In Mexico, however, the likely outcome of the election is spreading anxiety among investors. That election “will also generate substantial market volatility, particularly because it will be a very tight election similar to what we’ve seen at the gubernatorial level, with margins of less than 2% for some winners,” Leme points out. “That will generate volatility.” As in Brazil in 2002, having as leading candidate a leftist politician—Andrés Manuel López Obrador—is generating some concerns. “He is unproven, untested, [and] we don’t know what policies he will pursue,” says Leme.
Many economists in and outside of Mexico have warned of potential negative fallout from a victory by López Obrador. This might play into his hands, of course, as expectations will be low when he takes office. He also would be stepping into the shoes of Vicente Fox, a president who many criticized for being too weak and failing to push through key economic reforms, Cañonero comments. In fact, many observers believe the opposition PRI party, which ruled Mexico for 71 years until 2000, is capable of pushing through key reforms if their candidate is elected.
While the election is sowing doubt among investors, few expect a repeat of the 1994 “Tequila Crisis,” when the peso plunged. According to Leme, Mexico’s economy is solid enough and its fiscal policies are robust enough to weather the potential pre- and post-election turmoil. Most analysts expect the currency to weaken but for the country’s economic expansion to continue, posting perhaps 3% growth in 2006. “There’s going to be uncertainty [but] overall substantial strength,” Leme says.
Elsewhere in the region, similar uncertainty prevails. Cañonero sees major improvements in Colombia in 2006. The likely re-election of Alvaro Uribe as the country’s president in May 2006 will result in a significant boost to Colombia’s economy, which needs to deal with fiscal imbalances and high external account deficits, he says.
Venezuela, another key economy, is causing mixed feelings among economists, however. On the one hand, the country’s massive oil revenues are seen as a boon. On the other hand, the rapid spending of those revenues is seen as a negative. Political uncertainty as president Hugo Chavez increases his power at the expense of independent institutions, coupled with rising attacks against local and foreign investors, is also raising concern.
“Under Chavez, we expect Venezuela’s credit fundamentals to continue to deteriorate over the long term, owing to intensifying price controls, the public sector’s expansion into numerous non-oil sectors, and the weakening of the investment climate, legal framework and transparency,” CSFB analyst Cem Karacadag wrote in a recent research report.
Overall, Latin America should see good growth this year, helped by the outlook for the global economy and higher commodity prices. “In terms of growth liquidity, in terms of market performance [and] currency debt, it’s going to be hard to replicate the outstanding performance of 2005, [but] overall there will be positive returns,” Leme says. Cañonero believes the first half will see the strongest growth, followed by a weaker second half. “We see a very favorable development,” he concludes.
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