Politics, populism and policy risk in Latin America

• Political risk: the risk of social unrest is rising, as is the risk of political upsets at the ballot box that brings in more political outsiders

• Economic risk: managing demands for spending will be a major policy challenge, and risks creating creditworthiness concerns, along with inflation and currency pressure.

• Policy risk: As countries grapple with fiscal gaps and public demands for spending, big changes to tax, labour market, infrastructure, and to the legal and regulatory environment are in the works.

A new report from The Economist Intelligence Unit (The EIU) examines the emerging risk to business operations from post Covid-19 policy shifts. Using the EIU’s Risk Briefing, the report argues that risks are on the rise—and not just to political and macroeconomic stability. Businesses need to be on the lookout for major policy and regulatory shifts.

“A lot of attention is focused on the immediate impacts of the pandemic, but we’re looking ahead to the big shifts in policy that could be coming in the aftermath of Covid-19. In an environment where populist policy proposals to Latin America’s problems are beginning to thrive, we see big risks to the legal and regulatory frameworks, to tax policy and to the labour market.”

FIONA MACKIE, REGIONAL DIRECTOR FOR LATIN AMERICA AND THE CARIBBEAN AT THE ECONOMIST INTELLIGENCE UNIT

In a big election year for Latin America, there has been a clear rise in anti-incumbency sentiment, demands for a greater role for the state in the economy, and an increasing preference for populist policy solutions among a growing proportion of the population. The problem for policymakers is a lack of room for policy manoeuvre to continue to bolster fiscal support measures without creating concerns over creditworthiness that then bubble over into macroeconomic instability.

Growing fiscal pressure, post-pandemic demands for a greater role for the state, and a rise in populist political actors and policy proposals suggest that there are brewing policy risks to business. In four key areas assessed by The EIU’s Risk Briefing, including legal and regulatory risk, tax policy risk, labour market risk and infrastructure risk, it is clear that new risks are on the rise. We believe that in some markets there is a risk of unfair competition policies that favour domestic over foreign businesses, a growing threat to the independence of regulators, and threats to the regulatory framework governing key sectors such as mining, energy and agriculture. 

Meanwhile, tax policy risk will be high. Wealth taxes are on the cards, and new indirect taxes are also likely. But there is in some markets also a significant risk of corporate tax hikes. At the very least tax incentives will come under the microscope. Meanwhile, labour market risk will materialise in the form of more acute skills shortages, growing labour conflict and new regulations that decrease labour market flexibility.

“Our forecasts for Latin America this year and next are cautiously optimistic. But looking beyond the immediate questions of vaccine rollout and fiscal support, we see big risks that business-friendly policies are reversed and that business-friendly reform agendas are derailed.”

FIONA MACKIE

Download the full report “Politics, populism and policy: operational risk in Latin America“