Public dissatisfaction with economic policies has grown in much of Latin America in recent years. The discontent relates to worsening economic conditions, as the Andean economies have suffered from slowing economic growth since 2014. This lower growth has slowed or even stopped the impressive improvement in social conditions over the previous decade, such as reduced poverty and better income distribution in some countries.

Weaker economic conditions may have worsened historical regional divisions, violence and crime, and the quality of basic services such as education and health. Slower economic progress may have also increased dissatisfaction with ongoing corruption and perceived economic and political inequality. We dive into each country's experience with popular demonstrations over the last decade in the Appendix.

Growing Dissatisfaction Set The Stage For Political Change

Recent elections in the region reflect voters' disappointment with the current system. For example, in Chile (A/Stable/A-1) and Colombia (BB+/Stable/B), candidates from traditional political parties failed to make it to the second round of the latest national elections. The winning presidential candidates in Ecuador (B-/Stable/B), Chile, and Peru (BBB/Negative/A-2) received a low share of the total vote in the first rounds of recent elections and won in the second rounds with only a narrow margin. The results reflect an increasingly fractured political arena with limited public support for elected presidents, hampering their ability to work with their legislatures to implement policies.

Persistent frail social conditions, exacerbated by the pandemic, may have contributed to the popularity of current leaders waning more quickly than that of their predecessors. This, paired with fractured legislatures, has made it harder for governments to craft and implement policy responses to complex social issues and sell the reforms to their populations and other political actors. Prospects for structural reform are especially low in countries such as Ecuador and Bolivia (B/Stable/B).

In Ecuador, President Guillermo Lasso was able to pass the tax reform required by the country's IMF program during his first months in power, but his administration has faced pushback from the legislature when trying to approve any other bill. In February, the administration held a referendum on issues such as increasing environmental protection, fighting crime, and reducing the number of congressmen. All eight proposals were soundly rejected by voters. The results reflect, in part, the fact that the referendum had partly become a plebiscite on the president and rejection has triggered a new impeachment effort by the Assembly.

Bolivia's President Luis Arce secured enough votes to win in the first round and obtain a simple majority. However, infighting within the governing Movimiento al Socialismo (MAS) party--which is also Arce's party--has delayed the approval of most of his proposed legislation, including a bill to strengthen the liquidity of central bank reserves.

In Chile, weak popular support for President Gabriel Boric affected the referendum to approve a new constitution in September 2022--just six months after Boric took office. The proposed constitutional draft was overwhelmingly rejected by voters, due in part to its association with the recently elected but unpopular political leadership. More recently, the lower house voted against the proposed tax reform, likely delaying or limiting the administration's capacity to deliver higher social spending.

On the other hand, Colombian President Gustavo Petro's negotiation with coalition parties in Congress (where his political party has a minority) led to the approval of a recent tax reform. This was an important step to fund the president's promised changes in social policies. However, Petro's proposed changes to labor, energy, and pension policies may be more challenging to implement.

Ongoing social fragility in the region undermines the ability of administrations to build enough political cohesion to pass difficult economic and other reforms that could improve GDP growth. Moreover, failure to improve social conditions could lead to more social or political instability. How the political class responds to long-standing social demands, which could spark a negative cycle of political and economic turbulence, will be key for the future of Andean sovereign ratings.

Social Disruption Itself Will Not Lower Sovereign Ratings

Predicting social disruption is very difficult, but weak economic prospects, recently high inflation, political fragmentation, and slow progress tackling long-standing social grievances raise the risk of renewed social unrest and increasing political confrontation. However, social disruption by itself does not necessarily imply a weaker rating. To assess the impact of future social events we would likely look at their economic, financial, and political consequences, and the ability of the sovereign to manage such developments.

Our lower-rated sovereigns ('B' category) generally incorporate political and regional divisions and weak governability. In those cases, we would consider whether worsening conditions could impair a sovereign's debt servicing capacity in the near to medium term.

Peru is the only Andean sovereign where recent social and political developments heightened governability risks and weakened our view of the government's capacity to implement policies on a timely basis. Over many years, different Peruvian administrations managed to sustain solid public finances, low debt, and continued economic growth despite political turbulence. However, prolonged, intensified political tensions have resulted in six presidents since 2016, one dissolution of Congress, and frequent changes of cabinet. We now expect higher uncertainty over future policies and limited business confidence to continue to hurt the country's growth prospects.

At the same time, Peru's worsening social conditions also indirectly worsened the sovereign's debt profile. During the pandemic, the government allowed several rounds of withdrawals from domestic private pension funds. The withdrawn money helped limit the contraction in domestic demand but reduced the value of assets held by the pension funds. That, in turn, reduced the local market's capacity to absorb government debt and fund fiscal deficits. As a result, the government increased reliance on external markets and borrowed more money in foreign currency, worsening its debt composition.

Chile suffered from massive public protests in 2019, which raised demands for broad changes in economic and social policies. However, Chile's ample monetary, exchange rate, and fiscal flexibility allowed the government to limit the negative effect of the protests on public finances while its political leadership channeled the public dissatisfaction into to an orderly process to write a new constitution. That said, the protests and the subsequent pandemic put political pressure on the government to boost social spending, which led to larger fiscal deficits and weakened the fiscal profile of the sovereign, resulting in a downgrade in March 2021.

The large public protests in Ecuador during October 2019 and August 2022 did not lead us to lower the sovereign's already low rating. However, we believe complex political dynamics may be limiting investor confidence and the sovereign's capacity to tap external markets--weakening its external liquidity--despite some improvement in fiscal performance since the sovereign's last debt default in April 2020.

Appendix: Social Unrest In The Andes Over The Past Decade

Political consensus in Chile allowed the government to maintain stable economic policies that sustained GDP growth over many years, making it the second wealthiest Latin American economy as measured by GDP per capita.

However, growth did not substantially decrease income inequality while increased prosperity altered society's aspirations. The massive protests in 2019 reflected demands for better social mobility, more generous social programs, and more equitably distributed economic gains. Such trends led to increased pluralism and somewhat increased political fragmentation. However, increasing disagreements on social policies have not weakened the support for rules-based fiscal and monetary policy. Moreover, Chile's political leadership has channeled public demands within institutional avenues, including a lengthy process to write a new constitution.

Following two decades of rapid gains in per capita GDP, Peru's socioeconomic indicators improved substantially. However, income inequality, infrastructure shortfalls, regional disparities, and labor informality remain significant social challenges.

The government's inability to reduce these disparities, coupled with many corruption scandals, has increased discontent with the political system, lowered the credibility of political institutions, and led to a very fragmented Congress composed of many weak political parties. The frictions between Peru's governing institutions have escalated in recent years and led to frequent changes in government, including six presidents since 2016. This political volatility limits the government's capacity to implement policies, solve social conflicts, and sustain GDP growth.

Colombia has enjoyed high investment and strong economic performance, owing to substantially improved security conditions since the beginning of this century and supportive oil prices. However, income inequality remains high, and there are widespread shortfalls of public services in many parts of the country.

Persistent social tensions have led to some changes in economic policies or delayed implementation of measures to limit the fiscal and external erosion that followed the end of the commodity super-cycle. Public protests across the country in May 2021 led the government to withdraw an ambitious fiscal reform (and later pass a diluted version of it) designed to staunch substantial fiscal deficits. We lowered our rating on Colombia in 2021, largely reflecting its weaker public finances. Subsequently, the election of the country's first center-left president signaled an important political change in a country long governed by centrist or conservative leaders. We expect cross-party dialogue will sustain pragmatic and predictable economic policies, despite increased political polarization.

Ethnic and regional divisions have historically limited Bolivia's governability and growth prospects. Nonetheless, the country enjoyed rapid economic growth, improving social indicators, and falling poverty thanks to high energy exports and a stable government that boosted public investment. However, lower energy prices and renewed political instability (following a contested election in October 2019), again raised social and political tensions.

An interim unelected administration took power in late 2019. The contested nature of the new administration, combined with the severe impact of the pandemic, limited the government's ability to address the substantial worsening of Bolivia's fiscal and external profile.

The election of a new government at the end of 2020 reduced political tensions initially, but political and regional disputes have increased recently. A political impasse constrains the administration's capacity to implement timely and forceful corrective policies to recover Bolivia's once large fiscal and external buffers.

Social and regional divisions in Ecuador have historically contributed to political and economic instability. During 1979-2007, presidents served on average only 2.6 years. The country saw relative political stability during 2007-2015 under President Rafael Correa, who used resources from an oil bonanza to fund high public investment and GDP growth. Growing prosperity reduced poverty, lowered income inequality, and sustained the president's popularity at historically high levels. However, public discontent increased after the 2014 fall in global oil prices, which weakened the country's limited fiscal buffers and slowed its economic growth. Political polarization, a weak executive, and the pandemic worsened the sovereign's credit standing, leading to a default in 2020.

The often difficult relationship between the government and indigenous groups, especially regarding mining and fuel subsidies, has frequently resulted in large protests, blocking projects, or undermining fiscal policy. Recent protests, along with a rejection of several reforms proposed by the government in a national referendum, have weakened the administration's political standing.

Related Research

• Colombia 'BB+/B' Foreign Currency Ratings Affirmed; Outlook Remains Stable, Jan. 20, 2023
• Peru Outlook Revised To Negative On Heightened Political Risk; 'BBB/A-2' Foreign Currency Ratings Affirmed, Dec. 12, 2022
• Bolivia Long-Term Ratings Lowered To 'B' On Higher External Risks; Outlook Stable, Dec. 6, 2022
• Chile 'A/A-1' Foreign Currency Ratings Affirmed; Outlook Remains Stable, Oct. 21, 2022
• Chile Will Rely On Its Robust Institutions After Draft Constitution's Referendum Defeat, Sept. 5, 2022
• Ecuador 'B-/B' Ratings Affirmed; Outlook Remains Stable, Aug. 17, 2022
• What A Hard Landing For The U.S. Economy Would Mean For Emerging Markets, Aug. 3, 2022
• ESG Overview: Global Sovereigns, Feb. 3, 2021