Drought weighs on post-pandemic recovery in Latin America

The increasingly frequent and intense droughts are having more and more a negative impact on the economy. Agriculture, mining, energy and transport are affected.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

In the centre of South America, the lack of rainfall continues in a fatal chain reaction on the economies. The drought in the southern Amazon and in the Pantanal region is the worst in the last 50 years. But the lower rainfall in central Brazil every year is not only a burden on the farmers in Mato Grosso. Because the Paraná River is carrying less water than it has for a long time, the dams in the southeast of the country have run dry. If it doesn’t start raining in the next few weeks, power rationing could be necessary by the end of the year – as it was last 20 years ago. The Amazon is suffering from the worst drought in almost a century.

In Argentina and Paraguay, too, a lack of rainfall is putting a strain on agriculture. As recently as 2018, farmers in the Pampas suffered the worst drought in 50 years. But now rivers are increasingly failing as transport routes. Argentina exports 80% of its grain from inland ports around Rosário to the Atlantic. In Paraguay, it is 95% of all exports. At present, however, the ships can load less and less, and the farmers have to switch to trucks, which bring the harvest to the ports on the Atlantic. The consequences are rising food prices.

Drought is also on the increase in the Andes: there has been too little rainfall for years, so that the fruit-growing regions of Mendoza in Argentina and Valparaíso in Chile will experience heavy losses this year. In Chile, a water emergency has been declared in four of 16 regions. Cities and farmers are becoming more dependent on glacial water. But the ice fields are also shrinking.

In Mexico, 70% of the country is experiencing drought, and 25% of the country is even affected by extreme drought. Here, too, it is the farmers in the north and west who are first to complain about crop losses. The country increasingly has to import maize.

According to a study by the World Bank, Chile’s and Argentina’s gross domestic product could fall by around one percentage point each this year due to the drought alone. For Brazil, investment banks have just lowered growth forecasts for 2022 to below one percent – but the drought is only one reason for the economic stagnation. If an energy crisis with electricity rationing does indeed occur – which is not yet certain – Brazil’s gross domestic product (GDP) could even shrink next year.

It is therefore surprising that climate change and its consequences for the economy and society have so far tended to be marginal issues on Latin America’s political agenda. However, this is likely to change quickly.

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Europe’s industry urgently needs a strategy for Latin America

The region is increasingly orienting itself towards the Far East – not only China is becoming more and more important, but the other Asian growth countries are also rapidly gaining weight in trade and investment. Europe is losing importance.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

70 kilometers north of Lima, the Chinese port operator Cosco Shipping Ports is just starting to build a new port. Investment volume: 3 billion dollars. Operations are scheduled to start in Chancay in 2023. With its capacity, it should then catch up in the future with the port of San Antonio in Chile, currently the most important Pacific port in South America.

Chancay is expected to play a key role in South America’s “natural extension” of China’s Belt and Road Initiative. It was only in 2017 that China designated Latin America as a strategic partner of the initiative. Meanwhile, 19 countries have signed an agreement with Beijing.

In Europe, it is easy to overlook the fact that it is not only trade between China and South America that will grow. The infrastructure of the new Silk Road will also accelerate South America’s exchange with the whole of Asia.

Marcos Troyjo, the Brazilian president of the New Development Bank (NDB), founded in 2015 by the BRICS countries (Brazil, Russia, India, China and South Africa) and based in Shanghai, has just pointed out in the Brazilian newspaper Estado de São Paulo that Asia is currently outstripping Europe in foreign trade with South America. According to Troyjo, Brazil alone has exported more to Asia in the last 12 months (even if China and Japan are not taken into account) than to the European Union. Troyjo compares the volumes impressively: Brazil now exports more to Singapore than to Germany. More to South Korea than to Spain. More to Malaysia than to Italy, more to India than to Great Britain. More to Thailand than to France. More to Bangladesh than to Australia, Denmark, Finland, Austria and Israel combined.

In 2001, Brazil and China exchanged a billion dollars worth of goods a year. Today, it’s a billion dollars every 60 hours, Troyjo says. It is foreseeable that the fast-growing Asian emerging markets will trigger an export boom in South America similar to what China did 20 years ago. That’s because South America’s mining and agribusiness companies provide the industrial commodities for infrastructure, metropolitan and industrial expansion in the Far East. But they also provide the commodities to feed the rising middle classes in these countries.

With exports, Asian investment in South America’s infrastructure will also increase massively. Raw materials only have value if they can be transported. The Chancay port in Peru is the latest example of this.

The loans and financing for the investments will also increasingly come from the Far East. The New Development Bank, for example, has just begun expanding its membership. As of this week, the United Arab Emirates, Uruguay and Bangladesh are new member countries in the NDB.

Europe’s industry urgently needs to develop a strategy for responding to the huge shift in global economic axes in South America.

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Why climate change could trigger a surge in industrialization

With the clean energy matrix and its raw materials, Latin American economies will particularly benefit from the green turn in the global economy. But for this to happen, governments would have to follow suit. This is especially true for Mexico and Brazil.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

Countries and companies around the world are increasingly responding to climate change. Emission-neutral economies are the goal. Action on climate change is becoming a central issue in global competition. For Latin America, this offers a unique opportunity.

This is because the region has more sustainable energy production in many countries than the average of the industrialized nations. On the one hand, this is due to the traditionally dominant hydropower for electricity generation in the center of South America. Biofuels have also been produced and used for many years, especially in Brazil. Their importance will increase in the coming years in all agricultural regions of Latin America. This is due to new technologies that are increasingly being used to convert biomass, as well as urban waste, into fuels and electricity.

In addition, fast-growing investments in wind and solar farms are making energy production in Latin America more sustainable. In addition to high solar radiation, the region has the windiest areas in the world – and the potential of off-shore wind farms has not even been tapped yet. Industrial use of the abundant geothermal energy is also only just beginning.

Chile is currently demonstrating how solar energy can be converted into “green” hydrogen, which is not produced from conventional energy sources but from solar and wind energy. The other countries will follow. Because with the falling prices for the sustainable energy infrastructure to produce hydrogen, Latin America is likely to become a major producer in the next decade.

For Latin America, the green transition will bring high investment and create jobs. Even the much-needed productivity and industrialization boost could trigger the changes in the global economy.

This is because green hydrogen can be incorporated into the value chains of local industries and not just exported as a fuel or energy carrier. Already, companies in Europe, the U.S. and China are demanding “green” steel and copper. In addition, companies could sustainably build the entire value chain and logistics from the ore mine in the Amazon or the Andes to the ports in Europe or China with biofuels or hydrogen, i.e. CO2-neutral.

But there is a problem. While ecological change is accelerating around the world, the governments of Latin America’s two largest economies have just taken the opposite approach. In Brazil and Mexico, the presidents are not taking the issue seriously: Mexico’s government has banned sustainable energy from its list of priorities. It is relying on the traditional oil industry and refineries. In Brazil, too, the government is ignoring the opportunities presented by the shift in the global economy.

But governments are changing. In the case of solar and wind energy, too, many Latin American countries were late to jump on the bandwagon. Today, they are among the most important investment locations for the industries worldwide.

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Despite the rapid recovery, investors remain nervous in South America

Why are the peso, real and sol so weak, although at the same time many South American countries are emerging from the pandemic recession faster than recently expected? Investors fear that rising U.S. interest rates could stop the recovery.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

Almost all economies in South America are recovering faster than expected from the pandemic recession. Following Brazil and Mexico, investment banks have just raised growth forecasts for Chile this year to a surprisingly high 9.5%. The Chilean economy already reached pre-pandemic levels in June.

Like Chile, almost all South American countries are benefiting from the commodity boom. Imports are also increasing significantly – which is an indication that companies are investing again. Indeed, imports of machinery and equipment have also grown strongly, as in Brazil. Current account deficits in the region have shrunk after the pandemic year and a half. This reduces the risk of payment defaults.

Nevertheless, the Chilean peso, the Peruvian sol and the Colombian peso are among the currencies that have depreciated sharply in recent months. The real has also declined about 20% against the dollar since the beginning of the pandemic. Daily fluctuations in exchange rates have increased enormously.

This does not add up: The recovery on the one hand, and the high volatility of exchange rates and the persistent weakness of currencies on the other.

They are a clear indication that investors do not trust the recovery. The reason is the weak public finances in the region on the one hand, and the tense political scenario on the other. The prospects of a possible interest rate hike in the U.S. are also increasing nervousness in South America.

If there is an increase in global interest rates – experts at the Institute of International Finance (IIF) in Washington fear – investor confidence could quickly fade, making it difficult to avoid a scenario of continued weak growth in Latin America.

After all, the increased budget deficits need to be financed. These have grown in the pandemic as governments made social compensation payments to support the poorest in their countries. But political unrest and social tensions in Colombia, Chile, Brazil and Peru are causing governments to exceed budget targets again this year. If an interest rate hike then occurs in the U.S., central banks in South America will also have to raise key rates, and at the same time the cost of credit will become more expensive for companies and countries in the region.

This in turn would put the brakes on growth. Already, pressure is mounting on monetary authorities for a tighter monetary stance: inflation rates are rising more strongly than expected.

COVID-19 in Latin America

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Is the rapid recovery of Latin America’s economy sustainable?

Economic activity in some key Latin American markets is picking up at a pace that did not seem possible recently. But forecasts remain difficult: With two exceptions, the population is still poorly vaccinated, and new virus variants can spread quickly. Political tensions also persist.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

Investment bank JP Morgan expects “not a swoosh, but a V” for Latin America’s recovery this year: After -6.6% (2020), its economists now expect +6.4% (2021) growth. This is surprising, because Latin America is still the region worldwide that is most affected by the pandemic. Although infections and deaths are falling in all countries, the level remains high by global standards.

In terms of vaccinations, the countries have recently made good progress. However, they lag well behind in an international comparison. No country has vaccinated more than one-fifth of its population twice – with the exception of Uruguay and Chile. There, around 60% of people are fully immunized. The delta virus variant is only now beginning to spread in Latin America.

Overall, the growth forecasts are positive but varied. The most positive surprises come from the renewed improvement in forecasts for the region’s two largest economies: Mexico (+6.8%) and Brazil (+5.5%) are likely to see such a strong upturn that economic strength could reach pre-pandemic levels in the coming months.

The recovery is also underway in the Andean countries, but the further course is uncertain: Above all, the political unrest in Colombia (expected growth for this year: +7.5%) caused a break in the processing chains there in May. In Peru, the election of left-wing president Pedro Castillo is unsettling companies. There, despite the high forecast of +10.8% this year, activity is not expected to recover to pre-pandemic levels until early next year.

In Chile, too, the unclear prospects in politics (elections in November and Constituent Assembly) are causing expected growth of only +8%. Argentina, even with a forecast recovery of +6.3%, will not recover in the foreseeable future from its economic crisis, which the pandemic has exacerbated. Argentina’s GDP shrank by almost -10% last year, after several years of recession already.

An additional factor of uncertainty is the increasing inflation in most economies. Will it weaken again toward the end of the year – as some economists expect – and thus remain temporary? Or will the high energy, raw material and food prices continue, the price-increasing effects of which will be exacerbated by the weak exchange rates in Latin America?

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China’s political influence in Brazil on the rise

In Europe, Brazil is criticized above all for the Bolsonaro government’s environmental and Amazon policies. There is hardly any dialogue anymore. China is using the gap and gaining more and more influence in Brazil via the sustainability agenda.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

In Brazil, official seminars on sustainability have been increasing in recent months. Participants include representatives from the state, government, private companies and associations. The topics are sustainability in trade relations, certified trade chains in agro and food, decarbonization of the economy, organic food and even the reduction of slash-and-burn agriculture in the Amazon.

This is surprising in a country like Brazil, where the government’s environmental and rainforest policies are at the center of criticism. Equally surprising is the fact that, for the first time, China is massively represented among the foreign participants in these debates: with high-ranking ministers, bankers and representatives of the academy. Europeans – with the exception of the private sector – are hardly represented. Sustainability is one of the core topics on the bilateral agenda between Europe and Brazil. But that is a thing of the past.

Hardly a week goes by without Brazil being pilloried in Europe. The main focus is on Bolsonaro’s environmental and Amazon policies. The criticism is certainly true. But the question arises as to whether Europe still wants a dialogue with Brazil at all. Rather, it seems that Europe has slammed the doors shut on Brazil.

Beijing is now making clever use of this gap. China’s diplomats have launched a dialogue offensive on the environment and sustainability.

This is strategically smart. After all, the major Asian power is Brazil’s most important trading partner alongside the USA and Europe, and is becoming increasingly influential as an investor. However, relations between China and Brazil are also strained. President Bolsonaro and some of his confidants regularly criticize China.

But unimpressed by this, China’s diplomats are working together with representatives of Brazil’s government and business community on a new sustainability agenda. To this end, China is offering financing and wants to establish a permanent institutionalized exchange of information between the countries. This is to take place at all levels, between governments, entrepreneurs, agro and consumers. As expected, topics such as indigenous protection or human rights are not discussed. From Brazil, numerous high-ranking representatives from companies, ministries and research institutes are involved. These are the contacts that any EU delegation in Brazil would wish to have as dialogue partners.

But from now on, China will have a say in Brazil’s environmental, consumer protection, and sustainability issues, and will help determine future standards and rules in the decarbonized exchange of goods.

China cleverly brings its political-technological agenda into the bilateral discussion via the sustainability issues. Keyword: Huawei’s participation in the 5G network. After all, who can be against faster cell phone networks if they enable smart farming or help build certified, sustainable supply chains?

Europe should be careful not to completely lose influence in Brazil because of its unwillingness to engage in dialogue.

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Rising food prices increase risk of protest in South America

South America is one of the world market’s most important suppliers of agricultural products – and yet the population there is experiencing the highest food price increases in the world. The reason: farmers export their products, and their prices are quoted in dollars. This further increases the prices in real and peso for food.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

South American farmers have harvested a record crop in recent months and have been able to export correspondingly more to China, the main buyer of soybeans, chicken meat and corn from Brazil, Argentina, Paraguay and Uruguay.

However, this is no consolation for consumers in these countries: Prices for beans, rice, sugar and vegetable oils, but also for beef, poultry and pork, rose more sharply in May than at any time in the last ten years. In Argentina, the government has therefore banned beef exports in order to curb the undersupply and price increases. It has done little good.

The reason for the high prices is, on the one hand, on the supply side the severe drought in Brazil, which will reduce production. In addition, the high oil prices also make biodiesel and ethanol attractive again. Farmers sell their corn or soybeans to energy companies, which convert the seeds into biodiesel. Sugar companies produce ethanol instead of sugar. The dilemma of “tank or plate” takes on a new relevance.

In South America, for example, there is a paradox: The continent is the most important supplier of food to the world market – but its own population can afford it less and less. The tendency is that price increases will only really increase – namely when producers will pass on their price increases for fuel and agricultural products to consumers. In 2020, farmers were still able to produce at almost the same cost as the previous year. But now prices for crop protection products, fertilizer and diesel have risen sharply.

Already, South Americans pay even more for food than other populations: Their currencies are weak against the dollar. But agricultural commodities, like energy and industrial raw materials, are traded in dollars. Consumers in São Paulo and Buenos Aires still pay an exchange rate premium on top of the higher prices.

For the governments in South America, this is an explosive mixture: Price increases such as for corn in Mexico or in the Andean countries have already led to revolts in 2007 and 2010. Already, people in Ecuador, Colombia, and recently Peru, Bolivia and Chile are demonstrating for better services from the state and more social justice. The pandemic has relegated many South Americans from the middle class to poverty. Even in rich Brazil, hunger – which actually seemed to have been conquered long ago – is rampant again.

COVID-19 in Latin America

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Mexico’s and Brazil’s presidents and their relationship to the economy

Populists have been at the helm in Brazil and Mexico for two and a half years. In Brazil, the right-wing ex-military leader Jair Bolsonaro is in power, in Mexico, it is the left-wing politician Andrés Manuel López Obrador. This is an opportunity to take stock.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

Mexico and Brazil are the two most important locations for German industry in Latin America. Around 340 million people live there, i.e. just over half the population of Latin America. They produce around just under two thirds of the region’s gross domestic product. While German companies in Brazil mainly supply the large local market, they use Mexico primarily as an export platform to the USA, but also worldwide.

Populist presidents have been in power in both countries for around 30 months. Although they are ideologically located at the two extremes of the political spectrum, they govern quite similarly in terms of content. Both the leftist López Obrador and the rightist Bolsonaro have little respect for the separation of powers, democratic institutions or the media. They have further divided their societies. Anyone who is not unconditionally in their favor is an enemy and defamed. They both prefer to govern with the military. Obrador has them building railroads in Mexico, managing ports and fighting drug mafias. Bolsonaro has brought 6000 military officers into state offices and companies. They are in the majority in his cabinet. Both politicians find environmental or climate issues a nuisance.

But they cultivate a different style: While Bolsonaro’s sociopolitical stance is sometimes clearly reactionary and anti-democratic – and thus constantly at the center of attention, even abroad – the leftist Andrés Obrador is also surprisingly conservative. But he does not advertise this, or his autocratic preferences, as Bolsonaro constantly does on social media.

In the pandemic, both failed similarly, albeit with different strategies: Both denied the pandemic, did not bother with vaccines for a long time and advised the population not to isolate itself. In Brazil, the government still paid generous social benefits in the first year of the pandemic and was able to mitigate the recession. In Mexico, the left kept the coffers closed and Mexico’s economy crashed.

Nevertheless, they differ significantly in their approach to the economy. In a nutshell, while Bolsonaro tends to be more free-market oriented, AMLO reaches into the mothballs of left-wing economic policies of the last century.

State-owned companies like Pemex are making an unexpected comeback. López Obrador has reversed the energy reform that was painstakingly pushed through. He is catching foreign companies that have invested in sustainable energies on the wrong foot. He is indifferent to hostile toward the private sector, and the state is once again intervening everywhere.

To be sure, Bolsonaro is by no means the liberal reformer he portrayed himself as during the election campaign, and he has hardly realized anything from his privatization program. But with a bit of luck, high commodity prices and an increasing inoculation of the population could bring Brazil’s economy back into normal mode by the end of the year. In Mexico, investors are likely to remain cautious because of the government’s adverse course, despite the boom in demand in the USA, from which Mexico’s industry has traditionally benefited as a supplier.

COVID-19 in Latin America

Development of case numbers in the region


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Vaccine doses administered by country

Is South America on the verge of a slide to the left in politics?

The political events, polls and votes of recent weeks suggest this: In the medium term, a leftward trend in South America’s politics is likely. But unlike its predecessors in the 2000s, the new generation of leftists will have fewer resources at its disposal.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

At present, it looks as if Ecuador’s new president Guillermo Lasso will soon be quite lonely politically in South America. The banker and economic liberal conservative could soon be meeting communists, Marxists and former guerrillas as heads of state at regional summits.

In Peru, for example, Marxist Pedro Castillo is the favorite in the polls for the runoff elections on June 6. In Chile, Daniel Jadue of the Communist Party is currently the most promising candidate for the November presidential election. Finally, in Colombia, former mayor and guerrilla Gustavo Petro is leading the polls for the elections a year from now. And in Brazil, too, ex-president and labor leader Luiz Inácio Lula da Silva currently has the best prospects of beating incumbent Jair Bolsonaro in a year and a half.

However, it is still completely open how this political change will affect the region’s economy. The last time the left came to power in South America, it benefited from a commodity boom that lasted more than a decade and encompassed the entire range of agricultural and industrial raw materials, from oil to soybeans, from copper to beef. The export boom ensured full foreign exchange coffers and high tax revenues. This explains why politicians like Chávez in Venezuela or the Kirchners in Argentina were able to successfully hold on to power for so long despite their weak policies.

This time, the starting position is different: There is a commodity boom now, too. But it does not look as if it will develop into a supercycle. The last long cycle for commodities was triggered by China’s rapid urbanization and the rise of its population into the middle class.

Today, on the other hand, public budgets are heavily in deficit after now a year and a half of social compensation and lost revenues during the pandemic. Growth forecasts are mixed because the Corona crisis will not end for some time. Vaccination campaigns are proceeding slowly.

As a result, currencies throughout South America are weakening. In addition, foreign investors are becoming less willing to lend. The downgrade of Colombia’s bonds to junk level last week are a harbinger that, with greater political risk, South America’s credit rating will also fall further.

The left-wing governments that may soon come to power in South America will therefore hardly be able to continue the distribution policies of their predecessors in the 2000s. They will have to satisfy the social needs of a poorer population with fewer resources. Only if they succeed in doing so will they be able to hold on to power.

COVID-19 in Latin America

Development of case numbers in the region


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Chile’s experiment could become a model for all of Latin America

It is to be expected that protests in Latin America will increase again. Chile is now trying to relieve pressure with a constitutional assembly as an outlet for the charged popular anger. Whether it will succeed is an open question. An exciting experiment in democracy begins in the Andean country this weekend.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

Chile is now electing a constituent assembly. 155 members, half women and half men, will then negotiate Chile’s new constitution for a maximum of one year. Then, in the middle of next year, the revised version will be voted on by referendum.

The majority of Chileans demanded this constitutional change after the severe protests in 2019. Many of them are disappointed: because despite the high growth, improved social indicators and consolidated democracy for now 30 years, the majority of Chileans are bothered by the lack of opportunities for advancement and the poor basic services provided by the state. In education, health and especially in the pension system, the state fails those who cannot afford private benefits. It is foreseeable that the new constitution will contain more state and less market economy. The majority of the population wants a social democratic system.

But it is also concerned with modernizing society. Chile has changed a lot in the last ten years, as can be seen from the widely discussed topics of divorce, abortion and gay marriage. Trust in politics, political parties and the business community, but also in the police and the Catholic Church, has reached a low point. Numerous scandals have contributed to this, which have also severely shaken the self-image of a conservative, honest elite.

In short, while Chilean society has become increasingly liberal over the past decade, the elite has remained closed and conservative.

The new constitution is now an attempt to rebuild trust in institutions and democracy – not least to save the successful economic model in the long term. After all, Chile has long played in a higher league economically in Latin America.

If the country can now also be modernized socially by means of a constitution, Chile could also become a political role model for Latin America’s divided societies.

COVID-19 in Latin America

Development of case numbers in the region


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