World Economy

LatAm States Under Pressure

LatAm States Under Pressure
LatAm States Under Pressure

Brazil shares and its currency fell, following a drop in global commodities prices, as investors waited for interim President Michel Temer’s team to announce measures to control debt and restore economic growth.

The real weakened nearly 1.5% against the dollar, which strengthened against a basket of currencies. Brazil’s central bank refrained from selling reverse currency swaps, unlike the previous two days, Reuters reported.

Finance Minister Henrique Meirelles, who was sworn in on Thursday, said harsh measures to stabilize the country’s rising debt burden would be announced at the right moment.

Brazil’s Senate on Thursday suspended President Dilma Rousseff and put her on trial, charged with breaking budget laws. Her vice president, Temer, has taken over as interim president.

Brazil’s benchmark stock index the Bovespa fell 2.7%, as did the MSCI Latin America index. Shares of state-run oil company Petroleo Brasileiro SA fell 3.37% as oil prices fell. Petrobras, as the company is commonly known, posted its third straight quarterly loss on Thursday.

Elsewhere in Latin America, Mexico’s peso weakened key Latin American stock indexes and currencies.

Meanwhile, the rising US dollar and decreasing commodity prices are weighing down on Latin American economies, with a vast majority of countries in the Western Hemisphere struggling to push down inflation.

According an analysis of Latin American economy by two regional analysts of the International Monetary Fund, the more the US dollar rises in value, the weaker become Latin American currencies. For the regional countries, expensive US dollar is inflating the price of imported goods and services.

  Better Monetary Frameworks

“Prices are on the rise in Latin America while they stagnate in the rest of the world,” the report stated. Inflation has remained stubbornly above central bank targets in some Latin American countries, particularly in Venezuela and Argentina.

Yet the report says Latin America may not slip deeper into turmoil because “monetary frameworks have improved substantially over the past two decades, the rate at which currency depreciations are passed through to domestic prices is much lower than in the past.”

Stronger and more independent central banks in the region, the report says, have been able to better anchor inflation expectations, thus preventing increases in the price of non-tradable goods following depreciations.

“This largely explains why the inflationary impacts of the recent episodes have been so modest despite the extent of currency depreciations in countries with well-established inflation targeting regimes, such as Chile, Colombia, Mexico, and Peru,” said the report titled Regional Economic Outlook: Western Hemisphere.

The IMF suggests that central banks remain trustworthy and hike interest rates whenever they expect inflation to go up. “If central banks clearly communicate the drivers that are pushing inflation above target and the reasons behind their interest rate decisions, monetary policy can remain accommodative,” the report said.