In 2020, governments in the Americas focused on healthcare responses to the pandemic; 2021 will be about economic response and recovery.
From politicians dining out during lockdowns to substantial differences in mortality rates between racial and ethnic groups in many countries, average citizens are conscious of being asked to make sacrifices that those with wealth and power can avoid. Governments must carefully navigate increases in taxes and cuts in welfare benefits in the next year.
Protests and unrest frequently stem from inequality. In 2019, massive protests in Chile started because of a hike in transportation costs, but what sustained the unrest was the demand to address social inequities.
In Latin America, food security issues are contributing to increased political risk. The issue is not food production but purchasing power, which could be a flashpoint in the future for strikes, riots, and other types of civil disturbances. One consequence of such issues: Sovereign debt is less likely to be repaid, as populist pressures may cause Latin American governments to prioritize economic relief over repayment of foreign debts.
One of the keys to economic recovery in the Americas, and other regions, is the rollout of COVID-19 vaccines. With the United States leading the way in vaccine development — and aggressively distributing doses in 2021 — the phenomenon of “vaccine diplomacy” has emerged. The US, Japan, India, and Australia have ratified an agreement which will supply COVID-19 vaccines across Asia by the close of 2022. This may serve to contain China’s growing influence regionally, as the Biden administration seeks to consolidate on shared democratic values across Asia while maintaining cooperation across security and cyber threats with Asia-Pacific partners. Lessening the reliance on China in Asia-Pacific could see important parts of China’s grand strategy compromised.
A global rebound in commodity prices should give respite to Latin American resource-based economies in 2021, though the main driver of that being growth in China is not expected to reach pre-pandemic levels. Here again, the new US administration will have an opportunity to reassert American foreign and economic policy where the Chinese have displaced the US almost everywhere as Latin America’s predominant trading partner.
In addition to the US, several Latin American nations have transfers of power in 2021. Argentina and Mexico face midterm elections in which political leaders may lean toward domestic spending instead of taking up much-needed fiscal reforms. Historically, politics in Latin America have swung like a pendulum — veering to the far left, then overcorrecting to the far right, and back again. The combination of the pandemic, uncertainty regarding vaccines, the absence of structural reforms, and other factors makes for an unpredictable political environment.
A poorly coordinated response to COVID-19 has left Brazil with the world’s second-highest number of cases and another surge is now underway. Dissatisfaction with the current Brazilian government over its pandemic response and high cost-of-living increases fuel the risk of unrest and supply chain disruptions in multiple industries. It is therefore not surprising that riots, strikes, and civil commotion remain Brazil’s highest risk.
In February 2021, the government replaced the head of the state-owned oil company Petrobras after criticizing the company’s high fuel prices as the government could not afford a paralyzing strike by the nations’ truckers — the main mode of business transport in the country. The government also has tentative plans to intervene in Brazil’s electricity sector, a trend that may continue as the government strives to improve chances of reelection (an eerie echo of developments underway in left-leaning Mexico). The government’s moves are stoking investor fears of a return to government state intervention.
Brazil’s current government is seeking reelection in 2022, but that is far from assured, as party popularity is slumping. To boost its chances, the party is trying to push through another round of cash transfers to the nation’s poorest, threatening to raise sovereign credit risk even higher.
Despite its struggles with the pandemic, Brazil’s economic performance appears to be rebounding. Once the economy stabilizes, the country may attract more foreign investment and open opportunities for further development. Brazil has made reforms to its pension system, which should help make it more sustainable, and has eased regulations on private ownership of key infrastructure, such as airports, highways, and railways. Trade protectionism, however, remains high.
COVID-19 will heavily influence Mexico’s political and economic outlook in 2021. Economic recovery from the pandemic got a late start, with the government providing modest relief to the business sector only in the past few months. Austerity measures, a 15% increase in the minimum wage, and a plan to tax larger corporations are likely to create difficult operating conditions for businesses operating in Mexico.
Polls show approval ratings for the current administration dropping steadily since peaking in the first quarter of 2019 at nearly 80%. As of December 2020, 61% of Mexicans approved of the government’s performance. Midterm elections in 2021 may weaken the control of the majority party, potentially prolonging Mexico’s pandemic recovery and hurting its ability to combat systemic issues such as organized crime and corruption. Competition and conflict among organized crime groups, particularly over drug-trafficking routes, may lead to more extortion, theft, kidnappings, and attacks on businesses.
Mexico’s WRR ratings show a sharp increase in its risk of contract agreement repudiation, to 6.9 from 6.3 in January 2020 as the current administration has expressed a clear preference for state-owned enterprises. This preference was evident between June and September 2020 as the government consistently terminated contracts on renewable projects involving foreign and private investment that drew upon state energy resources.
The possibility of a rollback of Mexico’s energy reforms — which were enacted under previous administrations and enabled significant foreign and private investment in the country’s oil and gas and power generation sectors — remains a threat. With a plethora of regulations for private companies to adhere to, Mexico has one of the highest regulatory burdens in the world.
Another factor in the country’s economic recovery is its reliance on the US, which accounts for 83% of exports. As a result, Mexico’s growth largely mirrors that of its biggest trading partner. Recovery in the US will help boost prospects in Mexico especially as the US-Mexico-Canada agreement, which ensures tariff-free access to the US market, bears fruit.