LatAm Economic Freedom Worsens

Mexico worsens, but still freer and more attractive that Brazil, rankings show.

BY LATINVEX STAFF

Economic freedom has worsened in Latin America, according to the new Economic Freedom Index from the Heritage Foundation.

All countries except Uruguay, Guatemala, the Dominican Republic and Ecuador became less free.

Chile remains the freest economy in Latin America, although it also saw a slight deterioration. However, Uruguay is now ranked second, ahead of Colombia.

Mexico’s economy is among those that are less free, but the country is still ahead of Brazil, which has a far more unfree economy, according to Heritage.

Cuba managed to improve its freedom slightly but remains the second-most repressed economy in Latin America after Venezuela.

FOREIGN INVESTMENT OPPORTUNITY: MEXICO PLUNGES

Mexico was among the countries that saw the worst drop on the latest Milken Institute Global Opportunity Index – going from 54^th place to 64^th place.

The annual assessment uses 96 variables including macroeconomic outlook, potential for future innovation and development, access to financial services, and conformance to international standards to offer a forward-looking analysis of the potential for foreign investment in 145 countries.

Since assuming Mexico’s presidency in December 2018, Andres Manuel Lopez Obrador has increasingly scared foreign investors through his policies and rhetoric.

However, the Milken index shows that despite the plunge Mexico remains more attractive that Brazil.

Latin America performs well compared to other emerging and developing economies in two key areas: 1) having a highly qualified and diverse workforce and 2) the breadth and depth of the region's financial systems.

Chile takes the top spot in Latin America. Chile received the highest ranking in the region due to its strong performance across all categories measured, particularly regarding how friendly its institutions are to foreign investors.

FITCH AFFIRMS DOMINICAN REPUBLIC RATINGS

Fitch Ratings has affirmed the Dominican Republic's long-term foreign-currency issuer default rating (IDR) at 'BB-' with a Negative Outlook.

The Negative Outlook reflects pressure on Dominican Republic's public finances that has been aggravated by the pandemic. The government (non-financial public sector) interest and debt burdens (27.9% of revenues, forecasted for 2021 and 58% of GDP, 2020, respectively) are rising as a result of the coronavirus response, and compare with 'BB' peer medians of 8.2% of revenues and 59.9% of GDP. Other public finance weaknesses include the quasi-fiscal losses from the Central Bank of the Dominican Republic's (BCRD) large stock of market securities (15.3% of GDP, 2020), which has crowded the domestic market and elevated interest rates, a low revenue base (14.4% of GDP in 2019 versus 30.5% of GDP for the 'BB' median), and the sovereign's large foreign-currency debt share (73.9%). Fiscal policy credibility - including implementation of the planned tax and electricity sector reforms - will be critical to stabilizing the government debt/GDP ratio and for the rating trajectory.

A new government, inaugurated in August 2020, cut and reallocated spending, and started electricity reforms to lower public utility losses and lower government financing needs.

Fitch expects the 2021 deficit to narrow to 4.7% of GDP, supported by one-time, advance tax payments from financial institutions and a gold mining firm and a economic recovery.

“We exclude potential capital revenues from energy-asset sales and concessions that are incorporated in the government's 3% deficit projection,” the ratings agency says.

Electricity reforms (including the reduction of financing and staff costs) trimmed some operational losses starting in 2020. Uncertainty over the government's capacity to divest energy assets influences the pace at which it can reduce large domestic amortizations for public electricity utilities, which meaningfully increase annual financing needs.

Dominican Republic's relatively diversified mix of current external receipts and lower commodity export dependence than the 'BB' median helped limit the current account deficit to 1.8% of GDP in 2020.

Fitch expects economic growth of 4.9% in 2021-2022 driven by tourism, remittances and manufacturing exports, after a 6.7% contraction in 2020. Labor market softness persists (unemployment is high at 7%) with business closures and job losses most pronounced among small, informal firms.

EL SALVADOR: VOTE ENDS GRIDLOCK 

The victory of El Salvador's President Nayib Bukele's New Ideas party in the country's legislative election will end the country's political gridlock, Fitch Ratings says, but it is not clear that this will lead to timely implementation of policies to bolster public finances.

With more than 90% of votes counted, New Ideas and its allies had obtained a Congressional majority, having secured about two-thirds of the vote, and looked likely to secure a qualified majority by also winning at least two-thirds of the available seats. The two parties that have dominated Salvadoran politics since the civil war ended in 1992 – the conservative Nationalist Republican Alliance (Arena) and leftist Farabundo Marti Liberation Front (FMLN) – had received just 8% and 7% of the vote, respectively.

The strength of Arena and FMLN had forced Bukele to govern with an opposition-controlled Congress since taking office in 2019. The resulting gridlock has hindered policy implementation and reduced the government's ability to tap external funding from either private or official sector creditors, which requires approval by a two-thirds majority in Congress.

With New Ideas and its allied parties securing more than two-thirds of Congressional seats, the election could facilitate external borrowing and fiscal adjustment. However, Bukele has yet to set out a medium-term fiscal strategy and his administration's plans for a supplementary 2020 budget would have reduced consolidation commitments even before the pandemic. Meanwhile, securing external funding via an IMF program would be contingent on commitments to fiscal adjustment, estimated at 3% of GDP pre-pandemic.

“A qualified Congressional majority would effectively give the presidency a range of powers, including debt issuance, naming judges and appointments to certain high-level government posts,” Fitch says. “While the election could improve the government's ability to implement policy decisions, it may weaken institutional checks and balances. Higher human development and governance indicators than peers support El Salvador's sovereign rating, as does the history of relative macroeconomic and financial stability anchored by official dollarization.”

. 

© Copyright Latinvex

More Trade Talks 

More Dominican Republic Coverage 

More El Salvador Coverage