The sudden fall in commodity prices, export volumes, FDI redirection, and growing unemployment strongly disturbs Latin American economies.
The year 2020 was remarkable and impressionable to say the least, and transformational to be accurate. Before the end of the COVID-19 pandemic — which will most probably happen after the inoculation of the world population — there has been a flurry of dialogues on the ‘post-COVID world.’ With the emergence of new strains, we are nowhere close to ending the pandemic, nonetheless, our baser instincts have kicked in and we have adapted to the ‘new normal.’ During this process of adaptation, certain transformations have occurred, most notable being a louder rallying cry against globalisation and re-imagining our trade and supply chains. This discussion on the reconfiguration of supply chains is linked to unseating China from its dominant role in the global supply chains. This renaissance in trade and commerce may create space for new powers to emerge and form an equitable multipolar world. In this duet, India is playing a crucial role by expanding its engagement around the world by reaching out to developing economies and recalibrating its relationships even with distant Latin American countries (LACs). On the other hand, developing economies and Latin American countries are vying to exit from their state of economic recession and reducing their dependence on China.
In a recent confabulation titled ‘India and Argentina in the New World Order,’ Dr Jaishankar with his Argentinian counterpart, Felipe Solá, mentioned the need for exploring the untapped potential with Latin American countries for resources and energy security, particularly the procurement of lithium for enhancing India’s battery manufacturing capacity. The Argentinian foreign minister stressed the need for diversification of trade and manufacturing in order to recover from the worsening pre-COVID recession. Not only Argentina, the entire Latin American region has been severely affected by the pandemic in economic and human terms. The IMF World Economic Outlook has reported a GDP contraction of 8.1 percent in Latin America in 2020. This economic downswing has taken a human toll, which is evident from the number of cases — with only 8.2 percent of the world population, the region had 28 percent of cases and 34 percent of deaths by end-September 2020. Making matters worse for several Latin American countries while recovering from a recession is the sharp decline in global demand, fall in commodity prices, increasing financial volatility, and additional impacts associated with lower investment, reduction in tourism, and a potential decrease in remittances.
Most LAC countries excluding Mexico, Brazil, and Nicaragua responded to the COVID-19 crisis with a national lockdown to curb the spread of the virus. After failing to curb the virus, mobility restrictions were removed to minimise the damage it incurred over the economy. However, the socio-economic impact on the most vulnerable groups has effected close to 60 percent of workers in the informal sector, part of the daily living economy and, thus, are at the risk of slipping back into poverty; increasing unemployment to 13.5 percent by the end of 2020.
In order to resuscitate the economy, supportive monetary and fiscal measures were implemented in several LAC countries from the beginning of the lockdown. However, since 2012, falling commodity prices had weakened their economy and their fiscal capacity to ameliorate the impact of the COVID-19 lockdowns. Unfortunately, the LAC region’s structural dependence on commodity exports, mainly originating from developed economies, has also reduced and severely impacted their recuperation cycle. For instance, crude oil prices experienced a sharp decline of 50 percent in April 2020, while the coal price declined 17 percent. Various mineral and metal prices also saw a decline — platinum saw a 23 percent decrease, followed by copper and zinc by 15 percent. The FAO Food Price Index also experienced a downward trend, with sugar and vegetable oil prices showing the strongest declines of 14.3 percent and 5.2 percent respectively. The current contraction is caused not only by falling prices but also by a decline in export volume. The global reduction in the total volume of international trade in 2020 was estimated to be 13 percent to 32 percent, which is mainly explained by the slowdown in consumption and economic activity in China, the US, and Europe.
The volumes of Latin America’s commodity exports are most affected by the strong decline in demand from their principal trading partners — China and the US. This reduction is caused by reduced travel and demand for fuel, as well as by the closedown of the Chinese manufacturing and technology industries, which use a large percentage of the metals mined in Latin America. Another impact of the COVID-19 crisis that may affect commodity prices in both the short and the long term is the decline in foreign investment and the fact that many planned investments by multinationals have been put on hold. Since the start of the pandemic, the global value of cross border mining deals has gone down by 32 percent. The London-based mining giant, Anglo American, has delayed a US $1.5 billion investment in the development of the Quellaveco copper mine in the Peruvian highlands. There are also alarming reports about high levels of capital flight across the region. The figures available for Colombia reports that foreign investors redirected US$ 115.7 million out of the country — representing about 16 percent of its total investment portfolio in Colombia.
This sudden fall in commodity prices, export volumes, FDI redirection, and growing unemployment strongly disturbs Latin American economies. This increases the pressure on government budgets, which need to remain large enough to deal with the pandemic; it also upsets governments’ ability to pay their debts or secure financing from external sources. Nonetheless, in order to jumpstart the economy, the focus on the commodity market may prove to be low-hanging fruit, however, increased focus on diversification and sustainability of production and markets needs to be prioritised with reduced dependence on China (although Brazil’s trade with China has increased more than in 2019 and may continue to grow even more this year). Besides trade, political action has continued to share the spotlight in the region during a time when the economic rejuvenation and the pandemic are ravaging the region. Exiled Bolivian socialist President Evo Morales is back in office, Chileans have voted to draft a new constitution, Peruvian President Martín Vizcarra has been impeached and replaced by Francisco Sagasti as the new interim president. The region will witness four general and three congressional midterm elections this year — all of this, while the economy is gutted and youth unemployment is on the rise.
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Syed Ali is an Independent analyst on Latin American affairs.Read More +