Daniel KernerManaging Director, Dinámica Global Insights · Executive briefing on Latin American geopolitics, macro risk, and U.S.–global crosscurrents.
Latin America gains from high oil prices, but energy pressures continue to generate political costs
The Middle East conflict continues to put upward pressure on energy costs. Further Houthi attacks on Saudi Arabia, including energy infrastructure, increase uncertainty. Higher shipping costs are widening price differences between markets, leaving the United States relatively better positioned than Europe and Asia.
Oil producers in the Americas can benefit without insulating consumers from the shock. Investment and production growth support several Latin American exporters, but Mexico is less well placed to capture those gains. High gasoline and diesel prices remain politically damaging, and additional Russian diesel exports are unlikely to provide substantial relief.
Affordability pressures favor Democrats ahead of the U.S. midterms. Higher inflation and fuel costs are weighing on Trump’s approval. Democrats are positioned to perform well, although narrow margins leave control of the Senate uncertain.
Brazil
Brazil’s runoff remains extremely close, while reform expectations exceed the political mandate
Flávio Bolsonaro’s polling advantage has narrowed, but a slim victory remains our base case. Initial post-first-round leads of roughly four to six points have narrowed to around one to three points. Lula’s improved campaign has helped, but a close contest was always likely in a deeply polarized electorate.
Small polling errors could materially change the apparent balance of the race. Different methodologies produce different estimates, and another miss of several points remains possible. The tightening supports caution about the margin rather than confidence in a decisive victory for either side.
Flávio has an easier route to additional votes than Lula. Most voters who supported eliminated candidates chose options from the center-right to the populist right. Flávio needs to consolidate much of that electorate; Lula must also mobilize a significant number of people who did not vote in the first round. Historically limited changes in abstention between rounds make Lula’s task harder.
Lula is using spending initiatives and the advantages of incumbency to close the gap. The government apparatus can help, but does not guarantee reelection. Jair Bolsonaro’s 2022 defeat demonstrated that additional spending may fail to overcome broader economic and reputational damage.
Rejection of the alternatives is a stronger electoral force than enthusiasm for sweeping reforms. Both candidates and their movements face substantial resistance. The right’s gains in Congress and governorships should not be interpreted as broad support for deep cuts to social spending, which remain unpopular even among many right-wing voters.
An ambitious opening agenda could encounter resistance by early 2027. Flávio would likely attempt significant initiatives early in his presidency, but could overestimate his mandate. Political constraints may become clearer in the first or early second quarter, shortening his honeymoon and tempering market expectations.
A constrained reform agenda would still create opportunities for investors. A Flávio administration could begin trade negotiations with Washington to reduce the U.S. tariff burden. Critical minerals and rare earths could also offer openings for non-Chinese companies. These would be meaningful changes even if the broader reform program disappoints initial expectations.
Mexico
Mexico faces continuing pressure on trade and security, but downside risks are constrained
Washington is using security pressure to strengthen its position in trade negotiations. Trade, migration, and security are increasingly treated as connected issues. Pressure over alleged links between organized crime and elements of Morena creates leverage that extends beyond law enforcement.
The Chihuahua case exposes the domestic limits of security cooperation. The deaths of two CIA employees and two Mexicans after an April raid on a fentanyl laboratory raised sovereignty concerns. Action against the former state attorney general over allegedly illegal cooperation now gives President Claudia Sheinbaum a way to respond to pressures within Morena and a way to pressure Governor Maru Campos.
U.S. actions against Mexican political figures increase the pressure on Sheinbaum to respond. Indictments involving officials in Sinaloa and visa restrictions affecting another Morena governor have intensified internal demands for pushback. At the same time, U.S. scrutiny can give Sheinbaum political cover to act against figures within her own coalition.
Keeping negotiations alive helps Mexico preserve its relative tariff advantage. Economy Minister Marcelo Ebrard and U.S. Trade Representative Jamieson Greer appeared to be making progress before Commerce Secretary Howard Lutnick intervened and changed the terms. Mexico has chosen to sustain the talks rather than allow a public rupture. Its growing role in AI-related supply chains adds to the incentive to protect trade flows.
Any trade agreement is likely to be limited and vulnerable to renewed demands. Sectoral arrangements are more plausible than a comprehensive settlement, and an executive agreement would remain exposed to renegotiation. Waiting until after the midterms does not resolve the central problem: Trump’s preference for retaining leverage and extracting further concessions.
A poor U.S. election result could increase the risk of a confrontation with Mexico. A weakened Trump could escalate on tariffs or authorize a strike against a cartel target. These are risks rather than the base case, but either would damage the relationship and complicate Sheinbaum’s balancing strategy.
Morena’s succession contest will increasingly shape the bilateral relationship. Trade setbacks would hurt Ebrard, while a security rupture could weaken Security Minister Omar García Harfuch. Ebrard has broader political relationships in Washington; García Harfuch is better known in U.S. law-enforcement and security circles. Other aspirants, including Clara Brugada, could favor a more confrontational approach.
A change of U.S. president would not automatically restore the earlier relationship. Linking trade to security and migration predates Trump and is likely to persist in some form. As Mexico approaches its own succession, Morena’s uncertain selection process and competing factions could make bilateral management harder, even if the party remains dominant after the 2027 midterms.
Argentina
Argentina faces rising financing risks
Argentina’s rising yields reflect both domestic vulnerabilities and global risk aversion. Investors are reassessing Milei’s electoral competitiveness and the prospects for renewed market access. Uncertainty about how Argentina will meet its debt payments in 2027, and especially in 2028, is adding to the pressure.
Political doubts and economic weakness can reinforce each other. Concern about the election raises financing costs and weakens confidence, making an economic recovery harder. A weaker economy then further undermines the government’s electoral position. This dynamic is unlikely to disappear as the 2027 election approaches.
Figure 1 · Argentina
Confidence in government across presidencies
Di Tella Government Confidence Index (ICG), monthly, 0–5 scale; latest reading 1.94
Swipe left for earlier presidencies
1: Fernando de la Rúa, followed by Ramón Puerta, Adolfo Rodríguez Saá and Eduardo Camaño in the December 2001 succession. Source: Universidad Torcuato Di Tella, supplied ICG data, November 2001–September 2026.
Milei retains an advantage from the opposition’s fragmentation, but the economy remains his central vulnerability. Low growth and persistent inflation are hurting his popularity and economic competitiveness, even if efforts to eliminate the mandatory PASO primaries also make it harder for the opposition to organize a unified candidacy.
Another U.S. financial intervention would be politically harder to deliver. President Donald Trump and Treasury Secretary Scott Bessent may remain willing to support Milei, but willingness does not guarantee a repeat of the earlier rescue. Greater congressional scrutiny and a more polarized Washington could constrain the scope for assistance.
Milei’s interventions in foreign elections risk complicating the relationships Argentina may need. His endorsement of Republican congressional candidate María Elvira Salazar, also backed by Colombia’s Abelardo de la Espriella, drew criticism from Democrat Gregory Meeks. Milei’s attacks on Pedro Sánchez and contacts with Vox leader Santiago Abascal similarly place him inside Spain’s partisan contest. These alignments could make external support more politically contentious.
Chile
Chile’s pension fund losses show risks in a volatile geopolitical environment
Chile’s pension-fund losses illustrate how geopolitical shocks can become domestic political crises. Positions that would have benefited from falling global interest rates instead suffered as the Iran conflict pushed up energy costs, inflation pressures, and yields. Although those exposures predated José Antonio Kast’s presidency, the losses add to public dissatisfaction.
U.S. policy and global financial conditions are becoming more important to regional political stability. Argentina’s financing needs and Chile’s pension losses show different transmission channels. Governments can face substantial political costs from shocks originating abroad, even when those shocks are not the result of their own decisions.
