Latin Finance - March/April 2010 - 21

political risk strong personalities involved at a time when confronting issues has became too personal,” he adds. Elsewhere, Peru is a market favorite that some analysts say is in jeopardy of slipping into the leftist camp. It consistently has higher growth than Brazil, but the president su ers perennial low approval ratings, as voters feel they are not beneﬁtting from the broader rally. “That is a big risk in an investment environment,” says Garman. “The risk of an outside candidate emerging in the 2011 presidential elections is large,” he adds, pointing to Ollanta Humala’s near win in the last election. But there seems little danger of a more generalized shift away from market friendly policy. “Some of the more heterodox populist administrations are running out of steam because their policies are not sustainable,” says Garman. “The fears of a wave of nationalist, populist economic policies were vastly overblown,” he adds. Chávismos and Lulismos: Heterodox policy makers are running out of steam lending, this will knock the US economy and commodities, he adds. “Brazil is very dependent on commodity prices remaining high and if there is any downward shock, the Brazil growth rate will feel the e ects and ﬁscal and debt policies will have to be adjusted. Venezuela, Ecuador, Mexico and Argentina will be similarly a ected,” says Schubert. “If the commodity bubble breaks, capital controls will follow,” he adds. towards reduction in political risk, not an elimination,” says Villar. Portfolio investors have an array of hedging mechanisms at their disposal. Direct investors need to pay attention to dispute resolution mechanisms in contracts. In particular, investors should insist on international rather than local law. This is getting pushback in Brazil, notes Cardona, as authorities try to maintain domestic control. “A properly drafted and thought through international arbitration provision at the outset will save millions, and years of sweat,” adds the lawyer. Investors can rest assured that there is a more robust political framework in the larger Latin economies, and a track record of smooth transition between presidents in the main markets. However, when such a large majority of market participants assumes that an event as signiﬁcant as the Brazil election is a non-issue, there is inevitably trouble. “You’ve got to pick your investment spots and know something about the country,” says Rhodes. “Those countries that have strong institutions will best be able to take advantage of the present economic situation. But you can never be complacent,” concludes the veteran banker. LF Doomsday Scenario A slim minority of market participants believes that an economic slump will be the catalyst for political crisis. Those who believe the US is destined for another downturn say dollar volatility and commodity weakness will sow the seeds of LatAm turmoil. “As an investor, 2010 will be a market that requires one to be much more cautious and creative,” says Martin Schubert, chairman of EM trader Eurinam. “We are on the cusp of a serious economic crisis in emerging markets, which ultimately will translate into a political crisis in those countries with excessive ﬁscal deﬁcits and weak currencies,” adds Schubert. “The world has gotten much smaller, and sovereign debt is susceptible to vulture investor tactics, especially use of credit default swaps,” says Schubert. “[Latin American countries have] got to keep their ﬁscal houses in order, or else,” he adds. Latin American history provides ample evidence to support both points. According to Schubert – who is focused on distressed situations – there is too much debt in LatAm, and the ratio to GDP is too high. If China continues to restrict The Complacency Trap Quantum’s Marx notes that LatAm economies are pro-cyclical, boosted by a weak dollar and low US interest rates that inﬂate commodities. But he says the region is much more resilient than in the past, and less susceptible to the vicious cycle that has precipitated prior political crisis, including capital outﬂows. “Yes, you have some increased risk, but you have much more of a stronger basis,” says Marx. “There will be some tests, but most countries are better prepared than in the past,” he adds. Strong institutions should help weatherproof economies for the impact of a downturn in the commodity cycle. They should also aid implementation of counter-cyclical policy. “In general, the surprise has been on the positive side, and therefore a trend March/April 2010 LATINFINANCE 21

Latin Finance - March/April 2010

Table of Contents for the Digital Edition of Latin Finance - March/April 2010