As pandemic-induced restrictions begin to ease, there has been an uptick in global demand for commodities as economies gradually emerge from Covid and growth gears start whirring again. This, on paper, bodes well for Latin America which leads the world in exporting critical supply chain components, from coffee to copper and from zinc to lithium. Commodity demand and voluminous exports is usually reflected by a healthy currency. Unfortunately, here Latin America bucks the trend – currencies across the region have been among the worst-performing emerging market currencies anywhere in the world.  

A leading Brazilian economist and former World Bank official explained, “Across the region, currency depreciation will exacerbate weak foreign direct investment and a continued capital flight meaning a bounce-back in the short to medium-term is hard to envisage. Political risks compounded by policy uncertainty are also major contributory factors.”  

"Across the region, currency depreciation will exacerbate weak foreign direct investment and a continued capital flight."

Economist and former World Bank official, Brazil

Certainly, the overwhelming dependence of the region’s economies – especially Brazil, Argentina, Peru and Chile - on commodities exports mean that they trade what are, de facto, ‘currency commodities’. Depreciation has been exacerbated by political uncertainty given a new left-wing administration in Chile, an Argentinian government struggling to pay back record levels of debt to the IMF and electoral uncertainty in Colombia and Brazil to name just a few developments vexing markets and pausing capital inflows. 

Resolving these dilemmas in the longer-term necessitates looking beyond the region’s shores and thousands of miles eastward. A Chinese government eager to support medium to high rates of growth could reenergise the region’s currencies. True, growth in the world’s second largest economy has slowed in recent months exerting a particularly pernicious effect on Latin America’s largest economy, Brazil. Reduced Chinese demand for iron ore for example caused the Real to drop by 1% almost overnight and spurred concerns over a reduced appetite for other steel-making materials. But even slow growth in China is enormous in comparison to much of the rest of the world, and thus a cause for optimism. 

"The health of Latin American commodities depends to a large extenT on growth in the Chinese economy."

Economist and former World Bank official, Brazil

The economist remarked, “The health of Latin American commodities depends to a large extent on growth in the Chinese economy which is the largest importer of these commodities. The question that needs to be asked is whether Beijing will allow for growth lower than 5/6%. Despite a lot of noise, the government is still willing to support moderate to high growth rates. This in turn will support Latin American commodity prices which in the long-term, when political and policy uncertainties subside, will contribute to a stronger currency rebound.”  

Commodities alone of course will not fix Latin America’s currency malaise. A more intransigent source of weakness is the financial accounts for economies across the region. If foreign direct investment remains a trickle in comparison to other emerging regions, notably Asia, currencies will find it difficult to return to pre-pandemic levels. Capital needs to return and fast. Whilst uncertainties remain, expect to see domestic economic actors continue to dollarise their portfolios to hedge against radical policy shifts. This may be an overreaction – a projected leftward tilt in Brazil and Colombia for example will establish governments rather more pragmatic than headlines may have you think. Nonetheless, investors remain cautious with currencies trailing far behind.