M&G Investments
Latin American politics – the rise of the outsider
Charles de Quinsonas, Fund Manager at M&G Investments
The past couple of years has brought further dramatic shifts across the Latin American political landscape. Throughout 2021 and 2022 voters in the region elected a series of leftist candidates, from Gabriel Boric in Chile to Gustavo Petro in Colombia. This was followed by the remarkable political comeback of Luiz Inacio Lula da Silva, who narrowly defeated far-right populist Jair Bolsonaro to reclaim the Brazilian presidency in late 2022.
Many political commentators have described these victories as a new ‘pink tide’, mirroring the earlier wave of left-wing political leaders who swept to power in the late 1990s and early 2000s, such as Venezuela’s Hugo Chavez and Bolivia’s Evo Morales. This may be premature and there are signs that this second pink tide could already be past its peak. The popularity of Gustavo Petro in particular has started to wane amid rampant inflation in Colombia, while harsh economic realities have seen other Latin American leaders shift back towards the political centre ground.
What cannot be disputed, however, is the region’s capacity to deliver ongoing electoral surprises. The trend is clear - outsiders continue to outperform, fuelled by a range of underlying and deep-seated grievances, including economic inequality, corruption and high levels of violence.
In August of this year, anti-corruption candidate Bernardo Arevalo delivered a shock victory in Guatemala's presidential election, dealing a blow to the country’s conservative political establishment. In a country mired in corruption, poverty and gang violence, Arevalo’s anti-corruption message clearly struck a chord with disillusioned voters.
Meanwhile, in Ecuador bonds staged a strong rally as market-friendly candidate Daniel Noboa became the surprise frontrunner. A 35-year-old heir to a banana empire, Noboa was a political unknown until a few weeks ago, garnering a mere few percent of votes. However, by presenting himself as an outsider he was able to capture a significant share of the crucial youth vote, allowing him to advance to the run-off election that are set to take place in October.
With the trend for political upsets set to continue, commentators are now fixing their attention on Argentina where general elections are scheduled for 22 October 2023. In August, far-right outsider Javier Milei delivered a shock victory in the country’s primary elections. A severe economic crisis has left many Argentines disillusioned with the political establishment, creating fertile territory for populist candidates to exploit. The outlook for the first round in October is very open and is likely to be determined by the three key factors:
The level of voter participation in the election. The primary had only 66% and the first round tend attract higher participation.
The distribution of the votes of the candidates that will not make it to the election (Larreta, Grabois, along with several other smaller candidates and blank votes, together totalling 31%)
Any alliances between the candidates to increase their own chances (e.g. would a right-wing Milei and Bullrich alliance be feasible?)
As things stand, it appears unlikely that Massa will have sufficient support to win the October election outright in the first round. Election rules state that a candidate can win in the first round with 40% of the vote if that exceeds the second place candidate by more than 10%.
In theory Milei could win in the first round if he captures a third of the spare votes highlighted above. If there is a second round, a Milei vs Massa scenario is likely to be the most bearish for the markets, while a Bullrich vs Massa more bullish as that increases the chances of a Bullrich victory.
In terms of economic policy, the 20% devaluation of the official exchange rate and interest rate hike helped facilitate the disbursement of $7.5 billion by the International Monetary Fund (IMF), improving the USD supply until the elections.
Having said that, the cash flow situation remains very tight and whoever takes office will need to further address the foreign exchange issue, as well as tighten both monetary and fiscal policy, and to re-tune the parameters of the IMF agreement.
Of course, this pattern of instability is not unique to Latin America, with political disruption being a growing trend across many emerging market countries. The recent coup d’état in Gabon was just the latest in a series of military takeovers that have occurred across Africa and came just after a month from the coup in Niger. Indeed since 2017, several African countries have faced coups or military interventions, including in Guinea, Mali, Chad, Sudan, and Zimbabwe. This in turn has raised the potential for political upheaval spreading to other African nations, given the success of military intervention in neighbouring countries. We have already seen Burkina Faso and Mali join military forces with Niger to protect against potential action taking against the coup leaders.
There is a sense that anti-French sentiment has contributed to some of the recent instability, given that many of these countries used to be French colonies with France generally being supportive of the political regimes that the coups sought to overthrow. Another factor behind the recent coups is that the ruling political parties had generally been in power for a long time. For instance, in Gabon, Ali Bongo had been president since 2009, having succeeded his father who had been in power since 1967. A lack of transparency in voting, leading to questions over the democratic process, has also been an underlying theme.
The continued strength of political outsiders across emerging markets shows no sign of abating and reflects a deep disillusionment with the established political order. The past couple of years has brought an acceleration of political upheavals as the main political parties struggle to deal with a range of underlying problems, including poverty, economic inequality, crime, and corruption. Against this volatile backdrop, political disruption is likely to remain a key trend across emerging markets.
