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Latin America’s Pandemic Election Cycle

Featured Author: Meagan Nace
Meagan Nace is an analyst on the Artisan Partners Sustainable Emerging Markets Team.

In addition to the public health tragedy, the pandemic has been a source of significant economic and fiscal setbacks for Latin America—at a time when social discontent over inequality was already beginning to surface. While we see some signs of economic improvement, the pandemic led to drops in much-needed investment—foreign, corporate and government—while fiscal conditions have become further strained. Now, a series of elections will reveal what leaders and policies each country feels will help it move forward—with potentially significant implications for the region’s financial markets.

Annual GDP Growth 

Source: IMF, World Economic Outlook database. Data as of 4/30/2021. GDP growth figures for 2021 and 2022 are projections. For illustrative purposes only.

Debt to GDP 

Source: IMF, World Economic Outlook database. Data as of 4/30/2021. Gross Government Debt to GDP figures for 2020 are estimates. For illustrative purposes only.

Peru’s June 6 election has garnered the most recent headlines. Socialist party candidate Pedro Castillo is poised for victory against conservative Keiko Fujimori, although she continues to contest results. Castillo’s agenda currently steers clear of nationalizing industries but includes higher taxes for multinational companies and larger royalties paid by mining companies (Peru trails only Chile in global copper production). Such policies have already unsettled equity markets and could lead to further volatility if they’re enacted.

Castillo also wants further fiscal stimulus to counter the pandemic’s impact, more government spending on populist programs, import controls to support local industries, and a new constitution. Fujimori was open to limited tax increases on miners, giving some mining tax revenue directly to citizens and raising the minimum wage. She also wanted to keep the constitution; not only is it generally free-market friendly, it was established in 1993 by Keiko’s controversial father, Alberto Fujimori.

Fortunately for large companies, investors and Peru’s rapidly rising fiscal deficit, the incoming Peruvian congress is fragmented—though that also means possible votes of no confidence and political volatility that could leave pressing economic issues unaddressed.

Speaking of constitutions, in October 2020 Chileans voted overwhelmingly to replace the country’s neoliberal, market-friendly constitution from the Augusto Pinochet era, another controversial leader (bit of a theme here). The long process got underway in earnest this May when Chileans elected a 155-member assembly to draft a new constitution. Once completed, the public will vote on the new document; a simple majority is needed for passage, otherwise the current constitution remains.

In May’s constitutional assembly election, left-wing parties and independent candidates—who generally favor more government involvement in the economy—fared far better than expected. President Sebastián Piñera’s coalition of center-right and right-wing parties, Chile Vamos, fell short of the one-third necessary to veto any proposals that would reduce property rights or drastically increase government spending. While a new constitution could be less market-friendly, Chile’s central bank should remain independent and the country has some of the healthiest political institutions in Latin America, which are somewhat reassuring for investors.

Meanwhile, Chile’s presidential election is in November. It’s hard to tell if the assembly election results spell trouble for Chile Vamos’ candidate. While Pinera isn’t running—presidents can’t serve consecutive terms—an inability to enact his agenda could hurt Chile Vamos’ chances of winning. Instead of following through on campaign promises to lower taxes and encourage investment, Piñera raised taxes and increased social spending in the wake of social unrest in 2019. COVID-19 led to more fiscal spending (hurting Chile’s long-term financial fundamentals) and citizens pulling money from their pension funds (jeopardizing a system meant to reduce the risk of worsening economic inequality).

While not as high-profile, elections in Mexico, Argentina and Colombia are also on the calendar. Mexico’s June 6 midterm elections appeared to be both defeat and victory for President Andres Manuel Lopez Obrador’s populist Morena party and opposition parties. In Argentina, this year’s midterm elections may influence debt negotiations with the IMF and show whether the Peronist administration’s questionable policies and statements have hurt its popularity. And in Colombia, escalating social unrest will likely affect legislative and presidential campaigns leading up to 2022 elections.

But the biggest election of all may be Brazil’s October 2022 presidential contest. Intrigue is already rising as former president Luiz Inacio Lula da Silva jumps back into the political ring. Lula remains popular, and President Jair Bolsonaro’s response to the pandemic has damaged his support. Plus, the pandemic halted Bolsanaro’s already waning pro-market reform efforts. While Lula has a leftist political background, as president between 2003 and 2010 he was pragmatic and became popular among both the public and the business community while in office.  

Pragmatism may be what the region needs most right now. In addition to strong vaccination efforts, governments on the left and right should look at policies to promote economic activity, attract foreign investment, avoid overregulation and over-taxation, and keep fiscal deficits from climbing much further. No small task, but success would help improve conditions now for everyone and set up countries for continued success.