Covid-19 has brought a role reversal for Latin America’s populists
Latin America’s leftwing populists have a fearsome reputation for spending money. From Juan Perón to Hugo Chávez, a succession of larger-than-life leaders have drained the public coffers in the name of progress. But things are changing. Leftwing leaders are preaching austerity and rightwing governments are running up big deficits. Investors should take note.
Consider Mexico’s president. Andrés Manuel López Obrador displays many of the traits of traditional Latin American leftists. He is fond of long speeches about “neoliberals” and how bad they are for the economy. He regularly denounces the international media, saying he prefers his own “alternative facts”. He wants the state to take a much bigger role in Mexico’s development. He has ordered construction to start on three big infrastructure projects of dubious economic value. But at the same time, he is determined to run a near-balanced budget.
Defying the advice of economists and Wall Street analysts to spend freely to fight the pandemic’s effects, Mr López Obrador has been doubling down on austerity — part of the platform he was elected on in 2018. He has imposed a public sector hiring freeze, eliminated 10 deputy ministries, cut officials’ Christmas bonuses and requested 25 per cent voluntary salary cuts. Further belt-tightening, he thinks, is the way to limit the economic pain of Covid-19.
The stakes are high. Mexico is forecast to be Latin America’s worst-affected major market this year, with the economy shrinking around 8 per cent, according to analyst estimates. But the president’s fiscal stimulus so far amounts to a puny 0.6 per cent of gross domestic product, reckons Bank of America.
Mexico’s is not the only role reversal in Latin America. The coronavirus crisis, and the wave of popular unrest that preceded it, have forced several of the region’s governments into uncharacteristic behaviour.
Ecuador, which vies with Argentina for the unenviable title of the region’s worst serial defaulter, is going out of its way to try to reschedule its foreign debt through careful negotiations with bondholders. Despite high coronavirus infection rates, a collapse in oil revenues and a dollarised economy with virtually no room for manoeuvre, the government seems determined to avoid a default. Bondholders have agreed to four months of breathing space while a restructuring is worked out.
Over in Venezuela, meanwhile, revolutionary socialist leader Nicolás Maduro last year railed against the IMF’s “model of exclusion, privatisation, impoverishment, individualism and savage and neoliberal capitalism”. But in mid-March he wrote to its managing director, Kristalina Georgieva, requesting a $5bn loan in a letter referring to the fund as an “honourable organisation”. The request was swiftly rebuffed, as the IMF said it was unclear who was running the country — Mr Maduro, who claimed victory in a disputed 2018 election, or opposition leader Juan Guaidó.
Chile’s conservative billionaire leader Sebastián Piñera is sponsoring one of the region’s largest spending packages, equal to almost 7 per cent of GDP. His previous agenda of tax cuts to attract foreign investment, and the promotion of Chile as a business success story, has given way to a new discourse emphasising higher health spending, more generous pensions and increased social security. A wave of riots late last year which threatened Mr Piñera’s survival began the change, but the Covid-19 crisis has cemented it. Taxes are headed up.
Perhaps the biggest about-turn of all has come in Brazil. Finance minister Paolo Guedes, a devoted former student of Milton Friedman, has moved from shrinking the state to expanding it.
In the face of soaring inflation, Argentina is busy printing pesos to cover a gaping government deficit and is veering towards a default on $65bn of foreign debt. Bondholders are angrily complaining at bad faith on the government’s part. Investors who bought into the previous president’s promises that this time would be different have been burnt.
“Argentina’s postwar economic history goes like this,” said Mr Ramos of Goldman. “You spend a decade printing money to finance large fiscal deficits, which ends in a hyperinflation crisis. Then they stop printing money and start printing bonds instead. That lasts a few years and then you have a debt crisis and a default. Then they start printing money again.”
The writer is the FT’s Latin America editor