Which countries in Latin America present the biggest hazards for businesses during 2018? And which offer the least risk—and the best opportunities for investors?
From electoral turmoil, pervasive corruption dangers and social upheaval in Brazil and Mexico, the relative safety of Colombia, Chile and Peru, and ultra-high risks but monster margins in Venezuela, here’s Latin iQ’s quick guide to the issues and events to watch out for in the region during the weeks and months ahead.
Political risk will flash on the Latin America radar this year as the region braces for an intense electoral calendar. Voters go to the polls in Brazil, Mexico, Colombia, Paraguay and Costa Rica (and maybe Venezuela). At least some of the new leaders taking power will alter course and tinker with the business climate.
Brazil is set for a heavy dose of political uncertainty. Former president Luiz Inácio Lula da Silva is galloping ahead in the polls to stage a political comeback in the October elections. But will Lula be allowed to compete? A conviction for corruption, if ultimately upheld in court, could block him from running.
That decision could come as soon as this week: on 24 January an appeals court in Porto Alegre is due to announce its ruling. Lula is unlikely to be acquitted—but a ruling to uphold won’t necessarily see him carted off to prison. Brazil’s judicial system leaves open further appeal avenues—and Lula will use them.
Uncertainty over Lula’s permissibility to run as a candidature could easily hang over the country’s political panorama for months as the matter grinds through an array of higher courts and the electoral tribunal.
Whatever the outcome, it’s risky: a return to power of Lula is likely to see a reversal of the tepid reforms enacted by incumbent Michel Temer, which is bad for economic prospects. Alternatively, the prospect of Lula, the country’s most popular politician, behind bars is a recipe for unrest and governability problems.
Turbulence also looms large in Mexico. Left-wing populist Andrés Manuel López Obrador is in pole position for the July election. AMLO has pledged to roll back reforms that have lured foreign investment into the energy sector. Add to that an end to NAFTA—which would boost AMLO’s chances—and Mexico’s business environment could turn decidedly ugly.
José Antonio Meade, the hand-picked successor candidate of unpopular incumbent Enrique Peña Nieto, could pip AMLO at the post. Meade is hardly an inspiring candidate, but in Mexico you can never underestimate the establishment’s grip on the state apparatus and its capacity to maintain the status quo.
Still, the risk of a last-minute upset stemming from the influence of ‘fake news’ propagated across social media by Russian hackers is real. Russia has a strategic interest in seeing disruption and instability in the US’s southern neighbour.
Political discord in Brazil and Mexico is likely to hog the headlines in the coming months, but a host of chronic risks—bureaucracy, corruption, labour issues and byzantine tax rules—already make these two countries challenging places to do business. Their growth forecasts this year are also anaemic.
In contrast, the Andean countries present less political risk, sturdier regulatory frameworks, more sprightly economic prospects, and more alluring margins. Business sectors offering the most exciting returns in these countries include private health services, tourism & leisure, luxury retail, renewables, and infrastructure.
Colombia also goes to the polls this year—but disruptive populists are nowhere to be seen. Currently ahead in the polls is Sergio Fajardo, a former mayor of Medellín with a track record of urban regeneration. Another top contender is former vice-president Germán Vargas Lleras. However, the chances of Rodrigo Londoño, the former commander of the FARC insurgent group—now a legal party—becoming president are minimal.
Furthermore, security risks, while not absent, are overinflated when it comes to Colombia: gone are the days when the country’s name was synonymous with drugs barons, violence and kidnappers. Institutions are robust, and the country’s bureaucracy is among the most efficient in Latin America.
Positive political change is also coming in Chile. Billionaire Sebastián Piñera takes office in March, and expectations are high that he will open the tap to investment. With corruption risks among the lowest in the region and a long list of free trade agreements, Chile offers one of the safest business environments in the region.
Then there is Peru, Ecuador, Panama and the Dominican Republic—nations often overlooked by foreign investors. None of these countries will be dogged by political and electoral uncertainty this year, and although they are not without their particular difficulties, most of these economies will grow at more dynamic rates.
Many of these countries are also quietly beefing up their anti-graft agencies and reforming legal structures to minimise corruption and bribery risks. Even Argentina is seeing improvements in this area: a sweeping new law making companies criminally liable for bribery and influence-peddling comes into effect next month.
And for investors with a cast-iron stomach for risk, there is Venezuela. Food shortages, hyperinflation, price controls, a lengthening list of US-sanctioned individuals, and the highest murder rate in the world. Add to this an unstable political regime and it’s a veritable minefield of risk if ever there was one.
Yet amid the mayhem, some potentially spectacular investment margins are on offer in Venezuela. Many assets are at giveaway prices, and while greater turmoil and nasty violence is certain in the short term, political change is also inevitable. As Baron Rothschild reputedly said, “Buy when there’s blood in the streets”.