Rising political risks shouldn’t derail recovery

Political risks are rising across Latin America. In Colombia and Mexico, left-leaning candidates have consolidated their leads in opinion polls ahead of presidential elections later this year, while the political crisis in Peru has sparked back into life in recent weeks, with speculation now mounting over a second impeachment vote against President Pedro Pablo Kuczynski. At the same time, developments over the past month appear to have confirmed our view that Brazil’s much-vaunted pension reform is now dead in the water. Responsibility for reviving it will lie with whatever government emerges from elections in October – but a credible reformist candidate has yet to stand out from the field. As it happens, we don’t think that any of these political events will derail the cyclical recovery that is now underway in each of these economies. But there is a real and growing risk that they could trigger bouts of volatility in financial markets – and a populist shift would weigh on the medium-term growth prospects for the region.