Latin America’s Smaller Election Turf Battles

Election attention this year and next in major regional markets Colombia, Mexico, Brazil and Argentina has also prompted an investor scan of under the radar contests throughout less followed locations from Central America to the Southern Cone. Previously assumed outcomes are often in doubt as voters express desire for serious change against an anemic economic growth backdrop even with partial commodity export rebound. In Bolivia President Morales may run for a fourth term after the constitutional court cleared the way, with the opposition perennially divided. Growth may meet the 4.5% target at the cost of runaway credit expansion and dual fiscal and current account deficits. Loose liquidity has combined with an overvalued currency in the IMF’s view, but the 5%-plus budget and balance of payments gaps respectively eliminated public employee bonuses and international reserves. Government debt is 40% of GDP and the Morales administration continues to siphon state bank deposits for infrastructure and social spending. The Dominican Republic is gearing up for 2020 polls with President Medina in contrast facing legal hurdles to another run. Ratings agencies maintain sovereign “BB” grades with a stable outlook despite lack of fiscal reform momentum, since tourism and remittance-backed growth is in the 5% range. The island was added as a fractional component in JP Morgan’s local bond index and it recently switched Chinese diplomatic ties from Taiwan to the mainland to open a big foreign aid and investment channel. Energy-stoked inflation remains a threat with the central bank policy rate over 5%, and oil imports also contribute to a small 1-2% current account deficit offset by solid remittance flows from the US which should support the peso around 50/dollar.

Uruguay’s presidential election is this year, and second quarter growth was just half a percent on export and tourism fallout from Argentina’s crash, exacerbated by exchange rate overvaluation. Earlier drought hit agricultural output, and a railway connecting Montevideo with other key stops may not be completed as planned. Inflation will stay close to 8% through 2019, and despite a primary surplus the budget shortfall is 3% of GDP. Paraguay in comparison is on track to near 5% consumption and fixed-investment driven growth, at half its neighbor’s inflation rate at 4%. Costa Rica’s fiscal plan to lower the 70% of GDP public debt is under debate after an early year Moody’s downgrade. It would introduce value added and adapt capital gains taxes, and add individual and corporate income levies. Civil service wages may be capped on 3% growth, as the government resorts to stopgap borrowing to address strike grievances. Inflation is also 3% with currency depreciation as the central bank tries to prevent a fall to 600/dollar. Panama uses the greenback, and its MSCI frontier stock market component was down almost 40% through the third quarter. Canal volume was solid despite the global trade standoff, and the budget is relatively balanced as opposed to sizable deficits in previous years. Growth should come in at 4% with slowing construction, but the Cobre Panama project should go ahead after negative Supreme Court decisions complicating it amid the private banking reputation hangover from the “Papers” revelations which damaged regional political leaders.