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Latin American bonds

This year’s packed electoral calendar in Latin America has been largely ignored by markets. Is this sensible?

Despite a sharp drop in May, Latin American equities, measured by the MSCI index, have risen nearly 30 per cent in dollar terms over the past 12 months. Meanwhile, Latin American sovereign debt spreads, at 200 basis points over US Treasuries, are 100bp tighter than a year ago. Yet the region’s political developments are hardly reassuring. Hugo Chávez, Venezuela’s president, Argentina’s Néstor Kirchner and Bolivia’s Evo Morales share an anti-globalisation and market-unfriendly agenda. Peru’s new president is Alan García, who led the country into debt default during the 1980s, while Colombia saw the re-election of tough rightwinger Alvaro Uribe. In Mexico, a bitterly controversial election was won by the relatively untested Felipe Calderón.

The common thread – the polarised choices voters face – is exemplified by Ecuador, where, in the second round of presidential elections next month, they must decide between Rafael Correa, a Chávez-style populist, or Alvaro Noboa, a banana tycoon.

Election fever
Parliamentary and
presidential elections
ChileDec 2005
BoliviaDec 2005
HaitiFeb 2006
Costa RicaFeb 2006
PeruApr-Jun 2006
ColumbiaMar-May 2006
MexicoJul 2006
Brazil*Oct 1 2006
Ecuador**Oct 15 2006
NicaraguaNov 5 2006
Venezuela***Dec 3 2006
* 2nd round of presidential elections Oct 29
** 2nd round of presidential elections Nov 26
*** Presidential elections only

Such choices demonstrate how divided Latin American societies remain, mainly because of their extreme income inequality. Investors may feel unconcerned that two out of five Latin Americans live in poverty. But they should be worried by the failure of politicians from across the spectrum to raise growth rates sufficiently to address the problem.

In Brazil, Sunday’s second round is likely to result in the re-election of the relatively moderate Luiz Inácio Lula da Silva. Yet, despite significant economic achievements, Brazil has grown on average only 2.9 per cent a year under his four-year stewardship.

There are good reasons for Latin American markets to turn a blind eye to politics. Owing to the commodities boom, many countries have been able to improve their external financing position, and thus their resilience to external shocks. But raising growth rates enough to make the region truly competitive requires significant reform. In Latin America’s increasingly polarised political scene, this seems ever more unlikely.

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