In Coronavirus Resources

On Thursday, May 21st, our firm conducted its sixth COVID themed webinar, this time looking ahead to the anticipated political fallout of the pandemic in Latin America’s three largest markets, representing roughly 80% of regional GDP.

This pandemic may be global but all politics are local. Three very different storylines are developing in all three markets. In Brazil, a federalist republic where state governments collect taxes and have full autonomy over health policies, there are fierce political divisions between the Bolsonaro administration and state governors. Much like in the US, Bolsonaro has underplayed the gravity of the Coronavirus, even while unable to write quarantine policies, the responsibility of state and municipal leaders. Governors, many of whom have tried to impose strict quarantines, have been frustrated by President Bolsonaro’s polemic statements downplaying the virus and encouraging people to walk the streets, and keep their businesses open. The divide also spills out to the general public. COVID is the leading but not the only factor leading to the diminishing public support for the President.

Without the support of the majority of the public and having lost political support from non-establishment parties, Bolsonaro has recently buddied up to the established centrist parties whom he openly excoriated during his campaign. This new political alliance will probably save Bolsonaro from impeachment and may in fact preserve the administration’s ability to pass crucial tax and labor reforms. But political survival for Bolsonaro and Super Minister Paulo Guedes and the ‘kingdom’ he has built within the administration (as our esteemed Brazil panelist Thiago de Aragao put it), will come at the cost of letting those centrist parties into key positions of the cabinet and through those personalities, influence in policy making. Though this will frustrate ‘King Paulo Guedes’, it will bring needed political stability to government and could bring longevity to any future reforms.

Mexico’s leader, AMLO, also began with a very lax approach to the coronavirus. Based upon the reporting of several respected international journalists as well as the investigative reporting of Mexico’s dying breed of independent journalists, several conclude that Mexico is under-reporting COVID deaths by a factor of four. This may stem from the simple lack of testing infrastructure and knowhow in hospitals and morgues but some speculate that it also stems from a politically frightened administration who desperately wants to downplay the health crisis of COVID because it knows that it lacks the financial resources to mitigate the economic risks of COVID quarantines.

No countries in Latin America, except perhaps for Chile and Peru, can afford to sustain long term lockdowns without setting their economies back five years. Mexico’s fiscal balance is tenuous at best given that its domestic economy was already in recession pre-epidemic and its export sales have now suffered due to declining US demand for cars and other products assembled in Mexico. 30+% of Mexico’s tax revenue comes from Pemex profits, oil exports, and gasoline sales, all of which have declined since COVID and Russian-Saudi supply wars began. Mexico was the last major LatAm economy to announce a fiscal response to COVID and it proved both meager and controversial.

AMLO has dedicated what little fiscal firepower he has to shore up financing for his two pet projects: a new Mexico City airport in a questionable location under dubious procurement procedures and the construction of a massive new oil refinery in his old political home front. Downstream oil refinery is one of the least promising sectors in the world today (with or without COVID) and the rest of the world is quickly divesting from it, but not AMLO.

As our famous panelist from Mexico, Roberto Salinas remarked, the out-of-touch leadership of AMLO has sparked disarray within the Morena party, which controls all three levels of government. As Mexico goes to the polls in 2021 to elect all 500 house of representative seats and half of the senate, Morena’s grip on a majority may be lost. AMLO wants to add a referendum to the midterm vote to gauge his own Presidency. The referendum would be legally non-binding but he is gambling that his popularity will help Morena candidates hold their seats. Given the economic debacle ahead thanks to the bungling of the COVID crisis and lack of resources to save the working classes, AMLO’s great political gamble may prove disastrous. The political opposition certainly hopes so but they remain relatively invisible given the omnipotence of AMLO in the media with his daily briefings.

Colombia represents a stark contrast to Brazil and Mexico in that its leadership, under Ivan Duque, has pursued a very orthodox and strict adherence to WHO guidelines. As Sergio Guzman, our special guest from Bogota remarked, ‘to my surprise, Duque has listened to the scientists’. As a result, Colombia has suffered fewer deaths in absolute and relative terms versus Brazil and Mexico. Colombian lockdowns have been so strictly enforced that at least 60% of the workforce cannot earn any living, and the majority of them are running out of money to buy even food, let alone pay rent and utilities. The Colombian government has resorted to handing out free food, like aid to drought stricken African communities. In spite of a massive logistical effort to deliver food, people are going hungry. Colombian’s poor show their frustration by waving red flags on their homes or outside their door. It is a modest form of protest. Such frustrations will not remain modest forever.

Colombia’s challenge is similar to other nations around the world who have managed to tamp down the spread of the virus. Politically, it is now difficult to open up. In a webinar I watched with the Governor of Antioquia presiding, he said: ‘there are municipalities in Colombia where no virus is detected. How can they open up without the risk of the virus entering their community?’ Such a question contradicts the spirit of the WHO guidelines, which were designed to ‘bend the curve’ of new infections so that health systems would not be over-run. It was never the intention of these policies to root out the virus. That is simply impossible, short of sealing all of us in a hermitic container. But herein lies Colombia’s dilemma and that of Argentina, another very successful quarantined jurisdiction. Politically, it is now believed that the virus must be stomped out, like a fire, instead of allowed to live but limiting the impact of infection. Not surprisingly, Colombia and Argentina both announced this week that all international flights will be suspended till the end of August, 2020. Is that date even realistic if your policies are based upon stopping all transmission of COVID-19?

Our take-away at AMI is that no country in Latin America has developed an optimal set of policies to deal with COVID. Unlike the US, EU and China, Latin American countries cannot print endless money without generating inflation and devaluation (remember the 1980s?). Furthermore, with few exceptions (Peru and Chile), Latin American countries cannot assume massive deficit spending without destroying their international debt ratings and raising the cost of financing. Where there is some slack is to use foreign reserves on domestic programs but again, international lenders frown upon this. Latin American countries cannot expect wide dispersion of a vaccine before 2022 for let’s face it, industrialized countries will clamor for and outbid the rest of the world on the first billion+ vaccines that are sold. Therefore, Latin America needs to learn how to co-exist with COVID-19. That means: 1. expanding ICU and ventilator capacity and making it mobile to move from one hot spot to the next. 2. Massively investing in testing and tracing. 3. Isolating the elderly and vulnerable in under-utilized hotels. 4. Opening up schools both traditional and online. 5. Opening up the economy with social distancing rules so there is a tax base to pay for all of these measures.

It will be a challenging few years ahead.

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