Social Unrest in Latin America: Back to the Old Ways?

As political chaos erupted this week in multiple South American countries, investors must now decide if Latin American sovereigns are still worth the risk.

The last week of March saw many states experience political turmoil on a scale not seen in the region for years, and that could potentially frighten off foreign investors.

Paraguay was plunged into a constitutional crisis after Congress was attacked and set on fire by an angry mob of protestors, fuming from president Horacio Cartes’s attempts to modify the constitution to allow his re-election.

The protest, in which one of the opposition leaders was killed, took place in the background of Inter-American Bank Conference in Asuncion, where the market-friendly government hosted dozens of businessmen from all over the region.

Similar events were happening in Venezuela, where thousands of people took to the street to protest the decision by the Supreme Court, under pressure from socialist President Nicolas Maduro, to overturn the power of the National Assembly, which is currently in the hands of the opposition.

Citizens of the crisis-hit country considered this action as an attempted “coup” on the constitutional order of the nation. Even as the order was reversed later, the sentiment resonated in the media and in comments by the Organization of American States (OAS), which met earlier this week.

Ecuador also saw its share of protest action during the weekend after socialist Lenin Moreno won the presidential run-off with a mere 51% of the votes.  The supporters of his opponent Guillermo Lasso held mass demonstrations after he questioned the legitimacy of the results.

So far, the electoral body has not been able to declare Moreno the winner, even after almost 100% of the votes have been counted.

Argentina has also had a challenging month as social upheaval intensified on both sides of the political spectrum.

On the one hand, the teacher’s unions have been striking since early this month, which delayed the start of school year to start in many provinces, including Buenos Aires.

Different unions have been staging protests all over the city of Buenos Aires, creating chaotic scenes in the capital of Latin America’s third largest economy.  At the same time, the union leaders also called for a general strike on April 6 that threatens to paralyze economic activity and lead to huge losses to the country’s budget.

On the other hand, thousands of people met in Plaza de Mayo, to show support to President Marci’s policies and contrast the social movements lead by the unions and the opposition party.

Social Unrest - Bad for Business?

2017 has been a good year for the capital markets in Latin Americ;, sovereign and corporate borrowers raised US$34bn from bond sales so far this year, according to Itaú BBA data, while bankers are adjusting their estimates up for the supply of new issuances in the region this year to US$80bn from as little as $60bn in November, in the aftermath of Donald Trump’s victory.

Many are beginning to wonder: as social and political discontent grows, will investors be forced to assume a more bearish view of the region?

According to Adam Collins, Latin America Economist at Capital Economics, the political climate neither in Paraguay nor Ecuador “possess any risk to the macroeconomic outlook for the region”.

However, the re-escalation of political risks in Argentina and Brazil are another story.

“In the case of Argentina, it has little to do with the protest that has been going on in the past week, because if you know Argentina’s history you know protest are quite common; but the impact these demonstrations could have on the midterm elections,” he said.

The economist believes that if Macri fails to secure a majority in the Senate in the October elections, it will put a damp on his reform agenda, especially in his target of reigning in the fiscal deficit.

“There is still a lot to do in Argentina in terms of reforms, and if investors feel that Macri won’t do well the in the elections, they could flee the Argentinean bond market,” the economist commented.

He believes a similar scenario could also be on the cards for president Michael Temer in Brazil, if he fails to pass his pension reform.

Meanwhile, regarding Ecuador, Collins doesn't’ see a major threat, neither with regards to political outlook of the region nor for the economy.

“Lasso has run before and after the last election also called fraud. So, it is more of the same.”

The political shift from populist governments to presidents with a more “market-friendly” approach, has so far sat well with international investors. However, the economic outlook for the region will depend these leaders’ ability to weather these storms in their backyard and push on with unpopular, but necessary policies.

Americas Policy & Government Argentina Brazil Chile

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