STRATFOR: Latin America – Annual Forecast 2016

latin America

Venezuela’s Decline Continues

The deterioration of the Venezuelan economy and the loss of the National Assembly to the opposition will weaken the ruling United Socialist Party of Venezuela’s (PSUV) and create more room for social unrest, financial default and political conflict among the branches of government. The opposition has won a significant majority in the National Assembly and can leverage it to undertake substantial economic and political reforms. Under pressure from this majority, segments of the ruling party could open negotiations with the opposition with the intent of forming alliances. But the PSUV could also use the court system to keep a hostile legislature in check. Regardless of the government’s strategy, divisions within the ruling party will likely worsen, and the PSUV elite will probably perceive the Dec. 6 electoral loss as a harbinger of another defeat in the 2019 presidential election.

The strain on Venezuela’s public finances will worsen in 2016. During the past year, Venezuela depleted its foreign reserves and funds to maintain imports and government spending. Without that cushion, the government will have to carefully prioritize public spending. Caracas will probably reduce imports further in 2016 to maintain both foreign debt payments and reinvestment into state-owned energy firm Petroleos de Venezuela (PDVSA). This is a risky strategy: While it preserves Venezuela’s limited access to foreign credit for the energy sector, the country’s primary source of dollar revenues, it will fuel inflation and exacerbate food shortages. Even with the government attempting to honor its debt, low revenue from PDVSA and depleted finances make a default a possibility for 2016.

Venezuela’s worsening food shortages and rising food prices will spur further isolated demonstrations, particularly in rural areas and states outside of Caracas. The government can manage such unrest as long as it does not coalesce into larger demonstrations. Given the level of public discontent in Venezuela concerning inflation and shortages, demonstrations could expand into wider unrest capable of worsening the country’s political stability.

Brazil’s Economic and Political Challenges

Brazil’s government will face the difficult tasks of maintaining employment and limiting inflation amid a domestic economic downturn and low global prices for its principal commodity exports. The effects of a 2014 corruption scandal at state-owned energy firm Petroleo Brasileiro (Petrobras) will linger into 2016. The government will take measures to address the negative economic effects of the scandal, such as allowing contracting firms currently banned from doing business with Petrobras to again sign contracts with it. Petrobras will also try to raise additional capital through asset sales and government funding, given its heavy debt obligations and need to fund exploration and production activities.

On the political front, the ruling Workers’ Party will encounter persistent challenges to its authority. Even if Brazilian President Dilma Rousseff survives the threat of impeachment, the Workers’ Party will remain highly dependent on its allies to fend off additional challenges to its power.

Sluggish demand growth for Brazilian export commodities and a slowing domestic market will push Brazil to look for additional foreign markets throughout the year. Despite disagreements with Argentina, Brazil is likely to press ahead with negotiating a free trade agreement between the Common Market of the South (known by its Spanish acronym, Mercosur) and the European Union. The divide between Argentina and Brazil concerning foreign trade strategies will likely deepen in 2016; Argentina will remain reluctant to subscribe to any trade agreements that weaken its already uncompetitive manufacturing base or lead to a significant trade imbalance.

Argentina’s New Government Addresses Debt Problems

With a new president at the helm, the Argentine government will begin taking steps in 2016 to address the legacy of economic problems from the previous administration. The government will likely try to begin negotiations with creditors that are demanding the repayment of debt owed from Argentina’s 2001 default; a successful negotiation would eventually give Argentina renewed access to global capital markets. In the meantime, additional funding from China or other creditors could give Argentine public finances some breathing room, but with the country in an economic decline, Buenos Aires will probably work toward opening talks with holdout creditors. The new government will also begin reducing public spending and devaluing the currency to close the gap between the official and parallel exchange rates. Despite the likelihood of some economic adjustments, structural problems such as high inflation and a persistent shortage of available foreign currency will continue to hurt Argentina. Consequently, it is unlikely that the new government will remove all barriers to foreign trade that would allow more imports and increase capital inflow in 2016.

Colombia Nears a Peace Deal With Rebels

Colombia’s export revenue growth will remain slow because of low oil prices. Because of the state’s reliance on oil for revenue, Bogota will have to make up for the shortfall elsewhere, likely through a tax reform. However, such a reform could be diluted or delayed if it faces resistance from the private sector.

The Colombian government and the Revolutionary Armed Forces of Colombia (FARC) will negotiate the militants’ demobilization. The government intends to sign a peace deal by March 2016, although the deadline for signing will likely be extended if the two sides fail to reach conclusive agreements on the rebels’ participation in Colombian politics, the nature of transitional justice mechanisms and the way in which militants will surrender their weapons. Any peace agreement signed between the FARC and the government will be put to a national vote at a date the central government will determine. Although the Colombian government and the FARC might not stick to the previous timeline and sign a deal by the end of the first quarter, all the pieces are in place for the two sides to continue talks, and an agreement could well be reached in 2016.

If the government seals a peace deal with the FARC, insurgent attacks across Colombia will remain few and largely limited to remote areas of the country in 2016. With the FARC focused on signing an agreement with the state, the National Liberation Army — a much smaller and less capable group that will pursue a separate peace deal with Bogota in 2016 — will be the only force willing and able to conduct militant attacks.

In 2016, the Colombian government will focus its counternarcotics strategy on the eradication of coca crops by individuals on the ground rather than by aerial spraying. This is likely to spur more violence against security forces and is more time-consuming than aerial spraying. Overall, this shift could hamper Bogota’s ability to eradicate coca crops in the country’s rural areas.

Mexico’s Criminal Groups Fragment

During 2016, Mexico’s export-oriented economy will cope with slowing global markets and a rising trade imbalance. Economic growth will be sluggish relative to other years, although the country will remain attractive to foreign investors. On the political front, periodic unrest from anti-government demonstrators and segments of teachers’ unions will continue in Mexico’s southwest, albeit at a much lower level than in 2015.

Mexican criminal organizations will continue fragmenting across the country as individual criminal networks come under government pressure or engage in turf wars against one another. This process will cause some areas of the country — such as the northeastern region, encompassing parts of Tamaulipas, Nuevo Leon and northern Veracruz states, as well as the southwestern states of Michoacan and Guerrero — to experience high levels of violence. Turf wars, such as those between the highly fragmented patchwork of criminal groups operating in Tamaulipas, the ongoing struggle between Tierra Caliente criminal groups in Michoacan and Jalisco, and the fragmentation of Sinaloa Federation affiliates in Baja California Sur and other regions of northwestern Mexico, will continue driving violence. The Mexican government will keep relying on the armed forces and federal police to spearhead its counternarcotics strategy, and the weak rule of law in specific areas will make the use of these forces necessary.

Bolivia’s President Seeks Another Term

Bolivia will hold a national referendum Feb. 21 to grant Bolivian President Evo Morales the ability to run for a third term in 2019. If Morales wins the ability to campaign for the presidency again, some protests from the opposition coalition are likely. Bolivian opposition parties lack the cohesion and public approval to conduct prolonged unrest and secessionist threats, as they did in 2008. However, at least some disruptive protests are likely to follow the vote.

Peru’s Economy Stays Afloat

Because of Peru’s reliance on mineral exports, lower Chinese demand growth for Peruvian copper relative to other years will hamper its economic expansion. However, Peru will use its relatively healthy public finances to avert the more negative effects of a significant economic downturn, like those seen in previous boom-and-bust cycles. Peru will hold a presidential vote April 10, pitting the conservative Keiko Fujimori against several other candidates, including Pedro Pablo Kuczynski, Alan Garcia and Alejandro Toledo. Regardless of the election’s outcome, major or immediate changes in the country’s openness to foreign investment and trade are not expected in Peru as a result of the vote.

Annual Forecast 2016 is republished with permission of Stratfor.

Despre Laurențiu Nedianu 450 Articles
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