From 2005 until 2014, Latin America enjoyed a ‘golden decade’ as rising commodity prices, economic growth and political stability improved lives – and investor returns – across the region. More recently, the investment climate in Latin America became more complicated, with political turmoil and economic crisis hitting many Latin American countries.
But after a transitional year in 2018, which saw dramatic political changes, particularly in Brazil and Mexico, 2019 could bring good news to the region. We look ahead to see what Latin America can expect in the year to come.
High corruption levels in Latin America have always deterred investors on fears of being caught up unwittingly with crooked local contractors, or being asked to pay bribes directly. But it’s likely that we have witnessed a peak in corruption levels and there will be some improvements in 2019.
The unravelling of huge bribery networks implicating senior politicians and some of the region’s largest companies, such as Brazilian construction and oil giants Odebrecht and Petrobras, has led to serious criminal and financial consequences for those involved. The corruption probes are continuing, particularly in Brazil where the Lava-Jato probe continues to make arrests. Deputy Rio de Janeiro state governor Luiz Pezao, in office from 2007 to 2014, was arrested in November 2018. Moreover, companies are paying up and reforming. In December 2018, Odebrecht agreed to pay a $182million fine to authorities in Peru to allow it to continue operating in the country.
The result is that companies and politicians are now more afraid to continue corrupt practises as the consequences are finally becoming more severe. Perhaps most significantly, the corruption probes have reached the ruling political classes, and inspired a clean out of corrupt leaders. Andrés Lopez Manuel Obrador (AMLO) took office in Mexico on an anti-corruption platform in 2018, as did Jair Bolsonaro in Brazil. Peru is investigating all four of its most recent presidents.
Expect to see more arrests in 2019 and more companies held to account, but 2018 and 2017 probably marked the high points for public outrage. Brazil will continue to be the regional leader in anti-corruption law, led by new Justice and Security Minister Sergio Moro, who led the Lava-Jato probe.
Narcos, human trafficking and illegal mining are all major challenges for most Latin American countries. Of course, you are never going to completely eradicate crime but at the moment these groups have an outsized impact on Latin American institutions.
Organised crime was on the rise in 2018 and will continue to grow next year, with Colombia the focal point. Despite the conclusion of the peace deal with the FARC in 2016, organised crime and guerrilla groups have fractured and expanded their influence in the region. This has been caused by the power vacuum left by the FARC, which has allowed rival groups such as the ELN to expand and new groups to form. Moreover, the flow of Venezuelan migrants into the country have become rich pickings for Colombian criminal groups seeking new recruits, and are spreading security resources thin. As such, Colombia’s coca production is at an all-time high, according to the United Nations, which increases the power of armed groups as they make bumper profits from the trade.
“Organised crime was on the rise in 2018 and will continue to grow next year, with Colombia the focal point…”
Mexico witnessed its deadliest year in 2018. and 2019 will follow that trajectory if AMLO does not alter the government’s kingpin strategy. At present security forces target key leaders of Marco gangs, who are quickly replaced. A more comprehensive solutions would be to provide alternative ways of life to organised crime in impoverished neighbourhoods.
Meanwhile, in Central America, the migrant caravan which reached the US border in late 2018 shows that, despite falling homicide rates in Honduras and El Salvador, organised crime remains a huge challenge. Similar migrant caravans could appear in 2019 as a result of the continued dominance of criminal groups in the region and high levels of rural and urban poverty.
General elections were held in Mexico, Brazil and Colombia – Latin America’s three most-populous countries – in 2018. Attention now turns to how the new crop of Latin American leaders will govern, but with a broad consolidation of market-friendly candidates and a respect for the political process, Latin America has reaffirmed support for democracy.
There are concerns that AMLO will undermine democracy in Mexico, but the evidence so far is mixed. On the one hand he cancelled the construction of a new $13billion airport in Mexico City after holding a popular vote, on the other, his first budget was sensible, making prudent spending promises and increasing the deficit only moderately, which was warmly greeted by markets. Meanwhile Brazil and Colombia calmed investors in 2018 with the election of Jair Bolsonaro and Iván Duque ahead of market-bashing Fernando Haddad, Lula’s chosen candidate in Brazil, and former left-wing guerrilla Gustavo Petro in Colombia.
The spotlight therefore shifts to Argentina’s elections, scheduled for October 2019. Market-favourite Macri is bidding for a second term, but after a bail-out from the IMF, rampant inflation and spending cuts still waiting to take effect, his chances of re-election are far from secure. If successful markets will cheer, if not attention will turn to the economic consequences of a new Peronist government, which could undo some of Macri’s market-friendly reforms, such as removing public utility subsides.
Brazil coming out of recession in 2018 means that the whole region’s statistics look better, as it accounts for around 40% of Latin American GDP. Other economic indicators in Brazil look encouraging, with unemployment falling, inflation stable at around 3.5%, which has allowed the central bank to cut interest rates, while GDP growth is picking up. Brazil’s chunky budget deficit is the biggest concern, reaching $35billion in 2018, accounting for around 7% of GDP. Much of this deficit comes from an overly generous pension system, which will have to be reformed if Brazil is to secure its financial stability.
“economic indicators in Brazil look encouraging…”
Mexico, the region’s second largest economy, is in better economic shape heading into 2019, owing to lower debt levels. Inflation is stable and remained under 5% for 2018 and is forecast to be around 3% in 2019, while national debt to GDP is 46%, compared to 74% in Brazil and 57% in Argentina.
Commodity prices have mostly recovered from lows in 2013/4 but are not at super cycle levels due to the slowdown in China. Oil prices look volatile heading into 2019, after dropping to around $45 by the end of 2018 from a peak of $75 a barrel in August 2018. Overall the outlook is positive. The IMF expects real GDP growth for Latin America to hit 2.2% in 2019, up from 1.2% growth for 2018. Growth prospects for the region in 2019 could be boosted if commodity prices recover and China grows on the back of a trade deal with the US, as well as a trade boost between the US and Mexico as a result of the new United States – Mexico- Canada Agreement (Nafta 2.0) signed in November 2018.
Latin America looks cheap, with the MSCI Latin America index down 7% in 2018. At the end of 2018 it was trading at 9,221 which is 23.7% lower than its 12-month peak. To give that some context the index reached a high of 24,637 in April 2011 and a low of 3,835 in January 2016, according to asset manager BlackRock.
Given that almost 60% of the index is exposed to Brazil, if investors turn bullish on the country, the entire region will be pulled up. The second-largest exposure is Mexico, with around 23%. Markets enthusiastically greeted Bolsonaro’s policies and political appointments which made Brazil’s stock market, the Bovespa, the best performing major index globally, returning 15% in 2018 – a year that 90% of indices posted negative returns.
Bolsonaro has pledged to delegate economic policy to ‘super minister’ Paulo Guedes, whose background as the co-founder of Brazilian investment bank BTG Pactual and PhD from the University of Chicago, makes him a market-friendly appointment. If he can fix Brazil’s public sector finances, the stock market could roar in 2019. Mexican president AMLO will keep markets on edge in 2018, as will political developments in Argentina in the run up to the October 2019 general election.
Despite improving its resilience in recent years, Latin America always remains particularly exposed to external factors. Commodity price falls would negatively affect current accounts across the region, while US interest rate hikes would increase the cost of dollar-denominated debt, and a slowdown in China could cause investment and trade to slow down.