Latin America’s Economic Resilience in the Face of Political and Monetary Challenges

The injection of economic turmoil into political tumult would be more than enough to cause a big crisis in Latin America. However, Latin America’s economies are holding their own. Capital flows to emerging countries have been more erratic since the Fed began raising interest rates last year, according to the Institute for International Finance.

  • Foreign portfolio flows into Latin American equities and bond markets averaged more than $10 billion in the first two months of the year, totaling more than $50 billion since the Fed began raising interest rates in April last year. After Silicon Valley Bank went bankrupt, there has been minimal data on money flows. Nonetheless, the currencies of the majority of Latin America’s larger economies have strengthened against the dollar in recent weeks.
  • According to the International Monetary Fund’s latest Fiscal Monitor, published in October, Latin America will have a balanced primary budget (before debt servicing) in 2022 and a tiny primary deficit of 0.4% of GDP this year.
  • This is a significantly tighter fiscal policy than is found in most other parts of the world. Yet fiscal policy isn’t the sole constraint. Central bankers in Latin America appear to be steely-eyed monetary hawks when compared to the Federal Reserve. They began rising interest rates early and tightened significantly more severely. Notwithstanding the Fed’s tightening, real rates in the United States remain negative. Brazil’s policy interest rate is approximately 8 percentage points higher than inflation.
  • Not only are real rates in Mexico hovering at 3.5%. It’s not unexpected that the peso has been trading near its highest level against the dollar in five years.

It appears to be a story about lessons learned. Latin America has been through too many financial crises to allow itself to succumb to another without a struggle.