Argentina was among the region’s worst economies in an investor risk ranking

A report by The Economist which warns of the advance of populist alternatives in various Latin American countries has placed Argentina in the first position in terms of risk for investors. Only Venezuela, Haiti and Cuba have higher levels of risk. The area in which the country scores the worst is that of economic risk, and specialists warn that “if macroeconomic imbalances are not corrected, there will be a strong monetary and inflationary adjustment”.

“In a year of great elections for Latin America, the political risks are already evident. The political risk is high, as voters oppose incumbents and demand a change in policy, leading to populist proposals to thrive. “The magazine came to this conclusion The Economist according to the report of its intelligence unit, entitled “Populism and politics: operational risk in Latin America”.

After a year 2020 marked by the coronavirus pandemic, in which the region recorded one of the highest death rates and recessions in the world, the most significant will be the changes in Latin American economic policy.

The report of The Economist focuses on three areas: political risk, economic risk and political risk of investments. In most of the sectors analyzed by the English publication, Venezuela is the country with the worst prospects for this year.

Political risk has been examined in three main areas: security, political stability and political efficiency. According to the intelligence unit, the coronavirus pandemic poses serious risks to both the security environment and political stability in the region. Likewise, the lack of political effectiveness “will hamper the ability of governments to face these challenges”.

Latin America has faced high levels of security risk for years as a result organized crime, high rates of violent crime and frequent influence of drug trafficking. Far from changing this reality, the pandemic “will create new opportunities for organized crime”. In this sense, as the technological revolution develops by leaps and bounds, experts envision a greater impact of “cybercrime”.

For its part, the report focuses on the social protests that erupted in late 2019 in several countries in the region, such as Chile, Bolivia and Ecuador, among others. Although these mobilisations decreased in 2020 due to traffic restrictions due to the coronavirus, according to The Economist the risk of new social unrest remains latent: “For the most part, none of the issues that fueled deep discontent with the performance of governments in the region – including security, corruption and economic malaise – have been resolved.”

In addition, another risk facing current Latin American governments is “that opposition groups come to power and cause a significant deterioration in the operating conditions of companies.” “2021 is another important election year for Latin America, with presidential elections in several major economies such as Ecuador, Peru and Chile, and midterm elections in key regional markets such as Mexico and Argentina. In most of these elections, some main trends seem to emerge: a marked increase in anti-outgoing sentiment, demand for a greater role for the state in the economy (at least while the pandemic continues) and a growing preference for populist political solutions among a growing proportion of the population ”.

In this context, The Latin American country with the worst index in terms of security risk, political stability and government efficiency is Venezuela. Among the worst, Guatemala, Mexico and Ecuador follow.

The Economist also raised some risk scenarios in some countries. In Panama, for example, he indicated that the Covid-19 crisis “leads to an increase in corruption, eroding trust in the government”. In Peru, meanwhile, political stability was undermined after the government “abandoned the political consensus on economic orthodoxy in favor of populism.” In the case of Mexico, organized crime activities have grown thanks to drug trafficking.

All these demands for change underlined by the report lead “to an increase in public spending to support the populations who continue to fight against the effects of the coronavirus”. This is part of the second axis studied by the intelligence unit of The Economist: the economic risk.

“To varying degrees, Latin American governments have implemented a combination of tax cuts, spending cuts and loan guarantees to try to protect businesses and individuals from the effects of the pandemic.” According to the report, one of the main drawbacks facing the region’s leaders “is the lack of policy space to continue to strengthen fiscal support measures without creating solvency problems which subsequently turn into instability. . Macroeconomic “.

When analyzing economic risk, specialists assessed macroeconomic risk, financial risk, and foreign trade and payment risk, measuring whether economic conditions are stable and predictable, whether investors can bring in and out of the country’s money, and whether the financial system is adequate for business needs: “In all of these areas, risks are increasing, not only due to the sharp collapse in economic activity last year, but also the heavy fiscal burden that the pandemic continues to pose.”

Looking ahead to 2021, the English publication says that “there will be” economic scars “due to investments and losses of human capital, and major sectoral changes, as some sectors advance at full speed while others are having difficulty “.

Venezuela and Argentina present the worst prospects for studies on macroeconomic risks and foreign trade. In the case of Argentina, The Economist warns that “if macroeconomic imbalances are not corrected, there will be a strong monetary and inflationary adjustment”.

Regarding the political risk of investments, the specialists underlined that “the increasing fiscal pressure, the post-pandemic demand for a greater role of the state in many key sectors and the increase of political actors and populist political proposals suggest that there are political risks. for companies, in addition to the macroeconomic risks highlighted above ”.

In the four key areas assessed by The Economist – legal and regulatory risk, fiscal policy risk, labor market risk and infrastructure risk – “it is clear that new risks are looming on the horizon, driven by the pandemic-related changes in the political environment and regulatory ”.

One of these risks relates to the lack of incentives resulting from “growing nationalism of resources amid growing objections to projects in the mining, energy and agriculture sectors”. As an example, the post recalled that Last year, the Argentine government attempted to nationalize a struggling soy exporter. Then it had to back down due to the strong social, political and commercial discontent generated by the initiative.

Experts also argue that the risk of fiscal policy this year “will be high” as governments attempt to close budget gaps while “being reluctant to cut spending.” “Wealth taxes are the order of the day, as seen in 2020, and it is also likely that new indirect taxes will be put in place, on digital services, among others, (in part because they are easier to collect for regional governments) ”.

“While our forecast for Latin America in 2021 is cautiously optimistic, investors will need to be prepared for these emerging risks,” the report concludes.

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