Latin America is feeling the fallout from U.S. interest rate hikes

By SERGIO HELD in Bogota, Colombia For China Daily | Global Chinese Daily | Updated: 2022-08-09 09:17

A shopper in Buenos Aires, Argentina, walks past a sign outside a store that read in English ‘Buy today, cheaper than tomorrow’, July 29, amid high inflation and a crisis economy are hitting the South American nation. AGUSTIN MARCARIAN/REUTERS

Analysts say the rapid rise in interest rates in the United States is having a major impact on Latin American economies that are dollar-dependent or have seen their currencies devalued against a stronger greenback.

The US benchmark interest rate is now in a range of 2.25-2.5%, the highest in a decade, after the Federal Reserve last raised 0.75 percentage points on July 28 in part of an effort to contain the surge in inflation. Other increases could arrive before the end of the year. The latest round of such steep increases has been widely cited as the cause of the 1997 financial crisis in developing economies.

“The rise in interest rates affects the emerging world, because the emerging world is in debt in dollars,” said Miguel Boggiano, CEO and chief investment officer of Carta Financiera, a specialized web portal focused on economics and finance in Argentina.

A major effect is “that the dollar has strengthened against all currencies in the world and this means that emerging countries will find it harder to return the dollar when the dollar becomes more expensive in local currency”.

Boggiano said Argentina’s current economic situation is so complex that beyond what the Federal Reserve is doing in Washington, Buenos Aires is far from solving its own economic problems.

Argentina has had three finance ministers in just over a month, amid a political and economic crisis. The current minister, Sergio Massa, was sworn in on Wednesday. Inflation in Argentina between June 2021 and June 2022 was 64%. Consumer prices in neighboring Chile rose 13% over the same period, more than four times the target.

Interest rate hikes in the United States increase the cost of funding for all other countries, said Alberto Bernal, head of emerging markets and global strategist at financial services firm XP Investments.

“The costs of financing public debt obligations, such as the interest rate on public debt bonds throughout Latin America, have increased significantly, as in the case of Colombia and Brazil,” said- he declared.

“In the weaker countries, like Argentina, we have already started to see very complicated effects in terms of currency crises because there are no dollars, and people are starting to feel the need for exchanging their pesos for dollars, and this generates a sharp increase in inflation and inflationary expectations,” Bernal added.

Latin American government bonds were largely reduced as higher borrowing costs discourage selling, according to a Bloomberg report.

The Colombian peso has been one of the most devalued currencies since the start of the year. In June, the Colombian currency lost 5.5% of its value.

Bernal explained that Colombia historically and structurally has a much higher current account deficit than the rest of Latin American countries, and this is a vulnerability when interest rates rise.

As for the near future, analysts like Bernal are closely monitoring inflation in the United States. Monthly inflation in June in the United States was 1% and the annual number was 9.1%, the highest since 1981.

“The important thing is that the rise in inflation in the United States is brought under control, … and that should help the American central bank and the other central banks of the world to be a little more progressive from now on,” said Bernard.

For his part, Boggiano in Argentina said the trend of rising interest rates in the United States could continue “that’s why the dollar is not only appreciating against emerging currencies”, he said. he said, stressing that in the case of Argentina, its government should introduce spending cuts and austerity measures, while remaining committed to addressing internal rigidities and price distortions that could cripple the economy.

“There must also be some indication of a prospect of stopping spending, because spending means continuing to print pesos, continuing to print paper money, and that has led us to this inflationary spiral, where inflation in July is estimated at 7 or 8 This is a monthly level probably not seen in the last 20 years, if there was a similar month,” Boggiano said.

Amid global monetary tightening and greater economic uncertainty, “external financial conditions in Latin America and the Caribbean are deteriorating, leading to higher borrowing costs and currency pressures,” according to a recent report. published by the World Economic Forum.

“Latin American and Caribbean economies continued their strong post-pandemic rebound, but as global financial conditions tighten, this upward trend is reversing,” the report said. As a result, central banks across the region have tightened monetary policy appropriately to anchor longer-term inflation expectations, such as in Brazil, where its central bank raised the policy rate to 13.75% on Wednesday.

The author is a freelance journalist for China Daily.

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