Latin America Risk Report, 27 November 2018
Poll Numbers in Argentina, Oil Prices, and more AMLO referendums
I hope everyone in the US had a good Thanksgiving. I’m thankful that so many of you provided positive feedback on the first newsletter and some of you subscribed. Thanks!
What does the oil crash mean for Latin America?
The price of oil was over $70 the day of Brazil’s first round and over $65 when Jair Bolsonaro won a majority of the vote in the second round. Analysts were floating the potential for $100 oil in the coming months. This bullish view on the oil market had some analysts predicting that Bolsonaro could benefit from a well-timed commodities boom in the first year of his term, something that would boost Brazil’s economy and likely impact the new president’s popularity.
A month later, oil is around $50.
For Bolsonaro, the drop will make it easier to deal with the controversy of high gasoline prices, but make nearly every other problem he faces more difficult. Pension reform is harder. Balancing state budgets is harder. Petrobras privatization looks less attractive to potential investors.
The low oil prices will create a similar dynamic for Lopez Obrador in Mexico. He’ll be able to manage concerns about high gasoline prices with ease. However, Pemex will not grow without higher prices. Pemex famously hedges against lower prices, but while the hedge will be profitable, it won’t make up for an overall low price environment. Meanwhile, foreign investors in Mexico will be less eager to invest in Mexico.
For Venezuela, the lower oil prices are a matter of survival. The briefly high oil prices allowed Maduro to raise enough cash to pay a few foreign debts. They did so at the expense of salaries to government workers, imports of food and debt repayments to China and Russia. Now oil prices are dropping just as Maduro faces renewed foreign pressure over his illegitimate hold on power. It’ll add to his stability challenge in the opening months of 2019.
Several countries, particularly those in Central America and the Caribbean, will benefit from the lower oil prices. Countries like Guatemala, Honduras, Haiti and Cuba all face significant economic challenges when fuel prices are high and find more room in their government budgets when they pay less for gas and electricity.
POLL NUMBERS!!! Argentina 2019 election
With the G20 in Argentina in a few days, it’s a good week to look at the poll numbers for Argentina’s presidential elections scheduled for October of next year.
Four polls this month show a virtual tie for the first round. Here are the first round numbers:
Recent polls also show a tie or a narrow win by Kirchner in the hypothetical second round. In spite of the polling, Macri remains the favorite for four reasons
Incumbents always win re-election in Latin America. That’s true even in anti incumbent climates like those seen in 2014 when Dilma and Santos both won their reelection campaigns in spite of weak economies and poor approval ratings.
The most recent crisis in Argentina appears to have bottomed out and the economy is on the rebound. Macri has managed to get the budget passed and the IMF to commit to a support package. Growth should return in the coming quarters.
Macri’s opposition remains divided. A majority currently say they would like to vote for a candidate other than Macri, but that majority is divided among those who support Kirchner, peronistas who oppose Kirchner, moderates looking for a non-Peronist alternative, and right wingers who want even more free market and pro business policies than Macri has provided.
Kirchner is really unpopular. While Kirchner polls slightly better than Macri in a hypothetical second round matchup, she is far more unpopular than he is. The voters who reject her do so strongly, unlikely to change their opinions. The recent corruption allegations have been a serious legal and reputational hit to her and there are more allegations coming. All of this could lead the 20% of undecideds and moderates to hold their noses and keep the current president if that scenario occurs.
That said, if a moderate candidate can manage to gain ground and earn a spot in the second round instead of Kirchner or her allies, it would be a very different race for the president.
According to Bloomberg, over half of the analysts they survey believe Macri will win reelection. Those same analysts believe the election has a very large impact on the probability of default:
Market participants give a 13 percent probability that Cambiemos could default on sovereign debt after the 2019 election against 74 percent should Fernandez win the election. If a more moderate Peronist candidate wins, the chances of default were set at 38 percent in the survey.
Another referendum in Mexico
Last weekend, AMLO held another referendum, this time over several proposed infrastructure projects. Around 90% of the 946,000 citizens voted in favor of building the Tren Maya in the Yucatan, the Dos Bocas refinery in Tabasco, and eight other infrastructure projects proposed by the incoming administration.
These referendums have low turnout. Fewer than one million citizens participated in the referendum regarding the infrastructure projects. For comparison, about 56 million of Mexico’s 90 million voters turned out for this year’s presidential election. Lopez Obrador is using these referendums to demonstrate popular support for his agenda, but the low turnout means they are not providing actual mandates for his policies.
The referendums help AMLO avoid other forms of opposition. Regarding Tren Maya specifically, activists want a very different referendum, one that consults with the indigenous communities and local populations who will be impacted by the construction of the train line. AMLO has attempted to brush the criticisms of local activists under the rug, but it is an area for potential protest later. This, along with the ignoring of environmental impact studies regarding his preferred new airport location, are examples of AMLO’s disregard for inconvenient information that goes against his policy agenda.
The next referendum will be about security strategy rather than infrastructure. AMLO has offered to hold his next referendum on 21 March the creation of a National Guard. That date may change as he is making it up as he goes along. The president-elect’s goal is to demonstrate support for his security strategy. Lopez Obrador is likely to frame any referendum question as a choice between his preferred strategy and what he perceives as a much less popular option. It’s unclear what happens if the referendum fails.
If they continue, these referendums will eventually become a focal point for protest against Lopez Obrador and his policies. Whether it is security strategy or a future issue, eventually AMLO’s opposition will organize and use these referendums as a way to protest his policies. AMLO has a stated commitment to this sort of direct democracy, but he’s also a pragmatic (and sometimes ruthless) politician. He may cancel a referendum if he thinks a potential loss will harm his administration.
Markets may be overthinking this. While investors are nervous - the peso is falling and bonds are being sold off - it’s worth remembering just how wrong the market can sometimes be about these questions. Investors were absolutely bullish about Peña Nieto, but his administration never delivered the growth or the security that it promised. Alternatively, investors panicked in Brazil in the early 2000’s as Lula da Silva took power. Over the short term, Lula (and a well timed commodity boom) delivered some of Brazil’s best years of growth and significant returns to investors who avoided the panic about the leftist president.
Corruption Corner
Mexico. Lopez Obrador suggested he may offer immunity to corrupt politicians who served prior to his administration. He may also ask about the issue in yet another referendum. AMLO has at least three good reasons for offering immunity.
He doesn’t want to focus his time on the past.
He doesn’t want to alienate potential allies and Congressional votes that he needs to accomplish his other priorities.
He also wants to protect himself and his allies from potential corruption investigations.
However, Mexican voters chose AMLO in part due to their anger about corruption. Offering impunity to corrupt politicians is exactly the opposite of what voters, particularly those who voted for AMLO, want. If this issue goes to referendum, it’s hard to see how immunity could pass.
Brazil. A São Paulo prosecutor indicted Lula for accepting bribes from the president of Equatorial Guinea. The bribes came as donations to his charity in 2011 and 2012, after Lula had left the presidency. Prosecutors claim that Lula helped direct construction contracts in exchange for the money.
Honduras. The details in the indictment of Juan Antonio Hernandez, the brother of Honduras’s president, suggest that he played a critical role in significant drug trafficking in the country. He branded cocaine with the initials “TH” for Tony Hernandez. He also solicited bribes for himself and on behalf of other high ranking Honduran politicians in order to prevent law enforcement action and obtain government payments for the criminal groups.
Reading List
Vice - Interview with former President Calderon about the drug war
NYT - A Journalist Was Killed in Mexico. Then His Colleagues Were Hacked.
Mexico News Daily - Tensions rise between AMLO’s team and governors over ‘super-delegates’
Global Americans and FIU - Central America Trends 2030
Evan Ellis, CSIS - The Future of Latin America and the Caribbean in the Context of the Rise of China
Inter-American Dialogue - Police Transformation in Latin America by 2030
Crisis Group - Friendly Fire: Venezuela’s Opposition Turmoil
Reuters - U.S. weighs sanctions on Cuban officials over role in Venezuela crackdown
Carlos Chamorro, Confidencial - La renuncia de Ortega-Murillo y la transición
Bloomberg - South America Trade Bloc Members Want Overhaul, Argentina Says
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