Brazil and Honduras - Political risks from nominally pro-business leaders

Bolsonaro and Hernandez portray themselves as pro-business, but companies face significant risks doing deals under both leaders.

CBC interviewed me about the risks involving a gold mine being developed in Brazil’s Amazon. I said, “There are so many red flags here I can't even count them.” which of course I didn’t mean literally. During the interview I did categorize the risks companies operating in Brazil’s Amazon should be considering including environmental, corruption, security and indigenous rights.

Financial Times cites my comments on Honduras being “a country captured by a criminal group masquerading as a political party.” See more in last month’s newsletter on the topic.

Political risks are sometimes mistakenly defined only by concerns that a government may expropriate or excessively regulate or tax a business in a way that makes it unprofitable. The issues from Hernandez in Honduras or Bolsonaro in Brazil are different because both leaders offer what is traditionally considered a fairly pro-business agenda. 

(Brazil is a more complicated case here because Bolsonaro’s mix of right-wing statism and incompetent management of economic policy is quite anti-business in some regards. But at least when it comes to the topic of environmentalism vs business in the rainforest, I think most analysts would agree Bolsonaro is on the side of business.)

Whether businesses are looking for new opportunities in these countries or just maintaining long standing operations, they need to treat the political risks as seriously as they would if their concerns were expropriation. 

Companies operating in countries like Brazil and Honduras must be wary of corruption, political manipulation of institutions and the generally bad reputational risk of being associated with those leaders. Businesses should also be wary that the relatively pro-business regulatory environment that these leaders offer could swiftly change under a new administration.

Corruption. To paraphrase Sarah Chayes, corruption is the operating system in Honduras. Bolsonaro was elected on an anti-corruption platform, but his administration has weakened many of the country’s institutional anti-corruption efforts built around the Lava Jato era. Given the levels of corruption in the current administrations, companies must be extra cautious that their local operations go beyond the letter of the law or the demands of current local regulators and act as if their operations will face significant scrutiny in the future or from investigators outside the countries.

Political manipulation of institutions. Hernandez and Bolsonaro are pro-business in the sense that they offer good deals for investment. But neither president has strengthened the institutional environment in which businesses should expect to be treated fairly. If anything, both presidents are very much focused on making the institutions bend to their own personal whims. 

That’s bad for long term business security and continuity. Neither president is building strong institutions that will sustainably improve citizen security or legal processes to protect the businesses.

This sort of political manipulation can also be a dangerous environment for businesses in the short term that end up on the wrong side of the leader.

Reputational Risk. Companies that are associated with Bolsonaro are at risk of being caught up in the divestment push occurring in Europe. While broadly around Amazon and environmental issues, the push has become associated with Brazil’s current president and his policies. Companies that have done deals with Hernandez and his government in Honduras will face questions given the evidence that has come to light in US courts about Hernandez’s association with criminal organizations. 

Look towards future administrations. Companies should know that these administrations won’t last and their actions will likely be looked poorly upon by future administrations. Deals done today will be reviewed for unfair benefits and could be upended by future leaders with different ideological agendas. That is to say, companies operating in Brazil and Honduras should not build their operations as if they will always be able to work with the leaders currently in power.

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