However, the toppling of presidents in Ecuador and Bolivia has reminded foreign investors that their interests do not always coincide directly with those perceived by large segments of the population. Investors are starting to consider the electoral calendar for Latin America in 2006, when Costa Rica, Colombia, Mexico and Brazil will hold presidential elections.
Markets should expect efforts on serious economic reforms in these countries to stop long before polling day. Private investment activity could be delayed pending concrete information about the new administration’s policies. For sovereign fixed-income investors, new bond supply can increase spreads if countries decide to pre-finance deficits ahead of election-related volatility.
The prospects for market friendly results in the forthcoming elections are mixed. In Colombia, President Uribe may be allowed to run again depending on a ruling from the constitutional court. This would enable further progress on security. In Mexican opinion polls the leading candidate is from the left-of-centre PRD party, but the two other main parties should not be ruled out yet. The PAN is currently in power, providing many avenues to boost support ahead of the election. The PRI party is the largest party in Congress with over 40 per cent of the seats, and has a potent grass-root political organising capability. Even if this does not deliver the presidency in 2006, the splintering of Congress should curtail the ability of the new president to pass radical laws that could upset markets.
The political trend in Latin America is away from market-oriented reforms such as privatisation, and towards democratic populism such as exhibited by Venezuela and Argentina. This will exert itself during 2006, which could scare off foreign investors from the region generally. It has to be recognised that most left-of-centre governments have been running stringent fiscal policies, benefiting sovereign creditworthiness. If world economic growth slows and commodity prices slump then Latin American governments will have to balance the interests of foreign investors against those of domestic populism.
John Cleary, chief investment officer, Standard Asset Management
