Home News The economy of Latin America is struggling to cope with the fallout from the war

The economy of Latin America is struggling to cope with the fallout from the war

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The economy of Latin America is struggling to cope with the fallout from the war

June 13, 2022 1:46 pm

When Russia invaded Ukraine in February, it wasn’t just Ukrainians who suffered. The prices of wheat, oil and other commodities – which both countries produce in large quantities – have skyrocketed, inflicting severe suffering on money-strapped and import-dependent countries. Some world leaders, however, have seen the bright side of this. “This crisis is a good opportunity for us,” said Jair Bolsonaro, president of Brazil in March. Similarly, in May, Argentina’s President Alberto Fernández said his country is “a reservoir of what the world needs right now: food and energy.”

Latin American economies are actually coping with war better than many other emerging markets. But families across the region are seeing their balance sheets battered by war-induced inflation. This trauma adds to several recent problems. In the medium term, the outlook for some Latin American economies is bleak.

Even before the war, 2022 promised to bring a lot of inconvenience to emerging countries. At the start of the year, production remained below pre-pandemic trends in many economies and the debt load increased substantially. Problems in the supply chain and rising prices have held back household consumption, while rising interest rates in rich countries have pushed capital away from poor ones, increasing financial pressure on companies and governments, already in trouble. in making ends meet.

Mixed results
Latin America seemed to be among the most troubled places. In January, the International Monetary Fund (IMF) predicted that its growth in 2022 would be the lowest of any other region in the world. Inflation increased in Argentina and Brazil. In its latest forecasts, the IMF has cut the economic growth projections of rich countries by 0.6 percent for this year, and by a full percentage point those of emerging economies.

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Yet Latin America has done pretty well over the past three months. Prices of grain and oil have risen by more than 20 percent since the war began. This is good news for Argentina, the third largest exporter of wheat to the Americas after the United States and Canada. High oil and gas prices are also giving a boost to hydrocarbon exporters, such as Brazil and Colombia. Although the outlook has gotten bleaker for most countries, the IMF has revised upward growth forecasts for this year for Argentina, Brazil, Peru and Colombia.

Many currencies in the region have appreciated against the dollar, in stark contrast to the rest of the emerging world

Elsewhere in the emerging world, the soaring cost of food and energy threatens to turn a difficult macroeconomic situation into a horrendous one. In Sri Lanka, for example, the drying up of hard currency reserves, caused by the increase in the price of oil imports, brought the government into insolvency on its foreign debt in April. In much of Latin America, on the other hand, exports of expensive commodities have provided a steady influx of hard currency, allowing people and businesses to import goods on good terms. Many currencies in the region have appreciated against the dollar, in stark contrast to the rest of the emerging world.

This has given politicians some space to try to protect their constituents from the suffering of high food and energy prices, a luxury that many other countries cannot afford. The government of Pakistan, for example, is cutting fuel subsidies in a desperate attempt to avoid a fate similar to that of Sri Lanka. In Mexico, on the other hand, the increase in revenues from oil exports helped to partially offset the increase in the costs of national fuel subsidies. The governments of Colombia and Chile are maintaining subsidies, while in Peru the government has reduced the tax on food and energy consumption. Across Latin America, politicians have taken measures equal to about 0.3 percent of GDP, on average, to try to protect families from the effects of war.

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Check inflation
It’s not all plain sailing, though. Despite the upward revisions, the IMF expects Latin America to grow more slowly this year than any other emerging country except Eastern Europe. Brazil will likely struggle to grow more than 1 percent this year, despite high commodity prices. While the cost of food and energy favors exporters, it also fuels inflation. Consumer prices are seeing double-digit increases in Chile and Brazil, well above central bank targets in other major Latin American economies. Central bankers raised interest rates to prevent the price hike from translating into a wider loss of confidence in governments’ ability to control inflation – a significant risk in a region that has a devastating inflation past . But higher rates also squeeze investment and growth.

Conditions could worsen further if inflation in rich economies turns out to be more resilient than expected, forcing central banks to hike rates more than markets expect. In the 1980s, the last time the United States tried to contain a serious inflation problem, the consequences for Latin America were disastrous: a wave of debt crisis and a lost economic decade.

Macroeconomic policy in the Americas has improved since then. But the combined pressure of several distinct shocks has left economies vulnerable.

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The region cannot afford another crisis. In 2020, Latin America experienced a greater decline in GDP than anywhere else in the world. The pandemic has resulted in foregoing investment, loss of school hours, and a drag on productivity. This is likely to dampen economic growth in the years to come; Indeed, the IMF believes that in 2024, production in Latin America is likely to remain around 5 percent lower than pre-pandemic trends. Recent difficulties have made themselves felt more harshly on the poor.

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In countries plagued by extreme inequality, such an unequal distribution of these difficulties could exacerbate political instability. The elections in Colombia and Brazil seem destined to produce winners ill-equipped to face the challenges of the moment. And if governments continue to be unable to provide aid to troubled Latin Americans – a daunting task given the headwinds of the global situation, with or without rising commodity prices – frustration in the region will only grow.

(Translation by Federico Ferrone)

This article appeared in the British weekly The Economist. Internazionale has a newsletter that tells what is happening in Latin America. Sign up here.

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