Emerging Markets

What To Expect In Latin America In 2016

By Daniel Lemaitre

LatinAmericaMapEconomic decline in dominant industries, worsening security in major urban centers, and high profile corruption accusations will continue to hinder development in Latin America in 2016.

In the Latin American context, 2015 can be catalogued as a year of political renovation.

The United States and Cuba officially restarted bilateral diplomatic relations; Guatemala experienced a transformative citizen-led political movement with spill-over effects in neighboring Honduras and El Salvador; Brazilian President Dilma Rousseff, a year after reelection, has been left in political paralysis after numerous corruption accusations hit close to the office of the president; the Colombian peace accords are almost finalized; and Argentina voted in Mauricio Macri, a free-market liberal, to halt the Kirchnerist trajectory.

Then there is Venezuela. In the midst of an economically catastrophic year, bilateral relations with Colombia deteriorated after Venezuelan authorities forcefully deported Colombian families living in border states.

Venezuelan President Nicolas Maduro spoke of war with Guyana when he renewed a 100-year old dispute for the Essequibo territory and mobilized troops to the border (the official government website includes Essequibo as a Venezuelan state, increasing the size of the country by approximately 20%). Mr. Maduro could not escape personal scandal—two nephews of the first lady were arrested by American authorities in Haiti on charges of conspiring to smuggle 800 kilos of cocaine to the United States.

Under this pessimistic backdrop, the opposition party won the December 6 (the 17th anniversary of Hugo Chavez’s first electoral victory) parliamentary elections with a supermajority—enough legislative votes to launch a Presidential recall referendum.

2016 will be a challenging year for Latin America because of the inability of both incumbent and newly elected political forces to create lasting solutions to the deepening region-wide economic downturn. The economic situation plaguing Latin America is connected to a structural dependence to commodities, thus leaving left and right of center policymakers with their hands tied and no tools to implement immediate alternative economic growth drivers.

Dissatisfaction across the hemisphere with macroeconomic performance as well as the high volume of corruption cases will create a negative political environment for governance. Finally, security will remain problematic, with urban violence trending upward in major cities and narcoterrorism gripping Colombia, El Salvador, Honduras, Guatemala, and Mexico.

In broad terms, the main challenges this coming year will be: 1) how will newly elected and incumbent political forces alike manage and restructure their economies, and 2) how will state institutions react to increased popular dissatisfaction with corruption and decadence among the political class.

Economics: Reforming State Owned Enterprises

In late 2014, GRI correctly predicted that 2015 would be a trying year economically for Latin America because of plummeting commodity prices and inaction by governments to adjust to negative externalities.

Almost uniformly across the hemisphere, policy makers in 2015 took a reactionary fiscal stance to the commodity bust, slashing national budgets for the coming year and creating rainy day funds to sustain social programs.

Dependency on commodity revenues will most likely drag the region-wide economic slide well into 2016, which may trigger the privatization of strategic state owned enterprises in the energy sector. Latin America still has a many large state owned enterprises with little management oversight and shielded from international financial reporting standards.

Moreover, state owned enterprises in the energy sector had been underperforming compared to private firms even before the commodity bust. These factors have created a space for privatization amid turbulent economic times.

Isagen, Colombia’s state owned electricity generator, may be one of the first companies to be privatized—the price of the share was recently raised to 4,130 pesos (3,330 pesos equal 1 U.S. dollar). Under-performing mixed stock holding corporations in the energy and public services industries are also prone to further capitalizations and partial stock sell-offs.

Political Hot Spots

Corruption will remain a hot button issue in 2016. Lack of political accountability in the highest levels of government may lead to new political disruptions and aggravate current corruption-related crises. Increased citizen dissatisfaction and ensuing leaderless mass protests are expected in key countries.

Brazil: Brazil, which is suffering through a steep recession, is the country most prone to anti-government mass protests. Dilma Rousseff is still the President, but she has lost political credibility within her party and former allies. Her government has been left without a congressional coalition, forcing it to broker deals on an ad-hoc basis. Although it seems that the Brazilian political class is not eager to initiate Mrs. Rousseff’s impeachment, protests may leave the congress no choice but to push for impeachment.

Chile: Chile, which has a culture of mass citizen mobilization, may be on the verge of a corruption-triggered political crisis. President Michelle Bachelet is governing delicately and with little confidence after several corruption allegations targeted high level officials in the bureaucracy. Mrs. Bachelet has already reshuffled her cabinet in an attempt to regain trust, but her approval rating remains dangerously low.

Ecuador: President Rafael Correa faced widespread national dissent for the first time in 2015. He has responded belligerently (in a similar style to Venezuelan President Nicolas Maduro) and has successfully maneuvered constitutional reforms to increase the power of the office of the President, allowing him to run for reelection. Correa’s fiery and polarizing rhetoric, combined with a worsening economic situation, is expected to decrease his popularity further and lead to mass protests in Quito and Guayaquil in the first half of 2016.

Northern Triangle: In Guatemala, recently elected President Jimmy Morales will have a very short honeymoon phase and his decisions will be critiqued deeply by the media and local civil society in the coming months. The protests leading up to ex-President Perez Molina’s resignation have created a sense of empowerment for citizens in El Salvador and especially Honduras, which may lead to large-scale anti-government protests in the first half of 2016—protests demanding better accountability measures for politicians have already sprouted in the past six months in Honduras.

Venezuela: For the first time in the Chavismo era, the legislature is controlled by the opposition party, who will control a congressional supermajority. A presidential recall referendum and a triumphant “yes” vote are expected in the first half of 2016. In the run-up to the referendum, damning and polarizing public statements from Chavismo and opposition leadership are also widely expected.

The economic situation will continue deteriorating, placing pressure on the new legislative majority to implement a solution. If the economy has not improved by the second half of 2016, Chavistas will openly denounce and blame the new legislative majority for the country’s woes, setting up the table for further violence and a gridlocked political climate.

(Partial) Peace in Colombia

A Colombian peace accord and corresponding ratification plebiscite are expected in the first half of 2016. Because of the plebiscite’s low threshold, the proposal is expected to pass. This won’t mean that the Colombian government will achieve uniform national peace in 2016—alarming levels of organized urban violence and the ELN—a marginalized guerrilla group excluded from the peace talks—remain the largest impediment to a truly peaceful Colombian post-conflict society.

Important elections:

Nicaragua will hold general elections in November 2016. Although incumbent Daniel Ortega is expected to win comfortably with at least 55% of the popular vote, certain factors may help the opposition gain ground: 1) public discontent with corruption, nepotism, and lack of civil liberties; 2) widespread national poverty with little progress in key development indicators; 3) international presence closely monitoring Nicaragua’s electoral preparation.

As is the case with Honduras, the Guatemalan 2015 protests may have an indirect effect on Nicaraguan civil society’s capacity to organize and manifest discontent in the first quarter of 2016.

The Dominican Republic will hold general elections in May, and while incumbent candidate Danilo Medina is among the most popular leaders in the western hemisphere, his controversial discriminatory stance on immigration (thousands of Dominicans of Haitian descent have been deported under his leadership, raising human rights concerns) has been heavily scrutinized by the international community and may create a political space for other parties to catch up and narrow his electoral lead.

Cuba – U.S. relations

A bright spot for Latin America in 2016 will be Cuban-American relations. Obama will likely push to liberalize economic ties as much as possible with Cuba before the next President takes the oath of office in January 2017.

The U.S. Department of State and the U.S. Treasury have been working diligently to draw back the multiple levels of sanctions that had accumulated for the past fifty years. Now that diplomatic ties have been restored, both countries have stated the importance of general economic reintegration. Full reintegration, however, will be an arduous process and not expected to be accomplished in the near term. The tourism sector will be the first to open to the U.S. market—American citizens will be able to travel to Cuba on commercial flights again in 2016.

It seems 2016 will not be a prosperous year for Latin America, but again, the region is accustomed to—almost in a cyclical manner—to elongated downturns. Perhaps this time, policymakers will enact innovative solutions to the usual economic problems.

Daniel Lemaitre is Senior Analyst at Global Risk Insights (GRI). He has worked in policy research centered on the political economy of the Andean region in the public, NGO, and private sectors. Daniel holds an MSc in Comparative Political Economy from the London School of Economics, concentrating on Latin American markets.


Courtesy of Global Risk Insights, © 2015 Global Risk Insights
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Global Risk Insights (GRI) provides expert analysis on political events impacting business, investment, and economic climates worldwide.

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