21 Oct The Specter of Inflation in Latin America
By Victorino Bernal and Amanda Perez
The specter of inflation in Latin America may send shudders through experienced investors, as memories of ultra-high inflation in the region come to mind. Fortunately, this is not the Latin America of the late 20th Century. This time Central Banks have demonstrated a proactive approach by increasing interest rates to ward off inflation.
Leading the way, Brazil increased interest rates to 6.25%, its highest rate increase since the pandemic began, followed by Uruguay to 5.25%, Mexico to 4.75%, Chile to 2.75%, Colombia to 2.00% and Peru to 1.50%. While leading central banks continue to expect upward revisions to GDP growth, the regional government’s response to rising inflation has been to swiftly reduce monetary stimulus and increase interest rates. The undesirable side effects of these remedial actions may lead to a slow-down in the economic recovery from the effects of the pandemic.
Although the specter of inflation is undeniable, seeing it as a cause for concern may be premature. The drivers here differentiate between what was seen in the 1990s, as central banks printed money to cover operational deficits. Today’s causes seem less deliberate by any government and instead are driven by side effects of the pandemic. Globally, disrupted supply chains struggle to keep up with pent-up consumer demand. Regionally, soaring food and energy prices continue to wreak havoc on the economy, as the region was already struggling with imports prior to the pandemic.
Latin American central banks seem to favor tightening monetary policy despite a weak economy just to keep inflation under control. The prevailing thought being that the effects of runaway inflation are worse than those of dampened economic activity in the long run.
Tightening fiscal control and monetary policy may be seen as the prudent thing to do during a weak economy, but a strong set of voters may disagree. Central Banks in the region, acting in the best interest of their national economy, may risk further political radicalization. As voters in Chile, Colombia and Brazil get ready to go to the polls over the next thirteen months, their frustration with pandemic mismanagement could result in incumbent governments being replaced with administrations willing to sustain public spending as a way of accelerating growth. Central Banks will be faced with even greater pressure to act out of concern for public finances but at the detriment of a possibly sluggish economy. They appear to be left with limited alternative tools to address these anticipated economic challenges.
MERCADO LIBRE SPAC
Mercado Libre, an Argentinian company that hosts the largest online marketplace and payments platform in Latin America, along with the special purpose acquisition company (SPAC) MELI Kaszek Pioneer Corp, is looking to invest in Latin American tech companies to generate alternative access to public markets. The company reduced its potential targets’ list from 200 to 30 companies based in Brazil, Mexico, Chile, and Argentina.
Mexican Farmers See an Increase In Exports to USA and Canada
Agriculture is growing in Mexico, as seen in the 2% rise in agriculture while the rest of the economy contracted by 8.5% in 2021. As American’s appetite for produce requires year-round production, Mexico has capitalized on its agricultural production and variety. New technologies, usually in partnership with foreign companies, led to a boom in production as the dissemination of know-how and methods of farming, irrigation and fertilizer become widely used in Mexico. This industry appears positioned to grow as Mexico navigates its own climate change vulnerabilities and changing foreign export dynamics.
The Rise of Fish Farming in Chile
ProChile, a government agency, is promoting Chile as a world class exporter of produce from the sea. Globally, the fish farming industry aims to be greener than traditional fishing by adjusting the diets of farmed carnivorous fish to be partially plant-based. This allows the reduction of food derived from wild fish and reduction of the use of antibiotics on farmed fish. However, as reported by the Economist on September 24, 2021, Chile’s fish farming industry has been using more antibiotics on its fish and dumping more waste into the ocean than most other countries, as Chile’s water pollution laws are less restrictive than in Europe and the United States. This year more than half of Chile’s constitutional assembly have elected to bolster environmental protections, indicating a growing appetite to adjust these harmful practices.
Puerto Rico’s Oversight Board Closes in on Debt Restructuring
Puerto Rico’s Oversight Board is close to a plan of Adjustment for over $120B of municipal debt. This will be the largest municipal bond restructuring in history. The Commonwealth General Obligation debt will be reduced by almost 80% from #33 billion to $7 billion. “After years of tough negotiations, a diverse group of creditors that includes retirees, unions, bondholders and bond insurers, and other creditors of the Commonwealth of Puerto Rico agreed to a Plan of Adjustment that is fair and provides a path out of bankruptcy,” said the Oversight Board’s Chairman David Skeel.
“Brazil Auxilio” new monetary program announced to help 17 million families
As reported by Mercopress, the government of Jair Bolsonaro announced their work on a program that looks to add on to the “Bolsa Familia” support program. The new program aims to provide 17 million families with monetary assistance of 400 Reais for the next 12 months. The Brazilian stock market plummeted 3.8% on the news, as the proposed bill subverts the Fiscal Responsibility Act and could add an additional 16 billion Reais to the government spending envelope.