The future of Myanmar's National League for Democracy (NLD) seemed preordained when the trammels of political repression were removed in 2012. The party would parlay the popularity of its leader Aung San Suu Kyi and coast to victory in the 2015 elections over a ruling party led by widely despised former generals. But democracy is messy, and even its most fervent adherents can slip once the real challenges of governance and politics surface.

The NLD has stumbled in the past few months and its trajectory is now less certain. The party faces a growing list of constituent demands and the ruling Union and Solidarity Development Party (USDP) has demonstrated a talent for political maneuvering that is improving its outlook.

The NLD's internal disorder is in part a natural consequence of having to shift its focus from opposing a hated military government to winning an election in a diverse country. Burma has 135 recognized ethnic groups, many of which live along the eastern, western, and northern borders. Some of them have never yielded to rule by an outside force, making the majority-ethnic Burman NLD's task of building an effective national party more difficult. But the party has also been accused of mishandling internal party elections, delaying the first party congress until the second week of March. Several hundred disgruntled members defected from the party in Pathein several months ago, and recently party members gathered in Mandalay to protest party election fraud. The aging party leaders are also rumored to be excluding party youth from the policymaking process, which could result in more defections that could bolster the NLD's competitors or provide the core of new parties ahead of the 2015 national elections.

Aung San Suu Kyi's new role has also forced her to make compromises that have alienated some would-be NLD supporters. She has exhibited greater pragmatism and less ideological conviction in her role as member of parliament than she did as an activist. Though her silence on the Rohingya humanitarian crisis is less problematic in Myanmar than it is among international donors, Aung San Suu Kyi has not won allies through her silence on the conflict in Kachin State. Her silence may cost the NLD dearly if it finds that it must rely on ethnic parties to form a ruling coalition after the 2015 elections, much as the NLD did in 1990 when it formed an alliance with ethnic coalition the United Nationalities League for Democracy.

Meanwhile, the USDP has improved its ability to govern, thanks in part to personnel changes that have promoted technocrats and its experience with the exercise of power. The USDP has been increasingly vocal about taking credit for the recent political liberalization, and as economic liberalization begins to improve the standard of living, the party's leaders will no doubt seek to burnish the USDP's reputation. From a policy perspective, this means that development will likely be steered toward areas that return the biggest, quickest, and most obvious improvements in living standards, which includes areas such as electrification, telecoms, and agriculture.

Finally, the USDP will use the familiar divide-and-rule tactic of the past, working to undermine their opponents by fostering personality-based rivalries and distrust across ethnic lines. The USDP and military have pursued an aggressive effort to broker ceasefire deals with 11 groups since November 2011, whom they will then encourage to register as political parties. If successful, this tactic will force the implicit acceptance of the 2008 Constitution by Myanmar's ethnic groups and will also present the NLD with new challenges in minority ethnic electoral districts. And if the NLD cannot improve its relationship with ethnically based parties -- either because of concerns about the selection of local party officials or because of its silence on the Kachin -- then it may find itself competing with them instead of building a coalition. That outcome would divide the opposition vote and cede the advantage to the USDP.

Similarly, in an effort to raise the stock of the breakaway NLD competitor, the National Democratic Force, President Thein Sein on Feb. 6 appointed one of its members of parliament as the first non-USDP cabinet minister. And if Thein Sein feels he can succeed, he may also encourage the pro-democracy group, 88 Generation Students (88 GS), to form a party. The organization's moral authority in Myanmar approaches that of Aung San Suu Kyi, and an 88 GS party would challenge NLD's pro-democracy bona fides.

The result is that the NLD is too weak to shape the reform agenda for the next three years, and perhaps longer. Aung San Suu Kyi is probably aware of this and as a result will be careful not to overreach and risk alienating international stakeholders. For the USDP's part, Thein Sein and his cabinet will continue with reforms that are intended in part to gradually legitimize both the military and the USDP while entrenching their privileged economic and political positions.

Christian Lewis is a researcher in Eurasia Group's Asia practice.

Note: Today is the ninth in a series of posts that detail Eurasia Group's Top Risks for 2013

With slow growth, persistent inflation, and large fiscal and current account deficits, India desperately needs to implement a range of economic reforms. But due to its own shortcomings and a constraining political environment, the ability of the Congress party-led United Progressive Alliance to tackle structural problems is limited -- and will wane further in the run-up to national elections.

Elections are due by May 2014, and the Congress party is scrambling to shore up its popularity in the wake of high-profile corruption scandals. Other coalition members and issue-based supporters, sensing weakness, will try their hardest to extract political concessions from the Congress while the opposition Bharatiya Janata Party (BJP) will likely remain relentlessly obstructionist in its quest to regain power.

Consequently, parliamentary gridlock will persist, with only minor administrative reforms politically feasible in 2013. P. Chimdambaram's return as finance minister in July 2012 has buoyed foreign investor confidence and market sentiment, but he needs to make deep, politically difficult spending cuts to improve India's chance of averting a sovereign credit downgrade to junk status.

And parliamentary elections are not likely to lead to an improved policymaking environment. Like the Congress party, the BJP is in the throes of a prolonged leadership transition and has been largely unable to capitalize on the decline in public support for Congress. This leadership vacuum has enhanced the influence of swing regional and state parties. Elections will likely result in a hung parliament and an even more unstable coalition that will be capable of approving only lowest-common-denominator policies.

Growth will improve in 2013 but India will likely miss its fiscal deficit targets of 5.3 percent of GDP for fiscal year 2012-2013, and 4.8 percent for fiscal year 2013-2014, without substantial subsidy cuts unprecedented in an election year budget.

Expectations for India's performance in 2013 are limited. While it can hope to accomplish just enough on fiscal policy and economic reforms to avoid a sovereign downgrade, India will make negligible progress on structural problems that have long vexed its economy.

On Wednesday, we'll profile Risk #10: South Africa.

Eurasia Group's weekly selection of essential reading for the political risk junkie-presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup or @IanBremmer.

Must-Reads

Banyan Asia blog, The Economist

On Wednesday, Park Geun-hye was named president of South Korea by a small margin, making her the first woman to hold the post in the nation's history. How will her presidency differ from Lee Myung-bak's? What are the implications for North-South relations? 

Sanjaya Baru, The Hindu

A much more momentous Asian election took place this past weekend, as Shinzo Abe and the LDP returned to power. Many are focusing on the possible conflicts that the election could provoke between China and Japan, but this piece asks: Are Japan and India the "natural partners in Asia?" In light of the conflict over the Senkaku/Diaoyu islands, it seems Japan is pursuing an ABC policy (Anybody But China). Why not India?

Sami Yousafzai, The Daily Beast

The eradication of polio has been tantalizingly within reach, as its presence has dwindled to just a handful of countries. But wiping the disease out of Pakistan comes with substantial risks. This piece focuses on the dangers to the anti-polio mission in the wake of Bin Laden's death and the role that vaccinations played in gathering intelligence for the operation. 

J.J. Gould, The Atlantic

Another atrocity that hasn't disappeared: human trafficking and forced labor. These are new terms for what Gould still dubs 'slavery.' Even by conservative estimates, there are more people enslaved today than at any point in history. This is an epidemic that needs global attention. 

Brian Whitmore, Power Vertical Blog

If there were a foreign-policy edition of People magazine, Putin would fill the pages. Why all the hype for his most recent press conference? Consider analysis of his performance as our guilty pleasure political risk story. 

Longer Reads

Joshua Foer, The New Yorker

This piece is not political per se, but the treatment of language as an art -- communicable and easily repurposed the world over -- has global as well as philosophical implications. Foer follows a man who spent 34 years inventing a language designed to more precisely mirror reality. The story of who ended up co-opting it -- for political purposes no less -- makes for a fascinating read.

By Daniel Kerner and Risa Grais-Targow

The Bolivarian revolution in Venezuela is rapidly approaching its biggest test yet: The defiant Hugo Chavez, the man who has personified Venezuelan politics for 14 years, has publicly admitted that his days as president may be numbered. His movement has a slight edge in elections that are likely to be called within months, but much will depend on the president's ability to transfer his personal appeal to his chosen successor.

Throughout multiple treatments for what appears to be cancer, Chavez had refused to publicly acknowledge that he may be too weak to lead his country. But on December 8 he announced that he would need a fourth round of surgery in Cuba, and named Vice President Nicolas Maduro as his successor, setting in motion plans for a potentially rapid transition.

According to the Venezuelan constitution, new elections must be held within 30 days should the president be forced to step aside before inauguration day (January 10) or during his first four years in office. Maduro would likely face Miranda Governor Henrique Capriles Radonski, whom Chavez defeated by about 10 percentage points in the October 7 presidential election.

Anointing a successor is a clear admission by Chavez that he is unlikely to complete his six-year term, making an election inevitable. There are three main reasons the government will likely call for a vote as soon as possible.

The future of Chavismo depends on Chavez's ability to transform a movement that is largely based on a cult of personality to one that can survive without him in perpetuity. Chavez remains popular, despite the fact that a majority of the public thinks poorly of the government's ability to solve problems. Chavez therefore needs to aggressively make the case to the Venezuelan people that Maduro has the talent and vision to carry on the revolution. Chavez's ability to campaign for Maduro is uncertain, but it will only lessen with time.

Second, foreign exchange dynamics are untenable for much longer. The country has an unorthodox three-tiered exchange system, with two different official rates for businesses and individuals needing dollars, as well as a parallel (illegal) rate. Black-market rates indicate that the bolivar should be much weaker than it is in the official windows, and dollars are becoming increasingly scarce.

The government would likely prefer to hold fresh elections before a devaluation, which would propel already-high inflation and be politically costly for Maduro's candidacy. In the meantime, the government can rely on domestic and foreign debt issuance to meet fiscal and foreign exchange needs to buttress the political environment in Maduro's favor. 

Finally, Chavismo wants to capitalize on an opposition that remains weak and divided following Capriles Radonski's defeat, by forcing it to compete before an official candidate selection process can take place. Capriles Radonski faces a gubernatorial election on 16 December, which he is likely to win. But if he does not, the opposition will have to scramble to coalesce around a new candidate in a short amount of time.

That said, the opposition is likely to take advantage of its best chance to win since Chavez came to power by uniting around a single candidate. It is far from certain that Chavez will be successful in transferring his personal appeal to Maduro, but Chavismo retains a slight edge in the coming election.

Regardless of who wins, Venezuela faces a very challenging 2013. Maduro would be forced to make difficult economic adjustments and manage divisions within Chavismo. An opposition president would have to make the same adjustments before setting out on a reform course, but would face even more obstruction from Chavismo stakeholders across the state apparatus.

Daniel Kerner is an analyst in Eurasia Group's Latin America practice. Risa Grais-Targow is an associate in the firm's Latin America practice.

By Famke Krumbmüller

The results of the closely watched Dutch elections are broadly positive, signaling a shift toward centrist policies, and making it unlikely that the new government will throw up roadblocks to management of the ongoing eurozone crisis. Pre-vote concerns that a government led by the Socialist Party (SP) could have weakened the Netherlands' support of the conservative northern camp led by Germany are now moot.

The People's Party for Freedom and Democracy (VVD -- also known as the liberals) secured a strong plurality in the lower house with 41 seats, up 10 from the previous parliament and the largest number of seats the party has ever controlled. The Labor party (PVDA) took second place with 39 seats (up nine). The Socialists (SP) remained steady at 15 seats, but most other parties saw their seat tallies decline sharply. The far right Party for Freedom (PVV) headed by the flamboyant Geert Wilder lost nine seats, down to 15, the centrist Christian Democratic Appeal (CDA) lost eight seats for a total of 13, and the Green Left took three seats (down seven). The centrist Democrats 66 (D66) boosted their total by two, taking 12 seats in the new parliament.

The results likely make formation of a new government easier than had been anticipated. The expectation prior to the vote had been that one of the three major parties (VVD, SP, or the PVDA) would negotiate support from centrist parties to stitch together a working majority. Mark Rutte's VVD is likely to again form the basis of a coalition, but it will have to work with the PVDA in order to govern. But the VVD may add one or two other smaller parties in an effort to make legislative approval in the senate easier. A VVD-PVDA coalition would control 80 of 150 seats in the lower house, but only 30 of 75 seats in the senate. The CDA and D66 are the probable candidates, with the CDA somewhat more likely given that its 11 upper house seats would secure a comfortable majority in the senate. But the CDA's reduced vote tally has eroded its negotiating leverage and one option is that a VVD-PVDA coalition negotiates CDA support in the senate only, rather than formally bringing it into the government. That scenario -- with only two parties in the coalition -- would make policymaking simpler, though a third party may reduce tensions between Labor and the Liberals.

The key signpost for future policy trends will be the cabinet formation process. Both Rutte (VVD) and Diederik Samsom (PVDA) know they need to form a stable government as quickly as possible, but the two parties must also work through a potentially acrimonious policy agreement process. In the end, future policy is likely to be somewhat more balanced between the left and right than it currently is and the next government could have the political wherewithal to approve needed and painful domestic healthcare and housing reforms. Nonetheless, with Rutte in line to return as prime minister, a high degree of continuity is likely. A long government formation process (which is common in the Netherlands) could be a signal of tensions though, and the agreement will signal how stable such coalition will be. Rutte's likely return as prime minister also signals that the coalition government will be pro-European and that it is likely to support ongoing fiscal rectitude, though the PVDA may push for some measures to stimulate growth.

Famke Krumbmüller is an associate with Eurasia Group's Europe practice.

By Carlos Ramirez

At first glance, the Institutional Revolutionary Party (PRI) is the clear winner of Mexico's July 1 presidential election. But a closer look at the results reveals a more muddled picture. On the surface, the PRI certainly came out ahead: After 12 years in opposition, Mexico's once-hegemonic power reclaimed the presidency and engineered a strong congressional coalition. Also, when Enrique Pena Nieto is inaugurated on December 1, the party will have governors in place in 22 states and control of a majority of state legislatures. Meanwhile, the PRI's main rival, the currently ruling National Action Party (PAN), fielded a third-place presidential candidate, lost control of the key states of Jalisco and Morelos, and saw itself reduced to the third-largest party in the lower house of congress.

The PRI's pick-ups and the PAN's failure to retain the presidency were largely predicted in the weeks preceding the election. What came as a surprise was Pena Nieto's inability to reach the critical 42 percent threshold of total votes, which translated into a weaker performance for the PRI in the congressional races. The party failed to achieve working majorities in both chambers, and the outcome fell far short of the PRI's expectations-especially in the senate, whose members are elected every six years. So in a dramatic turn of events, Pena Nieto will assume the presidency but will have to depend on legislative support from the PAN to secure his agenda.

The electoral outcome has damaged the center-right PAN, but it does have this one lifeline. As a pivotal party in congress, it will be the only powerbroker with which the PRI will be able to negotiate structural reforms. This is the inverse result of the 2006 election, which may provide some consolation to PANistas who watched the policies of outgoing president Felipe Calderon repeatedly held up by the PRI over the past six years. This time, it is the PRI that will be tied to the PAN for the entirety of the Pena Nieto administration.

This ironic turn of events clearly was not part of the PRI's plan. Pena Nieto intended, after winning by a double-digit margin and capturing both chambers, to propose moving forward on many long-stalled reforms, to secure congressional approval with or without PAN support, and to avoid having to undermine the vested interests that make up his constituency. The goal was to demonstrate the PRI's effectiveness from the outset and achieve solid results. The Mexican public, in turn, would see 12 long years of obstructionism and stalled reforms quickly vanish. But that plan collapsed last weekend.

So why, exactly, is the outcome so bad for the PRI? From a business perspective, it seems reasonable that the PRI and the PAN would come together to enact needed reforms. According to Pena Nieto and his advisers, the PRI is pursuing the same reforms that the PAN tried (and failed) to pass during the Vicente Fox (2000-2006) and Calderon (2006-2012) administrations: fundamental changes in the areas of labor, fiscal policy, energy, and competition. The PAN has no deep-seated ideological opposition to any of these (unlike the other major party, the Democratic Revolution Party, or PRD). And it does not have strong ties to the groups with an interest in maintaining the status quo. Conventional wisdom, therefore, would say that Pena Nieto will find a way to get the PAN on board to pass the relevant legislation.

It is not that simple, however. If the PAN learns from its historic defeat, it will quickly come to terms with the fact that it now has a golden opportunity over the next six years to push for a much deeper transformation of Mexico's political and economic landscape. In particular, the PAN can offer support for the PRI's structural reforms in exchange for dismantling the vestiges of the old PRI-led corporatist coalition that survived Mexico's transition to democracy. (The PAN struggled against this coalition during its 12 years in the presidential residence.)

Accomplishing such a feat is a pretty straight-forward task, as there is no shortage of issues on which the PAN can seek concessions in exchange for supporting reforms. The list is large -- underscoring the many problems left untouched during the past dozen years-but certainly achievable. Here are some of the topics that could be up for negotiation:

• Changes to the political regime: Allowing legislators and municipal presidents to be reelected, instituting a second round in presidential elections;
• Improved governance: Reforming Mexico's dysfunctional federalist arrangement, seeking to reduce the power of unions in the education system and within the public sector-bureaucrats, oil company Pemex, and the Social Security Institute, for instance-by mandating transparency and democracy within them;
• Macroeconomic reforms: Limiting the capacity of governors to go into debt and making them more accountable for expenditures, forcing state governors to keep transparent fiscal accounts, reforming Mexico's various broken pension systems;
• Changes to the energy sector: Allowing risk-sharing contracts in the oil sector and preparing Pemex for a future stock float, opening the refining and petrochemical sectors; and
• Enhancing competition: Strengthening the power of the regulatory agencies including the Federal Commission of Telecommunications and the Banking Commission.

There is no question that the PAN will support these structural improvements. After all, the party's only chance of returning to power relatively quickly is if Mexico breaks with its corporatist past and modernizes at a faster pace. The real question is whether Pena Nieto is serious about enacting real change-serious enough that he is willing to defy the rent-seeking coalition that backs him. If he is truly committed to advancing reforms (and is ready for the epic, vociferous resistance sure to emanate both from within his own party and from the PRD), then Pena Nieto might succeed in becoming the first president to usher in a historic transformation. In that scenario, the country will have undergone unprecedented economic reforms during his administration and will function in 2018 within a renovated institutional framework that empowers Mexicans to reach their real potential. If, however, Pena Nieto is not committed enough -- if he ends up preferring accommodation rather than transformation, and if the dead weight of the PRI's past prevails once again -- then Mexico will remain condemned to the same mediocre performance witnessed over the past decade.

The stakes for Pena Nieto are clear. Will Mexico's new president be transformational, or will he prefer to continue playing the role of a soap-opera actor? Like Mexico's famed telenovelas, the election had a surprise ending.

Carlos Ramirez is an analyst in Eurasia Group's Latin America practice.

By Alexander Kliment

Vladimir Putin thinks that Russia's elections are over, and that it's time to move on with business as usual. The trouble for him -- and the system of "managed democracy" he has built -- is that Russia's season of elections is just beginning.

In his final address as Prime Minister to Russia's State Duma (the lower house of parliament) on Wednesday, Putin, who will return to the presidency on May 7, explained that in a "mature democracy, after elections are concluded there begins a more important phase of work." He called for unity and an end to the "heightened emotions" that have recently taken hold of Russia's politics.

So much for that. A few minutes later, the entire faction of the left-leaning Kremlin-created opposition party A Just Russia walked out of the hall in response to Putin's defiantly tin-eared response to a question about the disputed mayoral election in Astrakhan. In that city, the largest administrative center in Russia's Caspian littoral, A Just Russia member Oleg Shein has now entered the third week of a widely-publicized hunger strike to protest well-documented fraud in a mayoral vote that he lost on March 4, the very day that Putin was returned to the Kremlin.

The battle in Astrakhan, which anti-corruption crusader Alexey Navalny and other opposition figures have joined, follows a mayoral election in the northern city of Yaroslavl, where a former member of Putin's United Russia (UR) party ran as an independent, built unified support from several opposition groups, shrugged off scathing coverage from local media, and trounced the government's preferred candidate. More than a thousand election observers, mainly from Moscow, arrived to monitor the vote.

The controversies in Astrakhan and Yaroslavl have mainly to do with local issues, and Putin still has pre-eminent control of the country. United Russia, however tarnished by its new sobriquet as the "party of crooks and thieves," maintains its chokehold on the legislative and executive branches at all levels of Russian politics. But these local episodes underscore an emerging national reality: Opposition politics is taking root in Russia, and the regions will be the most fertile ground.

Despite Putin's wishful thinking, election season is far from finished. Later this year, regional legislative elections will be held in a half dozen localities. A similar number will vote in 2013 and 2014. By then, Russia's opposition forces may well have coalesced into a coherent national force, and voters will choose a new city council for Moscow, a city that Putin actually lost in last month's election.

Moreover, the Duma is expected to approve a bill in coming weeks that will reintroduce direct election of regional governors, though the president can still "filter" the candidates. Several regions could elect new leaders as early as this fall.

These elections will take place at a moment of unprecedented civil society activism, a trend that will cast a bright light on Russia's brand of democracy. Candidates for posts ultimately beholden to the Kremlin for their authority and resources must court an electorate increasingly skeptical of the prevailing power elite. Putin's "vertical of power," the system he has used to maintain political control across the country, already brittle thanks to the weakness of Russia's governing institutions, could begin to show real signs of stress as an increasingly restive public watches election results with new interest.

If so, the country's nascent opposition will have to begin to build a much broader infrastructure to help its leaders speak to a national audience about local problems. Change won't come quickly. Putin's approval rating stands at 68 percent, and Russia's economy is performing reasonably well. Moreover, few key regions face legislative or possible gubernatorial elections in coming months. But at the regional level, increased activism and attention from civil society and opposition groups, coupled with a threatening crisis of legitimacy for United Russia, could introduce a new element of unpredictability into local politics and, by extension, into center-regional relations.

Russia's opposition has a lot of building to do, but at least it now knows that a growing number of Russians are paying attention.

Alexander Kliment is an analyst in Eurasia Group's Eurasia practice.

Today, we turn to the last in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.

Here's a summary:

Venezuela -- A lose-lose election. No matter who wins the October 7 presidential election, Venezuela's political and economic conditions are likely to worsen. President Hugo Chavez would maintain the same distorting economic policies, and the economy would struggle to overcome the effects of a large pre-election increase in spending and debt issuance. An opposition win would likely lead to an eventual improvement in economic policy, but the transition could produce instability as Chavez supporters, who would still control most of the state apparatus, try to counteract reform. 

Q- Can Chavez win another election? What will affect the outcome?

A- Chavez has the edge because of his relatively persistent popularity despite a growing dissatisfaction with the status quo. The president's popularity (his approval ratings are currently around 50 percent) comes despite high inflation (estimated at nearly 28 percent in 2011), low growth, good shortages, and an electricity crisis. To alleviate these negatives, Chavez will likely engage in a massive campaign spending spree, fueled by high oil prices. His government will also issue a large amount of debt to provide dollar-denominated assets to curry favor and counteract dollar shortages. The major wild card is Chavez's health. He announced in July that he was diagnosed with cancer, but little is known about the severity of his illness. Should his health deteriorate significantly, Chavez's reelection chances will diminish, as the public's faith in his ability to lead drops.

Q- Who is the opposition?

A- The Coalition for Democratic Unity (MUD) will select its presidential candidate when it holds primary elections on February 12. Miranda Governor Henrique Capriles Radonski, a young and popular governor from one of Venezuela's most important states, is the favorite. The opposition hopes to capitalize on the growing dissatisfaction with Chavez and to continue the momentum from the 2010 legislative elections, when a unified opposition list of candidates won 54 percent of the popular vote against the president's United Venezuelan Socialist Party (PSUV). The MUD would promote more orthodox macroeconomic policies, likely leading to lower inflation and more fiscal stability in the long run. The opposition would also adopt oil-related policies that are more attractive to foreign investment.

Q- What are the different risks arising out of the election outcome?

A- A Chavez win would mean a continuation of the same economic policies that have produced widespread market distortions and a strained relationship with foreign oil companies. It will be even harder for the country to recover from the large uptick in spending and debt Chavez is likely to push to improve his election chances. Given Chavez's wide-ranging power within the government, however, it would be easier for a Chavez government than a more fragmented opposition to make some economic adjustments, such as devaluing the currency or tweaking the foreign exchange system.

An opposition win, while positive for long-run growth, could paradoxically lead to more instability in the short-run. The government would be opposed at every turn by Chavez allies, contributing to policy paralysis. The most stable outcome would probably occur if the opposition wins, and Chavez's health makes it difficult for him to continue leading his movement behind the scenes. The most unstable environment would likely arise from a rapid deterioration in Chavez's health, causing him to abandon the presidential race and creating a power vacuum that would roil both the governing party and the opposition.

By Daniel Kerner

It's been a busy few weeks in Latin America, with citizens scurrying to the polls in Guatemala, Nicaragua, and Argentina. In Guatemala and Nicaragua, the elections left some uncertainty. Will former army general Otto Perez Molina's tough rhetoric translate into meaningful change in Guatemala, especially where crime and taxation are concerned? And with rampant electoral fraud alleged in Nicaragua, will the United States and the European Union recognize incumbent Daniel Ortega's nearly 32-point win? There are fewer questions in Argentina, where Cristina Fernandez de Kirchner's reelection promises more of the same-and possibly even more of it, if she tries to tweak the constitution to give herself a shot at a third term.

Despite Argentina's staggeringly high inflation (around 25 percent, according to private estimates), worsening fiscal position (spending is up 35 percent so far this year), declining trade surplus (imports have grown 37 percent year-to-date, while exports have gained only 28 percent), and steady capital flight (around $3 billion a month for the past few months), Fernandez de Kirchner swept the Oct. 23 elections. Macroeconomic imbalances notwithstanding, GDP continues to expand, unemployment is low, and wages have kept up with inflation. And this, together with expansive social policies, has improved voters' well-being. Now backed by nearly 54 percent of the vote, as well as comfortable majorities in both the lower house and the senate, Fernandez de Kirchner has little incentive to steer economic policy in a more orthodox direction-including, say, less expansionary fiscal and monetary policies to contain inflation or easing restrictions on foreign trade-especially as Argentine authorities watch the US and Europe struggle under just such a framework.  

The government's moves since the elections support this more-of-the-same outlook. Three days after Fernandez de Kirchner's win, her administration decreed that it would force energy and mining companies to repatriate all of their export revenue (previously, they'd been allowed to keep 70 percent and 100 percent of it abroad). This about-face was likely an attempt to reduce downward pressure on the currency, a result of the deteriorating trade balance and rising demand for dollars. The government also limited access to foreign currency to stem capital flight. The central bank has already spent more than $4 billion of its reserves trying to prop the peso up, and while the administration is loath to let the currency fall, it's likely to keep proffering ad hoc fixes like forcing companies to repatriate revenue or imposing foreign exchange controls rather than making any serious adjustments. Likewise, while the government announced earlier this month that it would reduce subsidies to the energy and transportation sectors, thereby curtailing spending, the proposed $140 million reduction is miniscule compared with the roughly $17 billion that the government spends on subsidies. And most of that $17 billion will probably come in the form of higher taxes rather than higher energy prices (which would stimulate investment).  So no game changer there.

As a result, Argentina's economic distortions are unlikely to improve much, and could worsen if the world economy languishes further. Fernandez de Kirchner will have to be careful, though. Her popularity depends in part on the country's economic conditions, and her chance of securing a third term depends on her popularity. She'll need support from two-thirds of both chambers to make the necessary constitutional adjustment -- a challenge, but not an impossibility. It remains to be seen whether she'll test the waters this year. 

Daniel Kerner is an analyst in Eurasia Group's Latin America practice.

By Daniel Kerner

President Cristina Fernandez de Kirchner scored a clear victory in Argentina's first ever open primary election on August 14, setting the stage for her to sweep the October 23 presidential election. Fernandez de Kirchner's win in the primary came on the back of Argentina's strong economic growth. That growth, however, is based on unorthodox economic policies that are unlikely to change if Fernandez de Kirchner wins reelection, and that implies macroeconomic concerns in the future.

Fernandez de Kirchner is in a very strong political position. Popular support for her is at the highest levels since she came to office in December 2007. Moreover, several indicators suggest voters are content with the status quo and that there is little demand for change. Fernandez de Kirchner's 50.06 percent of the primary votes compares favorably to the 45.6 percent she won in the 2007 presidential elections. The increase is mostly because of robust economic growth and the opposition's weakness.

Fernandez de Kirchner's overwhelming victory bodes very well for her chances in the October elections. Participation was high at more than 77 percent, which means that these results should be taken as indication of how voters are likely to behave in October. In fact, support for her could even grow as her front-runner status attracts additional voters.

In contrast, the opposition is in disarray. There is a substantial distance between Fernandez de Kirchner and other candidates and no other candidate is likely to emerge as serious competitor. Ricardo Alfonsin obtained only 12.7 percent of the votes, a former president, Eduardo Duhalde, got 12.6 percent, and the socialist candidate Hermes Binner received 10.27 percent.

There is some speculation that opposition parties could coalesce behind a single candidate in October. That is unlikely. All three opposition candidates were close and there is little incentive for any of them to step aside. Additionally, any decision to leave the race would mean abandoning that party's candidates for legislative and local elections, and that would be resisted. Barring a major economic or social deterioration in the run up to the October elections, Fernandez de Kirchner is favored to win. In fact, the primary is likely to generate the perception that Fernandez de Kirchner is unbeatable.

With Fernandez de Kirchner on track to win reelection, attention now turns to what might happen during her next term. There is unlikely to be any major change or improvement in economic policy after the election, in fact, quite the opposite. Strong growth and popular support mean that the government perceives little need to adjust policy. Fernandez de Kirchner's likely victory in October (and probably with a comfortable margin) will only reinforce this feeling. In addition, the profile of some of the individuals that seem to be gaining strength within government suggests that Argentina's unorthodox economic policies are likely to continue, which bodes poorly for the country's macroeconomic outlook.

Daniel Kerner is an analyst in Eurasia Group’s Latin America practice.

By Risa Grais-Targow and Daniel Kerner

Venezuela's President Hugo Chávez is currently recuperating in a Cuban hospital after emergency surgery on a pelvic abscess. Or so goes the official story. However, in the three weeks since the June 10 operation, rumors have metastasized into full-blown speculation that he is in critical condition (perhaps with prostate cancer) and that Venezuela is on the verge of having to find a successor to the man who has run the country for 12 years.

Chávez's uncharacteristic quiet since the surgery has been feeding the rumors. With the exception of several tweets and a call into a local television show immediately following his surgery, Chávez has maintained complete silence. Also contributing to the uncertainty has been mixed messages from his close associates. Foreign Affairs Minister Nicolas Maduro recently said Chávez was "fighting for his health" while Vice President Elias Jaua downplayed the severity of his illness. If Chávez remains absent during the upcoming July 5 independence day celebrations, it will confirm that his health situation is grave.

If Chávez is indeed seriously ill, a number of scenarios present themselves, all of which result in greatly heightened short-term political and economic uncertainty. If he is forced to step down in the near term or if he abandons the 2012 presidential race, his Chavista movement will face significant challenges. There is no clear successor. Influential figures, such as Jaua (next in line if Chávez were to die or resign) or Maduro, lack popular appeal. Others, such as Finance Minister Jorge Giordani or PDVSA President Rafael Ramirez, strongly influence particular sectors but lack his political skills or clout. Interestingly, Chávez's younger brother Adan has ramped up both his revolutionary rhetoric and his public visibility, suggesting that he may be preparing himself for a transition. In the end, however, Chavismo's political survival would be in question if Chávez leaves the scene.

Infighting could also undermine policymaking. Venezuela faces serious policy issues. The country's electricity grid is failing and power supply does not meet demand, and the oil sector desperately needs additional investment in order to boost production (the government's principal revenue source). Squabbles could also distract from delivering on social programs, the cornerstone of the movement's popularity.

All of this is, however, potentially good news for the opposition. The opposition has been struggling to establish a united front ahead of what was already shaping up a tight election. If Chávez is out of the running, the opposition would have a better chance of winning. More importantly, if they were to win, they would have an easier time managing the transition than if Chávez were to lose the race.

Risa Grais-Targow is an associate with Eurasia Group's Latin America practice. Daniel Kerner is an analyst with Eurasia Group's Latin America practice.

By Daniel Kerner

Venezuela's President Hugo Chávez faces the real possibility that he may lose the 2012 presidential election after more than a decade in office, in part because of his administration's failure to ensure adequate power supplies. Venezuela was forced to implement strict rationing in 2010, which thwarted the country's economic recovery. But while last year's problems were caused mostly by shortfalls in rain that stressed hydropower reservoirs, the problems are now the result of the government's failure to meaningfully address capacity and transmission problems.

The recent measures to address the situation are unlikely to solve the sector's problems. On June 13, the government announced it will offer up to 50% reduction in rates to households who reduce their consumption by up to 20%, but will also fine consumers 200% of their bill if they increase consumption by over 20% from a 2009 baseline. In addition, commercial users have been asked to install their own generating capacity, and face surcharges or electricity cuts if they do not. Finally, illuminated billboards will be shut off after midnight. The measures could contain demand, but do not address the fact that the system cannot meet peak demand.

The government has promised to increase generation capacity, the only real solution to the current structural problems. But it is unlikely to deliver given financial and logistical challenges, and Venezuela will still face transmission bottlenecks. The country is estimated to have around 24,000 MW of installed capacity; effective capacity, however, is around 17,000 MW. The government claims it installed 1,250 MW of new capacity in 2010 and will install an additional 2,568 MW in 2011, but the data's reliability is suspect -- the government stopped publishing data on Venezuela's power system last year, a tacit admission that the problems are severe. The government has also promised to invest some $21 billion in the sector over the next several years, but a long list of spending commitments and the government's proven inability to manage the electricity sector means these promises are hard to take seriously.

The shortages are likely to have a dramatic impact on an economy that is only now slowly recovering -- it grew by 4.5% in the first quarter, the first positive figure in a year and a half. Similar measures in 2009 and 2010 helped cut industrial activity by 6.4% in 2009 and 3.4% in 2010. Energy saving measures could limit industrial production, and blackouts could disrupt oil output.

Higher energy prices and electricity shortages, however, pose a serious political liability for Chávez's hopes of reelection, especially if they affect economic growth. In 2009, power shortages helped reduce his approval ratings from 61% to around 50%. A variety of opinion polls show that Chávez has lost support. The government has done its best to protect Caracas from the power shortages as a means of avoiding the political costs. But the state of Zulia, which recently suffered a day-long blackout, is home to the country's second largest city, Maracaibo.

Chávez will still likely have an edge over the opposition, however. He does have a strong group of core supports among the rural poor who are over represented in the legislature and he is gearing up to expand debt-fueled spending on social programs. But the election is shaping up to be the tightest of his decade-long run as president and Chávez is more vulnerable than ever before to economic and social problems.

Daniel Kerner is an analyst in Eurasia Group’s Latin America practice

By Antonio Barroso

Spain's ruling Socialist Party (PSOE) suffered a major defeat in Sunday's regional and local elections, shifting the political focus firmly to the national parliament. Prime Minister Jose Luis Rodriguez Zapatero remains unlikely to resign, despite calls from the opposition Popular Party (PP). The results do, however, complicate the government's efforts to introduce further reforms, which however remain likely to be approved.

The PP trounced the PSOE, leading in the overall vote count by more than ten percentage points. The PP retained control of regions and cities, such as Madrid, but also scored wins in former PSOE bastions such as Castile-La Mancha and Extremadura. The vote reflects the historical volatility of leftist support for the PSOE compared to the well understood stability of support for the PP.

The defeat puts the socialists on the defensive, but Zapatero has no intention of either calling an early legislative election or holding a confidence vote for now. The PSOE will stick to its strategy: wait for the economy to recover and give the party enough time to select a new prime ministerial candidate. The government will likely continue to push for reforms such as a review of collective bargaining agreements or the restructuring of the Spanish financial sector in order to avoid an external intervention. But those reforms will be tougher to push through parliament now.

The PSOE will try to rely on its legislative deal with the Nationalist Basque Party (PNV) and the Canary Coalition (CC) to implement economic measures. Although PNV leader Inigo Urkullu recently threatened to withdraw from the agreement if extreme-left wing nationalist party Bildu was not authorized to run in the elections, the PNV is likely to stick to the agreement. Urkullu wants to use the PNV's leverage at the national level to control the debate about the end of violence in the Basque Country and to ensure that the national government follows through on its promise to grant more policy autonomy to the regions. Urkullu also knows that a PP government with an absolute majority, as some polls currently suggest is a possibility, would be less sensitive to demands from the autonomous regions.

This scenario could change, however, if Zapatero is forced into implementing further austerity measures in order to comply with deficit targets. Additional spending cuts would almost certainly increase social discontent and the nationalist parties could decide to withdraw their support in order to avoid sharing the political penalties implicit in additional austerity.

Antonio Barroso is an analyst with Eurasia Group's Europe practice.

By Risa Grais-Targow

Votes are still being tallied for Ecuadorean President Rafael Correa's May 7 constitutional referendum (to his own 2008 constitution), which asked voters to weigh in on 10 issues ranging from banning bullfighting and gambling to granting Correa greater control over the media and the judiciary. As this went to press, voters looked likely to approve the bulk of the proposals, though two of the most important were up for grabs. The referendum has caused a few jitters, in part because of the precedent set by Correa's northern neighbor, President Hugo Chávez, who enjoys broad control over Venezuela's media and institutions and convinced voters to abolish term limits in a 2009 referendum. But even if the final count enhances Correa's powers, he won't be the next Chávez.

For one, Correa is likely to get closer rather than more hostile to the United States in the aftermath of the referendum. Bilateral relations have been shaky since April, when Correa declared U.S. Ambassador Heather Hodges persona non grata after WikiLeaks released cables suggesting that Correa was aware of corruption in the upper echelons of his police force. The accusation undermined Correa's campaign rhetoric about sprucing up Ecuador's tarnished justice system. In retaliation, U.S. President Barack Obama expelled Ecuador's ambassador, even while the renewal of the decades-old Andean Trade Promotion and Drug Eradication Act (ATPDEA) remained outstanding. The trade preferences expired in February, just in time for Ecuador's flower exporters to lose out on the Valentine's Day market. They and other exporters are still clamoring for ATPDEA to be renewed. Once Correa's campaign for more control has subsided, he'll likely heed those calls and sidle up to the United States again in order to hold onto the U.S. market.

Moreover, the referendum is essentially a popularity contest -- and one from which Correa is likely to emerge victorious. He is an appealing candidate and a good campaigner, and he has an approval rating of 57 percent. Winning yet another contest should bolster his confidence further by reinvigorating his mandate -- which, maybe paradoxically, will make him less inclined to behave rashly.

That said, if the unexpectedly close outcome gnaws at Correa, there could be a few bumps in the road ahead. The two items in the referendum that would clinch a Chávez-like power grab for Correa are those pertaining to the media and the judiciary. They are the two he likely cares most about and are also the most closely contested. The proposal regarding the judiciary would allow Correa to essentially handpick judges, concentrating ever more power in the executive and limiting the checks on the president's authority. If the measure is approved, Correa could also wield his dominion over the courts to curb any serious political threats. The question pertaining to the media, meanwhile, would create an oversight body to regulate "discriminatory media" -- as defined by the president. But the close race suggests that Ecuadoreans are less enthusiastic about enabling a strongman than Venezuelans were. That's a good sign, even if Correa wins this round.

Risa Grais-Targow is an associate in Eurasia Group's Latin America practice.