Walter Molano | Overview: Latin trouble

This year has turned out to be a dark chapter for Latin America. The year started off on a good note. Brazil had a new pro-reform president. Argentina was on track for the re-election of its pro-market chief executive. It had unwavering multilateral support, and there were signs of an economic recovery. Colombia was enjoying the benefits of the peace accords with the FARC. There were some signs that regime change was in the winds for Venezuela, and Ecuador’s leftist government had shifted to the right.

Mexico was the only concern, as its new populist leader cancelled the construction of the new mega airport, as well as the energy reforms. Moreover, there were concerns about US monetary policy, as the Fed steadily increased interest rates. Unfortunately, as the end of the year looms closer, the Latin American picture has turned upside down.

Social unrest has erupted in Chile, Ecuador, Bolivia and Colombia. The once-disgraced Kirchner administration has returned to power in Argentina. An attempt to remove energy subsidies in Ecuador resulted in violent protests, particularly by indigenous groups, that forced the president to flee the capital. A small increase in train fares triggered fiery riots in Chile that culminated in billions of dollars in damages and the implementation of martial law.

Although it was only for a few nights, it was the first time that martial law had been imposed for social unrest since the days of the dictatorship. In Bolivia, irregularities during the presidential elections erupted in massive unrest, forcing President Evo Morales to seek refuge in the Mexican embassy. A peaceful set of marches by labour groups and university students in Colombia turned into class warfare, as looters turned on upper-middle-class homes and high-rises.

The government was forced to ban the sale of alcohol and impose martial law. Although there was no common thread in the unrest, there were commonalities. Social media platforms, such as Telegram and Twitter, played an important role in coordinating and executing the protests, without the presence of a clear leader. These apps are encrypted and can hold tens of thousands of people in a common chat. The protesters also learned from each other.

Tactics, such as the use of lasers to temporarily blind riot police, were commonplace. There were also thematic undercurrents. There is a great deal of frustration with the enormous concentration of wealth and the total disregard for environmental issues. This may also lead to a shift towards more leftist economic policies. In Ecuador, former President Rafael Correa denounced the use of “neoliberal” economic policies by his successor. However, Chile is the country where we could see the most notable changes.

In an attempt to mollify the protesters, President Sebastiá Piñera agreed to rewrite the constitution. Although the country’s Magna Carta has been modified many times, it is seen as a relic of the Pinochet era. The problem is that the process will take at least two years. In the meantime, investors will be loath to make any long-term investments in Chile.

There is also a good chance that the process will be hijacked by the fringe parties that occupy the political left. The country will undergo several referendums in order to decide whether to proceed with the process, to approve the constitutional assembly and, finally, to ratify the final document.

Air of uncertainty

As a result, a new air of uncertainty and pessimism is descending on the region, despite the reversal in US monetary policy. As interest rates move lower, this should be a golden moment for Latin America. Unfortunately, the shift towards the political left in some countries and the wave of social unrest have soured the mood. Beneath the surface, the economic slowdown in China is an important theme.

Latin American benefited enormously from the re-integration of China into the global economy since 2001. However, as China becomes a middle-income country, its GDP growth rate will move towards equilibrium. The problem is that the equilibrium growth rate is the population growth rate, which in China’s case is negative. Instead of an engine of economic growth, China will become a drag on the global economy. No region will feel this more than Latin America. Its foreign exchange markets are already under strain; and this could be an indicator of the problems that lie ahead.

The only country in the region that will be exempted will be Mexico. China was a competitor against its manufacturing relationship with the US. Yet, the US trade war with China is bringing much of the manufacturing back home, and Mexico will benefit enormously. The only detriment is President Andrés Manuel López Obrador’s angry rhetoric, which is sapping investor confidence. However, the economics usually trumps the politics. Therefore, we are in for a lot of challenges in Latin America.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.wmolano@bcpsecurities.com