By John Price Posted March 1, 2021 In Business Trends & Strategy, Eco-political analysis, General Interest, Mining
After the most disruptive year (2020) in over a century, Latin America investors must now navigate a region as laden with risk as it is with opportunity. COVID-19 and its accompanying lockdowns have sadly divided us far more than united us, in spite of the remarkable moments of humanity shown across the region since the pandemic struck. Even before the onset of COVID-19, Latin America was struggling with stalled economic progress, underinvestment, and flirted with political populism. Such a backdrop adds several challenges to the region’s economic recovery, which begins in earnest in 2021.
THE GOOD － Country Analyses
CHILE: The world stood in awe in October 2019 as two million Chileans marched in Santiago, protesting their government’s brash displays of insensitive policies and poor governance. Some predicted the end of Chile’s economic miracle. They were wrong. Democracy and economic growth are alive and well in Chile. In April 2021, voters will convene to elect the diverse assembly of leaders who will rewrite their constitution, a bold experiment that will once again demonstrate Chile’s nation-building prowess.
Chile’s greatest virtue as a nation is its collective sense of prudence and restraint. The rainy day fund that they built on the back of copper royalties, combined with decades of fiscal discipline, enabled Chile to fund one of the world’s most impressive counter-cyclical economic relief programs designed to aid the most vulnerable during COVID lockdowns. Poverty levels in Chile did increase but by far fewer measure than countries like Mexico and Colombia.
Looking forward, Chile’s export mix of copper and food products enjoys rising world prices and demand, such that billions of vital foreign currency will flow into Chile over the next 24 months, strengthening the Peso and living standards of Chileans. An economic recovery that is swift and widespread will be the best antidote to any rise in populism on the heels of the 2019 protests and COVID lockdowns.
Thanks to a First World-style vaccination program that is leaps and bounds ahead of any other Latin American equivalent, Chile will reach herd immunization 3-12 months ahead of its Latin American neighbors. By mid-2021, if not sooner, droves of affluent Brazilians, Argentines, Peruvians and Colombians will fly to Chile to get vaccinated ahead of their own countries’ plodding vaccination schedules. As a result, Santiago hotels and luxury shopping malls will get a much-needed shot in the arm (no pun intended).
BRAZIL: Brazil’s thinking class shudders with embarrassment every time President Bolsonaro opens his mouth and yet the country continues to steer a net positive and sensible path when it comes to economic policy. An interesting case in point was Bolsonaro’s dismissal of Petrobras’ competent CEO, Roberto Castello Branco, replaced by an old army crony, General Silva e Luna – a perilous move that destroyed 20% of Petrobras’ market cap in 48 hours. But Petrobras is, below its highest echelons, a meritocracy, which generated $11bn USD profit in its last reported quarter. Compare that with Mexico’s Pemex, the most inefficient oil major on the planet, which continues to drain scarce Mexican government funds under the leadership of AMLO. Petrobras will survive political meddling at the top because it is institutionally sound. Much the same can be said about Brazil’s wider government, which in spite of Lavo Jato, impeachments and the Bolsonaro family, still boasts the strongest institutions in Latin America.
Heading into the COVID crisis, Brazil was the economic darling of Latin America, having tackled important reforms and promising more. Reversing almost three decades of tradition, Finance Minister Paulo Guedes pursued tight fiscal policies and encouraged the Central Bank to loosen monetary policy (lower interest rates). The strategy began unleashing the animal spirits of Brazilian investors who had repatriated billions back to their country from off-shore savings. Low interest rates have prevented Brazil’s Real from recovering lost ground caused by capital flight when COVID struck.
Now Brazil’s financial strategy has altered course again. Bolsonaro proved to be the most generous spender in Latin America during COVID, sending billions to the poor and small business. Now, in order to reign-in inflation, the Central Bank will need to raise rates in 2021, which will strengthen the Real, much to the delight of foreign investors.
Bolsonaro’s Robin Hood spending helped bolster his popularity, even while his motley coalition of small parties lost their ability to pass legislature. Now Bolsonaro is in league with Brazil’s most powerful Centrão political parties, the once maligned (by Bolsonaro) champions of pork barrel congressional politics. Bolsonaro devotees are chastened by the new political alliance but Brazilian policy making and political stability are the better for it. The pro-business reform path remains in play and, with wider legislative support, becomes more viable, albeit somewhat diluted.
The chart below shows Brazil’s GDP growth percentage rate from 2019 to 2023 (in red), with the Brazilian real’s effective exchange rate highlighted in yellow for each of those years, so as to compare both metrics.
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