Key Trends for the Quarter
In Venezuela, the Walls Close in on Maduro
During the second quarter, extensive sanctions levied by Washington and rising opposition protests will drive a crucial negotiation in Venezuela. The sanctions will starve Venezuela of oil income it needs for imports. Opposition protests will grow, swaying more low-ranking soldiers to oppose the government — and eventually threaten it. This pressure will drive Venezuelan military commanders and politicians to discuss the terms of a Venezuelan political transition with the opposition and the Trump administration. But the negotiations will stall and eventually fail unless a significant number of officers controlling military units are reassured they will not face arrest or extradition to the United States. It is important to note, however, that even if the support of the armed forces for President Nicolas Maduro cannot be swayed, a foreign military intervention is highly unlikely. The best-case scenario for Venezuela is a relatively seamless transition of power to a more business-friendly government.
However, a quick change of government is far from certain. Even with talk of amnesty, military commanders turning against Maduro is an inherently risky proposition. Any attempted coup could easily degenerate into a violent conflict between factions within the armed forces. Such a confrontation would damage Venezuela's physical infrastructure, complicating the country's economic recovery. A post-Maduro Venezuela will tout extensive opportunities in its energy sector, in dire need of oil revenue to rebuild its economy. But the country will remain a precarious place for energy companies to do business, especially considering that the armed forces will maintain extensive oversight of the energy sector and government as part of any bargain with the opposition. Companies investing in Venezuela will have to manage inherent local corruption as officials prioritize lining their own pockets over ensuring economic stability. For more about the opposition's push to unseat Maduro, read our latest assessment on Venezuela.
Mexico's New President Raises Investment Risk
In the second quarter, Mexico's new administration could approve constitutional reforms to hold more legally binding referendums, providing more opportunities for the electorate to vote on national and local matters. President Andres Manuel Lopez Obrador will tighten his grip over the country's energy regulators by appointing new officials to lead them. This move will narrow opportunities for foreign energy investment for the remainder of Lopez Obrador's term. Even if the president cannot find the votes in Congress for constitutional reform on referendums, he will still hold impromptu votes on individual investments that displease local communities. Over the coming months and years, foreign investments in oil, gas and even real estate will face greater risk of falling victim to regulatory decisions or a sudden referendum.
Argentina's Government Fears the Return of Populism
Argentine President Mauricio Macri will face an uphill battle this quarter ahead of the October general election. The pro-business Macri will enact austerity measures throughout the remainder of the year. These measures are necessary to access financing from the International Monetary Fund but will alienate some voters. Former President Cristina Fernandez de Kirchner will rise as the most likely challenger to Macri — unless ongoing criminal investigations disqualify her from running. Should Fernandez be barred from the October vote, Macri's chances of winning will rise. For more on Macri's difficult path to a second term, read our assessment on the challenges facing the Argentine leader over the coming year.
Brazil's Trade Reform Push Faces a Tightening Deadline
As the clock ticks down to Argentina's presidential election, South America's two largest economies will move closer to knocking down protectionist trade barriers. Brazil and Argentina will advance negotiations to reduce import tariffs and give each member state of the Common Market of the South (the trade bloc known as Mercosur) the freedom to negotiate and sign free trade agreements on their own. Brazil will attempt to negotiate and approve any trade policy amendments before the new Argentine president — who could well be the protectionist populist Fernandez — takes office in December.
Failure by member countries to agree on ways to reform the Common Market of the South will pave the way to Mercosur’s eventual dissolution.
A successful push by Brazil to untie Mercosur states' hands on trade negotiations would expand foreign exporters' trade opportunities with these states in coming years. Though Argentina's government wishes to avoid a trade policy dispute with Brazil, pressure from manufacturing unions may cause it to oppose any tariff reductions. Should that occur, the Brazilian administration will seriously consider threatening a withdrawal from the trade bloc to persuade Argentina to accept its terms. Read our latest assessment for more on the Brazilian push to upend regional trade policy.
- Nicaragua's government will weaken as the economy deteriorates and political allies abandon it.
- Mexico's new government will contend with rising murders and organized criminal activity, and will rely on the military to contain the violence.
Key Dates to Watch
- March 29: General licenses provided by the U.S. Treasury Department for U.S. companies to continue doing business with Venezuela's state-owned energy company Petroleos de Venezuela will expire.
- April 28: Petroleos de Venezuela will be cut off from the U.S. financial system.
- April 30: Mexico's Congress will begin its recess and won't convene again until mid-September.