Regional Political Risk: Growth And Elections In Focus

BMI View: P olitical risk will remain elevated in Latin America over the next 12 months . S lowing economic activity will see social tensions rise in some of the region's largest economies, while a busy electoral calendar increases uncertainty related to policy trajectories. The latter risk is particularly acute in Central America, where third-party candidates are making strong presidential bids in Honduras and El Salvador.

A combination of shifting growth dynamics, which will see economic activity slow significantly in several of Latin America's largest economies, and a number of key elections has the potential to significantly alter the political landscape in the region in the next 12 to 14 months. Our view for weaker economic activity and currency depreciation in many major Latin American economies , due in part to our view for a multi-year slowdown in China, means that we expect governments to increasingly disappoint citizens who have become accustomed to fast growth, rising incomes and cheaper imports. As such, we believe that the signs of fraying social fabric in the region seen in recent months, in the form of major protests in Brazil, Chile , and Peru are sign s of things to come , helping to complicate re-election bids for some incumbents in the region, and potentially leading to greater political turnover in the coming years ( see 'EM Turbulence To Continue As Policymaking Becomes Increasingly Difficult', June 21 ).

I ndeed, i n Chile , large scale protests over education reform have been tied to the country's still - significant income inequality and the perception that the government has not adequately distributed the gains of the country's fast growth in recent years. These issues echo those in Peru, and we believe they are only likely to be exacerbated by a further slowdown in growth in the coming years. Meanwhile, i n Brazil, an isolated protest over a bus tariff hike ballooned into a widespread protest movement in June , which encompass ed a range of issues including the poor quality of public services, misdirected government spending, rising living costs, and corruption. Moreover, should progress on legislative reforms stall in the coming months, we could tensions flare up once again , particularly in advance of the FIFA World Cup in June 2014 , causing us to downgrade the 'social stability' subcomponent of our Short-Term Political Risk Rating for the country once again ( see 'Public Unrest: Assessing The Policy Implications', June 20 ) .

Rousseff's Re-Election No Longer A Sure Thing
Brazil - Poll: 'Which Of These Candidates Would You Vote For In The 2014 Presidential Election?', %

BMI View: P olitical risk will remain elevated in Latin America over the next 12 months . S lowing economic activity will see social tensions rise in some of the region's largest economies, while a busy electoral calendar increases uncertainty related to policy trajectories. The latter risk is particularly acute in Central America, where third-party candidates are making strong presidential bids in Honduras and El Salvador.

A combination of shifting growth dynamics, which will see economic activity slow significantly in several of Latin America's largest economies, and a number of key elections has the potential to significantly alter the political landscape in the region in the next 12 to 14 months. Our view for weaker economic activity and currency depreciation in many major Latin American economies , due in part to our view for a multi-year slowdown in China, means that we expect governments to increasingly disappoint citizens who have become accustomed to fast growth, rising incomes and cheaper imports. As such, we believe that the signs of fraying social fabric in the region seen in recent months, in the form of major protests in Brazil, Chile , and Peru are sign s of things to come , helping to complicate re-election bids for some incumbents in the region, and potentially leading to greater political turnover in the coming years ( see 'EM Turbulence To Continue As Policymaking Becomes Increasingly Difficult', June 21 ).

I ndeed, i n Chile , large scale protests over education reform have been tied to the country's still - significant income inequality and the perception that the government has not adequately distributed the gains of the country's fast growth in recent years. These issues echo those in Peru, and we believe they are only likely to be exacerbated by a further slowdown in growth in the coming years. Meanwhile, i n Brazil, an isolated protest over a bus tariff hike ballooned into a widespread protest movement in June , which encompass ed a range of issues including the poor quality of public services, misdirected government spending, rising living costs, and corruption. Moreover, should progress on legislative reforms stall in the coming months, we could tensions flare up once again , particularly in advance of the FIFA World Cup in June 2014 , causing us to downgrade the 'social stability' subcomponent of our Short-Term Political Risk Rating for the country once again ( see 'Public Unrest: Assessing The Policy Implications', June 20 ) .

In addition to structural economic dynamics , which suggest that social tensions will head higher, both Brazil and Chile have general elections in the next 12 months , which moderately increases uncertainty over the countries' political trajectories . In Chile , we expect that former president and current frontrunner Michelle Bachelet of the centre-left Concertación de Partidos por la Democracia will return to the presidency following next month's vote. As such, we anticipate that Bachelet is likely to increase social spending moderately , which could help mitigate social tensions somewhat, but will result in modest fiscal slippage ( see 'Elections Unlikely To Alter Business-Friendly Policies', October 4 ) . Moreover, we do not rule out greater government intervention in the economy, although our core view is that the government will remain relatively business-friendly.

Rousseff's Re-Election No Longer A Sure Thing
Brazil - Poll: 'Which Of These Candidates Would You Vote For In The 2014 Presidential Election?', %

In Brazil, while we believe that while President Dilma Rousseff remains the candidate best positioned to win in October 2014, a recent opposition alliance formed between former Environment Minister Marina Silva and the left-wing Partido Socialista Brasileiro (PSB), previously a coalition partner of the ruling Partido dos Trabalhadores, increases the possibility of a second round election ( see 'Silva-PSB Alliance: A Potential Game Changer', October 10). Moreover, we see potential for the

Home-Grown Risks To Remain Significant

Although we anticipate that Mexico and Colombia will be better positioned to weather global economic rebalancing due to stronger ties to an improving US economy, growing domestic consumer stories and relatively strong regulatory environments, we do not believe that they will be immune from upticks in political risk in the coming months. While a linchpin of our favourable long-term outlook on Mexico is President Enrique Peña Nieto's reform drive, we believe this is likely to keep social tensions elevated in the short-to-medium term ( see 'Reforms To Move Forward Despite Rising Political Challenges', October 7). Protests over education reform in recent weeks indicate that the implementation of reforms will remain difficult, as they challenge entrenched interests. As such, we believe that fiscal reform, which is currently being negotiated, as well as energy sector liberalisation could spur similar protests in the coming months.

Support For Santos Waning
Colombia - Poll: 'Do You Approve Or Disapprove Of President Santos' Re-Election Bid?', %

In Colombia, a number of protests have broken out in different sectors, including mining, agriculture, transport and healthcare, disrupting the economy in recent months. While protests have mostly dissipated in recent weeks, given that a number of the issues at stake are unlikely to be resolved in the short-to-medium term, as is the case for Colombian farmers protesting free trade agreements and their impacts on local industries, labour unrest could increase again in the run up to the May 2014 presidential election ( see 'Less Convinced About Santos' Re-Election', September 4). This, combined with slow progress in the talks between the government and left-wing insurgent group, Fuerzas Armadas Revolucionarias de Colombia (Farc) - a preliminary agreement has been reached on only one of the six proposed points and violence persists - informs our increasingly sceptical view on President Juan Manuel Santos's re-election prospects. Indeed, with public support for Santos waning in recent months, and unlikely to rebound significantly on the back of the above factors, we believe that former president Álvaro Uribe's newly-formed Centro Democrático movement could present a significant challenge to the sitting president re-election bid.

Economic Interventionism To Remain An Issue

Although political risk has been running high in Argentina and Venezuela for several quarters, as highly interventionist economic policies have created structurally high inflation and goods shortages, we foresee greater signs of change in the former than the latter in the coming months. We expect that 2013 will serve as a political turning point for Argentina, as waning support for President Cristina Fernández de Kircher and setbacks for the ruling Frente Para la Victoria (FPV) in the October 27 midterm elections help to shift the balance of power towards the more moderate wing of the Peronist coalition ( see 'Domestic Politics Crib Sheet', September 17). However, with inflation set to remain elevated even in the event of a more moderate policy course beginning in late 2013, we cannot rule out further protests over wages and salaries in the coming months.

While Venezuela is facing a similar, but slightly more severe set of economic issues to Argentina - inflation is running at nearly 50.0% year-on-year, there are widespread shortages of goods and hard currency, and the prospect of a currency devaluation in 2014 is rising - we expect President Nicolás Maduro to largely stay the current policy course ( see 'Economic Woes May Cause Intra-Party Rifts', September 16).

Price Growth Not Losing Steam Yet
Venezuela - Consumer Price Inflation, % chg y-o-y

Although we believe that the president's appointments of Nelson Merentes as finance minister and of Eudomar Tovar as central bank president are pragmatic choices, they will not go far enough to turn the tide for the economy. As such, we see potential for tensions to increase between Maduro and the president of the national assembly, Diosdado Cabello, who represents the more militant wing of the ruling Partido Socialista Unido de Venezuela (PSUV), which would increase the possibility of military intervention to remove Maduro. A poor performance by the PSUV in the December 8 municipal elections could increase the likelihood of such an outcome, potentially prompting us to revise down our already-weak Short-Term Political Risk Rating of 48.1 for Venezuela.

Close Elections To Keep Investors Guessing On Policy Trajectory

A number of closely-contested races in some of the region's more frontier markets, particularly in Central America, are also likely to keep political risk elevated in the coming months given the potential for rising social tensions to feed through to election-related violence. We have long highlighted that this is the case in Honduras, where a general election is set for November 2013. Third party candidate Xiomara Castro de Zelaya of Libertad y Refundación, the wife of deposed former president Manuel Zelaya, is currently leading right-wing candidate Juan Orlando Hernández of the Partido Nacional in the polls. However, given that her lead is within the margin of error, and the percentage of undecided voters remains substantial, we believe that the race is too close to call at the moment ( see 'Hotly-Contested Presidential Race Remains Too Close To Call', October 9). A Castro victory would likely shift the country's political trajectory towards the left, and take on the populist bent of several of her husband's term, challenging the interests of some of the country's political elite and potentially causing social tensions to increase.

Moreover, given the military intervention in 2009, which removed former president Zelaya from power, we cannot rule out a situation in which the current government or military seeks to prevent Castro from taking office, a scenario which would significantly increase the potential for post-election violence.

Third-Party Candidates Making Elections Too Close To Call
Voting Intentions For El Salvador's 2014 Presidential Election (LHS) & Honduras's November 2013 Presidential Election (RHS), %

In El Salvador, recent polling data also suggests that a potential spoiler is becoming a plausible standalone candidate for the February 2014 presidential election. Support for former president, and current nominee of the centre-right Movimiento Unidad, Antonio Saca González has jumped to 27.7% as of late July, placing him only 0.9% behind centre-right opposition party Alianza Republicana Nacionalista candidate Norman Quijano, and 2.2% behind the ruling centre-left Farabundo Martí para la Liberación Nacional's candidate Salvador Sánchez Cerén. As such, we expect that a second round run-off in March is highly likely, meaning that uncertainty over El Salvador's political trajectory will remain a salient concern for investors in the coming months.

Latin America ELECTION TIMETABLE, 2013-2014
Sources: BMI, world media. N/A = not applicable, no clear party, or no house view. TBA/TBC = to be announced/confirmed. Note: Election dates are subject to change at short notice.
Country Election Type Date Dominant Party/Nominated Candidate Opposition Party/Candidate(s) Expected Outcome
OCTOBER
Argentina Legislative 27 October Frente Para la Victoria (Front for Victory)-Partido Justicialista coalition Frente Renovador, Radical Civic Union, Peronist Opposition, Socialist Party, various others Frente Renovador win
NOVEMBER
Honduras Presidential 10 November Juan Orlando Hernandez (PN) Mauricio Villeda (PL), Xiomara Castro de Zelaya (Libertad y Refundación) Too uncertain
Legislative Partido Nacional (PN) Partido Liberal (PL), Libertad y Refundación, Partido Anti Corrupción PN win
Chile Presidential 17 November Evelyn Matthei (Coalición por el Cambio) Michelle Bachelet (Concertación) Bachelet win
DECEMBER
Venezuela Municipal 8 December N/A N/A N/A
2014
FEBRUARY
Costa Rica Presidential 2 February Johnny Araya (Partido Liberación Nacional) (TBC) Epsy Campbell (Partido Acción Ciudadana), Pedro Muñoz (Partido Unidad Social Cristiana) Araya win
Legislative PLN PAC, PUSC N/A
El Salvador Presidential 2 February Salvador Sánchez Ceren (Frente Farabundo Martí para la Liberación Nacional) Norman Quijano (Alianza Republicana Nacionalista), Antonio Saca (Gran Alianza por la Unidad Nacional) Too uncertain
Legislative General People's Congress Islah (Reform), various others Too uncertain
MARCH
Colombia Legislative March Partido de la U (Social Party of National Unity), Partido Conservador Centro Democrático coalition N/A
MAY
Panama Presidential 4 May José Domingo Arias (Cambio Democrático (CD)) Juan Carlos Navarro (Partido Revolucionario Democrático (PRD)) Too uncertain
Legislative Cambio Democrático Partido Revolucionario Democrático (PRD) Too uncertain
Colombia Presidential May Juan Manuel Santos (Social Party of National Unity) TBA (Centro Democrático) Too uncertain
OCTOBER
Brazil Presidential 5 October Dilma Rousseff (PT) Aecio Neves (PSDB), Marina Silva, others N/A
Legislative Partido dos Trabalhadores (PT), Partido do Movimento Democrático Brasileiro (PMDB),and Partido Socialista Brasileiro (PSB) Partido da Social Democracia Brasileira (PSDB) N/A
Uruguay Presidential 26 October Tabare Vazquez (Broad Front) TBA (National Party) N/A
DECEMBER
Bolivia Presidential December Evo Morales (Movimiento al Socialismo (MAS)) TBA Morales win

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This article is tagged to:
Sector: Country Risk
Geography: Latin America, Brazil, Chile, Colombia, Honduras, Mexico, Peru, El Salvador
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