Austerity bears down on Latin America’s social challenges | Analyst Picks| RiskMap 2021
Austerity bears down on Latin America’s social challengesGabriel Brasil | Associate Analyst
In 2021 the COVID-19 pandemic will continue to aggravate Latin America’s existing challenges such as political instability and economic inequality. Most governments – with the notable exception of Mexico - introduced strong relief packages throughout 2020 to curb unemployment and to support companies of all sizes with the uncertain economic environment. While this has helped to mitigate more dramatic social consequences across the region, it also led to significant increases in government spending – and debt levels.
In 2021, the finance bill will arrive, and the region will have a tough balancing act to strike between the need for austerity (to reduce interest rates and mitigate inflation concerns), and the persistent challenge of the social situation in the region. Many countries will struggle to pass reforms due to the lack of clear recovery plans and reduced support in the legislative. For example, Brazil’s President Jair Bolsonaro retains a minority in Congress and is likely to struggle to implement his pro-business agenda. Argentina and Ecuador will have to negotiate its external debt restructuring programmes with the IMF. Domestic challenges will also be an obstacle for fiscal reforms in Chile and Colombia, where Presidents Sebastián Piñera and Iván Duque continue to face governability challenges that preceded the pandemic. The list goes on. The best cases are probably Uruguay and Guatemala, which will likely present more positive outlooks on the back of more resilient economic fundamentals and solid governability conditions.
Amid such complexity and rising social anxiety, the region will be marked by elevated unrest risks in the coming year. These will pose significant operational threats for businesses in countries such as Argentina, where the opposition has become increasingly mobilised, Chile, where the ongoing constitutional process will continue to trigger large-scale demonstrations, and Peru, where instability has been a key feature of the political environment in the past year.
On a positive note, while such a constrained fiscal environment will continue to limit most governments’ scope for public investment, this will present increased opportunities for private investments in sectors such as infrastructure, energy and sanitation. It is likely that administrations across the region – particularly Brazil, Ecuador and Colombia - will continue to rely on concessions to plug the gaps of investment demands and to ultimately foster job generation. The age of austerity begins.