Colombia's turn to lean left?

Summary

In mid-2020, we identified rising populism and support for populist-style political candidates to be a long-term theme that emerged from COVID. Latin America has been a region where this theme has materialized, and with Colombians heading to the polls this weekend, opinion polls suggest Colombia may be on the verge of electing their own populist president. As of the latest polling data, the populist and left-leaning Gustavo Petro is leading opinion polls; however, a Petro win is far from guaranteed as opposition candidates have demonstrated strong momentum in recent weeks. In this report, we lay out each of the main candidates' top policy proposals and gauge potential market reactions to the outcome of the first-round vote.

While we believe a Petro victory would represent a sea change in Colombian politics, a Rodolfo Hernandez administration could place Colombia's public finance position on a worsening trajectory and ultimately push Colombia's sovereign credit rating further into non-investment grade territory. In the lead-up to the election, local financial markets have been calm. But, we worry a scenario where Petro meets Hernandez in a runoff vote could unsettle financial markets and put sovereign debt and the peso under pressure as the risk of deteriorating fundamentals would rise and be a focus of market participants. Long term, a divided Colombian congress should keep many of the more radical policy proposals from being implemented, although policy paralysis and precarious public finances should keep Colombia in non-investment grade rating territory.

Populism Has Been Popular in Latin America

Latin America has arguably been the region most affected by the significant events of recent years. Regional economies experienced some of the sharpest activity declines during the depths of the pandemic, while a select few have yet to reach pre-pandemic nominal GDP levels. Inflation across Latin America has also been persistently high and has reduced purchasing power for households across the region. Many of the larger and more systemically important countries, such as Brazil, Chile, Colombia, Mexico, Peru and Argentina, are experiencing above-target price growth with little indication inflationary pressures have peaked. In response, central banks across Latin America are looking to raise interest rates into restrictive territory purely in an effort to contain inflation. Restrictive policy rates raises the probability that most Latam countries could fall into recession within the next 12 months. Needless to say, the economic prospects for Latin America are less than stellar. With economies struggling to gather momentum and the cost of living soaring, civilian protests and demonstrations have erupted across the region. These demonstrations started in 2020 during the rise of COVID and in response to lockdowns, intensified in 2021 during times of high inflation, and are ongoing in 2022 as price growth has yet to subside and poverty levels rise.

In our 2020 midyear outlook, we identified renewed support for populism and populist leaders as one of the long-term themes likely to emerge from COVID. Without question, Latin America has been a region to fit this theme and embrace populism during the COVID era. In 2021, Peru and Chile elected populist leaders with relatively unorthodox policy platforms. Both Castillo of Peru and Boric of Chile were elected under the promise of more government intervention, fiscal support for low-income households as well as creating more protectionist-style economies. In Brazil, Lula da Silva, the wildly popular former president known for lifting millions of Brazilian households out of poverty through social spending programs, is campaigning on a similar platform and leading opinion polls ahead of this year's election. And in Colombia, well known politician Gustavo Petro, has been able to rally support for his progressive policy platform. Petro also wants to increase social spending through fiscal support programs and is seeking to essentially upend Colombia's current economic model. While Brazil's election and political developments in Peru and Chile are certainly important and will be influential over the economic path of each country, Colombia's election is approaching and could result in an even further shift left in Latin American politics.

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