Brazil and Mexico face serious political challenges amidst different economic conditions.

BY JOACHIM BAMRUD

Argentina’s next president – who will be elected in October this year – will likely be more business-friendly than outgoing President Cristina Kirchner, experts say.

Meanwhile, Venezuela is set to see a worsening of its political and economic situation this year.

And both Brazil and Mexico will face serious political challenges this year, led by the corruption scandal at Brazilian state oil company Petrobras and the security situation in Mexico, according to experts.

“It is … hard to imagine that whomever is elected as the next president will not make it a serious priority to reestablish the confidence of the international financial community by forging some agreement with the bondholders,” says Cynthia J. Arnson, Director, Latin American Program, Woodrow Wilson International Center for Scholars. “Should that occur, the government will gain the greater confidence of both Argentine and international investors.”

Michael Shifter, President of the Inter-American Dialogue, agrees. “Argentina’s 2015 elections are critical and mark the end of the Kirchner era,” he says.  “There will be a fresh political environment, with new opportunities.   It is likely whatever government follows will be more business friendly than that of Cristina Fernandez, though perhaps only marginally so. Ambitious and dramatic market oriented reforms should not be expected, no matter who wins.  Such an agenda would not be politically supported in Argentina.”

But there appears to be a consensus among the leading contenders for the presidency that a more pragmatic approach to economic questions and foreign investment makes sense, in light of the country’s current economic difficulties, Shifter says.  

“How fast the change will happen – and to what extent -- remains to be seen,” he says.  “Certainly, foreign investors are eager and ready to take advantage of possibly more propitious conditions.  In any case, it is hard to imagine that the next government in Argentina will be less hospitable to business interests than the current one.”

Riordan Roett, Professor and Director, Latin American Studies Program, Western Hemisphere Studies, SAIS-Johns Hopkins University, agrees. “The outcome could not be worse than the present administration,” he says.

Despite all the problems, there is a strong interest among businesspeople in different countries to invest in Argentina, says Ariel Armony, the Senior Director of International Programs and Director of the University Center for International Studies at the University of Pittsburgh as of March 2015.

“Expectations are high, thus all candidates have the strong incentive to announce concrete measures to create a more business-friendly environment,” he says.

Buenos Aires mayor Mauricio Macri from Propuesta Republicana (PRO) is certainly more business-friendly, Roett says.

Sergio Massa from the ruling Peronist party is probably so, while Daniel Scioli is a wild card, he says.

“The main contenders in the October elections come from within Peronism, but with different degrees of confrontation with the current government,” Arnson points out. 

As a result, the many forms of state intervention in the economy will not disappear overnight, she warns. 

And the question indicating the death – murder or suicide -- of prosecutor Alberto Nisman threatens to mushroom into a full-blown political scandal implicating the President, Foreign Ministry, and intelligence services, Arnson says. Nisman was found dead in his apartment on January 18, the day before he was scheduled to testify in Congress about his findings that showed President Kirchner and her Foreign Minister Hector Timerman were covering up the investigation into the 1994 bombing of the Jewish community center (AMIA) in Buenos Aires, killing 85 people. Nisman said Iran was guilty of the bombing but that the current government agreed to drop their prosecution in return for closer commercial ties.

“How the government handles the investigation into his death—whether there is lingering cynicism and doubt or whether voters feel that the case has been openly clarified—could have important implications for the October 2015 elections,” Arnson says.

LATIN AMERICA

Overall in Latin America, 2015 will be a year of relative political stability but challenges related to falling oil prices and an economic slowdown.

“This is going to be a year with new challenges in the economic domain, so a number of governments in the region will be forced to make adjustments to their economies,” Armony says.

The drop in oil prices will impact countries differently, while China’s slowing growth will reduce demand for Latin American commodities and raw materials and regional economic growth is estimated to be low, creating budgetary pressures, Roett says.

The “super cycle” of elections in 2014 is over, and the presidents of Bolivia, Brazil, Chile, Colombia, Costa Rica, El Salvador, and Uruguay have (or will, in the case of Uruguay’s Tabaré Vázquez) set about the task of governing amidst a regional and global economic slowdown, Arnson says.

“Internal politics will be marked by the increased difficulties in governing as slow or declining growth confronts newly-mobilized sectors who have only recently escaped poverty,” she says.  “The greater expectations of government performance may be difficult to meet in the new economic circumstances, but not so much so that incumbent survival is threatened.” 

A potentially big story would be a peace agreement in Colombia between the government of President Juan Manuel Santos and the Revolutionary Armed Forces of Colombia (FARC). “A successful peace deal this year in Colombia would be the region’s bright spot,” Arnson says.

And the prospects for the Colombian government and the FARC reaching a peace agreement remain, on balance, pretty good, Shifter says. 

“The problem is that the process is taking a lot longer than anticipated -- and the clock is running,” he says.  “The FARC are not in any hurry, while the government is keen to reach a deal, and really needs to do so in 2015. Otherwise, the Santos administration, which has promised that any accord will be submitted to some mechanism of a popular vote, runs the risk that the Colombian people's patience could reach its limit. There is widespread frustration and mistrust of the FARC within Colombia, so the government needs to demonstrate final results.   Progress has been made, but the most sensitive and complicated items on the agenda -- which go to the question of whether the FARC will end up paying for their crimes -- remain unresolved.  For Colombia’s peace process, 2015 will be a defining year. Politically, the current situation can’t drag on much longer.” 

MEXICO

In Mexico, the killing of 43 students in Iguala in September marked a turning point for President Enrique Peña Nieto, who had been on a roll in terms of progress linked to economic reforms, winning widespread plaudits internationally. Meanwhile, in November questions were raised about his ethics when it was revealed that his wife was purchasing a luxury home at a discounted price from one of the companies that won a $3.8 billion bid to build a railway. The government later revoked the results, leading to further doubts about Peña Nieto.

“Peña Nieto had a very rough and rocky 2014,” Shifter says.  “The luster surrounding his ambitious reform agenda, at least outside of Mexico, faded. That agenda proceeded, but the country’s stubborn, underlying security and human rights problems came to the surface with a vengeance, exemplified by the massacre of 43 students at Iguala.”

The tragedy was compounded by other serious allegations of corruption that raised doubts about the rosy narrative of a transformed, more modern PRI that accompanied the Peña Nieto administration, he says.

“The government has not responded to the crisis with great deftness,” Shifter says. “For a while the administration appeared that it was just hoping the crisis would pass or somehow resolve itself, but an awakened and aroused Mexican society was not prepared to go along with that notion.”

Peña Nieto’s poll numbers are low and declining oil prices are a serious concern and could further slow real results from the energy reform, he says. 

“The outlook is complicated, and 2015 will be critical for the PRI and Peña Nieto,” Shifter argues. “July’s legislative elections will be a test and should help reveal the standing of the three main parties. It is doubtful that the PAN, punished in the last presidential election, will benefit much from the PRI’s current troubles, and the PRD is badly fractured and also negatively affected by Iguala.”

There is a strong demand on the part of the Mexican population for the authorities to address deeply rooted problems of corruption, violence, and lack of accountability in the country, Armony points out. “The political outlook in 2015 will be tightly linked to the response of the government to this citizen demand,” he says.

Peña Nieto will continue to face criticism over security issues but the liberalization of the oil industry should proceed as planned, Roett says. “The new investment in that sector over the next few years will prove to be positive for mid-term stability,” he says.

Arnson agrees, but warns that the security issue remains serious. “Mexico’s economic reforms, particularly in the energy sector, hold great medium- and long-term promise,” she says.  “But unless the country resolves the ongoing, and in some respects deepening security crisis, the opening of the Mexican economy will constitute a pyrrhic victory.  The issue is not only to overhaul the police and other internal security forces, but to tackle the corruption, cronyism, and rule of law deficits that have allowed the security situation to deteriorate to such a great degree.”

BRAZIL

Meanwhile, in Brazil, President Dilma Rousseff is facing a double whammy of economic slowdown and a major corruption scandal at Petrobras, Brazil’s and Latin America’s largest company on the Latinvex 500.

“President Dilma Rousseff begins her second term with a bleak economic outlook, a burgeoning corruption scandal at Petrobras, and a powerful private sector increasingly frustrated with twelve years of Worker’s Party statist economic policy,” Arnson says. 

The appointment of a respected new Finance Minister, Joaquim Levy, who enjoys domestic and international backing, has raised hopes that the Brazilian economy will slowly recover, she says. 

However, Levy and team have an uphill battle with Congress – especially the ruling Workers Party (PT) – over fiscal adjustment, Roett warns. 

“President Rousseff must deftly and resolutely handle the fallout of the Petrobras scandal and make a credible commitment to investigate and punish corruption in all public entities,” Arnson says.  “She must also deal with the demands of emergent middle classes at a time of economic stagnation, or at best, slow recovery.  These will test her governing skills.”

Shifter agrees. “Dilma Rousseff will not have the luxury of wasting any time at the outset of her second term,” he says.  “She will need to show positive results – and quickly. “

Her chief, overriding task is to regain a measure of confidence in the Brazilian economy, which has been stagnating in recent years. And to deliver on the promising, more market-friendly measures she announced in his second inaugural address, Rousseff will need to forge political pacts and construct coalitions, while retaining the PT’s backing.  “Her political and negotiating skills will be severely tested,” Shifter says. 

There is a certain fatigue with 12 years of PT rule, and her reelection can be interpreted less as enthusiasm for her leadership than concern that the social gains than many Brazilians have seen might be reversed. 

Although Rousseff identified fighting corruption as one of her main priorities, the Petrobras scandal could well be extremely debilitating for her second term, Shifter warms. “The controversy risks consuming enormous energy and drawing attention away from the economic changes that Brazil desperately needs to get back on track,” he says. “The concern politically in Brazil is simply heightened cynicism and frustration, which could reignite some of the discontent on display with street protests in the summer of 2013.”

Those protests were in part against what many saw as costly overruns on building stadiums for the 2014 World Cup in soccer. Next year, Rio de Janeiro will host the 2016 Summer Olympics. “The preparation for the 2016 Olympics could spark protests again over the cost and the inability of the government to find funds for improving public education and health facilities,” Roett says.

VENEZUELA

Oil-dependent Venezuela faces a potentially disastrous year, Roett says. “Oil prices will not recover enough to meet budget projections, …inflation is almost out of control and the political leadership appears helpless to address any of the important policy questions,” he says.

The rapid and steep decline in oil prices—which constitute 95 percent of the country’s export revenues—has made it impossible to mask the years -- if not decades -- of economic mismanagement and corruption, Arnson says. 

“Expropriations and exchange controls and volatility have virtually strangled the private sector, making the dysfunction of the state sector even more stark,” she says.  “Shortages of basic consumer goods and rolling power outages, not to mention astronomical rates of crime and violence, make daily life a constant challenge for Venezuelan citizens.”

Support for Chavismo is at a record low and support for the administration of President Nicolas Maduro is in the low 20's, Armony points out. “Coupled with the array of economic troubles and the falling price of oil, the political situation in Venezuela is likely to become more unstable during 2015,” he predicts.

All signs point to 2015 being the year when Venezuela’s mounting troubles will come to a head, Shifter says. 

“The trends are uniformly negative and it is hard to see how any of them are going to abate in the short term,” he says. “The economy, aggravated by declining oil prices, appears to be in free fall, with the government being either unable or unwilling to take corrective measures.”

But the most crucial political dynamics will play out within the ruling Chavista coalition, and less in the opposition, he says. 

“The situation appears increasingly unsustainable,” Shifter says. “It is doubtful Maduro has the wherewithal politically to hold things together.   The scenarios are highly uncertain. The government does not seem to face imminent collapse, but given the downward spiral Maduro may not be able to maintain himself in power, and ruling factions, including the military, could well be looking for other options.”

The US-Cuba thaw further hurts Maduro, he adds. “His aggressive stance against Washington will not get much sympathy from Latin America,” Shifter says. “The region, after all, is applauding what Obama did on Cuba policy.” 

Overall, Latin America needs to reach consensus on key reforms in order to compensate for the economic slowdown, Shifter says.

“The question, however, is whether the political forces in several key countries will be able to reach consensus to pursue badly needed and major reforms,” he says.  “That is the only way to bolster competitiveness and productivity.  After a decade of a relatively benign environment and solid progress on several fronts, the region will now confront a more challenging agenda.  Political leaders cannot afford to be complacent.”

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