In 2018, populist candidates in Latin America's two largest countries rode a wave of public disillusionment to the presidency. During 2019, new opportunities and risks will open up for investors as these new leaders attempt to deliver on their campaign promises. In Mexico, leftist President Andres Manuel Lopez Obrador will try to right what he perceives to be historical wrongs by pushing for greater resource nationalism and by giving voters more power over government affairs and public works. These moves could create obstacles that end up alienating investors. In Brazil, President Jair Bolsonaro will move to give agribusiness and mining greater leeway on off-limits indigenous lands. But this shift in policy, compounded by tighter social spending, will drive unrest against his administration, and investors could get caught up in the backlash.
Populist candidates won election to the presidency in Mexico and Brazil last year. In 2019, conservative Brazilian President Jair Bolsonaro and leftist Mexican President Andres Manuel Lopez Obrador will chip away at the status quo. But from an investor's viewpoint, Brazil's pro-business leader will present fewer overt risks than Mexico's new chief.
A Move to the Left in Mexico
In Mexico, risk to investors will come mainly from the president's populist domestic agenda. The main sources of uncertainty for foreign and domestic businesses will be Lopez Obrador's evolving energy policies and his drive to allow referendums on a broad range of topics. During his tenure, the president (who also uses the nickname AMLO) will try to reform the constitution so any citizen, any advocacy group, or any federal, state or local government can call for a binding referendum — even on subjects that the law currently excludes from public votes. Energy reform, social spending, private investments and anti-corruption measures could all conceivably end up on a ballot.
The AMLO government sees this change as a way to correct a political flaw and allow the public to have politically meaningful votes outside of federal elections every three years. But in practice, this reform stands a good chance of becoming a source of much greater uncertainty for businesses. Investors affected by requests for referendums will still be able to challenge those requests in federal court. However, the court may side with the party seeking a referendum — clearing the way for a binding vote that could disrupt a company's investment plans.
Private investments that could affect the environment or cause health concerns would be at particular risk. Voters at the municipal, state or federal level could halt a supposedly disruptive project, including oil, gas, pipeline and even clean energy investments. Large transportation projects such as highways would also be at risk. In addition, investors could face legal challenges long after they have begun seeking financing and committing funds to projects. If referendums derailed high-profile energy and public works projects, investors would consider Mexico a riskier destination for capital and would likely delay or avoid some ventures altogether.
A Pall Over Oil and Gas
For investments in energy projects, the threat would be multiplied. Besides being a likely target of a referendum, they face a president who has an overall negative view of Mexico's 2013 energy reforms. His administration currently lacks the votes it needs in the Senate to rescind significant parts of those reforms, so the legislative route appears blocked for now. But the AMLO administration still intends to shape energy policy to suit its political priorities.
To do this, the new government will likely attempt to adjust local content requirements and contract terms, which it can do without extensive changes to the constitution or to the legislation implementing the constitutional reforms. It can also reduce the annual budgets of the federal agencies that oversee energy: the National Hydrocarbons Commission (CNH), the Energy Regulatory Commission (CRE) and the Security, Energy and Environmental Agency (ASEA). The CNH oversees the oil and gas bidding rounds for exploration and production (upstream) while the CRE is in charge of permits for refining, processing, marketing and distribution (downstream). ASEA is the main agency tasked with approving environmental permits for upstream and downstream investments.
Funding cuts will likely lead to layoffs and to talented employees leaving these agencies; this trend will be exacerbated by a presidential order to freeze federal hiring. Even without a broader effort to amend the constitution or the nation's laws, AMLO would still be able to slow private investment into Mexico's energy sector for years by shrinking its size and reducing the efficiency of its energy regulators.
Brazil and the Pro-Business Backlash
In Brazil, the new government will pose fewer immediate risks to investors than the regulatory changes proposed by AMLO's administration. As president, Bolsonaro will promote policies that are far more business-friendly, including changes to the Common Market of the South that will facilitate new free trade agreements between Brazil and the rest of the world. But his social policies will likely lead to strong opposition from the political left, which could plausibly threaten foreign investors. Such backlash will largely take the form of street protests and local unrest against government policies.
In general, the largest risk to investors stems from the left's anger at the perception that Bolsonaro will erode social gains made during the 16 years of Workers' Party rule. The president has opposed some social changes, such as same-sex marriage (allowed in 2013). He will also preside over pension reform, a major austerity move that — though not one of his most controversial policies — will nevertheless serve as a lightning rod for criticism from the left. The reform will involve raising the retirement age and limiting payouts. Brazilians are accustomed to generous pensions and early retirement, so a cutback in benefits would likely be an issue that the left could exploit for political gain.
For some investors, Bolsonaro's management of indigenous reserves will be a more immediate source of risk. In a Jan. 1 executive order, he shifted the authority for setting the boundaries for indigenous reservations from the National Indian Foundation (FUNAI) to the Ministry of Agriculture. That agency will be responsible for demarcating those territories and deciding whether to allow miners, farmers and loggers into them. The order should be a positive move overall for the country's agribusiness and miners, since it would prevent the FUNAI (which is under the Ministry of Justice) from granting land to tribes that could be used for profitable activities.
But the move will add to the list of grievances held by the president's opponents. And it will attract negative attention from environmentalists and indigenous protesters, because the ministry favors limiting the growth of indigenous lands and supports business activity that could damage the environment there. In general, such protests will occur near indigenous reserves and in Brasilia, where opponents of the president will try to put on mass, disruptive demonstrations.
In addition, the expansion of private activities on or near indigenous land will present security risks for companies that choose to farm, ranch or mine there. Bolsonaro's decision will anger indigenous settlers. They will regard government land-use decisions as arbitrary, and they will turn to the federal courts and direct action to disrupt business activities. As agribusiness and other private interests make inroads into those reserves, the likelihood of direct violence against employees and sabotage will increase.
The new year will see the two heavyweights of Latin America — driven by populism — moving in opposite directions. Under AMLO, investors in Mexico can expect a more restrictive environment and greater risks arising from government policies. In Brazil, the government is becoming more friendly to business. The threat to investors will come from reaction to changes in those environmental and social policies that were designed to promote commerce.