Latin America is navigating shifting political winds, as the pandemic has magnified the chronic income inequality gaps in the region.
After a relatively limited election cycle across Latin America (Latam) in 2020, 2021 will surely go down in history as one of the most dramatic years for the region. Shockwaves were created in numerous elections and traditional parties saw their support collapse in favour of parties typically at the extreme, or at least away from the center, of their respective political spectrums. Some observers have explained this year of political upheaval as a one-off, post-COVID-19 protest vote. While the impact of the pandemic is certainly a factor in the demand for change that has been demonstrated so clearly by numerous electorates, this is only part of the answer, in our opinion. Social disturbances had already rocked Chile and Colombia before the pandemic, as populations demonstrated against inherent inequality overseen by center-right political elites, who were out of touch with the reality of life in these countries for ordinary people. The question therefore is how long will this new, or resurgent, face of Latam politics last and what will be the consequences for investors across the region. We fear that the expansive fiscal policies promised by the new leftist governments may put their public finances at risk. Equally, we stress that the region is increasingly dependent on foreign direct investment (FDI) to finance its current account deficits, and a return to protectionism would increase its financing vulnerabilities. All in all, while we still see value in the region, we view the current political situation with concern as it may deepen the economic differences with other emerging markets, unless the new governments embrace realpolitik and lean towards more sensible policy agendas.
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