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Latin America’s currencies signal economic damage despite commodities boom


What was good for copper was good for Chile’s peso. The fortunes of the currency of the world’s largest copper exporter were closely tied to the price of its main export.

Last year the pattern broke. World copper prices rose 25 per cent in 2021, but the Chilean peso’s value crashed by nearly 17 per cent against the US dollar — one of the worst performances by any major emerging market currency.

Chile’s experience was not unusual. Despite a strong global rise in commodity prices last year, the currencies of all major Latin American economies weakened, some dramatically.

The Colombian peso lost 16 per cent of its value against the dollar, while the Peruvian sol weakened by more than 9 per cent. Brazil’s real suffered its fifth consecutive year of devaluation, losing nearly 7 per cent.

Bar chart of Emerging market currency changes vs US dollar in 2021 (%) showing Latin American currencies suffered sharp falls in 2021

Economists say the striking divergence — unprecedented in recent years — points to a deep sickness in Latin America’s economies.

“It’s very bad news,” said Ernesto Revilla, chief Latin America economist at Citi. “This shows the region is coming out of the pandemic with deeper structural damage than we thought.”

The pandemic’s combined impact on Latin America’s people and economies was greater than in any other region in 2020. After a struggle to procure vaccines early last year, most Latin American governments managed to buy sufficient stocks during 2021 and the region ended the year as the world’s most vaccinated.

However, while the most serious health effects of the pandemic are fading, the economic damage looks much longer-lasting. Latin America was already the emerging world’s slowest-growing region before the pandemic, managing just 0.9 per cent year-on-year increases in GDP on average from 2014 to 2019, according to Goldman Sachs data.

Now, despite higher commodity prices, it risks settling back into mediocre growth, this time with fresh problems: extra debt taken on during the pandemic, rapidly rising inflation and much greater political risk as voters punish incumbents and swing towards populist outsiders.

“The market is treating Latin America as if it had suffered a structural shock and not a cyclical shock,” said Revilla.

Alberto Ramos, head of Latin America economics at Goldman Sachs, highlighted the region’s lurch towards political extremes in 2021. Peru and Chile elected hard left governments and socialist candidates are leading the polls for presidential elections this year in Brazil and Colombia.

“In a period of rallying commodity prices, the correlation [between commodity prices and currency strength] has broken because of political risk, to a large extent,” he said. “In Colombia, Chile, Peru and Brazil, the political and policy risks are quite high.”

Chile epitomised the trend. It elected last May a special assembly dominated by the left to rewrite the constitution, which is widely regarded as one of the region’s most investor-friendly. Seven months later, voters chose Gabriel Boric, a hard-left millennial former student activist, as president.

Boric has vowed to abolish the country’s private pension system, raise taxes by 5 per cent of gross domestic product to fund a big increase in public spending and impose restrictions on the mining industry.

Investors have noticed the region’s drift towards political extremes. About $50bn has been pulled out of the country since political unrest erupted in October 2019, according to the central bank. Peru suffered the biggest capital flight last year since records began in 1970, with some $15bn leaving the country.

The exception to the weak currency rule in Latin America has been Mexico, whose leftwing populist president has pursued nationalist and interventionist policies but also free trade with the US and fiscal discipline. Reflecting this, the Mexican peso fell only 4.5 per cent against the dollar last year, by far the best performance of any major Latin American currency.

“Mexico is the best home in a bad neighbourhood,” said Citi’s Revilla, pointing to President Andrés Manuel López Obrador’s austerity, the country’s relatively low levels of government debt and the likelihood that it would keep its investment grade rating. “The problems in Mexico are not short-term macro ones, but long-term ones of very low growth as a consequence of [López Obrador’s] economic policies.”

Those advantages have kept investors interested in Mexico, at least in the short term. But in the remainder of Latin America, the outlook for economies and currencies remains bleak.

In Brazil, the region’s largest economy, President Jair Bolsonaro has largely abandoned efforts to push through major structural reforms or big privatisations and is boosting spending to try to improve dire poll ratings and prepare the way for a re-election campaign.

The gloom on Faria Lima, Brazil’s Wall Street, is palpable. Also weighing on sentiment is uncertainty about what sort of economic policies leftist icon Luiz Inácio “Lula” da Silva, the current poll leader for October’s presidential election, would pursue if elected.

Lula’s former finance minister Guido Mantega argued in a recent article written at the behest of his former boss that a new Lula government should launch an “ambitious” investment programme, champion state-led industrial policies and aim to create a “social welfare state” — none of which went down well with markets.

Marcos Casarin, chief Latin America economist at Oxford Economics, noted that “there is a lot of bad news already priced into the [currencies] of Brazil, Colombia and Chile”.

But he believes the weakness of the region’s currencies in the face of a commodity boom points to much bigger challenges than political risk alone. “You only get rewarded with a stronger currency in a commodities boom if the boom serves to make you richer as a nation,” he said.

“The markets are foreseeing that this commodities boom didn’t bring prosperity, so the currencies didn’t deserve to go up. It was a boom for a dozen [commodities] companies but it didn’t translate into wider economic prosperity.”



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