Specialist intelligence company, Exclusive Analysis, outlines Latin America’s recent economic boom, forecasting the countries that are most likely to experience sudden changes over the next two years.
In contrast to the developed markets (where economic stagnation and debt default are the main concerns), Latin America is currently going through one of the best decades in its recent history. The commodity boom and an improved macroeconomic outlook are key reasons for its success. After the debt crisis of the 1980s, most Latin American economies put their houses in order by cutting fiscal deficits, privatising inefficient state companies, slashing inflation and crucially building up comfortable foreign reserve levels to provide currency stability. In addition, their debt burden has been on a declining trend for the past decade, making the region more resilient.
However, one additional factor that has contributed to the region’s prosperity is the significant reduction in poverty and the emergence of a large middle class in countries such as Brazil, Chile, Peru, Colombia, Argentina and Mexico. The resultant rapidly growing domestic market makes these countries more attractive to foreign investors and less dependent on export commodities. Brazil is perhaps a classic example of the latter; despite being a major commodity producer, exports account for just 12 per cent of GDP. Also, economic prosperity acts as an incentive to develop infrastructure via the need to expand housing, electricity dams, as well as building major highways and seaports.
However, having said that, within this rather benign picture political and violent risk is still present. In Latin America four countries stand out as those most likely to experience sudden changes in the next two years.
Venezuela faces significant game changing developments on account of President Chavez’s health problems. The seriousness of the illness increases the possibility that in the next two years Chavez will no longer be the political master of Venezuela. Without Chavez, the ruling party would be highly vulnerable and the chances of pro-business opposition gaining office would increase.
Rumours about Chávez’s true health condition and succession began with the President’s announcement that he had been diagnosed with cancer in June last year. Several government officials have been mentioned as possible successors, including Foreign Affairs Minister Maduro and PSUV head Diosdado Cabello. However, the Venezuelan Constitution is clear on this matter and should the President fail to overcome cancer, he will have to be replaced by Vice President Elias Jaua – who comes from the most extremist left-wing Chávismo – until the completion of the presidential term in January 2013. Jaua is however one of the many political factions within Chávismo and President Chávez will likely replace him. The Constitution also states that the head of Congress, Cabello, will become President if the President dies after being elected in October and before taking office in January.
The government is increasing state control over all sectors deemed strategic, putting gas, petrochemical, mining, food and forestry firms at risk. The gas and petrochemical sectors are likely to be asked to form state-led joint ventures mirroring the model used for the oil industry if President Chávez wins the 2012 presidential elections. The gas sector will be particularly at risk because the current 1999 gas law allows private operators such as Repsol and Chevron to hold a majority stake in major projects. Further, a current gas shortage makes it more likely that the government would press Chevron for the modification of the Deltana Platform contract, which states that only 10 per cent of the gas will be destined for the domestic market.
The Argentine government’s strategy of pursuing the isolation of the Falkland Islands, in the hope of persuading the UK to negotiate their sovereignty, is being stepped up prior to the 30th anniversary of the Falklands War (2 April-14 June 1982). President Fernandez insists Argentina will only use peaceful means to achieve its objective; it does not have the military capability to take the Falkland Islands against the current deployed UK force level.
Argentina’s diplomatic offensive began in earnest in early 2010, when several UK-based oil firms (Rockhopper, Borders & Southern, Falkland Oil and Gas) started exploration campaigns in disputed Falkland Islands waters. This led Argentina to pass a law barring any company with commercial involvement in the Falkland Islands from doing business in Argentina; however, this law has still to be enforced.
In 2011, Argentina secured Organisation of American States’ (OAS) support for pressure on the UK to comply with a UN resolution calling for a negotiated settlement. Significantly, this included a shift in US policy in favour of a negotiated solution. In December 2011, the leaders of the Mercosur bloc (Argentina, Brazil, Paraguay and Uruguay) adopted an Argentine resolution barring Falkland Islands -flagged vessels from their ports. Chilean President Sebastián Piñera also endorsed the ban. This is significant, given Chile’s support for the UK in the 1982 Falklands War.
While the Mercosur ban does not apply to merchant vessels flying the British flag, Uruguay, like Brazil, already bars access to its ports by Royal Navy warships in transit to and from the Falkland Islands. However, Uruguayan support for Argentina has been selective, and until now largely symbolic, complicated by difficult bilateral relations as a result of Argentine protectionism. Uruguay also resents Argentine interception of Spanish fishing vessels with Falkland Islands fishing licences within the ‘common use’ waters of the River Plate estuary.
On 18 January 2012, the Argentine opposition parties offered President Fernandez full support in the dispute, following a statement by UK Prime Minister David Cameron that the UK was ready to reinforce the Falkland Islands in the face of Argentine provocation. We assess that, in addition to increased Argentine diplomatic pressure in international fora, in the run-up to the 30th anniversary of the war there will be further calls in the Argentine Congress for enforcement of the 2010 law applying sanctions to foreign companies with alleged business interests in the Falkland Islands.
This and next year will be crucial for the government of President Evo Morales, as he no longer commands the strong political support he enjoyed on arrival in office. His approval rating has currently collapsed from 65 per cent to about 35 per cent. In the meantime, he is being challenged by local and regional leaders, who, until recently, were loyal to him. This is likely to result in political stalemate, but also in mounting, highly disruptive unrest across the country.
Demands for increasing allocation of state revenues to the provinces, public works, job creation and regional political autonomy are the main drivers of unrest in Peru. Under the Morales government the indigenous population (about 65 per cent of the total) has gained an important say in policy decisions. This has resulted in heightened expectations, which the government has struggled to meet. Political bickering at the local level is undermining Morales’ ability to govern, with local political and social groups resorting to direct action whenever they want to press economic or political demands. For example, between August and October 2011 Bolivian indigenous groups protested against the construction of a US$415 million road, undertaken by Brazil’s OAS, connecting the provinces of Cochabamba and Beni. Protests were held despite the fact that OAS had obtained an environmental licence and reached such an intensity that President Morales was forced to abandon the project.
Gas and oil companies are not usually the direct target of protests. However, local communities disrupt operations or occupy energy sites as a way of getting the government’s attention and extracting additional budget allocations from the state. The right to share royalties, alleged state neglect and demand for jobs are significant drivers. Lately, infrastructure projects such as the Tipnis Highway have faced strong resistance.
The country is holding a crucial presidential election in July 2012, whose result is likely to have an impact on the orientation of security policy regarding the war on the drug cartels. Drug-related violence has become the main concern for foreign investors in Mexico. These killings have been on the rise since 2006 after current President Calderon declared war on the drug cartels. However, violence is likely to recede if the Institutional Revolutionary Party (PRI), which is leading in the opinion polls, is elected. The reason for this is that the PRI is expected to reduce the emphasis on the war on the drug cartels, one of the main drivers of the spike in murders, gun battles as well as grenade and car bomb attacks.
Another area likely to see significant change is energy policy. PRI candidate Peña Nieto, who is in a strong position to become the country’s next president, has said that oil policy will need to be overhauled to attract FDI into the oil and gas sector. If implemented, it will open up Mexico’s oil industry to foreign investors. Also, it is expected that as the US economy picks up, Mexico – which sent 80 per cent of its exports to the US – will benefit. It is worth noting that despite the violence, tourism and FDI in Mexico increased slightly in 2011.
The number scores in Foresight on-line systems represent Exclusive Analysis’s quantified risk forecasts. Some scores measure country-wide risks and others measure the risks impacting different asset sets within countries. The scores are a useful tool when making quick comparisons of risks between different locations and for understanding risk trends when making longer term planning decisions. They capture both frequency and severity of risk over the forward one-year time-frame.
Exclusive Analysis is a specialist intelligence company that forecasts commercially relevant political and violent risks worldwide. Headquartered in London, Exclusive Analysis has over 200 analysts, 1,000 sources worldwide and offices in Brazil, Singapore, South Africa and Germany. The newest office will be opening in Hong Kong soon. Foresight Country Risk is part of the company’s Foresight suite of products. www.exclusive-analysis.com