Politics Are Again a Problem for Battered Latin American Markets

Photographer: Cesar Rodriguez/Bloomberg

Political turmoil in Brazil and Mexico is making things even worse for Latin American markets already suffering with lower commodity prices and the cost of the pandemic.

In a region home to some of the this year’s worst-performing emerging-market currencies and stocks, talk of impeachment in Brazil and a Mexico’s refusal to unveil stimulus measures is dampening the economic outlook even more.

Traders are expecting more volatility in Latin America than in other regions. While the average one-month implied volatility for the Brazilian real and the Mexican peso is climbing, a composite gauge for the Turkish lira, South African rand, Russian ruble and Indonesian rupiah has declined over recent weeks. The same divergence appears in longer-dated volatility measures.

Political risks in Brazil, Mexico to weigh heavily on Latam vs other parts of EM

Few Latin American nations are expected to escape a recession in 2020, according to the International Monetary Fund, which forecasts Brazil and Mexico’s economies to shrink 5.3% and 6.6% respectively. That’s in sharp contrast to emerging Asia, where the Fund still foresees growth in the largest economies such as China, India and Indonesia.

Financial markets have taken notice. The Brazilian real is the worst performer among 24 emerging-market currencies tracked by Bloomberg this year, closely followed by the Mexican peso. The Ibovespa and the S&P/BMV IPC stocks indexes are up 4.3% and down 0.8% this month in dollar terms, lagging a 6.5% rally in the MSCI Emerging Markets Index and the performance of stocks in Russia, Indonesia, South Africa and Turkey.

Latam equities have increasingly lagged EM peers since March

Investors confidence in Brazil is being hammered by a fresh political imbroglio, as two ministers left their posts in less than two weeks, one of them lobbing accusations at President Jair Bolsonaro that fueled talk about impeachment.

Conditions in Brazil are ripe for “a significant near-term political crisis in which impeachment could be in play,” Eurasia Group said in a client note. JPMorgan, meantime, moved Brazilian rates to underweight as a “much weaker BRL” is expected to “raise financial stability concerns.”

In Mexico, investors are concerned about President Andres Manuel Lopez Obrador’s refusal to aid the economy. On Monday, he rejected business-supporting loans of up to $12 billion, contradicting his own finance ministry, which supports the initiative.

Spending measures in both Mexico and Brazil “have come late in the day” and “the scale of the fiscal packages is still small,” William Jackson, chief emerging markets economist at Capital Economics, wrote in a report. He expects a region-wide downturn that will be “the deepest since reliable records began.”