While uncertainty about the economic future sweeps the world, the dollar continues to gain ground against other currencies.
And some of the largest Latin American economies are no exception.
Argentina, Chile and Colombia are the three countries that have suffered the worst devaluations of their currencies so far this year against the dollar.
Mexico, on the other hand, has not seen major turmoil in the foreign exchange market, while the Brazilian real and the Peruvian sol have not been hit so far and, on the contrary, have appreciated in the first six months of this year.
The fact that a country’s currency depreciates increases the price of imported products, increases inflation and makes it more expensive to pay debts in dollars, a situation that can generate fiscal pressures in the countries that emptied their coffers to face the pandemic and they currently have very little room for manoeuvre.
The appreciation of the dollar comes amid a rapid increase in interest rates, which in Latin America has been especially rapid, a measure that seeks to control inflation but, at the same time, puts a little brake on growth.
Why have the currencies of Argentina, Chile and Colombia devalued so much? Although they share a common backdrop on the international front, they each have their own internal reasons that have contributed to the depreciation of their currencies.
The Argentine peso heads the ranking of the most depreciated currencies in Latin America during the first half of this year among the largest economies in the region.
No doubt the currency’s current loss in value is part of a historical trend. After decades of economic crises, with recurrent inflationary cycles, Argentines do not trust the peso as a reserve currency, and choose to take refuge in the greenback.
The Argentine peso was created 30 years ago with the intention of stabilizing the currency after a period of hyperinflation and for a decade it was worth the same as a US dollar, thanks to a law that made the two currencies equal.
Today a peso is equivalent to less than a dollar cent (compared to the free market dollar, it is not even half a cent).
“The reason for this tremendous devaluation, one of the worst in the world, can be summed up in one thing: lack of confidence,” explains Verónica Smink, BBC Mundo correspondent in Argentina.
In recent years, he adds, political issues have been added to 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, generated a spike in the dollar.
And, more recently, the public fights between the current president, Alberto Fernández, and his powerful vice president, Cristina Fernández de Kirchner -which led to the resignation of the Minister of Economy on July 2-, have also generated uncertainty, causing a new rise (and consequent devaluation of the peso).
This is also argued by Ricardo Delgado, economist and president of the Analytica consulting firm, for whom “the background of the depreciation has to do with the political crisis that exists in Argentina within the ruling coalition.”
Fernández and Kirchner, he adds, have two very opposite views on economic policy and, particularly, on 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, she explains in dialogue with BBC Mundo.
In this scenario and with an economy that has issued a lot of currency in the last two years as a result of the pandemic,”there are many pesos in circulation that, in a context of rising inflation and political uncertainty, make people want to take refuge in the dollar as reserve of value.
Argentina has year-on-year inflation close to 62% and projections towards the end of the year point to a much higher rise.
The Chilean currency had been weakening against the US currency, but when it momentarily set 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 Boric declared that the increase in the dollar “is tremendously worrying” and argued that one of the main reasons “is the drop in the price of copper as a result of two factors that are external to the country.”
“One is the prospects of recession in Europe and the United States, which will only be clarified at the next meeting of the Federal Reserve, which still has some time, and also the process that China is still following with the closure of cities that has lowered the demand for copper,” he specified.
Along with the international scenario, Boric warned that “there are also internal factors and in this uncertainty, without a doubt, contributes”, referring to the September 4 plebiscite in which the country will finally decide whether to approve or reject the proposal for a new New Constitution. drawn up by a Constitutional Convention elected by popular vote.
Leonardo Suárez, Director of Studies at LarrainVial, a financial services firm, argues that the main reason for the rise in the dollar in Chile is the increase in the current account deficit, that is, spending on imports of goods and services is higher than export earnings.
This deficit, it adds, was driven by “excess spending” last year, in the context of a massive liquidity injection -both by fiscal aid in the wake of the pandemic, and by the early withdrawal of pension funds.
The exchange depreciation, he says in dialogue with BBC Mundo, had already been coming since the end of 2019, when in the midst of the social outbreak a political agreement was reached to change the Constitution. From that moment on, he affirms, “there was a punishment to the exchange rate”.
And in the last month, there was a sharp drop in the price of copper, causing a greater depreciation of the Chilean peso against the dollar, given that 56% of total Chilean exports are copper.
“This generates a shock of expectations in the markets and that is why the Chilean peso is hit harder than other currencies.”
All this happens when forecasts about a possible global recession grow more every day, a scenario that affects the price of copper and, therefore, the income that Chile receives.
The Colombian currency “has been devalued more than most of its peers in Latin America,” says Ricardo Ávila, senior analyst at the Colombian newspaper El Tiempo, in dialogue with BBC Mundo.
Indeed, the Colombian peso ranks third in the ranking after Argentina and Chile.
In addition to the international context that has pushed large investors to shelter their capital in less risky assets, “in the case of Colombia there is an extra element that has to do with political risk,” Ávila explains.
From his perspective, there is concern about the arrival of Gustavo Petro to power, to the extent that he has delivered the message that Colombia will depend less and less on oil, which is the main export product.
Given the prospect that Petro is not going to sign new oil exploration contracts, for example, the projections show, Ávila points out, that in 2026 Colombia would have to start importing gas and in 2028 Colombia would have to start importing oil.
If that promise comes true, there is a fear that Colombia will face a currency deficit and devaluation, he explains.
“In the last month the Colombian peso has been devalued a lot and that coincides with the election of Petro.”
Other observers argue that this is not so because Colombia’s debt papers have not been devalued. Now, specifically on the foreign exchange issue, says the expert, “if the perception is that there will be a lower entry of dollars, eventually that affects the exchange rate.”
The only country that marks a clear trend against the current is Uruguay, whose currency has 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 planned to raise its benchmark 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, against a backdrop of rising commodity prices following the Russian invasion of Ukraine. .
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