Inflation risk

Alarm bells ring as food prices start to rise across Latin America.

Food prices are rising in Latin America, setting off alarm bells in national governments and multilateral organisations. Economists believe this is directly connected to the effects of the pandemic with lower supply due to the economic lockdowns and slow reopening. A food security expert and advisor to several municipal governments explained, “In Bolivia, the panic over the virus last year caused governments to improvise and the most affected were rural producers. The quarantines were so strict that they did not contemplate exceptional measures to guarantee the production and provision of food. In countries like Argentina, some supply routes between provinces were closed for more than 7 months.”

A former Vice Minister of the Economy in Argentina had a separate view, “The global quarantine had a devastating effect on the public finances of developing countries, even more so for those already in crisis such as Argentina, Ecuador and Bolivia. These are “primary-exporting” countries, whose income comes mainly from commodity exports and which ended 2020 with high fiscal deficits and external deficits. They turned to international loans and strong monetary expansion, so as a result, prices are increasing.”

“These are “primary-exporting” countries, whose income comes mainly from commodity exports and which ended 2020 with high fiscal deficits and external deficits.”

Former Vice Minister of the Economy, Argentina

Finally, as global economies begin to recover, international commodity prices are experiencing a significant increase. And while this is good news for fiscal accounts, it will also have an impact on inflation. The former vice minister of economy continued, “It is a trade-off facing Latin America. On the one hand, countries are desperate to increase their external income and this will not come from productive diversification or even increased production. This will come from the increase in international prices.”

In short, the outlook for inflation is concerning for the region, “All Latin American countries will close 2021 with high inflation, in some cases at very dangerous levels, such as Argentina, which may see 50% accumulated annually. Even in Brazil and Mexico there are signs that inflation may reach 10%. A strong economic rebound is expected but this rising inflation will not allow as much room for manoeuvre in terms of economic policy,” explained the former vice minister.

“All Latin American countries will close 2021 with high inflation, in some cases at very dangerous levels.”

Former Vice Minister of the Economy, Argentina

In this sense, “China will once again play a leading role,” says an Argentine expert in geopolitics. “In the past, demand for commodities by China caused the great price boom and made the region have extraordinary income. This time China, seeking not to stop its recovery, has become aware and has already announced that it will take measures so that this does not happen again. Specifically, through price controls. The big question is how much their actions can impact global prices?”

But again, this means a trade-off for the region. Many governments are optimistic about the increase in international prices and recovering external income. Let’s not forget that China is among the main destination markets for almost all the countries in the region and at the same time is the main supplier of manufactured products. Any policy that this Asian giant implements has immediate effects in Latin America. “China has as a priority at this juncture to guarantee the food security of its population and that comes hand in hand with countries like Brazil and Argentina. However, unlike 2008, it now has much more international power and it is going to use it to prevent its increase in purchases from being translated into prices”, believed the geopolitics expert.

In conclusion, inflation poses a great challenge for the governments of Latin America, especially in food products. “Each country must decide how much it is willing to allow food prices to increase. Bolivia and Argentina are two examples of what not to do since, without further analysis, they began to prohibit exports of food products. Their intention to lower prices is good, but the remedy will be worse than the disease because the countries of the region are desperate for external income and Venezuela has already demonstrated what the prohibitions achieve,” said the former Vice Minister of Economy.

Climate is also likely to play a major role explained the geopolitical expert. “We are seeing the largest drought in decades in the US, followed by one of the worst heat waves ever to reach Canada. Will Latin America be next?

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