Via Nathaniel Parish Flannery, of Forbes with permission
Parish Flannery: Let’s take it to the regional level. Within Latin America how has the dynamic changed? What countries are currently attracting the most attention from foreign investors?
Abad: With the Middle East and Asia currently representing geopolitical flashpoints for the Trump administration, US foreign policy toward Latin America will likely be non-existent. This has potentially negative implications for the region. For instance, should Venezuela default on its debt obligations this year followed by failed attempts at regime change, the humanitarian crisis in that country could spill over into neighboring countries and further aggravate the refugee crisis in Central America. US indifference or a perceived lack of urgency in the face of such problems will only serve to further galvanize anti-US sentiment and cause US-Latin America relations to deteriorate from an already low base.
From an economic and market perspective, Latin America finally appears to be coming out of recession after weathering a commodity price shock, the fear of aggressive US rate hikes, and a series of self-inflicted wounds. Capital flows to the region remain buoyant and borrowing costs supportive for issuers, which bodes well for investment and external financing needs. In a yield-starved world, these factors make Latin America an attractive investment destination relative to other global markets.
However, the risks for the region remain two-fold: first, fiscal deficits and corporate debt burdens across the region are stubbornly high. These factors act as a drag on growth and cash flow, with US-dollar denominated corporate debt representing a key source of vulnerability for most countries during episodes of dollar strength and commodity price weakness.
Second, growth prospects in Latin America have becoming increasingly hostage to political considerations similar to what we’re observing in the US and select European countries. For instance, Brazil has made great strides in overcoming several years of “Car Wash”-related headlines and a recent presidential impeachment. However, the tentacles of this anti-corruption investigation, which have now extended to other countries in the region, have engulfed Brazil’s entire political spectrum threatening to derail the country’s much needed pension reform which is critical in tackling its massive fiscal deficit.
In the case of Mexico, the recent calm that has settled over US-Mexico relations may prove to be fleeting. Trump’s offensive characterizations about Mexicans and follow-through on deportations sowed the seeds for a more contentious relationship going forward. As we move closer to the 2018 presidential elections in Mexico, noise around NAFTA and any ensuing retaliation could once again depress local financial market sentiment, the peso and the economy.
In surveying the rest of Latin America, only Colombia appears to be on more stable footing. 2016 was a challenging year for the country with government officials battling declining oil prices, exchange rate volatility, and an unraveling of the peace agreement with the FARC.