A Bird's-Eye View Of The LATAM Macroeconomic Situation

‍A Region On The Rise

There's no question that economic circumstances are changing on a global scale. And with the changes will come a need for strategic adjustments on the part of the investing public. One of these changes has been an increased interest in emerging market economies as a target for foreign direct investment, and among these, few have attracted as much attention as Latin America.

Of course, this shift has to be seen through the lens of global events. First and foremost, we must mention that the end of the COVID-19 pandemic, the war in Ukraine, and the large issuance of dollars by the Federal Reserve of the United States and the European Central Bank caused disruptions in price levels in developed economies. One of the most significant outcomes has been the increase in the global price of food, raw materials, and commodities in general, as shown in the following graph from the Fed/IMF.

Latin American economies (and their currencies) are characterized by their correlation to commodity prices, as commodities are their main export category. In the last 3 years, the price of commodities has increased steadily, even after the Federal Reserve increased interest rates at a fast pace. On the other hand, these economies are also influenced by political winds; governments that uphold constitutional order usually result in higher asset valuations. Over all, each country is a universe of distinct factors, and this analysis will help readers gain a clearer perspective on Latin American currency developments. 

Argentina

The economy of Argentina is among the most volatile on the continent. For the year 2023, a decline in its GDP of approximately 2% is projected, mainly due to a significant drought that affected the agricultural sector, particularly soybean and wheat exports. Currently, the country has capital controls in place, which restrict the inflow and outflow of dollars. Its foreign exchange market is "broken" as the official government exchange rate does not accurately represent the real value of the local currency, the Argentine peso. 

In fact, there exists an "informal" exchange rate that is 100% higher than the official rate. Considering this informal exchange rate, Argentina is one of the cheapest economies in the continent for tourism, but making investments within the country is considered too risky for American capital. The currency of this country, the Argentine peso, is not considered a viable investment, as once acquired, it is subject to an approximate twelve-month inflation of 115%.

Brazil

The electoral victory of Lula Da Silva in 2022, leader of the Workers' Party, caused a political shift to the left in Brazil's government policies. However, the conditions for doing business in this country have not deteriorated excessively. Brazil's main exports have benefited from the increase in commodity prices, but this has not changed Brazil's debt profile which has most of its debt denominated in US dollars. The conditions in the Brazilian market are not negative, but Lula Da Silva has shown a growing interest in "de-dollarizing" the country and favoring trade with China through the use of the Yuan and possibly creating a currency with BRICS. The effects of these types of policies are usually not positive for asset price expectations and might be worse for Brazil's currency, the Brazilian real.

Chile

The economy and political landscape of Chile have been uniquely distinct in Latin America’s last 30 years. The consensus of the elites of Chile was to maintain an economy oriented towards the free flow of foreign capital, economic openness, and predictable rules. However, in recent years, Chile has been shaken by protests and attempts to establish a new constitution with a more social orientation. Gabriel Boric, the current president of Chile, is a young progressive that’s seeking to reform the constitution to provide more rights to marginalized groups like the Mapuche people and to establish an ecological framework for all activities in the country. The Chilean peso has been one of the most heavily affected currencies in Latin America in recent years. Just five years ago, the exchange rate was 650 CLP per USD, and currently is 830 CLP per USD.

Colombia

Despite recent bumps on the political front, Colombia is a particular case of economic success. It was a reflection of Latin America's economic stagnation between 2014 and 2020. According to short-term projections, Colombia is expected to achieve a compound annual growth rate (CAGR) of nearly 7% by the end of 2023. The arrival of President Gustavo Petro negatively shook expectations regarding the institutional landscape, but once in office, he has proven to be a reliable ally to the U.S.A. and has not changed the country's business conditions or sought to alter Colombia's constitution. This substantial reversal in the economic and political outlook has led to a strengthening of the Colombian peso in recent times, which peaked at around $5,000 COP to the dollar in early January and has since declined to around $4,000. Additionally, the sustained growth of Colombia's economy (graph below) has not yet been reflected in domestic asset prices, which creates a solid opportunity for investors

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Peru

Peru finds itself plunged into a situation of deep political instability. In the last six years, it has had six different presidents, as none have been able to fully control power and are quickly removed by the legislative assembly. Peru's economic outlook also appears volatile due to this situation, and the stability the country had achieved in recent years has been severely deteriorated. The presidents' inability to gain significant power is also a guarantee of continuity of business-friendly policies; however, Peru's conditions are not reliable for foreign investors given the climate of protests and social discontent.

Conclusion

Latin America is emerging as a region with high growth potential in the coming decade, driven by the surge in commodity and raw material prices, enabling rapid economic expansion in the majority of these countries. However, there are substantial differences in investment opportunities due to the political and monetary landscapes of each of them.

Brazil and Colombia offer the best conditions for doing business, but only Colombia can provide a foreign investment-friendly environment, economic openness, and macro-political stability. In this sense, Colombia offers a unique opportunity for investors seeking a difference in returns compared to what developed economies can yield.

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