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

Development of case numbers in the region

Currently reported cases in the countries

COVID-19 vaccine doses administered

Share of people vaccinated by country

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