LatAm’s Political Pendulum Swings Right: A Potentially Better Policy Mix, Not an Ideological Realignment

As former President Obama once quipped, “elections matter.”¹ In emerging markets, this observation may be even more relevant, as the policy preferences across political parties can vary significantly. Those differences, and the ability to implement them, can make elections meaningful inflection points for fiscal policy, security strategy, regulation and investor sentiment. In PPM’s sovereign investment process, we seek to identify and capitalize on these potential inflection points.

Recent conservative and right-leaning victories in Chile, Colombia and Peru point to a broader rightward shift across Latin America. These governments join Argentina, Ecuador, Bolivia, Honduras, Panama and Costa Rica in reflecting a more conservative regional tilt. While we view this shift as cyclical rather than secular, it may create investment opportunities as the region moves toward a more constructive policy mix and reform agenda at the margin.

CYCLICAL, NOT SECULAR, SHIFT TO THE RIGHT

We believe recent victories by the right may have benefited from conditions on the ground that favored their campaigns as opposed to a material ideological shift from voters. Incumbent administrations have generally been unpopular while voters have become more focused on security and safety, from our observations, after a deterioration in public order and an increase in gang activity across parts of the region. These issues tend to favor right-leaning candidates, in our experience. At the same time, we note that a broad demand for change from voters has allowed some unconventional candidates to capture frustration with the status quo more effectively than their opponents.

We do not view the shift to the right as structural or secular. The electorate appears to remain highly polarized, and close vote counts in countries such as Peru and Colombia indicate that these are not overwhelming mandates. Rather, the current cycle looks to us like a response to starting conditions that favored the right, just as the post-COVID cycle favored the left when social pressure, economic hardship and voter anger were more dominant. In our view, the new batch of leaders will need to prove they can deliver on security, growth and living standards. If they fail, they could be vulnerable in the next cycle.

POSITIVE INFLECTION POINT

From a credit perspective, the encouraging takeaway to us is that institutions and broader political and economic frameworks have generally remained resilient, particularly in the more developed emerging market economies. This has been true despite a sizable political pendulum swing from left to right over the past election cycle. While some backsliding and undesirable policy noise has occurred, checks and balances have held in many cases, and we believe this institutional resilience remains an important underpinning in evaluating these countries’ credit stories.

Looking ahead, this new cohort of conservative and right-leaning governments appears more business-friendly and is advocating deregulatory policies that could support business sentiment and activity. In addition, these leaders generally acknowledge that sovereign fiscal accounts have moved too far out of balance and that adjustment is needed, a welcome development from PPM’s perspective.