We invited Carlos Caicedo, Head of the Latin America Division at Exclusive Analysis Ltd, to discuss the current political risk environment in Latin America. Exclusive Analysis is a strategic intelligence company based in London with a worldwide network of expert analysts and human sources. Exclusive Analysis provides decision-ready, evidence-based forecasts for violent and political risk worldwide.

Within the past five years, underwriters have witnessed a significant increase in the political risk associated with several Latin American countries. Specifically, there is tremendous concern regarding the new left-leaning governments of Venezuela, Bolivia and Ecuador, which have moved away from their market-friendly policies in the 1990s to ones that greatly enhance the role of the state within the economy. This transformation is parallel with growing anti-US sentiment in the region, along with mounting disenchantment among impoverished millions who have seen few of the economic and social benefits promised to them by democratic governments. However, this leftward shift is by no means as widespread, or as pronounced, as is often proclaimed. Indeed, many countries have implemented sound macroeconomic policies that have brought stability and increased economic growth to their populations.

By way of simplification, it is possible to outline three different political risk profiles in South America: the populist left comprised of Venezuela, Bolivia and Ecuador; the pragmatic nationalist—Argentina; and the rest. This last category contains center left governments such as Brazil and Chile and pro-business governments such as Colombia. Most of Central America, with the notable exception of Nicaragua, also falls into the last group. As does Mexico, where the Calderon government has been pursuing market friendly policies since it came to power.

Indeed, the majority of Latin American countries continue to welcome foreign investment and there are few signs of an impending backlash. Accordingly, this article departs from the sensationalist headlines dominating coverage of Latin America to provide the reader objective regional political risk analysis.


Leading the populist bunch is Venezuela, where election victories have left President Hugo Chavez in virtually total control of Venezuela’s main institutions, including Congress, the Supreme Court, the Army and crucially, PDVSA, the state-run oil company.

Chavez is openly anti-US and aspires to assemble a coalition of likeminded governments in the region. In concrete terms, he has sought to gain more state control over the oil industry by means that include unilateral changes in contractual terms, with threats of expropriation against companies refusing to go along. Chavez is also moving to increase state control in other economic sectors, including media and telecommunications, heavy industry and food processing. This does not mean the end of private enterprise in Venezuela, but uncertainty about what sector will be next is causing private investors to either leave or delay expansion. Large property owners are at particular risk, as land reform is one of Chavez’s flagship programs. Media outlets and US companies, if perceived as anti-government, are also at risk. Also, labor unrest in large companies may quickly escalate into government intervention, as seen with Coca Cola in late 2006. There is no prospect of a major change in Venezuela’s political landscape in the three-to-five year outlook, with Chavez’ grip on power becoming, if anything, more solid.


Since coming to power in January 2006, Evo Morales has adopted a policy of nationalizing private industry. In May 2006 the military took control of natural gas installations as part of Bolivia’s hydrocarbons “nationalization.” Mandatory new contracts, including an increase in government take from 18% up to an 82% ceiling and controlling stakes for state hydrocarbons firm YPFB, were later signed with 12 multinationals, including Brazilian state firm Petrobras, Spain’s Repsol and France’s Total.

Other industries affected by the new policies include mining and telecommunications. In May 2007 the government announced that all mining activity in Bolivia will now be centrally controlled by the recently-revived state mining company, Comibol, and taxes for companies would be hiked. A five-year survey will be conducted to determine which concessions are considered “idle” to then return these to state control. In April 2007, the government said it would re-nationalize the country’s main telecoms company, Entel, run by Italian firm Telecom Italia, which has threatened arbitration.

Looking ahead, the government has said it will scrutinize any projects deemed not to be continually investing and creating local wealth and jobs. Furthermore, Morales wants the new Bolivian constitution, due late 2007, to include quotas to ensure indigenous participation in the economy and taxes or caps on extraordinary profits.

Still, his capacity to implement structural changes is smaller than that enjoyed by Chavez and Bolivia badly needs foreign capital to develop its gas industry. He faces strong political opposition from traditional political parties, which enjoy substantial parliamentary representation, including a contingent in the Constitutional Assembly.


President Rafael Correa faces a similar situation in that he has limited capacity to implement his left-leaning agenda. He reached power as an outsider, blaming Ecuador’s traditional political parties for the corruption and poverty affecting the country, while claiming that multinationals should also renegotiate the terms under which they exploit the country’s oil riches. He suggested the country reduce payments on foreign debt and was quick to align himself politically with Hugo Chavez.

Yet, with no formal representation in the country’s legislature his impact has been limited. He hopes eventually to coalesce his power through reforming the constitution. However, his efforts have led to serious institutional clashes with congress and the courts.

Correa has shied away from total confrontation with foreign investors. The government has not yet defaulted on debt as some worried. And, wary of expensive litigation, it has grudgingly accepted international arbitration with US oil firm Occidental Petroleum.

For the three year outlook, the threat of political risk resulting from nationalization is tempered by the realty of limits on state capacity. Correa is likely to focus on a few high profile confrontations with energy multinationals, rather than attempting an all-out assault against private enterprise.


Not all countries in the region share this shift to the left. The most obvious example is Colombia. President Alvaro Uribe was re-elected in 2006 for another four-year term on an orthodox platform that includes market friendly economic policies, close alignment with the US and a strong mandate to fight communist FARC guerrillas. Colombia is enjoying renewed growth and Uribe still enjoys 60% plus popularity, despite recent scandals linking the government to right wing paramilitary groups. Accordingly, Colombia should enjoy relatively low political risk in the next three years. Colombia is institutionally strong, the economy is well run and its record of always meeting its credit obligations is unmatched by any other country in Latin America. The main issue for investors and underwriters in Colombia is security and the threat of terrorism. It appears that foreign investors are mindful that violent threats in Colombia are manageable as long as they implement contingency plans. This perception has been strengthened by the major inroads made by President Uribe’s security policy. As a reflection, foreign investment in Colombia has tripled over the last two years.


As could be expected, Mexico has a very close economic association with the US by virtue of its proximity and free trade agreement. The election of Felipe Calderon, a pro-business conservative, will likely keep political risk low in the three year outlook. Mexico experienced significant political volatility around the 2006 elections on account of the extremely close results, which were not recognized by the PRD candidate Lopez Obrador. Since Calderon’s election, there has been a gradual improvement in the country’s governability. Aware that nearly 50% of the electorate did not endorse him, he has chosen pragmatism over ideology and has sought to bring on board the opposition, particularly the PRI, the largest opposition party in Congress. This is paying off in terms of a cooperative Congress that has so far backed Calderon’s important policies such as the pension reform. This support has proven lasting, as the PRI has announced it will vote with the government on a crucial tax reform that will see state revenue increasing by 3% of GDP. Also, Calderon appears committed to introduce policies that will open the door of Pemex, the state-run oil company, to foreign investors. Calderon is also tackling corruption in the police force and drug trafficking head on. Calderon’s drive to increase security, if achieved, will result in a significant improvement in the country’s business environment. On the macro-economic front, Mexico appears solid both on fiscal and monetary policy, in addition to having a sound debt outlook.

Brazil and Chile

Brazil and Chile occupy what could be described as the moderate center in this debate. Presidents Lula and Bachelet remain committed to moderate economic policies which combine increased levels of social spending with respect for foreign investment. This is significant given Brazil’s position as the largest country, and Chile’s status as the widely-recognized best economic performer in the region. Chile, given its political stability and proved sound macroeconomic record, faces limited political risk, with very few signs that its liberal economic policies and legal stability may be at risk. Brazil has made major strides in gaining the confidence of the markets for its macroeconomic policies. President Lula, despite his left-wing leanings, has maintained the sound macroeconomic policies he inherited from the Cardoso administration. As a result, the Central Bank has been allowed to set monetary policy without central government interference, the Lula administration has kept a primary fiscal surplus since 2003 and the country has greatly reduced its foreign debt burden. This, together with a commodity boom and a resilient world economy has helped Brazil to register a large trade surplus and accumulate record foreign reserves. Even so, the country has lagged behind on institutional reforms. For example, corruption, particularly political bribery is rife, the judiciary is inefficient, and sub-sovereign risk is a concern, as provinces have autonomy to contract debt. Also, investors are often put off by an excessive tax burden and an inflexible labor market, not to mention that real interest rates continue to be among the highest in the developing world. Even so, changes in Brazil tend to be gradual rather than revolutionary and most indicators suggest the political and business environment will gradually improve in the next few years.


President Kirchner is a pragmatic politician with nationalist leanings, but less brazen than Chavez and Morales. He has faced the same dilemma of keeping business confidence while appeasing the radical sectors both within his party, the Peronists, and a large base of social and labor groups who have applauded his uncompromising stance against foreign creditors and the IMF. Kirchner has reacted with populist measures including price controls on utilities, which have led to litigation with foreign multinationals. The main threat to Kirchner is soaring inflation, a result of his populist economic policies, and an impending energy crisis. Both threaten Argentina’s stellar economic performance of more than 8% growth over the last four years. His wife, Cristina Fernandez, current frontrunner in opinion polls, is likely to follow a similar route if elected, combining populist displays with pragmatism towards business. However, Cristina appears aware of the threat posed by inflation and the energy crisis and it is expected that she will be more willing to consider unpopular measures such as gradual liberalization of utility rates. Similarly, the phasing out of price controls, will be a gradual process.

The prospects

Latin America’s “pink tide” is not a hegemonic force. Some countries have moved from market oriented policies towards heterodox positions but many others have stuck with moderate policies. Latin America has been experiencing a so-called shift to the left over the last five years and yet countries like Colombia, Peru, Mexico, Brazil and Chile, as well as Uruguay and most of Central America remain open for business, continuing to embrace foreign investment as a necessary contributor to economic development. The countries that have radically shifted to the left, namely Venezuela, Bolivia and Ecuador, have been institutionally weak, which has facilitated the emergence of radical nationalist leaders. In particular, the crisis of the traditional political parties in these three countries has facilitated the rapid rise of ‘caudillos’ (strong men) such as Chavez, Morales and Correa. It appears that the key for investors these days in Latin America is to avoid generalization and look at each country on an individual basis. Overall, the region seems better prepared this time to deal with external shocks, and the appeal of economic nationalism a la Chavez is limited. ■