From the Forecast: “The continent [South America] as a whole will remain stable relative to other regions of the world.”
Update: South America’s abiding geographic feature is its isolation, which tends to insulate it from major events in the rest of the world. Aside from drug cultivation, commodities and the never-ending disaster that is Venezuela, South America has not much factored into global affairs lately, nor have geopolitical dynamics among South American nations created much in the way of serious risks. That seems to be the case for the rest of the year. We note that though our forecast is mostly on track for now, several recent events cut against it. And if it continues, it could push the forecast off track completely.
The chief culprit is Argentina, where the peso continues to nosedive. Much has been made of the collapse of the Turkish lira, including by us, but far less has been made of the decline in value of the Argentine peso, which like the lira is down more than 60 percent this year. But unlike the lira, it is still depreciating despite central government intervention. Strictly speaking, this isn’t unheard of in Argentina; it undergoes these kinds of currency fluctuations fairly regularly, and we have made the case that Argentina’s recent moves, including an ambitious reform program and a pre-emptive IMF loan, should be seen as prudent planning, not impending doom.
Still, Argentina now faces some big problems. A major drought has disrupted the agriculture sector and hurt the economy. Earlier this month, President Mauricio Macri said inflation might reach 30 percent again by the end of the year. The government has said it will renege on a promise to reduce soymeal and soyoil export taxes for want of more government revenue – a move that is sure to anger farmers. Argentina even imposed a two-day embargo on these exports to prevent farmers from selling before new tax measures came into effect.
Argentina may be the main culprit, but it isn’t the only one. Perhaps more concerning for South America is the recent weakness in commodity markets. Coffee, sugar and copper are just some of the commodities South American economies depend on, commodities whose prices have dipped in recent weeks. Brazil has currency woes of its own to deal with; the real is down 20 percent on the dollar for the year, currently hovering at a two-year low. Chile’s currency is down almost 10 percent on the dollar, and the country’s $184 billion in external debt compared to its paltry $37 billion worth of official reserves has us worried about potential shocks there.
This is to say nothing of the continued degradation of Venezuela, which is starting to spill over into Ecuador and Peru, where new entry requirements have been put in place to try to stem the flow of Venezuelan refugees. Meanwhile, Brazilian military forces already stationed at the border had to intervene at a Venezuelan refugee camp in Brazil to protect it from attack by a local mob.
Overall, there’s not enough evidence to say this forecast is off track. After all, economic uncertainty is a fixture in Argentine politics, commodities prices are inherently mercurial, and the vulnerabilities of countries like Brazil and Chile may not lead to outright calamity. Venezuela continues to survive, even as it appears, time and again, to bottom out. Even together, these events have failed to push our original assessment into negative territory. But at the rate things are going, they very well could.
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