Article / May 6, 2021

The Andean Region: At A Crossroads

One of South America’s most important geographic features is the Andes mountain range, which defines a much of the continent’s weather, agriculture, culture and even politics.

In recent weeks, sociopolitical developments have sent mixed signals to investment markets about the region’s outlook and two elections during the coming months will set the Andean tone for years to come.

While the Andes host regional integration and cooperation institutions such as the Andean Community, an economic and political block bringing together Colombia, Ecuador, Peru and Bolivia, the neighborhood is also home to distinct economic development models and even old rivalries. Let’s take a look at what’s going on in the neighborhood.

Chile: Stable or Wildcard?

 

Chile is the most developed nation along the Andes and a regional economic powerhouse, controlling approximately a third of the world’s copper market. However, like other countries in the hemisphere, Chile has felt the sting of social unrest, which has accentuated itself as a result of the COVID pandemic.

Traditionally considered one of the safest and most stable destinations for investment in Latin America, Chile has experienced a level of social discontent and unrest since 2019 that has led the country down a path to constitutional reform.

Needless to say, in an era of heightened social tensions and populism, the prospect of rewriting the rules of the national political institutions and its economy has resulted in uneasiness surrounding Chile’s macro outlook.

After having been postponed once already, Chileans are set to vote over the weekend of May 15 and 16 to elect the members of a new constitutional convention tasked with redrawing the country’s fundamental legal framework.

Right-wing and conservative parties will secure at least a third of the seats in the constitutional convention in a body that will require a two-thirds majority for all of its substantial decisions, thus ensuring that Chile remains a business-friendly country that is attractive to foreign investors.

However, the uncertainty that surrounds Chile’s rewriting of its Magna Carta over a period that is expected to last several years is enough to make markets uneasy and requires close attention to detail for investors operating in the country. It remains to be seen what direction Chile will take at this major crossroads for the country. 

Peru: Black Swan?

 

Shortly after Chile votes, on June 6, its northern neighbor – Peru – will decide its presidential run-off following April 11’s upset victory during the first electoral round by left-wing populist Pedro Castillo and the controversial daughter of the country’s former strongman, Keiko Fujimori.

The expected ascension of Castillo, a small town schoolteacher who enjoys the backing of Peru’s indigenous, rural and working classes, to the presidency represents a shock to Lima’s economic and social elites that hasn’t yet been fully processed. Meanwhile, international markets and multinational corporations are bracing for a worst-case scenario.

Though Castillo has tempered his rhetoric, the country’s national currency – Peruvian Sol – has lost ground against the US Dollar since April 11. Coupled with a painstakingly slow vaccination campaign, the prospects of a Bolivia or Argentina-style presidency in Peru could translate to a slow recovery for the country.

Whether Fujimori manages to pull ahead during the run-off or the polls are right and Castillo wins, Peru’s next government is likely to have populist tones. Concessions are likely to be made in favor of rural and indigenous communities, which will scare the country’s all-important mining sector. In the best of cases, large agricultural producers will escape unscathed.

On Saturday, May 1, Fujimori and Castillo faced off in a debate organized in the small town of Chato that turned out to be quite a populist performance. For a country that has had four presidents since July 2016, it is highly unlikely that Peru’s next president will finish out her or his five-year term.

Ecuador’s Pro-Business Swing

 

On April 11, just as Pedro Castillo shocked the region by leading Peru’s first-round of voting, Ecuador’s presidential run-off catapulted Guillermo Lasso, a banker and businessman, to the head of the state. Lasso’s victory attests to the significant loss of influence by former president Rafael Correa on the country’s political landscape.

Guillermo Lasso, President-Election of Ecuador

In 2017, after governing Ecuador for ten years, Rafael Correa ushered then-candidate Lenin Moreno to the executive mansion to continue Correa’s leftist agenda. However, as early as 2018, Moreno split with his political mentor and has governed Ecuador as a market-friendly, pro-private business, center-right president.

President Moreno’s political and ideological break with the man under whom he served as vice-president was tumultuous, but it gave Ecuador a different governing model and facilitated the victory of right-wing candidate Guillermo Lasso.

President-elect Lasso’s victory places Ecuador in the camp of investment, business, and market-friendly governments along the Andean region, alongside Colombia. Likewise, the Lasso administration is expected to be a vocal critic of anti-democratic actors in the region, like the current regime in Venezuela. 

On the domestic front, president-elect Lasso does not command a majority within the legislature, which means that continuity can be expected and that any major reform would require compromise.

Ecuador’s GDP Growth Rate (%)

Nevertheless, given that Ecuador’s economy has used the US Dollar as official currency for over two decades, macroeconomic risks such as inflation and deficits are expected to remain well under control.

Simultaneously, continued strengthening in commodity prices and global agricultural demand would greatly benefit Ecuador, whose largest exports are crude petroleum and food products.

On a macro level, in spite of the latest presidential election outcomes in other South American countries such as Argentina and Bolivia, the victory of a foreign-investment and private-enterprise champion in Ecuador dissipates fears of a regional turn left.

The outcome of Ecuador’s presidential election is a welcome sign for regional investors and markets, particularly in light of Lasso’s early lag in the polls and his showing during the first round of voting. Though it remains to be seen how Chile and Peru will vote over the coming weeks, it is certain that Ecuador’s post-COVID economic outlook is one of the most optimistic within the Andean region.