NS4540 Winter Term 2017 Decline of Populism Rabobank, Latin America: Turning the Populist page October 6, 2016

Overview Commodity boom of the past decade enabled governments to pursue more populist policies That in turn propped up the approval ratings of incumbents As the commodity cycle came to an end in 2011, political risk and discontent began to increase Only Argentina, Guatemala, and Guyana have experienced a decrease in political risk in 2016 Improvement in Argentina driven by election that put an end to Kirchnerism and its erratic, highly interventionist and economically unsustainable policies The deterioration in political risk has been more pronounced in South America where commodities play a more important role. Political risk – when human decisions not always technically driven change the direction of policy and the operating environment of firms

Political Risk Increasing

Transition from Populism I 2015-16 a turbulent time that has led To a general shift to the right in election results – Venezuela, Argentina, and Peru, and A move away from populism in policy – Brazil, Argentina Period has also been marred with corruption scandals in Brazil and Guatemala that toppled regimes and led to early elections Numerous corruption allegations seem to be related to a down turn in the economic cycle Having less benefits to distribute and less power to share, incumbents lose influence and other parties are able to take action against them The allocations have fueled discontent with current governments and as only a few countries held elections there is now a higher risk of protest.

Risk of Protests Increasing

Transition from Populism II In the past scandals and protests have played an important role in triggering political change Latin America has a remarkable history in removing presidents from office before the end of their terms. Between 1987 and 2003, 16 presidents had their term in office challenged – 9 had to step down. Many of these were related to corruption Today economic performance also a factor In 2015 purchasing power eroded by high unemployment and high inflation in many countries Four countries where both these indicators have deteriorated three witnessed political change in 2016 – Brazil (president impeached) and in Peru and Venezuela the opposition won the elections Two countries with extremely high inflation in 2015 (Argentina and Venezuela witnessed political change

Purchasing Power Indicators

Transition From Populism III Considering the level and/or increase in inflation, the sharp erosion of purchasing power in 2015 and 2016 could lead to higher dissatisfaction next year in: Argentina Suriname and Venezuela To a lesser extent in: Colombia, El Salvador, Guatemala, Nicaragua, and Paraguay

Transitions From Populism However in countries where there has been recent electoral and political change like Argentina and Guatemala, governments are benefitting from a popular mandate for change In some countries dissatisfaction may be expressed at the ballot box since Argentina, Chile and Ecuador holding elections in 2017 In Argentina the government needs to show some improvement by then In Chile and Ecuador, the economic deterioration in recent years is likely to boost the opposition

Assessment On a more positive note, most vulnerable countries likely to see their economic situation improve in 2017 and that should reduce dissatisfaction in the longer term. This could happen more quickly in Central America as the low levels of inflation and unemployment in 2016 could be reflected in less content All and all however the current levels of political risk are likely to linger for a while.

Looking Forward to 2017 Economic growth should be somewhat accelerating over the region except for Ecuador and Venezuela Countries in Central America are growing at a steady rate These countries have room for credit expansion and monetary easing Southern part of continent still bearing pain of lower commodity prices – three groups Countries such as Chile, Colombia, Peru, Paraguay and Uruguay are still enjoying positive growth rates At other extreme are unsuitable populist policies in the past have pushed Ecuador and Venezuela into deep recessions In the middle Brazil, Argentina and Suriname where situation remain challenging and all will have to under go significant macroeconomic adjustments

Selected Indicators

Debt Statistics