Speyside’s Predictions for Latin America in 2016In what has proved to be a challenging 2015 for Latin America and emerging markets, resulting in an increase in political and economic instability, Speyside’s senior team have gathered round and put their minds to the test for the fourth edition of our annual predictions and what should be expected around the big events in Latin America for 2016.
Argentina continues its move towards the centre and ends the debt dispute with the ′vulture′ funds
Even though Mauricio Macri campaigned on the assurance of radical and immediate reforms, the pace and promise shown by Argentina centre-right president in normalizing the economy has surprised many. In little under a month, currency controls have been lifted, inducing a devaluation in the peso of over 30%, and export taxes scrapped or reduced on agricultural products such as wheat, corn and soyabeans, Argentina’s biggest export.
Looking ahead towards 2016, reaching a settlement and reopening Argentina’s debt markets is Macri’s crucial signal that Argentina is open for foreign investors. An influx of foreign investment will give the government breathing space needed to implement orthodox economic policies to combat an immense budget deficit and roaring inflation. Macri will have to tread carefully to ensure that any deal can be sold or communicated positively locally, whilst the holdouts led by Elliott Management and Aurelius Capital Management will be aware that there may never be a better time for a settlement to be reached if Macri is solely a one term president.
Talks have started. Macri has sent emissaries, led by his Finance Secretary and Wall Street skilled Luis Caputo, to meet with mediators in December to start introductory negotiations that have been described as “constructive”. A further meeting will take place in the second week of January to commence the process of practical negotiations. We believe that a settlement will be reached in the first quarter of 2016, but the second challenge, and arguably the toughest, would be to get congressional approval. The ruling Cambiemos party holds a minority in the lower house and forming alliances in Congress (with moderate Peronists) will not just be key in passing legislation over a negotiated deal with holdout creditors, but will define Macri’s presidency.
Peace. But what happens next in Colombia?
All eyes in Colombia rest on peace. It is irresistibly likely an accord will be signed by the 23rd of March 2016 deadline set by President Santos and the FARC. Weariness with war will mean the consent of the people will follow, after an undoubtedly contentious national referendum, which polls currently put neck and neck. But, then what? Sure, international plaudits and a revolving door of visiting dignitaries, an influx of money from international institutions such as the World Bank and the EU, even perhaps the 2% of GDP peace dividend which the Government so confidently predicts. But not the certainty of immediate ‘peace’ or an eternal end to conflict – social or military.
In order to reap the full rewards of peace, the Colombian Government and its people must take this opportunity to tackle the root causes of what underpins conflict in Colombia and allows narcotraficantes and other criminals – such as the ELN guerrillas – to act with impunity, without fear of consistent state recriminations or an end to a flow of willing recruits. Two factors hold the key. First, resources must be poured into developing institutions – from a powerful and omnipresent police to an effective judiciary – in huge swathes of the country where the State currently have little or no presence, a situation which allows endemic corruption and illicit activity to exist unchallenged. Second, they must properly address, through investment and widening of healthcare, education and opportunity, the huge social and economic inequality between rural and urban, rich and poor which leads many inescapably into the clutches of crime.
If these opportunities are seized – together with a potential nascent recovery of the politically and economically crucial state owned company Ecopetrol - we predict the shoots of a new golden age for Colombia in 2016, bringing with it benefits such as: a rise in tax and revenue receipts from Ecopetrol that made up nearly 20% of Government revenue in the not too distant past; resurgent inward foreign direct investment from emboldened multinationals, particularly in the agribusiness sector, eager to take advantage of the weak peso, untapped land potential and a well-educated populous; large regions unshackled from the clutches of war, finally able to realize the potential of a land rich in natural abundance as much for tourists as for miners; and, an increasingly confident and emboldened Government and people’s voice on the world stage which will bring wider benefits locally and regionally.
By the end of 2016 Brazil will have a change of President.
Even if the incumbent, troubled President Dilma Rousseff survives the impeachment process launched in December 2015 – a tawdry political circus that has more improbable plot turns and reversals than even the most histrionic of Brazilian telenovelas – she will be fatally wounded. Even if she can limp through to the Brazilian winter months (and we think, on balance, she might), awful economic and corporate sector data will see a bloodbath against PT in Brazil's October municipal elections. Friendless and abandoned by coalition partners, technocrat ministers and party alike, Rousseff will go by the end of Q3 2016, if only to avoid certain impeachment on a second attempt. As Brazil’s economy goes from recession to depression and the myth of the 'economic miracle years' of the Lula regime exposed, this will combine to lead to sadly, potentially violent, popular protest and social dislocation, and the body politic will unite in believing the system will be under threat if she stays.
By years end it will be clear that the Lava Jato scandal in Brazil will spookily mirror the 1990s Tangentopoli / mani polite scandals in Italy. Political violence may become a risk in Brazil: potentially for the first time targeting the judges whose continued corruption investigations endanger an entire generation of political and financial elites. Some will simply conclude the judges must be stopped, at any price, if the current economic and political settlement in Brazil is to survive. The stage will be set for a complete political tsunami and, by the end of 2016, new political voices, and parties, will start to emerge and it will become quite starkly clear, even for the mighty PMDB, that the annihilation of it, and the PT Workers party, is on the cards for 2018’s Congressional elections unless radical, even painful, changes are made; to save the economy and to save the current political system in Brazil.
Incumbent PRI will gain even more ground in Mexican state-level elections June 2016
In the upcoming state-level election in June 2016, it is likely that the Partido Revolucionario Institucional (PRI) will emerge victorious, taking most of the twelve states that are up for grabs, including important states as Puebla, Oaxaca and Veracruz. In Puebla and Oaxaca the PRI had lost the governorship to the PAN and PRD, however, the PRI’s continued entrenchment in local politics, combined with its monetary influence, make successful outcome in the upcoming election likely. Veracruz, already ruled by the PRI, possesses the second largest number of PRI-registered voters of the Mexican states, after the State of Mexico, which all but guarantees a PRI victory in June 2016.
Latest electricity bids will eclipse previous oil & gas bids
Part and parcel of Mexican Energy reform is the liberalization of the electricity market. The stated goal is to improve efficiency, encourage cleaner energy sources, and lower the cost of electricity for the end user. According to SENER, the electricity matrix in Mexico is 85% fossil fuel generated; Mexico has the highest electricity transmission loss in the OECD, by far; and the Federal Electricity Commission charges the average Mexican end-user as much as 25% higher than in the United States.
Although progressing in parallel with the changes in oil & gas exploration regulation, electricity reform attracts less attention, is not nearly as controversial, and, therefore, has been able to advance with little opposition and in keeping with liberal tenets. If done well it could be a stronger driver of economic growth than O&G reform could almost immediately increase productivity in Mexico. The first electricity bid will occur March 2016.
Agustin Carstens strong candidate if Lagarde does not seek re-election
If Christine Lagarde decides not to seek re-election as managing director of the IMF next summer, there will be need for candidates who are both qualified and able to continue with the fund´s agenda. Traditionally, Directors are European or American, but the U.S. Congress recently dismantled the final barrier to reforms that will give the emerging-market countries more say in IMF affairs. If the position becomes available, Agustin Carstens will be the strongest candidate for the job. He was the runner-up in the last election, is highly respected by economists worldwide for his work as Mexico’s former Minister of Finance and current Central Bank Director and would heed the call for a more diverse IMF.
From first lady to Peruvian president
The political shift being felt across the region towards the centre-right will continue in Peru with Keiko Fujimori, leader of conservative party Fuerza Popular, beating Pedro Pablo Kuczynski in a run-off vote in June 2016. Current polling has Fujimori well ahead, but it is unlikely that she will manage to obtain the 50 percent needed to win the first round in April 2016. Although, candidates still have until January 11th to announce their “plancha presidencial” (vice-presidential candidates) that could have a dramatic effect on voter’s preferences.
In becoming president, Keiko Fujimori will achieve the rare political feat of holding the highest post in office after having being been first lady years previously.
Whilst Keiko Fujimori is a supporter of free market capitalism, there is little belief from the country’s financial sector that she (or any of the candidates) will enact large scale changes to business regulations and strengthening of institutions that are needed to further modernize the country’s service sectors. The ongoing social conflicts, corruption allegations and slowdown in economic growth that have battered current President Ollanta Humala’s approval rating will likely continue in the short-run as a deeply divided Congress will force the new president to form alliances in order to push through legislation, slowing down any regulatory change.
In the Nicaraguan Elections, Ortega will win a third term, entering a second decade in office
Due to significant changes in electoral law since the last presidential election in 2011, the upcoming Nicaraguan presidential election in November 2016 will likely result in incumbent president Daniel Ortega’s re-election for the third time. Ortega has been in office since 2007, re-elected for a second term in 2011. In January 2014, the Nicaraguan Congress removed the limit of two five-year presidential terms, with the intention of keeping President Ortega in office indefinitely. His 75% approval rating, the lack of the transparency in Nicaraguan elections, and the removal of a term limit more or less ensures Ortega’s continued presidency.Before the end of Fall 2016, U.S. and Cuba will conclude bilateral agreements on increased air routes
With American travel to Cuba up 50% since the beginning of the year, and new negotiations underway to restore regularly scheduled commercial flights between the two countries, we can expect to see a boom in air travel between the US and Cuba in 2016. Both governments recently announced that the US and Cuba are currently re-negotiating commercial air routes, and hope to reach an agreement before the year’s end. Should commercial air routes be successfully negotiated, the influx of tourists could significantly strain Cuba’s tourism infrastructure, where hotels and hostels are already booked months in advance.
Brazil’s great rivals win their third Olympic title in Rio
Whilst not considered a true Olympic sport by many, in South America, the Olympic football tournament is taken very seriously and holds historical importance. With our prediction of Brazil’s demise at the 2014 World Cup coming true, we have put ourselves out on a limb again and predicted similar heartbreak for the seleção at the 2016 Olympics. Led by the talented Ángel Correa, Argentina will win their third gold medal and extend Brazil’s wait for their first in what will be a closely watched final at the Maracanã between international footballs fiercest rivals.
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