Breakingviews - LatAm leaders will be trapped in vicious cycle

Demonstrators clash with security forces during a protest against Chile's state economic model in Valparaiso, Chile, October 21, 2019. REUTERS/Rodrigo Garrido

NEW YORK (Reuters Breakingviews) - Chile’s and Ecuador’s presidents are set to have a tough 2020. Like many of Latin America’s leaders, they should be pushing through tough reforms to help boost their economies. But the recent protests have made this challenging. And this should make growth even lousier, which in turn will make people even angrier. Ecuador’s Lenin Moreno and Sebastian Pinera in Chile look most exposed to this vicious cycle.

Protests quieted down after the two reversed despised policies, but both remain deeply unpopular. Moreno’s approval rating stood at around 30% in mid-2019, and his decision to cancel the fuel-subsidy reduction that sparked the unrest doesn’t seem to have helped. Meanwhile, at best one-tenth of Chileans thought Pinera was doing a good job, according to a number of November polls, despite sacking eight cabinet members and pledging to hold a referendum on rewriting the constitution.

Their lousy economies won’t help them. Chile Finance Minister Ignacio Briones estimates the protests have shaved 0.6% off 2019 growth and he almost halved the 2020 forecast to around 1.25%. Fitch reckons Ecuador’s economy will contract by 0.3% in 2019 and eke out a mere 0.4% expansion in 2020.

Pinera has more room to give in to spending demands – as he has already done with a $5.5 billion stimulus plan. Chile’s debt to GDP is only around 30%. It also has low borrowing costs, with 10-year bonds yielding around 3.2%, as of late December. In contrast, Ecuador’s debt burden is forecast to end 2019 at 54% of GDP, according to Fitch.

Moreno has to please both an angry population and the International Monetary Fund. The supranational lender is, at least, likely to be fairly lenient on budget targets. It just gave the country $500 million from a $4.2 billion credit facility after Congress passed a delayed, watered-down tax-reform bill. But pushing through labor and banking reforms will be tough.

Pinera has other problems, including allegations about the conduct of the police and military in the recent unrest. This will hang over his administration and could stymie his plans to reform institutions and increase science and technology investment.

That means Pinera is set to be a lame-duck leader at best in 2020. Moreno already is, having said he won’t run for office in 2021. Whether the compromises they’re making to stay in power work or not, though, their economies will suffer.

This is a Breakingviews prediction for 2020. To see more of our predictions, click here


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