point to a coordinated “dark hand” behind these attacks on democratic institutions. In Ecuador, they blame the virulent protests on former President Rafael Correa, whom some claim stole billions from Ecuador and operates in cahoots with Venezuela’s Maduro. In Chile, some question how a small group of disaffected students could coordinate a pyro-attack on 78 metro stations without organized support. Some even suggest that hidden within Chile’s c. 300,000 Venezuelan immigrants are intelligence agents of the Maduro government helping to sow chaos. Some speculate that the apparent manipulation of Bolivia’s election count was a hack perpetrated by expertise lent to Evo Morales by Cuba. The coincidental timing of all these events, coupled with the electoral return of a Peronist president in Argentina who immediately recognized the Evo Morales victory, is undoubtedly fuel for conspiracy theorists. But the fact remains that there are plenty of reasons in each country helping to ignite protests and lots of local political actors capable of leading those protests without foreign assistance.

The leftist narrative is homegrown and distinct in each country, built around specific grievances. In Chile, highly consolidated industries of household staples like pharmaceuticals and even toilet paper were investigated and indicted for collusion and price fixing, but under Chilean law, only a monetary fine applies, which turned out to be far less punitive than the profits made from their crimes. Recently, cases of corrupt practices by Chilean military officers have come to light, undermining faith in one of the country’s proudest institutions. In Ecuador, the fiscally hampered Moreno administration negotiated a loan from the IMF, conditioned in part upon ending the very costly but long standing (40 years) fuel subsidy that cost the nation $1.3bn per year (4% of the national budget). Fuel prices doubled overnight. In Bolivia, it is the left who are in power. Evo Morales, who was the incumbent for 14 years, tried to deflect blame upon a well-worn list of enemies – the U.S. government, multinational corporations and the low-land Bolivian elites. The political vacuum provoked by the departure of Morales and other senior government officials ushered in as interim President, the pro-US political leader, Jeanine Áñez of the Movimiento Demócrata Social (MDS) party. The left is calling it a coup. 

The third narrative is provided by the international press, whose lack of resources in these countries (most of their correspondents fly in from other posts) leads them to try to explain the October chaos through the lens of economic and development structural inadequacies. Declining economic growth levels, weak currencies, poor distribution of income and a weak rule of law are the real culprits behind such violent disruption. If you fix Latin America’s institutional and structural weaknesses, then political stability can be achieved.

All three narratives bear varying degrees of truth and relevancy, depending upon the country. On their own, each narrative is incomplete, even naïve. Put together, in a thoughtful manner, they begin to explain the situation in each country as well as a larger picture that yes, should concern investors across Latin America.  

Economic fear and frustration

Resource-exporting nations, in particular, are vulnerable to the kind of voter anxiety and anger that rocked Chile, Ecuador and Bolivia. From 2003-2014, these countries were awash with dollars. Their currencies strengthened to record levels, national fiscal budgets expanded by 15% per year on average, and US$2 trillion were earmarked for public infrastructure. Millions moved out of poverty, most of them working in informal sectors with no recourse when a recession struck. Latin America’s “lost half decade” began with the decline of metals prices in 2013 and worsened when oil prices collapsed in late 2014. More than a $1 trillion (c. 20%) of annualized LatAm GDP disappeared in 2015. Currencies collapsed (55% in Colombia), interest rates went up, real wages imploded. The hyper transparency provided by smart phones and social media, combined with brave work by journalists and public prosecutors (particularly in Brazil) exposed levels of corruption there-to-fore unseen before in Latin America.

Since 2015, Latin America’s GDP has not grown, and will likely remain unchanged in 2020, when measured in dollars. The revelations of corruption and abuse of power continue unabated as the political class fails to grasp the full effects of the digital revolution. Voters are losing faith in the ability of their elected officials to deliver the just and prosperous society that their campaigns promise. Latinobarómetro’s annual polling of voter attitudes towards democracy clearly show a decline in preference for democracy (versus an authoritarian government or a sense of ambivalence) from 58.4% in 2013 to 47.8% in its latest report.

The GINI index in Latin America remains stubbornly high, quantifying a toxic distrust between upper and lower economic classes. Yes, the region is ripe for political disruption and has delivered it in recent elections: Bolsonaro in Brazil, AMLO in Mexico, Fernández in Argentina. But when disruption ignores or undermines the rule of law and violates the constitution, then investors get spooked.

It will get worse before it gets better

With the very large exception of Brazil, there is little reason for macro-economic optimism in 2020 in Latin America. The global trends of low commodity prices and protectionism will continue to punish Latin America. The region’s very low investment rates are 2nd only to Africa and will worsen as the elite channel even more of their savings out of Mexico, Chile, Argentina, Bolivia, and Ecuador.

There seems no immediate political solution at hand in Ecuador or Haiti that will quiet rioters. In Chile, President Pinera acted quickly to propose a reform of the constitution, with input from a citizen-led body.  That has quietened protestors for now, but social divisions and angst in Chile will not be undone by legal revisions.  What the underclasses really desire is respect and equality from higher economic strata, a societal change that may take another generation or two to inculcate. 

History has shown that it is very difficult to reduce the differences between rich and poor without the tail winds of economic growth. Unable to rely on the world economy to lift it out of recession, the only path forward to growth is to attack the wasteful inefficiencies that plague Latin America’s service and government sectors. While free trade forced most LatAm economies to improve their manufacturing and agricultural sectors, the service sector remained uncompetitive. No government in Latin America has been able to downsize at the pace of tax revenue declines, forcing them into higher debt and/or higher taxes. Already over-regulated and taxed, small business owners migrate increasingly to the informal economy (further hurting tax collection) and the wealthy move their money off-shore.

Now, more than ever, the LatAm countries that choose to streamline taxation, simplify regulations, attack corruption from top (leadership) and bottom (strengthened judiciary and whistle-blowing) will be the countries that attract investment, realize formal sector growth, raise productivity and with it, real wages. Undertaking such a feat while keeping anxious voters and consumers hopeful through a disruptive transition is the challenge facing Latin American leaders today. Success will come to those leaders who have populist political credentials but pursue a sensible reformist agenda with the support of savvy technocrats. Today, such combinations are found in few jurisdictions: Brazil and Peru come to mind. It is this combination that some old-school Peronists hope that President Alberto Fernández can achieve in Argentina. It is the leadership blend that investors should look for when seeking returns in Latin America.  

Further reading

If you’d like to explore further insights we’ve developed into what 2020 holds for Latin America, please feel free to look at our regional forecast, our major markets forecast and our specific industry forecasts for payments, logistics, healthcare and consumer services. Our Analyses section also includes our whitepapers and presentations on Latin America, and our case studies page provides an overview of our market intelligence engagements for Latin America, including political risk, market assessments, competitive intelligence and more.

Contact us if you have a specific tough question or strategic concern in which market intelligence can point the way forward.

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