For a large portion of the 20th century and early 21st century, leading Latin American countries such as Argentina, Brazil, and Venezuela have generally been entrenched in ideologies positioned closer to the left of the political spectrum.
This macroeconomic populism often promoted income redistribution and poverty reduction at the expense of inflation management, fiscal prudence, and foreign investment. But a shift appears to be underway in the region, as evidenced by the election last month of a center-right candidate as president of Argentina.
Regional and international business interests are applauding this shift, but a big challenge facing Latin American economies now will be how to protect the socioeconomic gains of the last couple of decades as government leaders strive to be more market-oriented.
The November 22 election of Mauricio Macri, the former mayor of Buenos Aires, as Argentina’s next president ended 12 years of “Kirchnerismo.” Macri, a center-right opposition candidate of the pro-market Republican Proposal party, defeated Daniel Scioli, the Kirchner-anointed, would-be successor of the ruling Front for Victory party. Kirchnerismo is the populist left-wing government that was headed by Cristina Fernández de Kirchner (2007-15) and her husband Néstor Kirchner, who died in 2010.
Early polls had placed Scioli in the lead. But Macri’s unexpectedly strong showing was a clear signal of the electorate’s growing discontent with Fernández Kirchner’s presidency, which was characterized by a unique combination of personal charisma and combativeness. More troubling than her political style, her economic policies led to an increasingly unfriendly and uncompetitive business environment, which discouraged much-needed inward investment.
Markets had hoped for a Macri win, given his pro-business campaign promises. The incoming president will face tremendous challenges, including a lifting of currency and import restrictions, removal of export taxes on wheat and corn, and reduction of the levy on soybean exports.
Fiscal consolidation is expected to be a priority of the new government, given a widening government budget deficit projected at 4.9% of GDP for 2015. Other pressing tasks include tackling resilient inflation, which by some private estimates now stands at 30% (versus the much-discredited official statistic of 14.5%). Also pending is the $8 billion debt to the “bond holdouts,” which, as foreign reserves continue to dwindle, the Fernández-led government steadfastly refused to settle. It is thus imperative that the incoming administration signal its resoluteness to address these fundamental macroeconomic problems if business confidence and expectations are to be buoyed and sustained.
Populism of late has also been linked in Latin America to entrenched corruption, inefficiency, and stagnation, which brings us to Brazil.
The country’s next presidential election is not due until 2018. However, current President Dilma Rousseff of the Workers’ Party faces the threat of impeachment. A lawsuit is seeking to void Rousseff’s election results because of alleged breaches in campaign finance laws. Meanwhile, the staggering breadth of the corruption scandal involving state-controlled oil giant Petrobras is still unfolding. These events could lay the groundwork for another regional shift to the political right.
Notably, the growing intolerance of Brazil’s middle class for corruption in public office and its demands for an improved quality of life could be a breaking point for the Rousseff-led government. Such sentiments could pave the way for more pro-market policies, such as those proposed by recently defeated presidential candidate Aécio Neves.
In Venezuela, leftist President Nicolás Maduro, the hand-picked successor to the late President Hugo Chávez, has been unable to stem a shockingly sharp downward economic spiral. The slump is laying the groundwork for the opposition’s first ascent to power since Chávez took control 16 years ago.
The next presidential election is scheduled for December 2018, but parliamentary elections will occur this month — December 6. For firms with commercial interests in Venezuela, parliamentary results will likely be a good indication of the voters’ mood. Maduro’s approval rating is 24%, and predictions indicate the ruling United Socialist Party of Venezuela (PSUV) will lose many of the 96 seats it currently holds in the 167-seat national assembly.
If Venezuela forgoes an opportunity for reform, the country will likely remain dominated by a leftist political agenda. This would indeed be bad news for business.
Michelle Campbell is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in the UK, she covers the Latin American region for D&B Macro Market Country Insight Products. In addition to her experience in the financial services sector, Campbell has worked as a visiting lecturer in the UK and in the Caribbean. Michelle holds a master of science degree in economics from the University of the West Indies in Trinidad.