|Latin America Q3 Forecast
Regional trend: Brazil is rising as the continental hegemon of South America.
Independent of the fact that Brazil discovered yet more oil fields in the second quarter, the country certainly surged ahead of the rest of the continent by any chosen measure. Politically, financially and militarily, Brazil is truly prospering by Latin American standards.
But economics is where Brazil is shining brightest. It is a massive exporter of (or mostly self-sufficient in) many of the commodities whose prices are causing the rest of the world no end of problems, but its governance is professional and competent enough that it is -- so far -- managing the stress of high prices at home.
In the meantime, its primary regional competitors -- Argentina and Venezuela -- are struggling, falling backwards in relative power as Brazil strides forward. Brazil is leveraging this growing space competently. In the second quarter Brazil became the largest single investor in Argentina. And in the third it will take its first shipments of LNG, setting the stage for it declaring full energy dependence from its unreliable neighbors. Add in energy investment into those same neighbors and Brazil is laying the groundwork for controlling their energy options, not the other way around.
New Regional Trend: Crises are brewing in Latin America’s leftist block.
In the annual and second quarter forecast, we dealt with Argentina, Bolivia and Venezuela separately. We now weave those separate trends together: the populist policies that all have adopted are coming home to roost. Argentina faces a mounting economic crisis of its own making, Bolivia a political crisis, and Venezuela a breech of confidence between the people and the government.
Argentina: The financial, political and economic stability of Argentina is taking a sharp turn for the worse. Argentine President Cristina Fernandez de Kirchner's populist efforts to placate one group have consistently laid the foundations for future, greater problems. The juggling has already radically increased Argentina’s debt and reduced the country’s trade surplus by a quarter -- despite soaring international prices for all of Argentina’s exports. This shortsightedness is triggering unrest on a national level, sparking runaway inflation of the type that has made previous Argentine governments fall, is gutting the country’s productive capacity in industries in which it was until recently a global leader, and is raising the specter of food shortages in the not-so-distant future.
Bolivia: Bolivia is slowly sinking as the division between the poorer, populous and indigenous highlands led by President Evo Morales and the more European and richer lowlands deepens. Morale’s third-quarter referendum on centralizing power -- in essence forcing the lowlands into economic and political submission -- still relies on nothing but rhetoric, and so long as that is the case the country will slide towards a split de facto if not de jure.
In time indigenous President Evo Morales will be forced to accept that the so long as the lowlands physically control the economy on which his government depends, they cannot be talked or voted or threatened into submission. When that realization hits -- and we do not expect it to occur in the third quarter -- Bolivia will have its defining crisis. Until then, the imbalance of political and economic forces in the country will only become more skewed, making the resulting conflict that much worse.
Venezuela: At New Years it appeared that the Venezuelan- opposition was beginning to coalesce into a meaningful political force. That trend has since aborted itself as a challenge to President Hugo Chavez, but his own economic and political mismanagement has more than compensated for the lack of threats to the regime. Chavez has in many ways become his own worst enemy.
Rising food and commodity prices -- combined with self-destructive means of dealing with them -- have soured the Venezuelan population on Chavez’s leadership and fractured the ruling party. Many of Chavez attempts to rally nationalist sentiment, for example making war threats against Colombia, have instead backfired -- badly.
The core of the country’s stability has been reduced to Chavez’s lavish social programs. But their cost is rising faster than the country’s oil income, making Venezuela unique among oil exporters as the only one getting poorer. Against this backdrop it would be logical for foreign states hostile to Chavez to take a swipe at him, or an impetus for domestic opposition to rally against him, but no one has a deep enough interest to take any dramatic steps (the same, incidentally, goes for the Argentine and Bolivian governments as well). In the third quarter we expect Chavez’s credibility to take hits -- abroad, but even more so at home -- as the system’s coherence begins to crumble.
The problems of all three states feed upon each other. Bolivia’s secession crisis and poor economic management is reducing natural gas flows to Argentina, complicating Argentina’s existing power crisis. Venezuela’s political -- and by some reports, military -- support for Bolivia’s Morales only outrages and emboldens the lowlanders. Venezuela’s financial support for Argentina not only reduces the cash Caracas has to stabilize its own system, but their several billion dollars of debt linkages now links the economic problems of one to the other. These links and problems -- mostly rooted in the three’s populist economics -- have been building for years, but in the third quarter they will come to the forefront. We do not expect any catastrophic failures in the third quarter, but it is time to start thinking of just that. And the country that stands the most to gain from the problems or failures of all three? Brazil.
New Regional Trend: Mexico faces its moment of truth.
The government’s decision to carry the country’s drug wars to the cartels has generated a monstrous amount of instability – particularly on the Mexican-U.S. border. But in carrying out high profile assassinations of top law enforcement personnel in Mexico City itself, the cartels have forced the country to a decision point that will evolve the war into something new. Sustained attacks on key personnel in the halls of power are something that no state can tolerate. If they continue, it will mean that one (or a combination) of three things must happen.
First, Mexico City could strike a truce with the cartels to save the central region. Second, Mexico could hurl every asset they have into the war in an effort to at least secure the country’s core. A third possibility is that the cartels could strike a truce with each other and force the government away from the border and onto the defensive, which would in essence turn Mexico into a failed state.
None of the options is easy or pretty, but this much is clear: the current situation is absolutely intolerable and cannot be sustained.