By Raghav Chawla

Abstract 

Putin’s war in Ukraine has disrupted supply chains all over the world. Add to that rising geopolitical tensions between the United States and China, as well as rising inflation, and you have the perfect recipe for a recession. Beyond these shocks, however, opportunities for realizing long-term economic goals still persist in Latin America. This column examines the likelihood of a recession in Latin America while also outlining potential long-term opportunities.

Introduction

To understand the consequences and opportunities for Latin America as a result of a global recession, first we need to understand why the global economy is headed towards a recession. 

Recession, when defined in simple terms, refers to a prolonged downturn in the economy; it begins when the economy of the state reaches its peak and ends when the economy reaches its trough. This decline is not only limited to a fall in GDP but also affects employment, industrial production, consumption, income, and other relevant factors. Since the turn of the year 2022, many economists and analysts have predicted that the global economy is headed for a recession. There are three primary reasons that have accelerated this economic turmoil. Russia’s war in Ukraine has triggered a commodity shock in the world; soaring food prices and energy costs have reshaped supply chains. This, in turn, has resulted in the loss of macroeconomic stability. Consumer prices, which were already increasing due to post covid 19 shocks, were fuelled by the commodity shock, resulting in high rates of inflation. 

Is Latin America headed towards a recession?

In 2021, Latin America recovered from the pandemic-induced contraction. When the world economy reopened, the region profited from a rise in commodity prices brought on by strong demand. As a result, the region’s GDP increased by 6.8% in 2021, surpassing pre-pandemic levels in half of its member countries. However, Vladimir Putin started a war in Ukraine in 2022, which damaged these economic prospects. Since then, Argentina, Brazil, and Mexico, the three biggest economies in Latin America, have suffered slower economic growth than the rest of the world. 

Commodity Prices

Prospects for 2023 seem gloomy compared to the growth rates in 2022; there is a belief that the United States will be hit by a recession in 2023. A survey conducted by Bloomberg in October estimated a 60% downturn in the US economy, which essentially means a drop in the price of commodities. Since commodities are the principal exports of the region and a major source of incoming foreign reserves and government revenue, a decline in commodity prices is typically a sign of imminent economic turmoil in Latin America.  

Tight-Monetary Policy: Is a Debt Crisis Likely?

As a result of high inflation rates, Central Banks all over Europe and North America are tightening their monetary policy. A tight monetary policy is done to keep inflation under control in an economy. In addition to tightening monetary policies, the Economic Commission for Latin America and the Caribbean (ECLAC) concurs that capital inflows to Latin America have declined in 2022. As a result, several economies are experiencing a shortage of US dollars. Central banks will have to utilize their international reserves to protect their currencies from the rising dollar. Local currencies are devalued as a result, and the majority have fallen behind the US dollar since 2022 began. Colombia and Chile are notable instances, as by November 2022, their currencies had depreciated by 22% and 8%, respectively. A strong US dollar raises inflation due to more expensive imports, makes borrowing more difficult, and raises the cost of servicing dollar-denominated debt, all of which are issues for Latin America. 

Comparisons to the early 1980s have been made because of the tight monetary policy in the United States and the strong currency. Let’s move on to the present: As global interest rates have fallen since the 2008 financial crisis, Latin America’s debt has increased during the past ten years. Government debt as a percentage of GDP rose from 47% in 2012 to 69% in 2021  The region’s policy structure, however, is different this time around as a result of the modifications made by the 1980s crisis, particularly with regard to central banks’ independence.

The Case of Mexico and Brazil

Brazil and Mexico are the region’s largest economies, with both economies having been founded in distress. The two countries’ approaches to the pandemic could not have been more divergent. Brazil spent more money than many wealthy emerging economies combined. According to the International Monetary Fund, its stimulus efforts amounted to nearly 12% of gross domestic product, resulting in a record-high budget deficit. Mexico, on the hand, tightened its fiscal policies, which even Wall Street economists defined as constraints. Brazil’s large expenditures did result in a significantly faster recovery. In 2020, the GDP contracted by a tolerable 3.9%. The government’s pandemic measures, which included cash transfers to low-income households, were successful in bringing down poverty for a brief period of time, almost to record low levels.

The economy of Mexico, which shrank by more than 8% in 2020, isn’t expected to return to pre-pandemic levels until 2023. And compared to 2018, there are already 4 million more individuals living in poverty. If we take a closer look at Brazil since the fiscal support was reduced last year and the central bank began the most severe monetary tightening in history, Brazil’s economy slowed. In order to combat inflation, it increased the benchmark rate by 725 basis points.

Is there room for long-term growth?

Latin America’s Opportunity to Replace Russia’s Exports 

Since the advent of the Russia-Ukraine War, the west responded with a wave of sanctions on Russian corporations and officials with an aim to isolate the Russian economy. This opens the door for several Latin American countries to fill the gaps in the supply chains of several commodities for international markets. For instance, Russia is the primary exporter of natural gas and petroleum; however, since the conflict began, the European Union has decided to cut its dependence on the latter by 2027. This opens an opportunity for Latin America. For instance, Venezuela has already exported 2 ships carrying natural gas in mid-2022 in exchange for the easing of sanctions. Argentina’s Vaca Muerta is the world’s second-largest shale gas reserve and fourth-largest in terms of shale oil. Even in a conservative scenario, this reserve may propel Argentina into the top 20 oil exporters within the next ten years, cut natural gas imports by 60% in the following two years, and assist the nation in becoming energy self-sufficient within that time frame. However, for this to happen, Argentina needs more infrastructure to move its natural gas reserves to cities and ports. This is a huge challenge in Argentina’s highly unstable macroeconomic environment. The construction of the “Nestor Kichner” gas pipeline in 2023, has the potential to cut down Argentina’s LNG import dependence. This is also an opportunity for Argentina to emerge as an important supplier of the same.

Lithium in Latin America

Lithium-ion batteries are at the center of the world’s clean energy transition, particularly in the electric car and consumer product industries. It has been estimated that almost half of the world’s lithium comes from a region in the Andes Mountains known as the “Lithium Triangle,” jointly governed by Argentina, Bolivia, and Chile. Lithium demand increased by 33% and even the prices have shot by 10%. There is a lot of potential for Argentina, since  it has 13 projects in various salt-flat brine basins with one of the largest lithium concentrations in its pipeline. The possibility for high-grade, extensive lithium extraction with advantageous access and infrastructure is the main goal of these projects. The Argentinian government reduced export taxes for the mining industry in an effort to attract investment. This sector is anticipated to export $4 billion yearly (or 4.5 per cent of 2022 exports) in the coming years. On the other hand, despite Bolivia’s position as the world’s largest metal concentration, the country’s rising resource nationalism threatens the country’s lithium production future, resulting in the cancellation of contracts with a number of foreign companies. Chile, which is the world’s largest exporter of lithium, is facing a lot of challenges, and the mining sector has been a target of excessive regulation and environmental protests. The region is also witnessing a wave of ideological shifts in the wake of the changing geopolitical climate. 

Conclusion

Latin America continues to suffer shocks from the unending wave of global economic setbacks, such as logistical difficulties caused by the pandemic, inflation resulting from the war in Ukraine, and capital outflows due to the global monetary tightening. As such, 2022 was a year of decelerating growth for Latam, with the prospects for 2023 being even more unstable. A global recession will make things worse for the region since it will witness a fall in exports in many markets. Opportunities for investment and financing loans will also become rare. In a short time, it needs to coordinate public policy to bring inflation under control. Nonetheless, there are glimmers of hope in unexpected opportunities. 

About the Author

Raghav Chawla is a third-year student at the Jindal School of International Affairs, majoring in International Relations with a specialization in Economics and Foreign Policy. His interests include developmental economics, financial markets, and political risk management.

Image Source: Juan Ignacio Roncoroni/EPA, via Shutterstock