Seven Latin American countries hold elections this year and foreign investors are paying close attention to the results.
But it is not the winners of the left or the right that occupy the attention of global markets, but the possibility that elected governments will have to do their job.
This year the electoral olympics are taking place.
More than 50 countries that make up between 40% and 50% of the world's GDP are calling for elections in 2024. In Latin America, the presidential elections in El Salvador have already been held and those in Panama and the Dominican Republic remain to be held in May, Mexico in June, Venezuela in July and Uruguay in October.
Additionally, Brazil and Chile will have local government elections.
The elections will be held against a backdrop of low economic growth and higher poverty rates, high political polarization and the risk of social instability, as protests have erupted in different parts of the region since 2019. This is why, For foreign investors, one of the main concerns is that fragmented parliaments are elected in which it is difficult to pass reforms and adjustments to public policies, according to analysts from the Fitch analysis agency Shelly Shetty, Richard Francis, Todd Martínez and Mark Brown.
“This risk has been highlighted in the Andean region in recent years,” Fitch specialists wrote.
Chile, Peru, Colombia and Ecuador have experienced political and social upheaval over the last decade, which has translated into important changes in economic policy.
In Peru, for example, the 10-year moving average GDP growth has fallen from 4.4% in 2018 to 2.3% in 2023, largely impacted by political noise.
“The priorities of the new administrations and their effects on credit fundamentals will be the focus of our analysis… the composition of the new congresses will also influence governance.”
“The biggest case is Mexico,” says Kathryn Rooney, head of market strategy at StoneX Group, “based on conversations I've had with fellow investors, there is overwhelming optimism that can be seen in the Mexican peso, which is appreciating. and it is very strong.”
The official presidential candidate, Claudia Sheinbaum, is ahead in the polls, so the price of Mexican assets already contemplates her victory.
A surprise in the result would lead to a strong correction, says Rooney.
The new administration in Mexico, the second largest economy in the region, will face the difficult task of implementing a fiscal consolidation strategy and must find a way to heal the troubled finances of the state-owned company, Petróleos Mexicanos (Pemex), the company most indebted in the world in its sector.
“The composition of Congress would be an important barometer for governability,” the Fitch report says.
“The ruling party's majority in Congress and the great popularity of President (Andrés Manuel) López Obrador have facilitated governability, although the lack of a supermajority has prevented the president from advancing reforms that required constitutional amendments.
However, a victory for the opposition candidate could bring more market-friendly policies in the energy sector, although the composition of Congress would once again influence the form and scope of any reform,” the specialists added.
While the markets are already betting on a victory for Sheinbaum, there would be a sharp drop if his party, Morena, obtains a qualified majority in Congress, Rooney says.
"But it is not because of a rejection of their proposals, but because it is not currently discounted," explains the specialist. We saw this with the victory last year of Luis Inacio Lula da Silva in Brazil, that the markets were scared," she adds. .
Panama and the Dominican Republic “are investor favorites,” says Rooney, “the markets like their history.”
Panama, despite the losses it saw last year and that are expected this year due to the drought in the Canal through which part of global trade crosses, is a country that has historically had prudent macroeconomic policies.
For its part, the Dominican Republic grows well above the regional average.
For Fitch, both countries must resolve the sustained increase in their debt.
“With the elections, whatever the result, it is undeniable that emerging markets are gaining ground and people like the Latin American narrative,” says Rooney.
This has to do, in part, with the fact that the geopolitical panorama has made other emerging markets, such as Ukraine, Russia and some Middle Eastern countries, riskier bets.
“I am much more cautious than the market,” warns the specialist, “I think there is a lot of exuberance in the market at this time, everyone is on one side of the business and the positive sentiment is exaggerated.
“I think we are underestimating the risks of what is safer: that things will happen that we did not expect.”
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