While uncertainty about the economic future sweeps the globe, the dollar continues to gain strength against other currencies.
And some of the largest economies of Latin America are no exception.
Argentina, Chile and Colombia are the three countries that have suffered the worst devaluations so far this year against the dollar.
On the other hand, Mexico has not experienced major turmoil in the foreign exchange market, while the Brazilian real and the Peruvian sol have not yet been hit, on the contrary, their value has risen in the first six months of this year.
The fact that the devaluation of a country’s currency increases the price of imported products, increases inflation and makes paying debts in dollars more expensive, a situation that can generate financial stress in countries that have emptied their coffers to cope with the epidemic and currently have a lot. Little room to maneuver.
The appreciation of the dollar comes amid a rapid increase in interest rates, which has been particularly rapid in Latin America, a measure that seeks to control inflation, but at the same time limits growth.
Why did the currencies of Argentina, Chile and Colombia depreciate so much? Although they share a common background internationally, they each have their own internal reasons that have contributed to the devaluation of their currencies.
The Argentine peso tops the ranking of the lowest currencies in Latin America during the first half of this year among the largest economies in the region.
There is no doubt that the current loss of the currency is part of a historical trend. After decades of economic crises, with repeated cycles of inflation, Argentines do not trust the peso as a reserve currency, choosing to turn to the dollar.
The Argentine peso was created 30 years ago with the aim of stabilizing the currency after a period of hyperinflation and for a decade it was equal to the US dollar, thanks to a law making the two currencies equal.
Today the peso is equivalent to less than a cent on the dollar (compared to a free market dollar, it’s not even half a cent).
“The reason for this massive devaluation, one of the worst in the world, can be summed up in one thing: a lack of confidence,” explains Veronica Smenk, BBC Mundo’s Argentina correspondent.
In recent years, he adds, political issues have added to the macroeconomic problems that have accelerated the devaluation process.
The electoral defeat of the former center-right president – and friend of the markets – Mauricio Macri, in 2019, sent the dollar sharply higher.
More recently, public fights between the incumbent President, Alberto Fernandez, and his powerful Vice President Cristina Fernandez de Kirchner – which led to the resignation of the Economy Minister on July 2, have created uncertainty, creating new ones. Rise (and consequent depreciation of the peso).
This is also argued by Ricardo Delgado, economist and head of consultancy Analytica, who argues that “the background to the devaluation is related to the political crisis that exists in Argentina within the ruling coalition.”
He adds that Fernandez and Kirchner have a very opposing view of economic policy, especially about how to deal with the agreement with the International Monetary Fund.
While the president is in favor of continuing with the agreement signed in March, the vice president is clearly against it, as she explains in an interview with BBC Mundo.
In this scenario and with an economy that has issued a lot of currency in the past two years as a result of the pandemic, “there are many pesos in circulation which, in the context of rising inflation and political uncertainty, are making people want to take refuge in dollars as a reserve of value.”
Argentina has an annual inflation rate close to 62% and forecasts towards the end of the year are for a much higher rise.
The Chilean currency was weakening against the US currency, but when it hit an all-time high of 1,000 pesos per dollar on July 6, it sparked a heated debate about what is happening in the foreign exchange market.
The Chilean peso is the second currency that has depreciated the most in 2022 among the large economies of Latin America, after the Argentine currency.
President Gabriel Borek declared that the dollar’s appreciation was “extremely worrying” and argued that one of the main reasons “is the decline in the price of copper due to two factors external to the country”.
“One is the recession prospects in Europe and the United States, which will only be clarified at the next meeting of the Federal Reserve, which still has some time, as well as the process that China is still following by shutting down cities that have reduced demand for copper.”
Besides the international scenario, Borek warned that “there are also internal factors and in this uncertainty undoubtedly contribute,” referring to the September 4 referendum in which the country will finally decide whether to approve or reject a new proposal. A new constitution: drafted by a constitutional conference elected by popular vote.
Leonardo Suárez, Director of Studies at LarrainVial Financial Services, says that the main reason for the dollar’s rise in Chile is an increase in the current account deficit, i.e. spending on imports of goods and services is higher than exports. profits.
The report adds that this deficit was driven by “excess spending” last year, in the context of massive liquidity injections – whether through financial aid in the wake of the pandemic, or through early withdrawals of pension funds.
In an interview with BBC Mundo, he says a drop in the exchange value has already been coming since the end of 2019, when a political agreement was reached to change the constitution amid a social outbreak. He asserts that from that moment on, “there was a penalty for the exchange rate.”
And last month, there was a sharp drop in the price of copper, which caused an even greater depreciation of the Chilean peso against the dollar, given that 56% of total Chilean exports are copper.
“This is generating a shock from the expectations in the markets and this is why the Chilean peso is hurting more than other currencies.”
All this happens when expectations of a possible global recession are increasing every day, a scenario that affects the price of copper, and therefore the income that Chile receives.
In an interview with BBC Mundo, Ricardo Avila, chief analyst at Colombian newspaper El Tiempo, says the Colombian currency “has depreciated more than most of its Latin American counterparts.”
In fact, the Colombian peso ranks third in the ranking after Argentina and Chile.
In addition to the international context that has prompted large investors to protect their capital in less risky assets, “in the case of Colombia, there is an additional element of political risk,” Avila explains.
In his view, there is concern about Gustavo Petro’s coming to power, so much so that he conveyed the message that Colombia will depend less on oil, its main export product.
Given the possibility that Petro will not sign new contracts for oil exploration, for example, the forecast shows, Avila points out, that in 2026 Colombia will have to start importing gas and in 2028 Colombia will have to start importing oil.
He explains that if that promise comes true, there is a fear that Colombia could face a currency deficit and devaluation.
“Last month, the Colombian peso was devalued a lot and it coincides with the election of Petro.”
Other observers argue that this is not the case because Columbia’s debt securities have not been devalued. Now, on the issue of foreign exchange specifically, the expert says, “If the perception is that there will be less dollar entry, that ultimately affects the exchange rate.”
The only country indicating a clear trend against the tide is Uruguay, whose currency appreciated more than 10% in 2022 against the dollar.
The Uruguayan peso has rebounded since the country’s central bank announced on May 17 that it intends to raise the benchmark interest rate by at least 100 basis points to 10.25% in mid-August, as one of the measures to contain inflation.
The currency is also getting a boost from booming exports of agricultural commodities such as beef, wood pulp and soybeans, on the back of higher commodity prices after the Russian invasion of Ukraine.
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