Latin America in 2011: The (relatively) quiet region

By Eurasia Group’s Latin America practice

Following a solid economic recovery in 2010, most Latin American countries are looking ahead to a favorable 2011. Several elections are approaching, but there are no potential political upheavals or major economic policy shifts on the horizon. In Argentina and Venezuela, incumbents will attempt to muddle through with existing policies. Cuba will try to liberalize its economy, but with little near-term success. The region’s riskiest areas are in Peru, Colombia, and Mexico, while Brazil remains the region’s good news story.

In Argentina, former president Nestor Kirchner’s fatal heart attack in October had a profound impact on the country’s political dynamics. He was Argentina’s most important political figure and its main decision-maker — especially on economic issues — in his wife’s government. But his death is unlikely to change the overall direction of policy next year, given the growing likelihood that President Cristina Fernandez de Kirchner will win reelection in October as a result of her rising popularity and Argentina’s strengthening economy. The president’s advisers may be more willing to consider economic policy changes than when her former husband was alive, but only at the margins.

In Venezuela, deteriorating economic conditions, rising crime, and pervasive shortages of electricity and basic consumer goods have pushed President Hugo Chavez’s popularity numbers lower over the past two years, and political tension and uncertainty is bound to increase in the run up to the crucial 2012 presidential elections. His most recent electoral setback in the November midterm legislative election provides a check on his administration and its policies. But Chavez has not moderated his politics or economic policy in response, and though Venezuela has one of the worst growth outlooks in the region, his administration will likely push forward without major policy changes in 2011. Growth will be slow and inflation will remain high. Authorities will continue to intervene heavily in the economy and could resort to a new round of company takeovers to combat rising inflation and worsening food shortages.

Sluggish economic growth and dwindling state finances will encourage Raul Castro’s government to slowly liberalize elements of the Cuban economy in 2011. The economic reform plans are ambitious, but Cuba is not moving toward political change, and the island’s inability to trade with the United States will continue to hinder its recovery. Any change in U.S. policy toward Cuba is extremely unlikely, especially as Republicans take control of the House of Representatives and a longtime supporter of the embargo, Representative Ileana Ros-Lehtinen (R-FL), assumes the chairmanship of the House Committee on Foreign Affairs.

Brazil will probably surpass expectations. President-elect Dilma Rousseff will assume office on January 1 and may surprise some of her critics with continuation of the sort of economic pragmatism that made her predecessor successful. Her administration will make a genuine effort to control spending in payrolls and pensions, which will be critical to limiting inflation and taking pressure off monetary policy. She is also likely to advance a microeconomic reform agenda designed to deepen capital markets and overcome the hurdles for infrastructure investments and tax reform.

The key political event next year in Peru, one of the region’s fastest-growing countries, will be the April presidential and congressional elections. The result is likely to be policy continuity, but there is a chance that populist candidate Ollanta Humala could become more competitive in coming months. If Humala wins, he is unlikely to shift away completely from the current macroeconomic policy mix, but he would seek to greatly expand social programs and infrastructure investments, and raise taxes to finance spending, particularly on extraction industries.

In Colombia, popular newly elected President Juan Manuel Santos will make progress on reforms that improve the likelihood that rating agencies will upgrade the country’s standing to investment grade status. But approval of the government’s reform agenda will take time.

Mexico will face economic-reform paralysis in 2011 driven by pre-electoral politicking in the run-up to the 2012 elections. The battle against the drug cartels will occupy much of the government’s time and resources. The Felipe Calderon administration is gaining ground in its fight against organized crime, but cartels could engage in higher-profile attacks as they feel more pressure from the government. There will be a rising risk of more high-profile events, including terrorist-like attacks aimed at security forces and public officials. But the violence will likely remain concentrated among drug traffickers themselves and mostly confined to key drug-producing and -trafficking regions along the northern border and west coast.

This post was written by analysts in Eurasia Group’s Latin America practice.