Latin Finance - March/April 2010 - 16

political risk It’s the Politics, Stupid by James Crombie s Southern Europe teetered and Obama rattled Wall Street early in 2010, emerging markets experts were uncharacteristically sanguine about Latin America, once the most politically charged region. In many ways, the climate is radically di erent to 2002, when Brazil last appointed a new president and markets collapsed. Erstwhile aid recipient Brasilia now lends to the IMF, which in February appeared close to having to bail out some “developed world” economies. Investors assume 2010 will be a breeze for Latin American markets when it comes to internal politics. Everyone knows the bad countries – Ecuador, Venezuela, Bolivia, Argentina – and steers clear. But the rest seems plain sailing into tranquil waters. However, despite the relative merits of LatAm versus other parts of a troubled world, investors reek of complacency about polls, even in the bigger markets. “Structurally, Brazil is on a good path, but the assumption that not much is at stake in this election is a misplaced one,” says Christopher Garman, Latin America director at political risk consultancy Eurasia Group. “The precise mix of monetary, ﬁscal and exchange rate policy is at play.” Elsewhere, Mexico’s leader is locked in a bloody drug war and troubled by pressing ﬁscal reform. Alan García’s popularity numbers struggle to compete with Peru’s GDP growth rate, which appears to have left much of the population behind. A third Uribe term for Colombia is asking for trouble, and there are even isolated fears of economic downturn igniting a broader political crisis. Investors are troubled much less by the politics of Latin America than they fret over governance in Washington and Europe. However, even Brazil conceals risk that is not priced in. New Lula, hidden danger? Brazil’s Dilma Rousseff could roil Latin markets “The whole region is going to beneﬁt from a higher growth environment and that gives incumbents a little bit more room to maneuver,” says Garman. “This is a mixed blessing. The politicians will try and muddle along, but they have less of an incentive to make adjustments,” he adds. by Itaú Securities shows the majority of clients assuming minimal risk in the October election. Itaú notes surprisingly low volatility implied by options premia. “Non-Brazilians are pretty complacent with regard to Brazil risk,” says Brian O’Neill, vice chairman for LatAm and Canada at Lazard. This could soon change, and there is potential for investors to ﬂip en masse to neutral from outright blindly bullish, say analysts. The two likely candidates, Dilma Rousse and José Serra, are “not great choices,” according to Nick Chamie, Brazilian Flux Beyond niggling doubts about inﬂation, interest rates and crowding out to fund a deﬁcit, investors are overwhelmingly bullish Brazil. A late January survey 16 LATINFINANCE March/April 2010

Latin Finance - March/April 2010

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