The first week of May brought a strong devaluation of the main South American currencies, the volatility of the Argentine economy could be the trigger
So far this month, the currencies of the emerging economies have had their worst weeks in more than a year. During the first week of the month, there were sharp declines in Colombian, Mexican, and Chilean peso prices, in addition to the continued fall of the Brazilian real, which reached its lowest price in more than two years.
One of the explanations for the generalized collapse of prices seems to point to the Argentine economy, which again shows out-of-control inflation and perpetual weakness of its currency against the dollar. For the rest of Latin America, this is problematic, since Argentina is in the same investment asset categories as the rest of the region: the category of emerging markets and that of Latin American markets. When Argentina is affected, the valuation of the entire category falls, and over time, this leads to a devaluation of local currencies.
Following the Argentine scenario, large investors have withdrawn 5,500 million dollars from the emerging market portfolio according to data from the International Finance Institute. According to Bloomberg, they have withdrawn 1.2 billion of the Latin American portfolio only in the last week.
It should come as no surprise that the situation in Argentina worries investors, since the outlook is really hostile to foreign capital. This is particularly due to the inflation that continues to rise, generating uncertainty and a certain panic among financiers.
Inflation in Argentina is currently at an alarming 25.5%, and threatens to continue rising despite the emergency measures taken by the Macri government. Although it still has not reached the catastrophic 47% of 2016, Argentines already face difficulties in providing for their basic needs.
Lucas González, Argentine public official, assures that the situation already filled his life of uncertainty: "I changed the behavior in the purchases by the increase. Now people buy per day, if they have money they purchase, if they do not have, they no longer buy. People spend more, but at the same time consume less".
In turn, Elvia Candia, a Bolivian woman who lives in Buenos Aires, said she now spends 7,000 Argentine pesos a week on food, twice what she spent in January of this year.
Additionally, the Argentine economy also faces a particularly strong dollar. Although the vertiginous fall of the Argentine peso against the US currency seems to have stopped, it continues to be in a critical situation. Last week the dollar was quoted at 25.8 pesos, a record and a sign of the seriousness of the situation.
Due to the inclusion of Argentina in investment portfolios in emerging economies and Latin American economies, this weakness of the local currency against the dollar is what seems to be spreading throughout the region. The other countries of Latin America must prepare themselves for what this implies.
At the macro level, a generalized rise in the prices of imported goods should be expected, which in emerging markets will always mean problems for the consumer, since, except for food, most of the consumer goods in the region are imported. While on a smaller scale, Latin Americans should be careful with their trips, since the cost of these will tend to rise, so if they plan to travel it is advisable to pay for the preparations in advance.
Latin American Post | Pedro Bernal
Translated from "La devaluación de las monedas latinoamericanas puede rastrearse hasta Argentina"