Latin America’s Top Ten Risks for 2017

Simon Whistler, Principal at Control Risks, identifies the potential pitfalls facing investors in the region over the coming year...

1. Mexico: relations with the US and the rise of AMLO

Amid the debate over a possible renegotiation of the North American Free Trade Agreement (NAFTA), or disputes over deportations of illegal immigrants from the US and the construction of a wall between the two countries’ borders, the big winner in Mexico may well be perennial populist presidential candidate Andrés Manuel López Obrador (AMLO). Public dissatisfaction with mainstream political parties is already growing, and any perceptions that Mexico is failing to stand up to the deeply unpopular (in Mexico) US president-elect Donald Trump will strengthen AMLO as jockeying for the 2018 presidential election begins. The populist rhetoric of AMLO – who is a strong critic of the 2013 energy reform that allowed private participation in the sector – may alarm investors, but he proved himself to be a pragmatist when mayor of Mexico City (2000-05).

2. Cuba: watching for signs of what follows Castro

Following the death of former president Fidel Castro in November 2016, and the promise of his brother and successor Raúl to step down from the presidency in 2018, thoughts will turn to the potential next-in-line and what that means for the longevity of the one-party state. All signs thus far have pointed to Miguel Díaz-Canel, a first vice-president and from a younger generation of Cuban Communist Party (PCC) cadres, being the anointed successor. However, those expecting big economic and political changes in 2017 are likely to be disappointed. Cuba’s ‘opening’, as much as it can be described in that way, will continue to take place slowly, and with little care for what the outside world may want or think.

3. Central America’s Northern Triangle: the return of the banana republic

The rule of law in Guatemala, Honduras and El Salvador has historically been weak, but finds itself facing renewed and sustained challenges in 2017. Whether it is Honduran President Juan Orlando Hernández promoting presidential re-election and receiving acquiescence from the courts, only seven years after another president was ousted in a coup d’état for tentatively suggesting the same. Or ongoing corruption scandals in Guatemala that swallow up more of the political class, and make governance for President Jimmy Morales increasingly difficult in 2017. Or further deterioration of the security environment in El Salvador as political parties seek to score points against one another rather than tackle the situation head on. Each country has made progress in positioning themselves as attractive destinations for foreign investment, but investment will not be for the faint-hearted, and corporate governance will need to be tight, with governments themselves failing to set a positive example.

4. Colombia: mapping out post-conflict pockets of security risk

Implementation of the newly ratified peace agreement between the Colombian government and the Revolutionary Armed Forces of Colombia (FARC) guerrilla group is in full swing, as the administration fast-tracks the relevant legislation through Congress. But question marks remain as to how effective the peace may be in certain parts of the country, as Organised Armed Groups (GAOs), other guerrilla groups such as the National Liberation Army (ELN), and remnants of the FARC who reject the peace deal, compete to fill power vacuums left by the FARC. Critical to watch will be the end of the 180-day demobilisation and disarmament period set forth by the peace deal; at the conclusion of that period, we will have a better idea of where the future balance of power will lie in conflict-hit areas of the country, such as Cauca, Nariño, Chocó, Caquetá, Putumayo, Norte de Santander and Arauca departments, and to what extent security risks in Colombia will continue to be a prominent part of the operating environment.

5. Peru: PPK and the challenge of social unrest

Peruvian president Pedro Pablo Kuczynski (PPK) has garnered a lot of praise and attention since taking office in mid-2016, promoting Peru as a foreign investment bright spot amid a gloomier general outlook for Latin America. That is certainly true to an extent – investors benefit from a favourable investment climate – but it may be too early to anoint Peru just yet. A key challenge over the past several years for many companies, particularly in the critical extractives sector, has been major social unrest that has paralysed projects. It remains to be seen how effectively Kuczynski can tackle the issue: if he gets it right Peru’s plaudits will be all the more justified.

6. Venezuela: Maduro’s reign

President Nicolás Maduro’s government has made clear that it is determined to stay in office at all costs, despite the economic, political and social upheaval over which it is presiding. This has left progressively little space for the opposition to influence developments: protests have led nowhere; the planned recall referendum against Maduro has been shut down by pliant electoral authority; and talks with the government have only given more breathing space to the administration. All of the above emphasises just how little say the opposition has over the future of Maduro, personally, and of his government as a whole. Rather, it continues to be external factors – the role of the military, the price of oil, Venezuela’s willingness and ability to pay its sovereign debt, among others – that will help dictate the government’s path in 2017. That means more of the erratic and intransigent policymaking that has led Venezuela into its current troubles; and many private enterprises will continue to be caught in the crossfire.

7. Argentina: Macri and the provincial governors

From a political perspective, all eyes in Argentina will be on the October mid-term legislative elections. They will also go a long way to determining whether cautiously optimistic investor sentiment with regards to Argentina is justified or not – a defeat for Macri is likely to place a brake on inbound investment over concerns for the implementation of his reform agenda. But equally important to monitor is Macri’s relationship with provincial governors, and how that will shape the president’s legislative agenda. The governors hold huge sway over the legislators representing their provinces in Congress, and Macri has not been shy of using that to push through legislation – in exchange for larger disbursements of fiscal transfers. Should Macri and the governors continue to enjoy what is perceived to be a mutually beneficial relationship, even a defeat in the mid-terms may not be as disastrous as it first seems.

8. Mercosur: Uruguay’s Free Trade Agreement with China

In recent years Mercosur, the South American trade bloc comprising Argentina, Brazil, Paraguay, Uruguay, and the currently suspended Venezuela, has barely lived up to its name. Members have put up trade barriers between themselves, while little progress has been made in liberalising trade with the outside world. It may be Uruguay, that gives the key pointer in 2017 as to whether fine words will be turned into concrete action. It has begun to explore a potential bilateral free trade agreement with China: make progress on that front, and it will be instructive as to how its bigger neighbours react. Logic suggests that they will want the rest of Mercosur to follow suit, but logic has often been trumped by self-interest in the case of Mercosur, and it would be no surprise if Uruguay is eventually brought into line – or forced to go its own way.

9. Brazil: the judiciary vs the legislature

The major corruption scandals that have dominated Brazilian politics over the last two years are not going to disappear. However, the stage appears to be increasingly set for confrontation between the judiciary and the Brazilian political class over just how much further some of these investigations will be allowed to go. The court of public opinion is firmly on the side of the judiciary – protests will take place as more cases emerge – but it is likely that Congress will try to push back on what it sees as overreach by the judiciary. The independence and doggedness with which the Brazilian judiciary and investigators have gone about their tasks has won plaudits across Latin America. That reputation will be damaged, and with it some of the hope that the chaos of the past few years will lead to deep changes in official attitudes towards corruption, should the legislature get its way.

10. Ecuador: will Rafael Correa go quietly?

Ecuador’s strongman leader for the past ten years, President Rafael Correa, will step down from office following February’s presidential election. However, the weight of his personality and the populism he has promoted have afforded him an outsize position in Ecuadorian politics. If his chosen successor, Lenín Moreno, wins he may have a hard time keeping the ruling coalition together if he cannot match Correa’s charisma and performance. Should the opposition spring a surprise, it is difficult to imagine Correa following quietly as the centre-right moves to undo his legacy. Either way, 2017 may see a little more instability in Ecuadorian politics.