The politics of Latin America’s two biggest countries may have swung sharply to the right or left, but their economies are going nowhere.
Elections in Brazil and Mexico last year saw anti-establishment leaders surge to power as voters turned against the status quo. Stagnant economies played a part in the revolt — and the prospect of a quick revival under new governments is fading. Instead, economists have been slashing growth forecasts for both.
It’s early days for Brazilian President Jair Bolsonaro, a far-right former army captain, and Andres Manuel Lopez Obrador, a leftist who got elected in Mexico at his third attempt. But their teething troubles point to a wider problem. Over the past five years, Latin American economies have lagged emerging-market peers. It’s the only region where living standards actually declined.
While concern about a retreat from democracy is a global phenomenon, Latin America’s youthful institutions could be especially at risk — if voters decide that politicians from all points on the spectrum are equally incapable of turning things around.
There, the region’s third-biggest economy stands as a warning. For two decades and more in Argentina, power has swung between pro-business and populist governments — while the economy has endured repeated slumps under both.
It’s in a recession again now, one that could presage yet another swing of the pendulum in October elections, when market-friendly President Mauricio Macri faces a likely challenge from his leftist predecessor.
“The connecting theme in all these countries is a sense that the political systems aren’t working, a sense of fatigue,” said Rafael de la Fuente, chief Latin America economist at UBS AG. “That’s certainly true in Brazil and Mexico. The break from what came before is visible.”
“Could Argentina be next?” he said. “It’s right in the same vein.”
A study by Latinobarometro found that support for democracy is in long-term retreat in all three countries. It fell to 34 percent in Brazil last year, from 48 percent two decades earlier. There were similar-sized declines in Argentina (from a higher starting point) and Mexico.
Politicians can still energize the public, judging by last year’s elections. Lopez Obrador stitched together an unprecedented majority to rout the pro-business parties in charge of Mexico for decades. Brazil’s Congress saw a record turnover as a new generation of lawmakers won seats on Bolsonaro’s coattails.
There was more than economics behind the revolts. In both countries, voters expressed equal or greater disgust at soaring crime and corruption. Early signs are that the new leaders will struggle to fix these deep-rooted problems. Murder rates are still rising in Mexico, while Bolsonaro’s family rapidly got embroiled in a probe into their own finances.
Expectations for economic growth are souring too.
Markets were enthusiastic about Bolsonaro’s plan to reform Brazil’s pension system — a measure that could save $250 billion over a decade, and boost growth by attracting more private investment. They’re now skeptical that the president, who scorns traditional horse-trading in a fragmented legislature, can get it through.
Mexico’s outlook has been hurt by concern that business investment could dry up, after Lopez Obrador scrapped a $13 billion airport and froze foreigners out of the oil industry. There’s a cloud over trade too, with Nafta’s replacement still stalled in the U.S. Congress. The economy unexpectedly shrank in the first quarter.
All these present setbacks and future uncertainties pale in comparison to the trauma engulfing Argentina — again. Macri, who promised an enduring recovery when he was elected in 2015, has already presided over two recessions.
His predecessor, Cristina Fernandez de Kirchner, is likely to be his main rival in October. Many analysts blame her free-spending policies for the economy’s current woes.
“If Cristina comes back, I think the private sector will be very skeptical of growth prospects,” said Eric Farnsworth, vice president of the Council of the Americas.
Yet Macri’s attempt at a fix, backed by a record $56 billion of International Monetary Fund loans, has broken down.
Output is forecast to contract for a second year in 2019 (only Venezuela, gripped by violent unrest and almost frozen out of global commerce, has a worse outlook among the major Latin economies). Argentina’s interest rates are above 70 percent, and inflation is around 50 percent.
That’s a tough backdrop for a re-election campaign. Kirchner, mired in corruption scandals, has her own image problems — but a survey last month suggested Macri is even more unpopular, triggering a market wobble.
Populism isn’t new to any of these countries — or unique to them right now, as Brexit and President Donald Trump’s election in 2016 show.
Still, there’s something distinctive about the Latin American cycle, according to Christopher Sabatini at Columbia University, who’s been studying the region for more than two decades. Its current phase coincides with the end of a commodities boom that killed the dreams of a nascent middle class.
When countries were making easy money by selling crude oil or soybeans, they could turn a blind eye to structural flaws in economies – which then came back to bite them.
“What you’re looking at is an incapacity to address these harder issues,” Sabatini said. Over time, it may “decrease people’s belief in the democratic system.”
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Bloomberg’s Patrick Gillespie and Daniela Guzman contributed.