Latin America in 2022
Political Change and Capital Flight
2022 is election year for several of Latin America’s major economies. Brazil and Colombia are both holding presidential elections this year. Having elected a new president in December 2021, Chile is scheduled to a hold a referendum on a reformed constitution in the second half of 2022. Polling in all three countries points toward a significant leftward shift, reflecting recent voting trends regionwide. Corresponding campaign pledges across the continent are increasingly dropping pro-business commitments in favour of social reforms backed by higher corporate tax rates and wealth redistribution.
Against this backdrop, investor confidence is dropping and the prospect of capital flight is increasing. Below we provide a lay of the land across the region; its impact on investor confidence and precipitating capital flight; and the consequences for banks, asset managers and other service providers in investment-friendly jurisdictions who will see an influx of assets.
Colombia – a former left-wing guerrilla and legislative hurdles
Legislative elections were held in Colombia in March 2022, with a swing towards the Pacto Histórico, a left-leaning coalition led by senator Gustavo Petro, currently the front runner in the country’s presidential elections having won 40% of the vote in the first round held at the end of May 2022. Petro – who started his career in political activism with a far-left Colombian guerrilla group in the 1970s and 1980s – has campaigned on a reformist agenda focused on higher taxes for the wealthy, changes to healthcare and pensions, and pledges to halt new oil exploration. However, despite gains for Petro’s Pacto Histórico coalition in legislative elections earlier this year, no one grouping won an outright majority. This poses potential roadblocks to Petro’s policy aims should he win the second round run-off of the presidential election in mid-June 2022 against businessman and political outsider Rodolfo Hernández.
Colombia’s Banco de la República, the country’s central bank, reported that it had already seen evidence of capital flight ahead of the first round of presidential elections. Fears over the impacts of Petro’s policies will only intensify following his first round victory, and are expected to cause an increase in the desire among Colombia’s elites to find safe havens for their assets.
Chile – a new government and constitutional change
March 2022 saw the inauguration of leftist president Gabriel Boric, who has challenged Chile’s business friendly reputation by committing to radical reforms to the country’s free market economic model and the implementation of new social-welfare legislation. However, doubts over his ability to enact these changes have arisen in the face of falling approval ratings, a divided legislature and a government widely seen as inexperienced. The country is also currently in the final stages of a constitutional convention launched in July 2021 to reform its Pinochet-era constitution, with a final draft due to be put to a referendum in September 2022. This is expected to focus on social rights, reform of Chile’s Congress and the nationalisation of the country’s privatised water utilities. These proposed changes come in the wake of popular protests in the country in recent years against economic inequality.
Before Boric’s election, Chile had already seen a substantial increase in capital outflows from the country, totalling a reported USD 24.3 billion in the preceding two years, equivalent to more than 9% of annual gross domestic product. Boric’s uneasy first few months in power have not demonstrated the leadership that might reverse this trend. The left-leaning composition and expected outcome of the country’s constitutional convention also potentially pose concerns for those who, until recently, have felt comparatively comfortable by regional standards in Chile, which is known for its ease of doing business and relatively favourable tax regime.
Brazil – the reinvigorated left versus the populist right
Brazil will hold general elections in October 2022, where incumbent right wing populist president Jair Bolsonaro is widely projected to lose to Luiz Inácio Lula da Silva (widely known as Lula) of Brazil’s political left wing. Lula is running for a third presidential term after his convictions on charges of money laundering and corruption were quashed in March 2021. He has revealed little about his policy platform, though has sought to offset his perception as leftist with the appointment of Geraldo Alckmin, a centre-right former governor of São Paulo, as his running mate. For many of Brazil’s businesses and wealthy alike, neither Lula nor Bolsonaro inspire confidence when it comes to the promotion of Brazil as a positive business environment. Under Bolsonaro, Brazil had already seen record capital outflows by mid-2020. The lack of transparency around Lula’s expected policy focus is not a new phenomenon for the former president. However, this uncertainty combined with the few policy suggestions that have made their way into the public realm – such as lifting the cap on public spending and interfering in fuel prices – will likely do little to assuage investors’ concerns.
Broader Leftist Trends and Impacts on Investor Confidence
This apparent leftward political shift forms part of a trend that has also encompassed two of the region’s other leading economies: Mexico and Argentina. Nominally left-wing populist Andrés Manuel López Obrador (commonly known as AMLO) has led Mexico as president since December 2018. In December 2019, centre-left Alberto Fernández assumed the presidency in Argentina, accompanied by controversial former president Cristina Fernández de Kirchner as his vice president.
AMLO has demonstrated a public hostility towards big business. He has made threats to withdraw government contracts issued for the construction and operation of gas pipelines, and allegedly used the Mexican security services to restrict the operations of foreign companies seeking to compete against Mexican state-owned oil company Pemex.
Argentina’s economic problems, and in particular its repeated issues in servicing debts, are well-known. The final months of the term of President Alberto Fernández’s predecessor, Mauricio Macri, saw the reintroduction of currency controls in late 2019 in an attempt to stabilise financial markets, requiring the permission of government to buy foreign currency to transfer overseas. The inauguration of President Fernández in December 2019 was accompanied by suggestions of warmer relations with creditors, and a USD 44.5 billion debt restructuring deal was agreed with the IMF in March 2022. Nonetheless, like many in the region, the country was hit hard by the Covid-19 pandemic and its inflation levels remain high, standing at a reported annual rate at 55.1% as of the end of March 2022.
Capital Flight and Due Diligence
Whether grounded in legitimate concerns over expected policy outcomes or not, recent and predicted changes in Latin America’s political landscape increase the prospect of capital flight from the region. As capital flows out of these Latin American countries, asset managers, private banks and other service providers outside of the region will see an influx of individual and corporate clients seeking more secure and business-friendly domiciles. The US in particular has long served as a base for the financial interests of Latin American business and wealthy individuals, with Miami maintaining its status as a “gateway” to the region. Conducting due diligence on prospective clients’ source of wealth and track record remains vital in this context.
Corruption remains an endemic issue in many Latin American jurisdictions, often compounded by a close proximity between political and wealthy business elites. For example, Cristina Fernández de Kirchner remains subject to several ongoing corruption investigations in Argentina, though retains immunity from prosecution as the country’s vice president. These centre on allegations that she was involved in a criminal network as president which saw multiple businesspeople pay bribes to senior public officials in Argentina. Operation Lava Jato, a wide ranging investigation into bribery and corruption launched by the Brazilian authorities in 2014, has encompassed multiple major Brazilian businesses and political elites, and has spawned various related probes regionwide.
Ensuring that comprehensive due diligence is completed prior to engagement allows investors and asset managers to gain insight into any potential reputational, legal or regulatory risks surrounding a prospective client. In Latin America this relies upon in-depth knowledge of the varied jurisdictions and environments in which prospective clients operate, to develop a nuanced analysis of the risks associated with a given client and any relevant mitigating factors.