Mexico's President Andrés Manuel López Obrador, and Brazil's President Jair Bolsonaro. Photos: Shutterstock
Economy

What role will the political factor play in the long-term recovery of the two main Latin American countries

Resuming the economy in Brazil and Mexico will depend on the internal political rebalancing and improvement of the countries' external image, say analysts

Ler em português

Latin America is the current epicenter of the coronavirus pandemic, accounting for half of all COVID-19 deaths worldwide. Contrary to what developed countries have done, some of the main economies in the region are resuming their activities even though experiencing the peak of the epidemic, in hopes of starting the long recovery process as soon as possible, alleviating future fiscal losses.

For experts, however, attracting foreign investors to boost private investment as the main driver of economic resumption in Brazil and Mexico will not be an easy task, as it will depend on the internal political rebalancing and, consequently, on the improvement of these countries’ external images.

Brazil’s President Jair Bolsonaro, and Mexico’s President Andrés Manuel López Obrador. Photos: Shutterstock

READ ALSO: How far will Latin American currencies plummet?

According to the World Bank, emerging and developing economies will shrink for the first time in at least 60 years with a contraction of 2.5% in 2020. Latin American and Caribbean countries will suffer the biggest drop in GDP: 7.2%, due to their dependence on commodities.

Brazil and Mexico have been writing a similar story in the pandemic. At first, both Presidents Jair Bolsonaro and Andrés Manuel López Obrador (AMLO) showed disbelief at the consequences of COVID-19, not recommending isolation measures. Now, these Latin American leaders are betting on the economic reopening even though there are no signs that the pandemic is coming to an end in the region.

As the authorities believe that reopening is the best way to deal with unemployment, activities are returning due to economic pressure and the high political cost of keeping the population out of circulation. In Brazil, the main challenge is the extreme political tension, and in Mexico the fear of unpopularity in this recovery phase.

READ ALSO: Uruguay, Chile, and Brazil are the Latin American countries most likely to expand remote work

AMLO began to gradually reopen the Mexican economy in early June. Of all OECD countries, Mexico is the one that least promoted coronavirus tests, but Brazil is still the country with the most serious situation in the region. Malls and street stores have reopened in the country’s two largest cities on June 10.

The behavior of these two countries in the face of the pandemic does not differ from that of the developed countries for nothing. While developed countries managed to keep their economies closed during the period of confinement, in Latin America, a region that aggregates fragile health and social protection networks, it was not possible to do so.

Luís Felipe López-Calva, regional director of the United Nations Development Program and assistant to the Secretary-General of the United Nations, said, during the Journalism in a Pandemic course at the Knight Center for Journalism in the Americas, that when the economy stopped due to the health emergency, Latin American companies began to experience liquidity problems and were unable to pay wages. Eventually, they had to fire. In economies of record informality in the labor market, such as the Mexican and the Brazilian ones, the effect of this is devastating.

After a period of 15 years of reduction in poverty rates, Calva warns that it is estimated that around 30 million people will return to poverty in Latin America due to the COVID-19 pandemic.

Different economic moments, but both interrupted by COVID-19

Alberto Pfeifer, businessman, consultant, and researcher in Global Strategic Affairs at the University of São Paulo (USP) points out that Brazil and Mexico were at the beginning of the economic recovery process when they were interrupted by the COVID-19 pandemic.

“In previous years, the two countries have gone through different periods, in the case of Brazil in deep crisis, and in the case of Mexico an economy that has not been able to grow consistently with the country’s capabilities,” says Pfeifer.

Two anti-system presidents were elected, two presidents who presented different proposals, one more on the left (AMLO in Mexico), and the other with a more pro-market view, Jair Bolsonaro, in Brazil

Alberto Pfeifer, businessman, consultant, and researcher in Global Strategic Affairs at the University of São Paulo (USP).

According to the analyst, AMLO was never able to convince local and foreign investors about his proposal’s strength, unlike Jair Bolsonaro, who in the first year managed to approve the Pension and Social Security reform and start a process of economic recovery with good prospects for 2020.

With the pandemic, however, the two countries were affected in a way that generated enormous internal instability, increasing the perceived risk to these two countries. He believes that the reduction of this perception of risk and the stabilization of the political factor are essential for the economic recovery of both countries and that this will depend on two main factors mentioned at the beginning of this article: AMLO’s and Bolsonaro’s ability to organize the national political system to support the countries’ central government during this recovery phase, which will require tough measures on the fiscal side, like increasing tax revenues; and how they will manage to improve the countries’ external images, as a way of attracting foreign investors.

Listen what else Pfeifer has to say about the recovery of Mexico and Brazil in our podcast.

What concerns investors about Brazil? Not necessarily the harmful effects of COVID-19

In this respect, Thiago de Aragão, Strategy Director of Arko Advice, believes that political uncertainties, more than the harmful effects of COVID-19 on the economy, are the main source of concern among foreign investors regarding long-term investments in Brazil.

He believes that investors want to have a kind of stability forecast and while it may be possible to calculate the economic impact of the pandemic and the country’s potential recovery, investors cannot do the same in terms of political behavior.

Especially because the source of political instability in the country most often comes from the government. This leads to a feeling of insecurity because they (investors) cannot calculate political risk in a precise way to calculate how stable or unstable the environment will be in a while.

Thiago de Aragão, political scientist and Strategy Director of Arko Advice

For Aragão, in a context of great instability, the resumption of investments in Brazil depends on the analysis of each specific investor. There are important points, though, that encourages these individuals to continue looking for Brazil, according to the expert:

  • In the midst of the economic environment, there is a general understanding that the downturn in the economy in Brazil was led by an external factor. Therefore, it was not based on a fundamental error by the economic team;
  • Brazil became cheap because of the exchange rate;
  • There are several companies in Brazil that are solid, profitable and with a decent cash flow, with room for growth;
  • There are some privatization proposals, such as the sewage system, for example, and later on, the possibility of selling Eletrobras, the largest company in the electric sector in Latin America. In both cases, these are specific services that, invariably, people will consume because they are part of their basic needs;
  • Finally, unlike other Latin American countries, even if Brazil’s economic premises remain on unstable ground, the country’s constitutionality remains solid, this is something important to attract investments.
Listen what else Aragão has to say about the recovery of Mexico and Brazil in our podcast.