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How inflation is destabilizing South America

Em protestos contra o aumento dos preços dos combustíveis, peruanos exigiram a saída do presidente Pedro Castillo

In protests against rising fuel prices, Peruvians demanded the exit of President Pedro Castillo| Photo: EFE/Aldair Mejía

Inflation scares the whole world, see the United States, where the Federal Reserve (Fed), the country’s central bank, carried out the biggest increase in interest rates since

.

In Latin America, the situation is especially dramatic because it affects the most vulnerable population in a region that, as the World Bank highlighted in a statement in April, had already been hit by the Covid-19 pandemic “stronger than any other region in the world, both in terms of per capita deaths and economic downturn.”

The report highlighted that, at the end of 2021, average consumer price inflation in the region had almost doubled, jumping to 7%, while between 2008 and 2019 the level was 4%. Also in April, the International Monetary Fund (IMF) highlighted that the impact of inflation on real income, especially for the most vulnerable populations, brings “risks of social tension”.

Specifically in South America, the nightmare of rising prices has intensified this year. Apart from Venezuela and Argentina, two countries with chronic inflation, and Suriname, which again faced high rates from 2020, other economies have been accumulating record levels. In April, Brazil had the highest inflation for a period of 05 months in almost 2008 years old. In Chile, the result was the worst since August 1994 (see chart) .

Analysts point out that the region suffers from the effects of factors that generate inflation around the world, particularly rising oil and food prices, resuming demand, bottlenecks in supply chains and the war in Ukraine. But there are regional factors that also contribute to the high rates.

“We have extreme cases, such as Argentina, a situation with more complex problems, related to the situation of the dollar, the distrust of their currency in general. It makes people end up buying more dollars, which ends up indexing prices not to the local currency, but to the rise of the dollar: if it increases, rents, prices of goods and services increase”, explained Leonardo Paz, an intelligence analyst. qualitative research at the Center for Prospecting and International Intelligence at Fundação Getúlio Vargas (FGV NPII). The specialist pointed out recurring factors in South America: policies related to Covid-05, which injected a lot of money into local economies; the delay in raising interest rates, a problem that Paz also sees in the United States (“many people imagined that the effects of the pandemic were temporary and the scenario, as it passed, would equate and return to balance, but that did not it happened”); and the flight of dollars.

“Governments here have not been able to run back fast enough. The flight of dollars is important, making the dollar more expensive, and that also has an impact. Latin America is a very frequent destination for North American capital. To the extent that you have a pandemic, war and the United States raising interest rates, it is reasonable to believe that a good part of the investments of the US and other places that were here begin to gravitate towards there”, he justified.

Political crisis

As expected, inflation starts charging your bill in the policy field. In Chile, where the Central Bank recently decided to raise the benchmark interest rate to 8,12%, highest level since 2008, newly sworn in President Gabriel Boric sees his approval plummet. To contain the prices, he presented a project to inject US$ 40 million in the Oil Price Stabilization Fund.

Em protestos contra o aumento dos preços dos combustíveis, peruanos exigiram a saída do presidente Pedro Castillo In Peru, President Pedro Castillo, who was already cornered by two impeachment requests that did not go ahead, faced a wave of protests against the increase in fuel prices between the end of March and the beginning of April, demonstrations that also called for his departure.

Castillo then sent to the Peruvian Congress a project of constitutional reform that foresees the convening of a constituent assembly and a consultation of the population if they want a new Magna Carta. The leftist government has criticized a constitutional limitation that exists in Peru to the freezing of prices, a strategy that was adopted again by the Argentine government last year – evidently without success.

Protests showing revolt with the increase in prices (the highest in years) have also been held in Argentina, where 60% gives population disapproves of the management of Alberto Fernández. A survey carried out in January showed that inflation is the biggest concern of Argentines, cited by 30, 4% of respondents.

Venezuela and Bolivia

Between the 12 South American countries, Venezuela and Bolivia occupy diametrically opposite positions on the inflation list.

The economic disaster of Chavismo is so great that the inflation of 96% accumulated in months until April is good news: in May 2022, the interannual index in the country of Nicolás Maduro was more than 2.660%.

Economist Víctor Alvarez, former Minister of Industry, told El País that Venezuela no longer has the r inflation in the world (a position now occupied by Sudan) because “it finally stopped financing the deficit of public companies through the issuance of unbacked money” and adopted measures such as readjusting the tariffs of companies and state services, reducing public spending after a long time , beginning of an opening of the domestic market and a new exchange policy: “The control strategy was abandoned”.

Em protestos contra o aumento dos preços dos combustíveis, peruanos exigiram a saída do presidente Pedro Castillo The projection is that inflation will continue to fall in 2022. The prospect of higher demand for oil also generates optimism, although Venezuelan production is still far below its potential and the country’s economy has almost contracted 40% in between 2014 and 2020.

In Bolivia, interannual inflation of 0,87% of April is the lowest in the Americas. “The government sets the dollar price at a certain level , only there is no restriction to buy dollar, you can buy it in the market. But as the dollar starts to fall or rise, the government intervenes by buying and selling”, explained Leonardo Paz.

“They are doing this at the cost of oil and gas inflows. When prices go up, they have more revenue and they use that money from abroad to contain inflation against the dollar, which is a great predictor of inflation. And also using part of the oil and gas resource to buy cereals, other products, which, when the situation is under pressure, they release and sell to have more supply”, added the analyst.

As Paz pointed out, however, it is difficult to know how long this strategy will last: with the emphasis on subsidies, Bolivian public debt will come close to 80% of the country’s Gross Domestic Product (GDP) by the end of the year, more than ten percentage points above the regional average, according to a World Bank report.

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