The disenchantment of Latin America

18/12/2019
The disenchantment of Latin America Back to Trends

Disenchantment is not a new word. But never before has it translated so perfectly the sentiment of Latin America society today. Economic growth rates have been lackluster for years, with the prospects for the coming years not pointing to any improvement. The numbers speak for themselves: the International Monetary Fund (IMF) and the UN Economic
Commission for Latin America and the Caribbean (ECLAC) projecting, in July, GDP growth of 0.5% for 2019 and 1.4% for 2020. Forecasts which now appear overly optimistic.

The region’s capacity to weather external shocks is weaker than just a few years ago. Today, budget deficits are sharper, current account deficits are higher and international markets are exhibiting clear signs of instability.

The anti-trade policies implemented by Trump have generated insecurity. The United States threatened to leave NAFTA and to impose various restrictive policies, such as the recent tariffs on steel and other products. The USA-China trade war continues without respite. Investors await clear signs of a recovery, whose caution can be attributed to legal instability, the effectiveness of the anti-corruption efforts, populist immoderations and, now more than ever, the movements of the masses, which take to the streets of major urban centers every time rates for public services are hiked a few cents.

The social instability and convulsions of the disenchanted masses represent yet another component to consider in analyses. They are a new factor that mathematics has been unable to explain or to give an idea of what will come tomorrow.

Apparently, the smartphone is a major enemy, with the capacity to catalyze the disenchantment and to schedule the next congregation in the streets. The smartphone substitutes the political pendulum that swung between the left and the right with the real and generalized resentment of society against everything and everyone, with the capacity to mobilize protests not only in Santiago, Bogota and Quito, but also in Hong Kong, Paris and Iraq.

Emblematic Latin America economies, such as Brazil and Mexico, play a crucial role in the region’s performance. In Brazil, the success in passing structural reforms effectively represents important progress and brighter prospects. But the fear of the smartphone could inhibit new changes next year, which unfortunately is an election year in which 5,500 cities across the country will choose their mayor.

 

Brazil

Brazil’s fear of importing the social movements erupting across the region could inhibit promising initiatives to adjust the size of the Brazilian state to the scale of its capacity to pay for its government and its public pensions and still have the cash to invest.

If we ignore the inappropriate and boorish banalities voiced by President Jair Bolsonaro, his economic team gives us hope that there are real chances of advances in the economy for 2020 and the coming years, albeit with tepid but consistent growth rates.

Brazil, with its nearly 210 million people, always has been difficult to explain. Today it is experiencing various paradoxes. The stock market is setting record highs. The real is weakening against the dollar to unprecedented levels. Meanwhile,
Brazil's risk is at 121 basis points, the lowest since 2012 when the risk premium reached 500 basis points.

As recently analyzed by journalist William Waack in his article in the century-old newspaper O Estado de São Paulo, investors attribute these paradoxes to the fact that Brazil’s external debt has reached nearly 80% of GDP, even with the pension reform. The level of the budget deficit is not healthy and Argentina’s crisis explains the deterioration in the trade balance. Brazil’s export performance is highly dependent on Argentina.

From a more subjective viewpoint, uncertainty also can be attributed to Brazil’s weak economic growth. A study conducted a few years ago by the prestigious Getúlio Vargas Foundation (FGV) showed that the higher the uncertainty, the lower the GDP growth. This year, the uncertainty index fell to its lowest level of the last ten. Among the sayings in Brazil, there is one that can be seen as optimistic: “In Brazil, everything is possible.” Perhaps growing a bit more robustly and surprising the world could be possible over the coming years if President Bolsonaro would opt to keep his mouth shut a bit more and to stop endowing the world with his shock talk.

 

Mexico

But the gift of the spoken word is not just held by Bolsonaro in the name of the extreme right in Brazil. Mexico’s left, represented by President Lopéz Obrador, is a strong competitor in the practice of creating conflict. Curiously, civil society in both of these countries is divided between those who love and those who hate. The forecasts published some weeks ago pointed to GDP growth of 1.4% in 2020, and just a few days ago international financial institutions have adjusted this projection to 0.8%.

A stable economy is expected for next year, supported by the prudent fiscal policy that limited credit. Inflation is contained. The budget for 2020 increases public spending by 4.6% and projects around 4.8% more in productive investment.

For the multinationals that investment in Mexico, the Trump administration’s recent decision to classify the country’s drug cartels as terrorists could impose large investments in their compliance policies and controls and even in the cancellation of their business deals in the country. The implications and consequences of any kind of involvement with the cartels could lead to the flight of large companies given the risks.

In fact, the reach and scope of what would be classified as foreign terrorist organizations would leave multinational companies highly vulnerable. For example, if they do business with a midsized Mexican company and it is later shown
that the company, in the course of its production operations, has bought products and has relations with a member of a cartel, the consequences could be dire.

 

Colombia

Colombians also are taking to the streets to protest against their government, in this case, another representative of the region’s right, President Iván Duque, who was elected in 2018. In addition to protesting against the suspension of the peace deal with the FARC signed by his predecessor Juan Manuel Santos and the deaths of the leaders of agrarian social movements, the protests also are calling for social and economic measures targeting lower-income brackets, even with the government moving forward with the pension, labor and tax reforms, which are seen as being inspired by the Trump administration, in other words, as ultraliberal.

These reforms spearheaded by Duque, according to the country’s scientists, have overlooked the fact that Colombia has one of the highest concentrations of wealth in the local elite, which has thrown even more fuel on the protests. According to the IMF, in its analysis of Colombia’s economic performance, GDP should close this year at 3.6%, well above the 2.4%. With just over 50 million people and despite the growing economy, the country is facing a high unemployment rate, which reached  9.7% this year. High unemployment, high wealth concentration, less money for social programs and reforms that reduce benefits for the poor are just the right ingredients for mobilizing Colombians against the Duque in the second year of his term.

 

Argentina

On December 10, President Alberto Fernández, who defeated businessman Mauricio Macri, will move into Casa Rosada in
Argentina reliving the return of the name of former president Cristina Kirchner to newspaper headlines as the vice-president of this administration.

Macri, lamentably, was unable to revive the economy, which is plunging into a crisis that will drag GDP growth down to -3.1% this year, with the IMF projecting another year of economic contraction in 2020, of -1.3%. Unemployment also is high on the list of complaints of Argentineans, 10.6% of whom currently have no job opportunities, with this rate projected to remain above the 10% mark in 2020 and 2021.

Fernandéz, meanwhile, who was elected by a coalition of the left, wants to attack poverty and hunger by creating two new fronts, the Federal Council to Eradicate Hunger and the National Observatory to Eradicate Hunger. These mechanisms
will implement anti-hunger public policies at the national level, joining forces with the Church, universities, social organizations, companies and communication mean in a repeat, of course, of a populist effort to combat the problem.

Another pressing issue that should mobilize the new administration is combatting inflation, especially given that the IMF forecasts that the country will be one of the three nations in the world with the highest inflation rates in 2020. The forecast for 2019 is that prices for more than 45 million Argentineans will increase by 54.4% in the period. However, which way you look at the Casa Rosada, the new administration’s challenges are enormous in an environment of little faith in politicians and their policies.

 

Chile

Surprised by the protests that have engulfed the country since mid-October, admirers of Chile never imagined that the country’s 19.2 million people had been repressing such massive discontent. Held as a liberal economic model in Latin America, as exemplified by the economic liberalism of its investment banks, the people took to the streets against low pensions and the precarious state of healthcare and education, taking over Santiago and various parts of the country, from desert mountains to seaside cities.

Since the ousting of dictator Augusto Pinochet, in 1990, Chile had not experienced a generalized explosion of discontent and revolt that took over streets and metro stations, in which 25 people died, thousands were injured and 200 sustained serious eye injuries.

Sebastian Piñera was the target of fury on social networks, with messages disapproving of his administration reaching 90%,
according to public opinion surveys. In Chile, without a doubt, social networks and the fake news phenomenon contributed to uniting the angry masses across the country – the interpretation is that the means of traditional communication were,
until early October, working to keep opinion in the center of the political spectrum, containing the population’s dissatisfaction. But Facebook, Twitter and even WhatsApp were transformed into a channel to “verbalize” the criticisms and social demands of the people.

Piñera, meanwhile, is responding quickly and could contain the movement, which could be resolved through reforms and supported by the country’s healthy economic situation. According to the IMF, GDP should grow by 2.5% this year and by 3% in 2020, with unemployment of 6.9%, which should fall to 6.3% in 2023. Right now, those are the best indicators of any country in Latin America.

 

Peru

With allegations of corruption involving Odebrecht bringing down presidents and driving Alan Garcia to suicide, the group’s expulsion from Lima and even the current government taking on Keiko Fujimori, Peru appears to be experiencing mass
protests calling for the return of the right.

In this climate, President Martín Vizcarra, who was sworn in after Pedro Pablo Kuczynski resigned pressured by the Odebrecht scandal, recently has adopted a drastic measure: dissolving Congress and calling for presidential elections in
January 2020. At the same time, the Congress itself, reacting, removed Martín from office and appointed Vice-President Mercedes Araóz to lead the country. But that lasted less than 24 hours when Araóz resigned.

The discontentment of Congress with the Peruvian president is rooted in the changes that Martín wanted to make on the
Constitutional Court, seeking to reduce the opposition’s leadership among its members, who are much more faithful to the daughter of former president Fujimori Keiko. Vizcarra believes and defends that Peru must combat corruption and impunity to advance and reduce poverty while expanding opportunities for everyone – in short, politicians should use politics less for their personal benefit.

While the elections are pending, the country’s economy remains positive, despite the political discontentment. After delivering GDP growth of 4% in 2018, GDP should grow by 2.6% this year and accelerate to 3.6% in 2020, according to IMF forecasts. The 32.5 million Peruvians currently face an unemployment rate of 6.6%, which has been trending lower since the start of the decade, with inflation under 2.2%, one of the lowest in the region. With this scenario, although the protests could take to the streets of Lima and other major cities, the focus of protesters should be those guilty of corruption and politicians
involved in the wrongdoings of the executive and legislative branches.

 

Ecuador

With just over 17 million people, Ecuador has rebelled on the streets against the end of fuel subsidies and other austerity measures announced by Lenín Moreno. Indigenous people from all over the country and urban residents marched against the change in the position adopted by Moreno, who was elected to continue the leftist administration of Rafael Correa, who was generous and attentive to the population’s social demands. However, it seems that now there are no funds to pay for the subsidies.

With the approval rating of his administration low, at 19.2%, Moreno is trying to find ways to address the country’s weak economic performance, with GDP growth projected at negative 0.5% for this year and a mere positive 0.5% for 2020, and the unemployment rate at 4.3%, and rising slightly to 4.7% in 2020, but rising.

 

Paraguay

Brazil’s Operation Car Wash took a toll as well on its neighbor Paraguay, with an arrest warrant issued by the Brazilian courts for former president Horácio Cartes, who is charged with involvement with a major Brazilian black-market currency dealer. The development gave much-needed support to right-wing President Abdo Benitez, who was elected in early 2018. That is because the supporters of Cartes were undermining the president’s support and his administration’s measures. Bolsonaro’s Brazil and Macri’s Argentina also may be to blame for the low approval rates of the Asunción administration,
when they negotiated a revision of the Itaipu and Yacyretá agreements that reduced the compensation paid for the electricity purchased by Brazil and Argentina. Cartes was left with the image of a traitor of the nation and servant of other nations.

A major issue in the country has been the violence associated with drug trafficking and the country’s growing market for money laundering. The influence of Brazilian organized crime in border regions has led to a growing number of victims among the criminals and law enforcement, which has been frightening the more than 7 million Paraguayans who were more accustomed to dealing with Brazilian farmers than with criminals.

Following seven years of economic growth, recession has knocked on the country’s door this year, with GDP forecast to contract by 3%, with business activity constrained by the weak performance of its neighbors Brazil and Argentina, and also due to the international cattle and agriculture markets, which in 2019 were adversely affected by high rainfall and flooding in 2019. The prospects for the coming year are brighter but still tepid.

 

Panama

With less than six months into the new administration, the country already is reaching the end of its honeymoon with President Laurentino Cortizo. After starting his term with negotiations and an inflow of funds to shore up part of the budget, the government was challenged by protests of students and civil society, both clamoring for a suspension of the constitutional reforms coming up for votes in the National Congress, since they would be voted by a legislative branch tainted by scandals and corruption.

Despite the GDP forecast of 4.3% growth this year and acceleration in 2020, to 5.5%, Panama ranks fifth worldwide in terms of income inequality, with the rising cost of living working to reduce the middle class and consumer spending. The hopes of the nation and the efforts of Cortizo are the public-private partnership to build the Panama City subway, the construction of
the fourth bridge over the Panama Channel and the project to store natural gas to supply to Central American nations.

 

Nicaragua

What should we expect from Nicaragua in 2020? The answer to that question is more repression from Daniel Ortega, despite the pressure from protests in the streets of Managua and other cities. Until April last year, Ortega, who has been in power since 2007, manipulated the population through an amicable relationship with the business community and with democratic institutions, but with the protests last year that scenario has changed.

Ortega has been holding onto power by repressing the people and persecuting opposition politicians. His government,
replicating a regional model, faces intense accusations of corruption and illegally enriching allies, while the economy of the country’s 6.5 million people will contract by 5% this year, with unemployment at 8.7% of the labor force. The local government has been suffering international sanctions, but Ortega, a former Sandinista guerrilla, persists in power.

 

Venezuela

The Venezuelan dictatorship of Nicolás Maduro, the successor to the Bolivarian regime of Hugo Chaves, has been plunging deeper into chaos the people of the country, which has one of the largest oil reserves in South America. With an unemployment rate calculated by the IMF standing at 35% of the labor force and the GDP reaching an impressive negative 35%, Venezuela is expected to take a long time to return to normal, but which necessarily will involve a change in power in Caracas.

The democratic uprising of the people in favor of Juan Guaidó has not had any effect so far, despite support from OAS and governments around the world, such as the United States and France, to mention only the two most important.

In fact, for those who are familiar with the internal reality of Venezuela, organized crime also has infiltrated the bases of Guaidó and is undermining support and consensus for either of the sides, Maduro or Guaidó, to re-democratize the country. A sad chapter for this part of the continent, without a doubt.

 

Bolivia

Implicated in electoral fraud and ballot box inconsistencies last October, Bolivian President Evo Morales, who has led the country since 2006, resigned and fled the country to Mexico, fearing for his own safety and that of his family. Since then, the country has been experiencing a wave of riots and protests by both Morales’ supporters and the opposition, which is seeking new political leadership for the government.

The vice-president of Congress, Jeanine Añez, has succeeded the presidency, in accordance with the Constitution. Since then, she has been working to dismantle the actions of the Socialist model of the 21st Century, which guided Morales in his almost 14 years as president of Bolivia.

Driven by the commodities boom, the country has grown at impressive rates, such as 6.8% in 2013, for example. But the crisis has caught up with the country and GDP should grow by 2.5% this year, although the IMF expects Bolivia to grow by
3.8% in 2020, despite the political crisis sparked by the resignation of Morales and the rapid response by Añez to call for new elections in March or April of next year.

__

This article was produced by Paulo Andreoli, CEO and chairman of MSL Group in Latin America, with the collaboration of the CEOs of the group’s agencies and affiliates in the region:

MSL Argentina / Alurralde Jasper + Asoc.– Matias Alurralde
MSL Bolívia / Extend – Clemencia Siles
MSL Chile / MG Consulting – Tatiana Guiloff
MSL Colombia / Jimeno Acevedo – Mario Acevedo
MSL Ecuador / Comunicandes Consulting – Fielding Dupuy
MSL Mexico / PRP – Paola de la Barreda
MSL Panama / Logos – Fernando Cuenca
MSL Paraguay / DESA – Roberto Codas
MSL Peru / Corpro – Bernardo Furman
MSL Uruguay / N3XO – Pablo Reyes

DECEMBER, 2019

* The text reflects the personal opinion of the author

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