Why the current “flood” of raw materials is not enriching Latin America

Latin America is seen as a potential region by investors “Be part of the solution”, But to take advantage of this situation, he warned, governments must promote reforms to increase productivity and competition, improve education, change tax systems and reduce inequality.

This has been raised by some economic analysis as an opportunity for the region as the conflict in Ukraine has reduced supplies of energy products and grain.

From that perspective, the potential for the region to export more natural resources is considered “good news” after the Covid-19 pandemic left deep scars on Latin American economies.

However, from a historical perspective, basing a country’s development mainly on the export of natural resources – even in a crisis environment – ​​is considered a very bad idea.

It is commonly called “Resource Curse” Nature” or “plenty of contradiction”, This affects countries that are rich in raw materials but stuck at low levels of development because they export goods without added value, such as oil, minerals or grains.

At the same time, they are forced to import manufactured goods, which in the current environment of high inflation, affects both public and household finances.

Among those who do not know this boom In terms of raw material prices, doubts remain as to which sectors will continue to rise, which will follow the curves of fluctuations or how long high prices will last.

For example, in recent weeks, metals prices have fallen nearly 20% from their peak in March, and within that group, copper has suffered an even bigger blow.

But the rest materials They are at the top of the curve.

For now, it is not clear whether the high cost of raw materials in international markets is going to create more advantages than disadvantages for Latin American countries due to one key factor: World Widespread Inflation

“Rising inflation has an impact that can mask gains from a business standpoint,” says Elijah Oliveros-Rosen, an economist. senior From the Latin America Global Economics & Research Division of S&P Global Ratings.

There is no mathematical formula to calculate how much a country gains from commodities and how much it loses due to the impact of inflation, he explained in a conversation with BBC Mundo, because determining the net effect depends on many factors.

However, when it comes to who wins and who loses in the current economic climate, the researcher proposes to look at the matter from two perspectives: how it affects raw material producers and how it affects consumers in a given country.

Without a doubt, the manufacturing companies materialsOliveros-Rosen says countries like Brazil, which export commodities like oil, steel or food in particular, will benefit from higher prices.

But consumers are paying higher prices because of a wave of inflation that has caused many countries to raise interest rates at full speed.

Ultimately, energy inflation and food inflation hit households’ pockets hard.

As voices anticipating a recession in the U.S. and Europe grow louder, debt becomes more expensive and the economy slows to recover, affecting economic direction.

A slowdown in China, Latin America’s second-largest trading partner after the United States, doesn’t help the global economic outlook either.

“Such high inflation would rob us of all the benefits of a high cost of money.”ohs materials“Economist points out.

This is a concern shared by think tanks trying to understand the impact the new economic environment could have on the region.

“Growth expectations for this year remain moderate,” says Daniel Zaga, head of economic analysis at consulting firm Deloitte Mexico.

Rising commodity prices have created pressure on inflation, but have also impacted the trade and financial balances of regional countries.

The consequences are very different for each economy, because the rise in raw materials and the difficulties faced by Latin American countries are not the same.

Zaga explains, for example, in ArgentinaWhile the trade and financial outcome will be marginally favorable this year, the negative impact through inflation will be greater.

Cost of living increases currently exceed 60%, and analysts predict it will continue to rise.

In other countries like Colombia“The positive effect of trade and public finances outweighs the negative effect of inflation,” says the economist, who have brought inflation under control in recent decades.

At the same time, inside Economies like Mexico“The effect is negative in all areas: trade, public finances and inflation.”

However, we will have to wait for the evolution of the year to assess with greater precision the impact of the increase in raw materials on each country.

“However, on a general basis, and taking into account economic growth, most Latin American economies will not be affected by the conflict in Ukraine,” says Zaga.

The economic situation has been complicated in recent weeks.

The Bloomberg Commodity Spot Index, a key gauge of commodities that tracks contracts in the energy, metals and crop markets, has fallen nearly 20% as they grow, after hitting a record high in early June. A recession is feared.

Markets are giving signs that the U.S. Federal Reserve (equivalent to other countries’ central banks) cannot control inflation, which has hit its highest rate in four decades, without further raising the price of money, leading the economy into recession.

The picture is also not good in Europe, where interest rates have seen their biggest rise in two decades, while an economic slowdown in China is adding fuel to the fire.

It predicts an adverse future for investors and makes decisions to lower commodity prices, putting a pause on the incredible rally they’ve been enjoying.

Will prices continue to fall?Will they rise again?Will only metals fall when food prices rise?How much more will interest rates rise in the US?Which countries will enter recession?Will Russia stop selling gas? To Europe?

With such high uncertainty, large capitals prefer to avoid risk and seek refuge in safe investments.

As the international storm rages on, Latin America is trying to stem the tide of inflation that is suffocating families and grappling with complicated political situations.

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