Latin American Elections: a Year of Living Dangerously Lies Ahead

02/07/2018 - 12h37

If the road to hell is paved with good intentions, it recently took a Kafkaesque detour through Brazilian Federal Court TF4.

There, on January 24, a panel of three judges upheld the conviction of former president Luiz Inácio Lula da Silva on corruption charges.

The decision, the latest to flow from Brazil's huge anti-graft probe that has reverberated around Latin America and tarred leaders from Argentina to Mexico, blew Brazil's presidential election wide open.

Despite presiding over a two-term government that even one of his ministers described as Brazil's most corrupt, the former head of the Workers' party (PT) is the leading candidate to win the October election. But the court decision could effectively bar the leftist icon from running.

As Mr Lula da Silva says he will campaign anyway, the outcome is chaotic. "Lula is our candidate . . . There is no Plan B," vowed Gleisi Hoffmann, current head of the PT.

Similarly heady dramas will play out across Latin America this year. In a remarkable alignment of electoral calendars, six countries -including the most populous, Brazil, Mexico and Colombia, plus Venezuela's socialist regime- will hold presidential elections.

Far from being celebrations of democracy, though, the votes will be the region's biggest test of its democratic mettle since the transitions from dictatorship in the 1980s.

The elections take place at a time of popular rage over corruption probes. These have held to account previously untouchable figures.

In Brazil alone, the current president, Michel Temer, four former presidents and 100 federal politicians are either in jail or under investigation.

But the revelations of financial skulduggery have also infuriated citizens, sapped their faith in institutions and destabilised entire political systems, without offering solutions on how to put the pieces back together.

If 2016's presidential campaigns reshaped US politics, 2018 could see the same in Latin America.

Populists, riding the angry mood, stalk the land. In Colombia, where corruption is a prime concern, scandals have unsettled voters already on edge after a peace deal struck with Marxist rebels last year.

Two former guerrilla leaders will even run for president in June - unprecedented for a country that has spent 50 years fighting them.

Hyperinflationary chaos in neighbouring Venezuela adds to the jitters. "I moved to the US last year for family reasons," says one Colombian financier. "But in Bogotá, all my friends asked me: what is it you know that we don't?"

Next on the calendar is Mexico, where maverick leftist Andrés Manuel López Obrador, a nationalist who wants to stamp out corruption but believes that Fidel Castro is a hero, leads polls ahead of the July election.

Compounding the uncertainty is US president Donald Trump, who threatens to build a wall and end the North American Free Trade Agreement. "Mexico faces a perfect storm," says Jorge Castañeda, a former foreign minister.

As for Brazil, there is Jair Bolsonaro, a rightwing congressman and former army captain who thinks gun ownership should be widespread and homosexuality beaten out of gay children. Campaigning as the "anti-Lula", he is second in the polls.

"There's a vacuum of hope . . . a sense of unhappiness," laments Fernando Henrique Cardoso, the former president. "It's a disaster."

By the end of the year, two out of three Latin Americans, from countries producing $4tn of economic output, will have new presidents.

Costa Rica and Paraguay have elections. Venezuela, in default on about $60bn of international bonds, will hold what promises to be a sham election before April 30 (the US, much of Latin America and Europe say they will not recognise the result).

Even communist Cuba will get a new president when Raúl Castro steps down on April 19, the first time in 60 years that a Castro brother has not held the post.

There are parallels with the political reordering in developed countries. Traditional parties are breaking down, outsiders are forcing change and popular anger threatens to rewrite the constitutional order.

According to Latinobarómetro, a polling company, only 53 per cent of Latin Americans believe democracy is the best system of government.

Only one in seven trusts their fellow citizens. These are the lowest readings in over a decade. Such disquiet is true of leading democracies like Brazil or Colombia; it is doubly true of authoritarian Cuba and Venezuela.

Even before this week's global shake-out, markets have been volatile. "Political risk is key," says Fitch, the rating agency. "There are major economic and political risks for Latin America in 2018," adds Marcos Buscaglia of Alberdi Partners, an investment boutique.

As for defaulted creditors seeking payment from Venezuela: "Sorry . . . but you no longer matter. The focus of the government is winning the election," says Russ Dallen of Caracas Capital Markets. "Bondholders are unlikely to see a dime soon."

Yet for all the political hyperventilation and investor hedging of bets, the past two years have seen something of a turnround in Latin America. A region that almost defined populism has been rejecting its siren call even as the US and Europe seemed to embrace it.

After a decade of often corrupt leftist rule, more pragmatic centrists came to power in Brazil, Argentina, Chile and Peru.

With the help of more orthodoxpolicies, South American economies, battered by the end of the commodity price boom, began to recover from lengthy recessions.

Markets cheered. Between the end of 2015 and 2017, the MSCI's index of Latin American stocks rose by more than 50 per cent.

Since then, though, the mood has soured. The epicentre of the gloom lies in Brazil's anti-corruption investigation, called Lava Jato (Car Wash), into kickbacks at state oil company Petrobras.

Propelled by pressure from civil society and led by an independent judiciary -unlike politically driven purges in China, Russia or Saudi Arabia- Lava Jato is probably Latin America's biggest ever corruption investigation.

It also showed that Brazil's consensual or "rainbow" approach to politics and diplomacy, so often touted by Mr da Silva, was bought.

Lava Jato spawned other investigations, particularly into Odebrecht. A Brazilian construction company with multibillion-dollar projects across Latin America and Africa, Odebrecht ran what the US justice department has called the world's largest foreign bribery scheme.

Corruption charges have since been levelled against the former presidents of Argentina and Panama; two former presidents of Peru and the current president; the former vice-president of Ecuador; and both sides in Colombia's last election campaign.

A notable exception to this remarkable roll-call is Mexico -and not because the ruling Institutional Revolutionary party is lily-white, but because President Enrique Peña Nieto has made only token efforts to fight corruption.

In December, the Chamber of Deputies voted to make it illegal for citizens to publish corruption accusations online if the allegations could damage the target's credibility, even if the allegations turn out to be true.

Purging corruption -the promise held out by the Brazilian and other investigations- would be an undeniable boon for Latin America.

State capture and corruption go hand in hand with violent crime and, in a region with the highest homicide rates in the world, that scourge costs some 3 per cent of gross domestic product, equivalent to $236bn a year, the Inter-American Development Bank estimates. But the anti-graft purge has not been without a cost.

The scandals have frozen investment, held back economic recovery, sacked the traditional political order and polarised electorates already furious about recession and shuttered public services.

"It is as though the region is trying to do perestroika and glasnost at the same time," says a senior European diplomat, referring to the 1980s Soviet Union. "We know how well that turned out."

Social media networks have fanned the discontent. Latin America, according to media consultancy ComScore, spends proportionately more internet time on social media than any other region.

From abroad, international solidarity groups have mobilised over the internet to support embattled leftists, such as Mr Lula da Silva.

There are concerns too, especially in the US, that Russia may stir up trouble after its alleged hacking of the US presidential election and Catalonia's independence vote.

"If Russia truly wants to damage the US and weaken the western world order, Mexico's elections . . . offer a rewarding and vulnerable target," says Shannon O'Neil of the Council on Foreign Relations, a US think-tank.

"No other country influences the US as much as its southern neighbour [and] Russian intelligence has a long history in the Aztec nation [from the cold war]."

By the end of 2018 the region will know whether its anti-corruption drive is a sign that its democracies are strengthening or has dealt them a fatal blow. History offers cold comfort.

Italy's mani pulite, or "clean hands" movement of the 1990s, inspired Brazilian judges and prosecutors. But while it helped clean up Italian government, it also led to the rise of arch-populist Silvio Berlusconi.

Early signs are ominous. In Honduras, amid allegations that senior officials have links to drug trafficking, former president Juan Orlando Hernández was last month reinstated for a second term after a contested election that led to riots and left more than 30 dead.

But it is also too early to know what might happen in other countries. Judging from markets, which seek to price in future trends, it also may not turn out all bad.

After steep drops last year, Latin American stock markets have powered ahead, helped by a broader emerging markets rally, while currencies have rebounded.

So far, too, their response to the global sell-off has been mild, reflecting a belief that it is more a result of stretched US valuations than global economic slowdown.

In Brazil, more moderate candidates may emerge as the polarising figures of Mr Lula da Silva and Mr Bolsonaro fade.

Third in the polls is Marina Silva, an environmentalist on her third presidential run. Others include Geraldo Alckmin, the centre-right governor of São Paulo state, and Jaques Wagner, a leftwing former governor of Bahia.

In Mexico, businesses have sought comfort in Mr López Obrador's record as mayor of Mexico City, where he enlisted former New York mayor Rudy Giuliani to help stamp out crime, and Carlos Slim, the telecoms tycoon, to rebuild the city centre.

At the same time, centre-right candidate Ricardo Anaya Cortés is nipping at his heels in the polls, and Mr Trump has softened his rhetoric about Nafta.

Meanwhile Colombia may swing left but with Venezuela as its neighbour is unlikely to plump for an extremist.

Polls remain unreliable, as final candidates have not yet declared, but near the top of all surveys is Sergio Fajardo, a centre-left former mayor of Medellín, who would be considered a sensible social democrat anywhere else.

The optimistic view is that this year's election marathon will see a further democratic deepening in Latin America, allowing the promise of the Brazil-led excision of corruption to continue.

The pessimistic counter is that this surgery, while necessary, may kill the patient.

"I tend to think that the anti-corruption drive shows the region's democratic strengths," says Alejandro Salas, regional director of corruption watchdog Transparency International. The year will put that theory to the test.