By Vincent Lofaso – In South America, the geopolitical prospects differ between countries. Some nations will focus on deterring criminal syndications and settle peace deals with rebel forces while others seek to contain social unrest and hyperinflation. In a turn of events, there are nations that will actually enjoy political stability.
In general, most of the South American economies are export-driven. Therefore, low oil prices in combination with low commodity prices will restrict economic growth in the continent. Another monetary issue that will impede economic growth is the strength of the American dollar relative to the national currencies.
Since many South American nations have dollar driven debts, the fact that the U.S dollar is expected to remain strong in the immediate future, many governments will struggle to pay their debt fees and experience a decline in budget revenues.
One country that is particularly vulnerable to boosting commodity and resource projects is Chile. Nearly half of the nation’s exports are focused on the copper industry. In fact, Santiago is a global leader in the production of copper.
In addition, “49 percent of the country’s exports are related to the copper industry, and mining activities account for about 14 percent of Chile’s gross domestic product.”[i] Even though the copper prices have dropped significantly, Santiago has maintained its stability. This is mostly due to its surplus policy which legally obligates the government to consider long-term stable revenues when setting up the state budget. Also, “the structural budget balance is the surplus or deficit excluding automatic stabilizers, that is, difference between the expenditures that would be made and the revenues that would be collected if the economy were operating at potential GDP.”[ii]
In short, populous spending, which has been rampant throughout the continent, has been absent in Chile. By law, the financial surplus is saved to bolster public finances during tough times and this form of monetary accountability has contributed to Chile’s stability.
Things cannot be more different in Venezuela where the oil dependent economy is collapsing due to low oil prices. Venezuela went from one of the wealthiest nations to one of the poorest in the continent. Currently, President Maduro lacks a feasible policy. Thus far, he has been preoccupied buying time. In addition, the extreme conditions in Caracas will bring bankruptcy and it is still too early to see what actions Venezuela will take in 2017. However, if the Bolivarian country devotes on its debt, then it would set in motion a series of dramatic events.
First, Venezuela would lose its lending capabilities and foreign currency. Moreover, oil production will decline as well as the government’s ability to import commodities. These events would compel capital flight as well as social unrest. Obviously, this is a worst-case scenario. To that end in 2017, President Maduro will do whatever it takes to forestall a devote. This includes reducing imports to save its foreign currency reserves, but an import reduction and the scarce subsidies of goods could further inflate prices. According to Alejandro Warner, the Director of the IMF’s Western Hemisphere department, “Inflation will surge to 720 percent in 2016 from 275 percent last year.”[iii] As of February 2017, inflation in Venezuela stands at a staggering 720 percent and as high as this sounds, it could double in 2017 and reach 1,500 percent. In this regard, Venezuela’s financial conditions remind us of the hyperinflation crisis going on in Zimbabwe and much like the African experience, Caracas has introduced higher denomination bills to deal with the expected inflation. The one hundred Bolivar banknote, once one of the highest bills in production, has been removed from circulation. Instead, a new series of denominations were introduced ranging from a five-hundred Bolivar note to twenty thousand Bolivars.
In 2017, the extreme circumstances in Venezuela will deprive ordinary citizens of their living conditions and inside, there will be more social unrest.
In Colombia, the majority of the nation, through means of a referendum, refused a peace settlement with the Fuerzas Armadas Revolucionarias de Colombia (FARC). The main opposition party, Centro Democrático (Democratic Center), led by former Colombian President Álvaro Uribe Vélez, was behind the failure of the referendum. In many ways, President Juan Manuel Santos is racing against time and his primary objective for 2017 is to reach a new peace deal with the FARC rebels. To accelerate the negotiations, last year, the Colombian Congress ratified fast track legislative authority. This will allow for Santos to swiftly pass bills to demobilize and disarm the rebels.
However, following the referendum, the ruling party and the FARC rebels have included the opposition in the diplomatic negotiations. Evidently, this will complicate matters. For instance, the negotiations could lose momentum and end up in a stalemate. Already, factions within the FARC have been defected. Meanwhile, two constituent parties, within the Partido Social de Unidad Nacional, have planned to run their own candidates in the upcoming 2018 presidential elections.
Internal disagreements are fragmenting the authority of the ruling coalition and the FARC. Furthermore, the longer the peace talks take, the less a settlement can be reached between the two sides which leaves the government coalition more divided than ever ahead of the 2018 presidential elections.
In Peru, the country has enjoyed an economic turnaround. Over the past decade, low inflation, stable currency exchange rates, servant oriented sectors, and even free trade agreements (FTAs), have furnished Lima’s economic objectives.
Nevertheless in 2017, President Pedro Pablo Kuczynski’s immediate objective will be to address the surging organized crime in his country. In the last few years, violent crime such as homicides and abductions have risen substantially especially in the city of Callao. Much of the problem lies with criminal organizations that waged a war against each other on the city’s port. The situation reached its peak in 2015 and 2016 when the government claimed a state of emergency in the city of Callao. However, taking on organized crime in Callao will be no easy task. The city plays a vital role on the narcotics supply route in the Pacific region.
Therefore, Kuczynski’s fight against crime in Callao targets Peruvian, Mexican, Colombian, and Ecuadorian cartels.
Elsewhere in South America, the Petrobras scandal will continue to determine the future of the world’s largest Portuguese speaking country, Brazil. Following the impeachment of former president Dilma Rousseff, the Petrobras construction scandal is dragging most of the government at the forefront of the investigation. “Of the 513 members of the lower house in Congress, 303 face charges or are being investigated of serious crimes. In the Senate, the same goes for 49 of the 81 members.”[iv] Even the current President Michel Temer is also under investigation for illegal donations to his re-election campaign for Vice President in 2014.
It goes without saying that the level of corruption is unprecedented. The sweeping investigations come at quite a delicate time for Brazil. The Temer Administration intended to implement economic reforms which include reducing public spending, reforming the pension system, and labor laws. Plus, the 2018 presidential elections are closing in.
However, given the current circumstances, national reforms will most likely be postponed until after the 2018 presidential elections. Subsequently, this will translate into more social unrest in Brazil.
The economic situation is more fortunate in Brazil’s southwestern neighbor Paraguay. Although economic growth will be limited, the financial environment in the country will continue to attract foreign investors.
“Corporate Tax Rate in Paraguay averaged 18.50 percent from 1997 until 2016, reaching an all-time high of 30.00 percent in 1998 and a record low of 10.00 percent in 2006.”[v] There are several reasons that explain the economic stability in the country. First, citizens only pay a 10 percent income tax which has remained quite stable since 2006.
Plus, Paraguay has some of the lowest added tax rates in South America. In other words, it is an environment well suited for business, especially for international corporations. Over the course of this year, Paraguay’s tax policy will continue to attract foreign investment and thus, add billions of dollars to the country’s GDP.
In Uruguay, a somewhat controversial situation exists where President Tabaré Vázquez has been looking to reach a Free Trade Agreement with China. Uruguay is poised to make significant progress in 2017 and if the president stays on course, he could complete this FTA by next year.
However, what makes this a delicate matter is that Uruguay is a part of the MERCOSUR trade bloc and according to the MERCOSUR regulations, any new free trade agreement with non-members must be approved by member states. In addition, “other Mercosur members are not keen to have Chinese goods imported through Uruguay, dodging tariffs or customs requirements.”[vi] Top officials from Argentina and Brazil have expressed their disapproval of Uruguay’s negotiations with China.
The Brazilians and Argentinians are concerned that an FTA with China would hurt their manufacturing sectors as Uruguay’s trade talks with China remain a controversy for the MERCOSUR member states.
In Argentina, President Maurico Macri is seeking to ensure the country’s energy security by addressing its energy deficit. In recent years, the output of natural gas has declined so much that Argentina went from an energy exporter to a net importer. The president is trying to resolve the energy deficit by artificially raising the price of natural gas within the country. The idea is that higher prices would encourage foreign investment in the energy sector as well as saving the government around $400 billion per year. Meanwhile, higher prices would also discourage the consumption of energy for ordinary Argentinians.
Thereby, the country would balance its energy deficit. In the long term, Macri’s reforms will ensure the feasibility of Argentina’s energy security and increase revenues. By balancing the budget, the leadership in Buenos Aires will be able to take on higher loans which are required for additional economic reforms. However, the price hike has also upset many ordinary Argentinian citizens. The political opposition will seek to exploit the discontent amongst the public and in the short term, the energy policy could cost the ruling party seats in the legislative elections scheduled for October 2017. And while it’s too early to say how the elections will turn out, Macri’s reforms will only work if the next government continues them.
Thus, a loss in the elections would enhance the power of the opposition party, who can further complicate these reforms.
All in All, South America is a continent of contrasts. Therefore, the geopolitical prospects must be approached by each country and not collectively. The geopolitical and economic interests of many South American countries varies a lot. Two of the continents giants, Argentina and Brazil have made some leaps to becoming more modern nations, but internal struggles within their leaderships and their struggles to maintain economic reforms have plagued the nations to reaching their global potential.
However, even though South America has a large abundance of natural resources, most of the continent’s economies have struggled because of hyperinflation, corruption, unemployment, and currency stagnation. On the positive side, South America has been isolated from the conflict zones in the Middle East and the Asia-Pacific, so it has the potential to bring about social and economic reforms domestically. Despite being the epicenter of economic inequality, South America has made some significant progress.
Some of these reforms include a rising middle class, increasing demands for education and health care for all citizens, and creating better infrastructure. Many of the continent’s officials have made it clear on many occasions that they want a better future for all of South America.
[i] Mansharamani Vikram, “Column: Its copper industry dulled, Chile’s future still looks bright as a penny” August 11, 2016 PBS http://www.pbs.org/newshour/making-sense/column-chiles-copper-future-is-bright/
[ii] Dolan Ed, “How Intelligent Budget Rules Help Chile Prosper: Lessons For The US” July 25, 2011 Business Insider http://www.businessinsider.com/how-intelligent-budget-rules-help-chile-prosper-lessons-for-the-us-2011-7
[iii] Biller David, “IMF Sees Venezuela’s Inflation Rocketing to 720 Percent in 2016” January 22, 2016 Blomberg https://www.bloomberg.com/news/articles/2016-01-22/imf-sees-venezuela-inflation-rocketing-to-720-percent-in-2016
[iv] Bevins Vincent, “The politicians voting to impeach Brazil’s president are accused of more corruption than she is” March 28, 2016 Los Angeles Times http://www.latimes.com/world/mexico-americas/la-fg-brazil-impeach-20160328-story.html
[v] “Paraguay Corporate Tax Rate” 1997-2017 Trading Economics http://www.tradingeconomics.com/paraguay/corporate-tax-rate
[vi] “Uruguay seeks to advance FTA talks with China” February 3, 2017 China Daily http://europe.chinadaily.com.cn/business/2017-02/03/content_28092521.htm