BOGOTA – Waves of protests and political instability in Latin America have affected the region’s economy that is currently facing a slowdown, devaluation and dependence on a floundering commodity market.
The economy has reflected the turbulent times affecting the region, with slow growth estimates for this year at 0.1% and 1.4% for 2020, according to the United Nations Economic Commission for Latin America and the Caribbean.
Protests have increased economic uncertainty, adding another risk factor to balance sheets for this year.
Here are five key issues on the economic situation in Latin America:
1. END OF PROSPERITY AND INEQUALITY
Latin America remains “the region with the worst results in the world in terms of inequality,” said Enrique Gilles, a specialist at Ean University in Bogota.
He told EFE that the cycle of commodities and public policies has “allowed the consolidation of a middle class has made stronger demands for better welfare from their governments.”
“The way in which this situation is resolved – in particular which sectors of society will bear the burden of financing greater public spending – will undoubtedly create social tensions,” he said.
Francisco Azuero Zuñiga, an economic specialist at the University of Los Andes, agreed that Latin American countries still have a relatively high Gini index, a measure that calculates income inequality among citizens, as well as tax systems that are not progressive.
“In addition, our way of avoiding monopolies has not been effective and that has led to products that our people have to pay for becoming more expensive, which lowers people’s real income,” he said.
2. EFFECTS OF PROTESTS
Chile has begun to feel the effects of protests on its economy, reporting a 21% annual fall in its exports, which were $5.2 billion last month.
The Chilean Ministry of Finance predicted the country’s economy would grow around 2% this year, 0.6% less than estimates before the social unrest began in mid-October.
In Bolivia, protests that broke out after the presidential elections have generated losses of at least $167 million.
Similarly, Ecuador’s productive sector lost at least $1.6 billion in sales in the 11 days that economic activity was halted due to the wave of demonstrations in early October.
After having reached growth of up to 6.5% in the current decade, Nicaragua’s gross domestic product (GDP), which had reached 6.5% in the current decade, contracted to 3.8% in 2018.
This year it is estimated there will be another contraction of between 5.4% and 6.8%, mainly due to the socio-political crisis in the Central American country.
3. DEVALUATION HIT
Devaluation has worsened amid the protests, political transitions and the deterioration of economic indicators, increasing the debt in national currencies and “the financial effort required” to pay off their foreign debt, Alfonso Esparza, a senior market analyst on Latin America at foreign exchange company Oanda, told EFE.
Esparza said the Argentine peso was the most devalued currency against the dollar in the last 12 months in the region with a depreciation of 65.9%.
“The return of a populist model increased the likelihood of a debt default, and investors sold the local currency,” he said.
“The exchange rate has recovered slightly from the maximum reached, but this is the result of the efforts by the central bank and of the government.”
Another of the most devalued regional currencies last year was the Chilean peso, at 15.26%, which continues to be pressured by “domestic disturbances,” he said.
Uruguay’s economy has been affected by the situation in neighbouring Argentina, Esparza said.
He added that the Uruguayan peso has suffered an annual depreciation against the dollar of 15.25%.
The epidemic has also spread to Brazil, with a 9.77% devaluation of the real in the last 12 months, and to Colombia, which has suffered a 7.94% drop in the value of its peso.
Venezuela’s currency has depreciated 99.72% in one year to 23,402.91 bolivars per dollar as of October 31.
4. NATIONAL RISK
The perceived risk to investors has been another factor that has complicated matters amid higher costs of financing.
In Ecuador, the Country Risk Premium rose last month to 823 points on October 16, its highest rate of the year.
Following the same pattern, Argentina’s risk rose on Wednesday to 2,527 points, compared to just 617 a year ago.
Brazil’s risk premium reached 117 points at the end of October, the lowest since May 2013, due to a constant drop in base interest rates and pension reforms.
Gilles said that while social protests “may imply a slowdown in capital flow due to the greater risk perceived by global investors,” Latin America continues to offer good risk-adjusted conditions on returns, meaning capital will still flow into the region.
5. PICTURE OF UNCERTAINTY
Gilles said an external element that explains the current and future course of Latin American economies is “unprecedented” global uncertainty.
The trade war between the United States and China has caused investors to adopt a conservative position and take refuge in the safest assets provided by the most stable countries.
“We are living in a world in which the rules of the second postwar period are weakening, perhaps closing the period of Pax Americana, and all this due in large part to the policies of the United States government itself,” he added.
“If there is no clear institutionality on international economic relations, global risk increases and this is going to harm our countries.”