In a recent economic outlook, AB said the political environment of emerging markets is set to determine economic policy and design, particularly in Latin America.
Regarding Brazil, the possibility of presidential impeachment for President Dilma Rousseff still looms, with the investigation into alleged bribery involving state-owned oil company Petrobras ongoing.
“If these political uncertainties persist, business and consumer confidence probably won’t recover, making it hard to overcome the slump in activity,” AB stated.
Brazil’s outlook for 2016, said AB, remains grim. GDP is likely to shrink further and sovereign debt ratios are set to increase. Moreover, the country’s inflation still exceeds 10 per cent despite the economy contracting more than expected in 2015.
While both Argentina and Venezuela saw the election of new governments at the end of 2015, the latter is on course to heighten the country’s economic volatility.
Venezuela’s Chavista government, under President Nicolas Maduro, has signalled that it has no intention of implementing much needed market reforms, AB pointed out.
“At this point, it looks as though political volatility could get worse in the months ahead. In addition, the government may have trouble servicing its debt with oil prices as low as they are,” AB said.
Conversely, Argentina’s newly appointed President Mauricio Macri is a relative bright spot within the region. He has begun introducing significant economic changes. AB said the reforms include the elimination in currency market restrictions.
President Macri, according to AB, has also increased interest rates and “rekindled” negotiations with foreign creditors.
“These market-friendly decisions have boosted investor spirits, although the administration still faces important challenges, including the risk of high pass-through from the depreciation to domestic prices, the lack of access to international financing and a majority opposition in the Senate that will make carrying out reforms more difficult.”
