Geopolitical risks have undoubtedly become top concerns for corporate leadership worldwide. How should companies manage these often existential risks? Who should be responsible for monitoring and deciding how to mitigate or respond to adverse geopolitical events? What major risks does the current geopolitical landscape pose for Latin America? And what are the most significant opportunities for the region?
To address these questions, Latin Trade interviewed The Honourable Alexander Brennan, Founder and CEO of Brennan & Partners, a leading London-based strategic advisory firm providing Public Affairs & Communications, Strategy and Business Development services for companies, investors, and governments globally.
What are the most relevant geopolitical challenges facing Latin America in 2024 and beyond?
Before considering the challenges faced by the region in 2024 and beyond, I would like to place Latin America in its proper global context; the region is facing a number of geopolitical challenges but, in relative terms, may reasonably be regarded as stable. This relative stability is notable given the well-publicized live conflicts elsewhere: in Eastern Europe, where a conflict is now well into its third year; in the Middle East, where an almost year-long conflict continues to proliferate; in the South China Sea, where tensions continue to increase; and in the United States, where a potentially divisive election is approaching. All these challenges make for a geopolitically unstable world.
This relative stability that Latin America is enjoying, is something that can and should be leveraged by regional actors to encourage foreign investment.
I also want to re-state a well-known point: Latin America is rich in resources that the global economy is dependent upon for growth, satisfying food security, energy needs, energy transition agendas, critical mineral agendas, and increasingly, supply chain agendas. The latter two are particularly vital components of nearshoring and friendshoring.
I am reminded in this context of Latin America’s geostrategic advantage by President Cardoso of Brazil’s comments when reflecting on the growing U.S.-China tensions in the region. He remarked “I think we have to take advantage of our greatest strategic asset. Brazil is far.” In that simple proposition you may understand what the region’s advantages are.
Returning to the challenges, Latin America faces several in 2024 and beyond. I’ll highlight some of them grouping them into two categories: intraregional and extra-regional.
To the intraregional, political instability and governance issues continue to afflict the region. I am thinking, in particular, of the relative weakness of institutions at the sovereign level and beyond. Many such institutions struggle with governance and rule of law issues; a lack of transparency and challenges with corruption also continue to undermine institutional effectiveness, leading to a lack of public trust in governments and their leaders, which ultimately contributes to political instability. Regional institutions would benefit from strengthening to enable them to deliver closer integration.
The other point I will make on the subject of political stability and governance issues, which is my first risk, is that populism and authoritarianism continue to rear their heads. There are well-publicized and recent examples of this in the region. Indeed, populism and authoritarianism have contributed to political instability, they have eroded democratic norms. In several countries, they have called into question electoral processes, something we have recently seen in one country in particular.
Challenge number two in the region is insecurity driven by organized crime, which introduces significant challenges across a number of countries. Organized crime elements exert substantial influence over local governments and economies and are all too frequently linked to issues of violence and insecurity.
The third challenge I identify is economic inequality and poverty, linked, of course, to crime and political instability. Economic disparities are a real issue, with levels of income inequality across Latin America ranking amongst the highest in the world. This inequality contributes to social unrest, crime, political instability, and increasingly, to migration challenges. One tangible example of the consequences of economic inequality is the growing migration flow through the Darien Gap, which is indicative of the scale of the problem.
Secondly – and in relation to economic inequality and poverty – is the region’s dependence on commodities. Many Latin American countries continue to be understandably but disproportionately reliant on the export of commodities to a handful of key buyers.
When those buyers experience economic downturns, exporting countries suffer a corresponding downturn in demand for their commodities, which leads to economic shocks. The exposure to commodities downturns and global market volatility is a challenge for which the clear solution is increased economic diversification.
Further intraregional challenges include environmental challenges: Latin America is, as all regions are, vulnerable to the impacts of climate change. More frequent and severe natural disasters only exacerbate the issues of poverty, economic inequality, deforestation and general environmental degradation. The Amazon rainforest, in particular, is under severe threat and that has significant implications for global climate change and biodiversity.
Turning our attention now to extra-regional challenges, the greatest is that of geopolitical dynamics and foreign influence, and the often destabilizing manner in which those dynamics are playing themselves out in the region.
There are, of course, the trade plays between the United States and China. In recent decades, Latin America has become an area of significant geostrategic interest for China, and that interest in the region has challenged the United States’ own regional trading footprint. The influence of other states and actors in the region has also been made manifest.
A final subset of geopolitical dynamics and foreign influences is the upcoming U.S. election and what a Trump or Harris administration would mean for Latin America. There are some early indications on what those might be, but it is still too early to make concrete predictions.
Returning to my introductory remarks and concluding on a positive note, Latin America offers solutions to many of the challenges the world is facing at the moment in the areas of food security, energy security, and demand for critical minerals, and the region can also be a voice on the global stage in advocating for the environment.
Are there any new opportunities for Latin American companies that can be leveraged in probable future scenarios?
I believe nearshoring and friendshoring will together continue to represent an opportunity for Latin American countries, and particularly Mexico, which has been the primary beneficiary of the increasing geopolitical tensions between U.S. and China. Mexico recently overtook China as the U.S.’s largest trading partner, and with U.S.-China tensions continuing to increase unabated, this trend is likely to continue.
Mexico offers a skilled labor force and relevant infrastructure, geographical proximity and membership in the USMCA which make it an attractive partner for the United States, though a Trump versus Harris presidency may alter this calculus. This is something we will continue to monitor. In summary, nearshoring, the benefits of which are already extending to other countries in the region, is one opportunity for Latin American companies.
The second opportunity for Latin America, perhaps less well defined, is the fact that in 2024 many tens of countries and hundreds of millions of people went to the polls and voted-in new governments in countries all over the world. By the end of 2024, we will find a world in which a large number of countries, including key players, are under new leadership.
This is significant, as it offers an opportunity for Latin American governments and companies to engage with countries that are under new or reelected leadership, particularly those that are taking a new attitude to trade and investment with Latin America, are looking to renew their emphasis on it, or are looking to, for example, relax trade barriers.
Of course, political change in 2024 is a double-edged sword with the potential to result in challenging bilateral relations, in light of the resource-rich nature of the region.
Another opportunity that Latin American companies have, is to take advantage of the strengthening global response to climate change. It’s highly probable that in the coming years, we will see the continued intensification of global efforts to meet or surpass Paris climate initiative pledges. This would represent an opportunity for Latin American companies to establish themselves as global bellwethers and engage in thought leadership in the race to net zero. In a region with such a rich range of delicate ecosystems and biodiversity to behave responsibly should, on the face of it, be great for Latin American companies, and the example they can set for companies elsewhere would be notable. Many companies across the region are actively well placed or can actively benefit from this trend too.
With the energy transition ramping up globally, and the increased investment governments have committed to making in renewable energy sources such as wind and solar, we can expect to see a necessary increase in extractives, and in particular, certain commodities like lithium, by some orders of magnitude. Companies that capitalize by investing in renewable energy opportunities could then also participate in carbon trading markets. That would be the second opportunity for them.
The third opportunity I would like to discuss has already been seen in other areas globally: the continued rise of ecommerce and the expansion of digital payment platforms. This trend will be especially beneficial for small businesses and households, given the currently high level of informality in the economies of Latin America which has historically made it more difficult for large segments of the population to engage with financial institutions. The ongoing formalization of Latin American economies comes at an opportune time, as regional governments should be looking to capitalize on their demographic dividends and integrate younger members into the workforce.
A final opportunity for the region lies in the area of infrastructure. Major infrastructure projects in Latin America represent an opportunity for regional companies. There has been a marked uptick in planning and building major infrastructure projects across the region seen in Mexico in the Tren Maya and the Interoceanic Corridor; the Chancay deep-water port in Peru; the Panama Canal’s new water reservoir; and the proposed Bi-oceanic Corridors both in Central and South America, which would be significant undertakings. As other powers across the world like China continue to see Latin America as a region of greater strategic importance and as the U.S. seeks to maintain its position of influence in the region, it is reasonable to assume that the number of large projects such as these will continue to increase.
Latin American nations face many risks, including the increasing probability of climate-change-induced natural disasters, harsher verbal confrontations among political leaders, and slower GDP growth stemming from low productivity and lower commodity prices. Based on your experience, what best practices should countries and companies in the region adopt to better manage these and other material risks?
I believe there is no silver bullet for nations and companies seeking to navigate the very distinct and complex risks within the region. However, something made evident by the pandemic was the enormous importance of developing contingency plans for destabilizing events, whether these are economic shocks, natural disasters or security issues, and the failure of countries to have such plans prepared. Having a plan in place and the necessary actors primed to coordinate a response can materially mitigate the negative effects of these shocks.
When developing specific policies to combat risks that countries have more direct control over, it is crucial that risks are approached as multifaceted and complex, not oversimplified, and that there is a joint, coordinated approach between the public and private sector, or within the public sector if it is leading the response to a given risk. Climate change is a good example of this. It may not be something an individual state can control, but the devastating effects of it could be mitigated by implementing successful policy in areas such as agriculture and logging. An illustration of this, and a major factor behind emigration from and destabilization in Central America, is the failure of regional crop yields, due to droughts that have been exacerbated by poor small-share agricultural practices. Those practices could be improved with more effective policy and strategic investment.
Effective policy, of course, requires the absence of corruption, the implementation of transparent processes, the elimination of unnecessary bureaucratic hurdles, and above all, a strict adherence to the rule of law which must underpin everything.
These are prerequisites for the effective functioning of the modern state and the management of risk.
Countries and companies stand the best chance of succeeding in mitigating against these risks when they act in concert with other states through existing regional fora, and when they work to strengthen those regional fora further. At the same time, governments should engage with the private sector on both a national and regional level to ensure that the public and private sector approach to known risks is joined up. Furthermore, countries should also ensure that companies have the opportunity to convene and act in greater harmony and coordination through national or regional Chambers of Commerce, or business groupings.
Greater regional integration at the public sector level is certainly a way of mitigating against those risks, and engagement with the private sector is crucial. This requires attitudinal changes in terms of the solutions that need to be achieved, but these are examples of ways in which the risks mentioned earlier can be mitigated.
Should the role of the corporate head of government affairs increasingly include that of Chief Geopolitical Officer? Or should risk and opportunity analysis be conducted by experts positioned elsewhere, such as closer to the Board of Directors or the CFO?
Only recently I was reading an article in a publication, which had carried out a survey of a few hundred institutional investors. All of them cited geopolitical risk as their number one concern. Other polls, as a PwC poll, and the Saïd Oxford Business School-GlobeScan poll, suggest that geopolitical risk is ranked top amongst C-Suite leaders in Europe and beyond.
There’s an enormous amount of evidence for the fact that geopolitics is now a concern for corporate leaders.
There isn’t a one-size-fits-all approach, with different businesses of different sizes operating across different sectors, but almost all companies need to be mindful of geopolitical risk in 2024, and take relevant advice.
Since 2020, established political and economic norms have been upended, and there’s been an encouraging recognition within business of the equal importance of geopolitical challenges and opportunity analysis in this new landscape. I think corporate decision makers are increasingly recognizing that this new geopolitical settlement is remote from the multilateral and rules-based order that arguably characterized global relationships for the circa 30 years following the end of the Cold War. Obviously, today’s geopolitical settlement represents a sharp departure from that, and decision makers are increasingly assessing geopolitical risk alongside their traditional evaluations of risk which may include economic and climate risk. It is an imperative that they also consider the interconnected nature of these risks.
How companies resource the requirement for that geopolitical advice will depend on their perceived exposure to such risks and accompanying budgets for purpose. For example, I would expect a multinational corporation in Latin America with a global supply chain to have permanent in-house capability, but to outsource as required to sectoral and/or regional experts. This function should report to the Board
I think that given the impact of security, financial, healthcare, climate or cyber risks, and that these could be existential for companies, their scrutiny is required at the highest level of corporate decision-making.
Smaller companies, with lesser geographical footprints might choose, for budgetary reasons, to rely more heavily on outside advice rather than having in-house capability with the fixed cost that that would imply for their budgets.
Given the absence of meaningful budgets for purpose within MSMEs, these firms may be required to adopt a more reactive than proactive approach: mitigation after the event rather than pre-empting crises before they arise.
Even acknowledging the unavailability of budgets for purpose, such firms may wish to avail themselves of access to platforms which monitor such risks, and which can provide companies with information in real time, or at least on a constant basis, so that they have a steady stream of information relating to geopolitical risk and therefore at least a general awareness of what risks could arise for their business.
As a general remark, cyber risk, especially in the age of AI, is a top concern for businesses and governments alike. We recently saw this quite dramatically with an outage that impacted financial markets, travel, logistics, payments – all the functions which we global citizens rely on day-to-day to carry out our activities. I think it is incumbent on all businesses, large and small, and on state actors to have appropriate protections and contingency planning in place for cyber risk, including cyber AI risk. This should come in recognition of the online world that many or all of us live and work in, and the increasing threats to it from hackers and AI-powered cyber-attacks.
