Perhaps nowhere is the disconnect between quiet markets and current social tensions as sharp as in Latin America. The question is how long this dissonance can last. For now, economic data for the region appears to be improving and debt markets are strangely quiet. But anger is spreading on the streets, especially in Colombia. And since the percentage of new daily Covid-19 cases in Latin America is four times higher than the average in emerging markets, even though the third wave of the pandemic has just begun, 650 million people in the region are threatened by humanitarian action. catastrophe.
With increasing political uncertainty, capital investment has stalled in the region, which is already suffering from low productivity growth. Worse, an entire generation of Latin American children has lost nearly a year and a half of school.
For Cuba, Russia and China, which already have a bridge with Venezuela, the pandemic presents an opportunity for further penetration into Latin America. Markets seem relieved that the winner of Peru’s presidential election, Marxist Pedro Castillo, is at least a few from the mainstream. Accountable economic advisors seem to have their own, but it remains to be seen how much of an impact they can have.
Commodity prices help
Additionally, last year’s economic data for Latin America is only good in the sense that it’s not as dire as it was in 2020, when economic output fell by 7%. In April, the International Monetary Fund projected that the region’s GDP would grow by 4.6% in 2021; The latest estimates are closer to 6%. Per capita, most Latin American countries will not return to pre-pandemic levels until 2022 at the earliest.
Alarmingly, most of the region’s real growth in 2021 will come from higher commodity prices driven by economic recovery elsewhere, rather than productivity gains that sustain incomes throughout the commodity cycle. To make matters worse, low-income families have been particularly hard hit by the pandemic and the associated economic downturn.
To understand the political challenges facing Latin America, one only needs to look at its two largest economies: Brazil and Mexico. Together, these two factors account for more than half of the region’s economic output. Ostensibly, they are ruled by completely different politicians: Brazil by its right-wing president Jair Bolsonaro, and Mexico by its left-wing president Andres Manuel Lopez Obrador. But these two men are similar in important ways.
While Lopez Obrador’s political instincts have their roots in the radical worldview of the 1970s, and Bolsonaro appears to be nostalgic for the era of military rule in Brazil, both are eccentric autocrats. Plus, despite their disastrous handling of the pandemic and a host of other unreasonable economic decisions, both remain reasonably popular. Shortly after taking office at the end of 2018, Lopez Obrador canceled the urgently needed new airport project in Mexico City. While he had promised solid economic growth during the election campaign, Mexico’s GDP was already shrinking before the pandemic.
For his part, Bolsonaro continues to successfully blame the opposition left-wing Workers’ Party, which ruled the country until 2016, for Brazil’s problems. Several PT leaders, including former president Luis Inacio Lula da Silva, have been sentenced to prison terms for corruption. However, it is possible that Brazil will have a left-wing president again in a few years – perhaps Lula, whose conviction was overturned in March – while Mexico could again fall into the hands of the center.
Given this uncertainty, why aren’t the bond markets concerned? This is partly because both countries have remained relatively conservative in debt management. It is true that Brazil’s national debt is expected to reach nearly 100% of GDP this year. But most of it is denominated in the local currency, and the Brazilian people own 90% of the total. Even companies that get limited external loans; The country’s external debt is only about 40% of GDP.
Mexico’s national debt is less than that of Brazil and about 60% of GDP. Despite all the other radicalism, Lopez Obrador has so far proven to be conservative in fiscal policy, similar to Lula in Brazil. The lesson is that debt crises can derail a populist revolution.
Increase budget income
It is true that governments in the region have come up with a robust macroeconomic response to the pandemic. But they have less room than the United States to continue financing the deficit. To increase spending and tackle inequality, Latin American countries must find a way to increase their budget revenues. Ironically, the protests in Colombia did not start in response to cuts in welfare benefits, but rather because the government sought to raise taxes paid by the middle class in order to provide greater support to the country’s poorer citizens.
In the past few decades, the United States has not committed itself to deepening its commitment to solving Latin American problems, but this may change. First of all, the region needs extensive vaccine support. America can also help by boosting trade — notably by doing something about the bottlenecks caused by the pandemic and lifting the Trump-era protectionist measures.
Much of Latin America is still far from dire conditions in Venezuela, where economic output has fallen by an incredible 75% since 2013. But given the ongoing humanitarian catastrophe there and the specter of political instability elsewhere, investors should not take sustainable economic recovery for granted. Assumptive.
Copyright: Project Syndicate.
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