Making Money! South America – As one Economic Model Sinks Another Emerges

By Tuesday February 19th, 2019 Investment

In collaboration with The Global CIO Office (Bill O’Neill, Gary Dugan)

Singapore, Dubai and London, 15th February 2019

  • South America is in an epicentre of evolving political and economic systems
  • As Venezuela slumps Brazil is re-emerging
  • One can only hope that Venezuela does gravitate to proxy wars between superpowers
  • Political change in Brazil could bring investors hope of a new dawn for the region
  • Brazilian leadership offers hope of real reform and economic progress

 

During a recent trip to South America, I was very struck at how the region is once again abandoning one form of perceived utopia for another. Could there ever be such a contrast seen through the eyes of the citizens of Brazil and Venezuela? The aim as always of any new government or regime is to try to offer security and prosperity to its citizens.

 

South America has been the epicentre of experiments of political and economic systems; from Peronism to military juntas to hard currency boards to socialism, countries rarely adhered to the middle path for any length of time. Chile was maybe one country that attempted to stick to philosophical consistency in recent decades despite a troubled political past. The long-drawn-out collapse of a socialist star in Venezuela has descended into a vicious confrontation between two generations of leaders. Meanwhile, relief at the end of power for the Workers Party in Brazil has highlighted the huge challenge ahead for President Jair Bolsonaro. He will seek to shrink a bloated state and introduce some desperately needed competition in key sectors.

Venezuelan President Nicolás Maduro has dug his heels in and looks unlikely to budge any time soon despite enormous economic pressure. The economy has halved in size since 2014. Juan Guaidó, the new interim leader in the eyes of most of the international community, has united much of the opposition. However, he still does not have his hands on the levers of power. To-date he has failed to receive the explicit backing of the military. Neither the army nor a corrupt governing structure yet sees an incentive to cut its link with Mr Maduro despite the overtures from both the European Union and other South American neighbours. Economic sanctions are seriously hurting the country. Oil revenues are set to tail off even further from April. Complete economic collapse may be just months away. The risk for the financial markets is that Venezuela becomes the site of a possible confrontation between the US and Russia/China. The US is clearly losing patience with a mind to intervene militarily are coming up against Russia-China, backers of the current regime who may look to secure their investment in the country. A US-coordinated military intervention still seems highly unlikely, but the risk is probably higher than some may perceive.

 

Such a move would almost certainly trigger outflows of capital from the region at large potentially leading to some underperformance of broad emerging-market assets.

The Brazilian government is watching events in Venezuela closely. However day-to-day they are very much basking in the glory of a democratic, transition of power. On my visit there, I was very much struck by the sense that, in the recent election, a discredited Workers Party had lost the confidence of the electorate rather than there being a wholesale move by the population to support Bolsonaro’s rather vague mandate. It was time for a change. At least, for now, the electorate wants to give the new President the benefit of the doubt reflected in his approval rating of over 60%.

The big challenge for Brazil is the need for pension reform. Even civil servants recognise that their accrued benefits are way beyond what is justified by the countries recent weak economic fortunes. Early signals from the government of change have met with the stock market’s approval. More state privatisations and possible tariff reform are topics under discussion by the new free-market led government. In the country, there appears little pressure for privatisations despite the Petrobras scandal. However, the opening of markets to foreign completion could yet capture the imagination of a hard-pressed consumer. Brazil has some of the highest import taxes of any developed economy forcing o. It looks as if a lot of the good news on Bolsonaro is in the equity market price at this point, but this is definitely a story to follow regardless of what may befall its oil-rich northern neighbour.

 

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