- Cecilia Barria
- BBC News World
2 hours
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After the start of the war in Ukraine at the end of February, the price of raw materials rose frantically.
In the midst of uncertainty, products such as oil, metals, gasoline, natural gas, wheat, corn or soybeans soared and in a few days a new boom of the commodities.
The Russian invasion and sanctions applied by Western nations to Moscow initiated historic increases in global food and fuel prices and prompted companies to look for alternative sources of supply.
“You have a shock where you lack basic products, food and energy and also metals, there is a problem of food security and [América Latina] looks like the one that will help us get through the problems,” Ilan Goldfajn, director of the Western Hemisphere Department at the International Monetary Fund (IMF), said in April.
Latin America, he added, has been seen by investors as a region that can “be part of the solution”, But he warned that to make the most of this context, governments would have to promote reforms to increase productivity and competition, improve education, change tax systems and reduce inequality.
The Curse of Natural Resources
This has also been raised by some economic analyzes that see what is happening as an opportunity for the region, given the decrease in the supply of energy products and cereals due to the conflict in Ukraine.
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From that perspective, the possibility that the region can export more natural resources is considered “good news”, after the covid-19 pandemic left deep scars on Latin American economies.
Although, from a historical point of view, basing a country’s growth mainly on the export of natural resources -even in a context of crisis- is considered a very bad idea.
It is what is usually called the “resource curse” natural” or the “paradox of abundance”, that affects countries that, despite being rich in raw materials, tend to remain trapped in a low level of development because they export products without added value, such as oil, minerals or grains.
At the same time, they are forced to import manufactured products, which, in the current context of high inflation, is causing both public and household finances to be hit.
Among the unknowns of this boom of raw material prices, doubts persist about which sectors will continue to rise, which will go through curves of rises and falls or for how long high prices could last.
In recent weeks, for example, the price of metals has fallen nearly 20% from its peak in March and within that group, copper, has suffered an even greater blow.
But the rest of the commodities They remain at the top of the curve.
For now, it is not very clear if the higher prices of raw materials in international markets are going to generate more advantages than disadvantages for Latin American countries due to a key factor: rampant inflation sweeping the world.
Inflation casts doubt on profits
“Increasing inflation has an impact that is likely to overshadow gains from a business standpoint,” says Elijah Oliveros-Rosen, an economist. senior from the Latin America Global Economics & Research division of the consulting firm S&P Global Ratings.
There is no mathematical formula to calculate exactly how much a country earns from income from commodities and how much it loses due to the impact of inflation, he explains in conversation with BBC Mundo, because determining the net effect depends on many factors.
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In any case, when looking at who wins and who loses in the current economic context, the analyst proposes looking at the matter from two angles: how it affects producers of raw materials and how it affects consumers in a given country.
Without a doubt, the companies that produce commoditiessays Oliveros-Rosen, will benefit from higher prices, especially in countries like Brazil, which is an exporter of products such as oil, steel, or food.
But consumers are paying much higher prices due to the tidal wave of inflation that has caused many countries to raise interest rates at full speed.
In the end, energy inflation and food inflation are hitting families’ pockets very hard.
To this is added that credit becomes more expensive and the economy recovers more slowly, affecting the economic course, precisely when the voices that anticipate a recession in the United States and Europe are gaining ground.
Nor does the slowdown in China in the global economic outlook, Latin America’s second-largest trading partner after the United States, help.
“Such high inflation can take away all the benefits of the high price of money.”os commodities“points out the economist.
More positive or more negative?
This is a concern shared by analysis centers that are trying to decipher the impact that the new economic context may have on the region.
“Growth expectations for this year remain moderate,” says Daniel Zaga, head of Economic Analysis at the consulting firm Deloitte Mexico.
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The jump in the price of raw materials, he adds, has generated pressure on inflation, but it has also had an effect on the trade and fiscal balances of the countries of the region.
Very different effects for each economy, because the rise in raw materials and the difficulties that Latin American countries are going through are not homogeneous.
Zaga explains that, for example, in Argentinawhere the trade and fiscal effect could be slightly positive this year, the negative impact through inflation could be greater.
Currently the increase in the cost of living exceeds 60%, and analysts project that it will probably continue to climb.
In other countries like Colombiawhich has had inflation under control in recent decades, “the positive effect via trade and public finances will be greater than the negative effect of inflation,” says the economist.
While, in economies like the Mexican“the effect is negative in all areas: trade, public finances and inflation.”
In any case, we will have to wait for the evolution of the year to assess with greater precision the impact that the rise in raw materials will have on each country.
“However, in general terms, and taking into account economic growth, most Latin American economies will not be affected by the conflict in Ukraine,” says Zaga.
The turn of the last weeks
The economic scenario has been complicated in recent weeks.
A key gauge of commodities, the Bloomberg Commodity Spot Index, which tracks contracts in energy, metals and crop markets, is down nearly 20% after hitting a record in early June, as they grow. fears that a recession is coming.
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The markets are giving signs that the United States Federal Reserve (equivalent to the Central Bank of other countries) will not be able to control inflation, which has reached its highest level in four decades, without raising the price of money even more, leading the economy into a recession.
Nor does the picture look good in Europe, where interest rates have just experienced their biggest rise in two decades, while the economic slowdown in China adds fuel to the fire.
That causes investors to anticipate an adverse future and make decisions that push down commodity prices, putting a pause to the incredible rally they had experienced.
Will prices continue to fall? Will they rise again? Will only metals fall, while the price of food will continue to climb? How much more will interest rates rise in the US? Which countries will enter a recession? ? Will Russia stop selling gas to Europe?
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With such a high level of uncertainty, large capitals have preferred to avoid risk and seek refuge in safer investments.
As the international storm continues, Latin America tries to control the wave of inflation that is suffocating households and deal with complicated political scenarios that, by the way, also have profound economic repercussions.
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