Temer and Macri

Progress on market reforms appears to be stalling amid resistance from opposition-dominated parliaments and fears of populist backlashes, writes Yigal Chazan.

Centre-right presidents of leading South American countries are struggling to revive their slumbering economies, slowing the region’s recovery from the stagnation and recession of recent years.

The leaders of Brazil, Argentina, Peru – Michel Temer, Mauricio Macri and Pedro Pablo Kuczynski respectively – have had a mixed record on market reforms, as they seek to address the economic legacies of their left-leaning predecessors. They have found the going hard, largely because they lack majorities in parliament and fear populist backlashes.

Mr Temer and Mr Kuczynski have also been preoccupied with fighting off corruption allegations related to the massive bribery scandals that have gripped the continent.

Even Chile’s new president, Sebastián Piñera, a former airline magnate and past president, may find it hard to tackle sluggish growth because of the opposition’s strong presence in Congress, particularly with a left-wing bloc winning seats through a new proportional representation system. As such, there is likely to be resistance to his plans to part-finance moves to make Chile more competitive through cuts to “ineffective” government programmes and “unnecessary” state sector spending. 

Emerging on the right

The right-of-centre administrations that govern some of South America’s biggest economies have emerged in the last few years with the ebbing of the ‘pink tide’ that swept the region in the 2000s. The end of the commodities boom that had sustained left-wing governments and fuelled corruption heralded the change in political direction.

The left remain in power in only a handful of countries – notably Venezuela and Bolivia. But the legacy of heavy social spending that characterised their tenure, constraining growth and deterring many investors, has hamstrung successor governments. With the neoliberal policies of the 1990s largely discredited, the new centre-right administrations have favoured a softly-softly approach to market reforms, to minimise hardship and limit political opposition. The policy has yet to deliver major economic gains.

Mr Temer initially fared well when in 2016 he took over from leftist president Dilma Rousseff, who was found to have broken fiscal rules to cover up the scale of Brazil’s huge budget deficit. Previously vice-president, Mr Temer implemented some fairly difficult reforms, including an overhaul of restrictive labour laws and a 20-year cap on public spending increases. His popularity remained high as he tamed inflation and steered Brazil out of a long recession, but his ratings plunged when he became ensnared in a corruption scandal.

Rowing back on cuts

He denies accusations that he arranged to receive bribes in return for political favours, Meanwhile, his efforts to prevent the case reaching the courts held up moves to tackle arguably the biggest obstacle to Brazil getting its financial house in order: the country’s very generous pension system, which takes up around a third of the federal budget. Also, in the wake of the graft allegations, the government was forced to abandon budget deficit targets through to 2020 after legislators refused to raise taxes.

A vote on reforming retirement provision, the cornerstone of the president’s agenda, has been shelved – but with elections in October 2018, few lawmakers would risk angering voters by backing the measure in any case. At the same time, a lacklustre recovery together with the absence of tangible economic benefits and Mr Temer’s current standing have benefited both left-wing and populist rivals. 

Former leftist president Lula da Silva is polling at 36%, despite a conviction for corruption related to a bribes-for-contract scandal involving state-controlled oil company Petrobras, which may preclude him from running in the presidential ballot. It suggests that the centre-right may have its work cut out holding on to power in the upcoming poll, in which Mr Temer is not expected to stand.

Beware the backlash

In Argentina, Mr Macri, son of one of the country’s wealthiest businessman, is doing better but has also had to curb his enthusiasm for reform. An impressive performance by his ruling coalition in October 2017’s mid-term congressional elections was seen as an endorsement of his direction of travel, although his achievements after two years in office do not match his intentions on coming to power. 

Mr Macri resolved a long-running dispute with creditors returning the country to bond markets, removed currency controls, scrapped or lowered export taxes and slashed utility subsidies. However, inflation and the budget deficit remain high and foreign investment is limited. His Peronist rivals are divided and demoralised, but Mr Macri still has to rely on moderates among them to push through reforms, even after his autumn electoral success.

Yet as he strives to make further changes, Mr Macri risks a public backlash and opposition from the country’s powerful unions. Congressional approval of a pension reform bill in December triggered protests in Buenos Aires, and he now appears to be scaling back a proposed overhaul of labour laws under pressure from unions.  

Critics within his camp argue that the pace of change has been too slow to win over investors. For now, the opposition Peronists are weak, not least because the divisive Christina de Kirchner remains their leader. But her influence could diminish over time and if Mr Macri cannot deliver better economic news by the 2019 elections, his opponents could stage a comeback.

No wiggle room

Since coming to power in 2016, Mr Kuczynski, a former Wall Street banker, has had little room for manoeuvre. Peru’s Congress is controlled by supporters of his right-wing populist presidential rival, Keiko Fujimori, daughter of former president Alberto Fujimori, who was jailed for corruption and human rights abuses in 2009. While Mr Kuczynski inherited a heathier economy than his Argentinian and Brazilian counterparts, he has yet to deliver on his pledge to modernise the country and boost growth – thus far mainly cutting red tape.

A number of factors have worked against him. These include his government’s tempestuous relations with Congress – which recently managed to oust the cabinet; heavy rains that destroyed roads and bridges; and the Odebrecht corruption scandal that has stalled vital infrastructure projects, with officials reportedly still reluctant to give the go-ahead on many of the latter.

Mr Kuczynski himself has been caught up in the bribes-for-contracts affair. He denies any wrongdoing, but his failure to disclose past business links with the Brazilian construction company at the centre of the scandal led to an impeachment vote, which he only narrowly won.

He sparked further controversy by subsequently pardoning Alberto Fujimori, a move some saw as part of deal with several members of the opposition to stave off impeachment. Mr Kuczynski’s allies reject suggestions there was any such pact. Yet several of his ministers resigned over the issue and he may face further congressional attempts to dislodge him. The president, whose ratings among the public and business leaders have slumped, is determined to press on – but he is looking increasingly vulnerable.

Chile’s Mr Piñera, who took office on March 11, will have keenly observed the fortunes of his centre-right regional counterparts, and there are already signs that he may be adopting Mr Macri’s ‘gradualist’ approach to economic change. He will reportedly stick with some of his predecessor’s plans to both bolster pensions and provide free higher education as he sets about cutting taxes, regulations and the budget deficit. Just as with Mssrs Temer, Macri and Kuscynki at the start of their tenures, business confidence in Mr Piñera is currently high – but how long will it remain so?   

Yigal Chazan is an associate at Alaco, a London-based business intelligence consultancy.

This article is sourced from fDi Magazine
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