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Political turbulence limits Latin America’s economic prospects

Looking beyond the current election cycle, the governance problems that plague several Latin American countries are becoming an obstacle to investment

Latin America
A protester faces riot police in a march against Dina Boluarte in Lima (Peru), in February 2023.Jhon Reyes (EFE)

Latin America has surprised economic analysts for the better this year. In recent weeks, multilateral organizations such as the International Monetary Fund and the World Bank have improved their growth prospects for the regional Gross Domestic Product (GDP), which is projected to reach 2%, well above what they anticipated at the beginning of the year. But a closer look at the forecasts shows that the impulse comes, mostly, from the two largest economies (Brazil and Mexico). The rest of the region is experiencing difficulties, and one of the biggest is the political situation.

A report from the credit risk rating company Fitch, published last week, identifies “political turbulence” as a factor that increasingly limits public finances in Bolivia, Ecuador, Panama, Peru, Chile and Colombia. A second study, published by the Spanish analysis firm Focus Economics, also identifies political instability as an obstacle to growth for the remainder of the year and into 2024. This transcends the current electoral cycle, which includes presidential elections in Argentina this weekend.

“The region’s GDP growth forecasts for 2023 continued to be revised upwards over the past month, mainly thanks to recent better-than-expected data in Brazil and Mexico,” Focus Economics economists wrote in a report on October 10. “Next year, Latin America’s economic expansion will slow down and will be well below the world average, hampered by political instability and the region’s limited presence in high value-added industries,” say these specialists.

In terms of public finances, this has been a good year, Fitch noted in its report. While regional growth was driven by Brazil and Mexico, “growth has been mixed elsewhere, with momentum in Central America fueled by remittances, sluggishness in Andean countries amid policy tightening and political turbulence, and a drought-induced recession in Argentina,” the report says. So far this year, Fitch has improved the credit rating of six of the 19 countries with sovereign debt in international markets. It was the region with the best performance in the world.

However, political challenges and instability continue to weigh on the ratings in most of Latin America, Fitch analysts warned. These issues have played a role in most of the downgrades and negative outlooks, specifically by clouding policy predictability, aggravating fiscal pressures and/or negatively affecting growth, the report noted about Bolivia, Ecuador, Panama and Peru. In Chile and Colombia, the authors note, governance problems have already contributed to rating downgrades in recent years.

The forecast for Argentina, the third largest economy in the region, is pessimistic. The economy will be affected by exchange controls, hyperinflation and rising interest rates, all monetary policy decisions. The drought has limited exports and economic activity. On the other hand, the country has seen income from increased tourism and increased energy production from the Vaca Muerta oil field. But, Focus warns, “the risks are skewed to the downside and include a further decline in the currency, possible debt default and exacerbated political instability.”

In Peru, the consensus is that GDP will grow at a significantly slower rate this year compared to last. Inflation and rising debt costs complicate the country’s financial situation. Furthermore, a global environment weakened by wars in Ukraine and the Middle East will affect the external sector. “Weather phenomena associated with El Niño and rising social unrest amid political uncertainty pose downside risks,” said the Focus report.

For Chile, analysts see that the probability that citizens will reject a new constitution in the December referendum is increasing, complicating governance. While in Bolivia, President Luis Arce was expelled from his political party to choose former president Evo Morales as a candidate in the 2025 presidential elections. In both cases, political uncertainty could deter investment, specialists warned.

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