The two shocks upending Latin America
By Dan Restrepo and Ricardo Zuniga
Across Latin America and the Caribbean, voters worried about rising crime have elected populists who promise to impose order and security in their countries. Some observers have read this development as a sign of a regional swing to the right, but there is little evidence of a durable shift in that direction. Rather than ideology, what seems to be driving voters is a frustration with traditional politicians’ failure to solve everyday problems. In the latest electoral cycle, voters rebelled against the breakdown of law and order; in the next, they may push back on rising costs and the region’s persistent social and economic inequalities.
Gasoline and diesel prices have risen sharply in most Latin American countries in recent months.
Latin American and Caribbean governments, already operating with limited fiscal space, must now grapple with two external shocks: the prolonged closure of the Strait of Hormuz and this year’s El Niño, a warming of sea surface temperatures in the Pacific Ocean that upends normal weather patterns. Both are fueling inflation, disrupting supply chains, and forcing cash-strapped, indebted governments to make hard choices.
For voters across the region, these twin crises have brought the economy back to center stage. Leaders such as Chilean President José Antonio Kast and Ecuadorian President Daniel Noboa, who won office on security-focused platforms, have seen their public standing plummet as economic woes deepen. Argentine President Javier Milei, who in 2023 ran an outsider campaign against economic mismanagement, faces an uphill 2027 reelection bid as Argentines struggle with day-to-day economic challenges despite the country’s macroeconomic improvements.
All this sets the stage for more political swings in the coming years, as climate change and geopolitical shifts generate shocks at a pace difficult for any government to contend with. That turbulence could fuel further polarization and reward populists whose promised solutions are unlikely to fix the structural flaws holding back growth.
But chaos is not inevitable. The region has the resources to adapt to a more unstable environment. Its critical minerals, abundant renewable energy, and strong agricultural sector are exactly what the world needs for food security, advanced technology, and the energy transition. To harness those resources, however, the region will have to overcome profound infrastructure deficits, strengthen the rule of law, and accelerate regional integration. Multilateral development banks and outside actors, such as the United States and Europe, can help by bringing in private investment for shared infrastructure, promoting intraregional trade and regulatory harmonization, and creating value chains where economic benefits are broadly shared. The alternative is a region that lurches from crisis to crisis, and from one extreme to another.
Shock waves from Hormuz
Disruptions to energy and fertilizer markets stemming from the prolonged effective closure of the strait have already reshaped Latin American politics. In March, Kast saw his approval rating drop 14 points after he declined to issue consumer subsidies to soften the blow of rising energy prices. In April, Peruvians, upset by the sharpest monthly inflation spike in the country in more than 30 years, showed how economic anxiety can upend politics and open the door to populists. The leftist Roberto Sánchez unexpectedly surged in the first round of presidential elections but ultimately lost narrowly in the runoff to the right-wing candidate, Keiko Fujimori. In Argentina, despite a burgeoning hydrocarbon sector, higher energy costs have renewed inflation concerns and created a headache for Milei, whose disapproval rating spiked to 63 percent in late April, up from 49 percent at the start of the year.
Given the region’s dependence on imported gasoline and diesel, the economic toll of sustained high oil prices is only growing. The governments of the Dominican Republic, Nicaragua, and several small Caribbean countries have subsidized energy costs — a costly proposition as high prices persist. Elsewhere, governments cannot afford such relief, and consumers have been hit hard. The price of maize, a staple across Central America, rose by more than 60 percent in Honduras from 2025 to 2026. In Guatemala, soaring gasoline prices led to public protests.
To be sure, some countries have benefited from the turbulence in the energy sector. Chief among them is Guyana, whose oil revenues have grown more than 50 percent so far this year. Venezuela has also profited, although the long-term viability of its oil and gas sector remains in question in the absence of a meaningful democratic transition. The Trump administration’s deal with Interim President Delcy Rodríguez already faces congressional scrutiny that will only intensify if the U.S. midterm elections shift control of either chamber to the opposition Democrats.
In Argentina, expanding shale oil and gas production has turned the country from a net energy importer into an exporter, boosting its dollar export revenues. Brazil’s growing hydrocarbon sector has also made it Latin America’s largest oil producer and one of the world’s top ten, with room for further growth. And Peru and Chile have offset higher energy costs by exporting minerals, including copper and gold, whose prices have climbed to record highs.
Still, if the strait remains closed — and particularly if the United States curtails diesel fuel exports — countries across the region will face higher energy import costs that will weigh on agricultural production and drive inflation.
From bad to worse
This year, the consequences of the closure of the Strait of Hormuz will be magnified by what could be one of the most significant El Niños on record. In the coming months, it will likely bring flooding and drought to Argentina, Brazil, Ecuador, Paraguay, and Peru; drought to Central America and the Amazon rainforest; and disruptions to key Pacific fisheries. Having drained their budgets responding to the market shocks of the Gulf conflict, many governments will meet these new challenges with empty coffers.
The region is already feeling some of the effects. Peru has endured heavy rains, landslides, and flooding that has affected hundreds of thousands of people, and the resulting economic disruptions are likely to intensify as the year continues. Colombia, hit by a 7.4 magnitude earthquake in August, faces El Niño–driven pressure on its hydroelectric plants and its coffee output, which remains a major source of export income. In both countries, disaster response is straining the finances and capacity of new leaders who campaigned on security but must now contend with economic fragility.
As Central America faces the possibility of severe drought, food insecurity, and high costs for fuel and fertilizer, regional governments will likely have to suspend fuel taxes (and forgo substantial revenues) to head off protests. A decade ago, a strong El Niño hurt farmers in El Salvador, Guatemala, and Honduras, fueling a wave of migration to the United States. Now, with far tighter restrictions at the U.S.-Mexican border closing off migration as a relief valve, those countries face the prospect of growing social unrest within their borders. Lower rainfall totals are also reducing water levels in the Panama Canal and slowing shipping, further straining the already disrupted trade in liquefied natural gas.
Given its expanse and varied climates, Brazil faces the broadest exposure. El Niño threatens soy and corn harvests in the south while plunging savannahs and rainforests into drought and sparking wildfires. Hydropower, which supplies most of Brazil’s electricity, will likely come under strain, forcing greater reliance on more expensive gas-fired, diesel-fired, and coal-fired electricity generation in the north and northeast. That shift could require price subsidies for consumers and slow the country’s data-center boom. All of this is unfolding during a polarizing presidential election between President Luiz Inácio Lula da Silva and Senator Flávio Bolsonaro, son of the far-right former president Jair Bolsonaro, who was convicted of plotting a coup.
In Argentina, Milei’s economic plan depends on a strong grain harvest to rebuild dollar reserves and sustain his crusade against inflation. After a prolonged drought that curtailed previous harvests, Argentina needs the above-average rainfall El Niño will bring, but too much could damage infrastructure and reduce yields, hitting export income. Lower agricultural revenue would leave the government with less money, and lower domestic food production would drive up consumer prices — both boons to the most extreme Peronist populists running against Milei in 2027.
The closure of the Strait of Hormuz and a historic El Niño arrive just as the region was regaining its footing after the COVID-19 pandemic, which hit Latin America and the Caribbean especially hard and caused the region’s sharpest economic contraction in 120 years. That the region avoided another decade of lost growth is a positive sign. But with external shocks now arriving regularly, governments will lack the fiscal and political space needed to address the structural factors limiting growth and development. Without concerted region-wide efforts to seize opportunities in a shifting global economy, chronic underperformance will prevail.
Full-court press
Latin American countries can do little to reopen the Strait of Hormuz or cool the waters of the Pacific. If they are to weather these crises, they will have to band together in ways that have eluded them in the past.
No region in the world trades less with itself than Latin America and the Caribbean. Governments must find the political will to better link their economies in the interest of achieving growth that reaches ordinary citizens. They must also strengthen the rule of law and exercise greater fiscal discipline. The region’s multilateral development banks — the Inter-American Development Bank, CAF-Development Bank of Latin America and the Caribbean, and a panoply of subregional banks — can help on several fronts. They can provide emergency financing and planning support for disaster response. They can also court more private investment.
If governments in the region fail to address inflation, food insecurity, and other economic disruptions, social unrest will follow. Leaders elected on security agendas, such as Salvadoran President Nayib Bukele and Ecuador’s Noboa, will likely intensify their hardline rhetoric and policies. Others, including Colombian President Abelardo de la Espriella, who recently launched a crackdown on Venezuelan migrants in his country, will be tempted to stoke xenophobia to deflect blame for policy shortcomings. Argentina’s Kirchneristas — supporters of former President Cristina Fernández de Kirchner—and other economic populists will once again gain ground at the ballot box. As populists are wont to do, they will run on promises they cannot fulfill and enact policies that drive up spending and deficits without generating significant and broadly shared growth.
Beyond the region’s own governments, two outside players can help it avoid the worst consequences of these crises: Europe and the United States. The European Union is already positioning itself as a reliable, predictable alternative to both China and the United States. If the bloc’s Court of Justice upholds the long-sought EU-Mercosur Partnership Agreement next year, the EU will lock in free trade with Argentina, Brazil, Paraguay, and Uruguay. Through its “Global Gateway” initiative, the EU is also supporting the region’s economy with more than $50 billion in public and private investments.
The United States under President Donald Trump is taking a different approach: coercion through tariffs and the use of force. Washington may be able to strong-arm a country such as Venezuela for a short-term resource grab, but such an approach risks squandering U.S. influence in the region over the long term. A stable and prosperous Latin America is in the United States’ interest, and so is keeping key supply chains close to home, particularly for critical minerals and advanced technologies. To that end, Washington should encourage governments in the region, multilateral development banks, and the private sector to build resilient supply chains across Latin America and the Caribbean. Together, they can provide Latin American countries with the financing and disaster-response support the region needs to emerge from these crises stronger.
Despite the challenges they face, the region’s governments have an opportunity to help meet some of the world’s most pressing needs and promote shared growth. If they fail, they will open the door to increasingly extreme economic populists who will only make the region’s problems worse. And if the United States and Europe fail to support economic integration, China will deepen its ties throughout the hemisphere by promising quick, visible wins to governments of all ideological stripes — propping them up in the short term but compounding their difficulties in the long run. Quick wins will not fix the structural flaws holding back growth.
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Credit: Foreign Affairs
