How will Latin America's upcoming lengthy election cycle affect the reform agenda and credit ratings?
Latin America will soon enter into an electoral cycle that will last about a year and a half and, depending on the results, some countries could face difficulties in terms of their credit ratings. This is because of one important factor: The ongoing fiscal consolidation continues to be a challenge for many governments that are facing a context of low economic growth and lower tax revenues, especially those related to low commodity prices, which makes it even more difficult to curb the current debt dynamics in the region.
*Guest blog post from Latinoamerica21.
Presidential elections are scheduled in seven countries: Brazil, Chile, Colombia, Costa Rica, Mexico, Paraguay and Venezuela. All of the countries, with the exception of Venezuela, will see their current presidents’ terms ending and new leaders taking on the role. In addition, congressional elections will be held in Argentina— which could test Mauricio Macri’s reform agenda—and in El Salvador, where months of political paralysis has led to a significant decline in sources of funding for the government in addition to a debt default.
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The elections will be of particular importance for the future of credit ratings for countries that have a negative outlook: Brazil, Chile and Mexico.
In Brazil, the largest economy in the region, the seemingly endless saga of corruption scandals that has engulfed nearly all of the country's political class—with President Temer himself recently becoming involved—has caused uncertainty to increase substantially and can lead to a greater degree of conflict in the elections. This is why Brazil will require strong political leadership to emerge, one that can continue pushing economic reforms to improve the prospects for growth and to clean up public finances of the southern economic giant.
Meanwhile, in Chile the combination of low economic growth and increases in the fiscal deficit have led to the country's debt doubling in the last five years. However, the appetite for Chilean debt remains high among international investors given its low level of country risk—the lowest in the region. The next government will have to tackle the challenge of reducing the growing fiscal deficit. The most recent data indicate that this year the fiscal deficit will remain very close to the 2.8% of GDP recorded in 2016, which marked the highest deficit in many years.
Finally, Mexico's slow economic growth and institutional weakness, together with crime rising and perceptions of increased corruption, have substantially reduced the popularity of President Peña Nieto and the chances that his party (the PRI) will win the 2018 presidential elections. Likewise, the next NAFTA negotiations have the potential to be a major source of political uncertainty given the complexity of the issue and the importance of its results for the future of the economy.
The electoral cycle will be equally important in Costa Rica and El Salvador, as it remains to be seen whether the results of the elections will help to break the political paralysis that has driven credit ratings cuts in the last six months. Moreover, these economies may see further cuts to their ratings in the future as many fiscal reform initiatives are still pending.
In Venezuela, where economic activity has collapsed and serious political-social risks exist, presidential elections are scheduled for December 2018. However, President Nicolas Maduro's plans to convene a constituent assembly could alter the electoral calendar, while the opposition is looking for a 360-degree change in the government. The situation remains tense and while the Maduro regime seeks to reduce the already severe distortions that have been introduced into the economy over several years, a change of government would seek a profound change in economic policy. In both cases, Venezuela's sovereign solvency is a major concern and the likelihood of the country falling into a debt default is still very high.
Meanwhile, the outlook for Colombia’s credit rating is stable. However, fiscal consolidation could be jeopardized as a result of weak economic growth and some obstacles that have thus far been encountered in the implementation of the peace agreement with the FARC.
The international ratings agencies that will be closely monitoring the region’s electoral cycle expect a calm the transition to power across the region, with the possible exception of Venezuela. According to the ratings agencies, elections in and of themselves do not affect country ratings if they are not accompanied by major changes in economic policies. For example, if there are notable changes in economic policy in Argentina, Brazil or Mexico, this could affect their credit profiles. On the other hand, if the results of the elections in Costa Rica and El Salvador put an end to the political impasses, this could help their credit profiles. For now, the new administrations in Chile and Colombia will face important challenges in order to achieve fiscal consolidation, which is fundamental for defining the trajectory of ratings for these countries.
Ricardo Aceves is a Mexican economist specializing in Latin American macroeconomic issues and currently works as a credit risk analyst at CRIF Ratings in Barcelona. He previously worked as Senior Economist for Latin America at FocusEconomics.
Latinoamerica21 is a blog about current economic, political and social topics in Latin America that is currently published within the newspaper El Observador de Uruguay and will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: El próximo ciclo electoral podría impactar la agenda reformista y las calificaciones crediticias en la región
*Guest blog posts do not reflect the views of FocusEconomics.
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Date: July 6, 2017
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