Latin America is going to end 2015 with a big bang. The entire region has experienced what could only be described as a mini Latin Spring. The corrupt government of Argentina lost power to the pro-business leader, Mauricio Macri. Meanwhile, Venezuela's left-wing extremists suffered a defeat in Parliamentary elections. More recently, Brazil's president, Dilma Rousseff, is facing impeachment charges amid a corruption scandal.
All this naturally begs two questions; are the winds changing in the Latin American space and what does that mean for LatAm currencies?
Troubles in LatAm, at a Glance
Before we delve into those two questions, it's important to have an understanding of that region's economic woes.
Brazil: On the Path to Default?
Brazil, the largest economy in the region, is walking a narrow ledge. If the government makes any more mistakes, it's going over the precipice. And then it will be headed down a steep slope, right towards bankruptcy. Just this week we learned that the government's pro-austerity Finance Minister, Joaquim Levy, resigned. He was replaced by a "close aid" to the Brazilian President.
At the heart of Brazil's troubles is its worst recession since the 1930's. GDP growth has plunged while the country's inflation spirals out of control. Inflation is largely being driven by ballooning government debt, spurred on by reckless spending and ill-advised corporate bailouts.
Meanwhile, Brazil's prime sources of revenue, i.e. commodities, are plunging in price. The one last hope was that all of this would somehow be balanced by budget cuts. However, that hope has since died with the finance minister's resignation. Mr. Levy was, apparently, all that was standing in the way of more reckless spending and more government guarantees.
Implication on the Real: The currency plunged more than 50% against the dollar since January 2015.
Argentina: A Tough Road Ahead
Unlike Brazil, where the central left has still some hold on power, the case for Argentina seems much brighter.
The pro-business President, Mauricio Macri, ended the fixed exchange rate of the Argentinean Peso. That brought the currency plunging very close to its exchange rate on the black market. The idea behind the decision is simple. Eventually, it will allow the country to be cheap enough to lure foreign investors and to spur growth. Moreover, Argentina could accumulate more foreign reserves and eventually service its debt better.
Implication on the Peso: The Peso lost roughly 40% of its value, trading close to its black market value.
Venezuela: Spring Elections Loom
Venezuela, perhaps the worst of the three, is literally bankrupt with its economy collapsing over plunging Oil prices. The country experienced a jaw-dropping 100% of inflation (according to Madura) as the Venezuelan Bolivar becomes practically worthless on the black market. That's "thanks" to the extreme leftist leader, Nicolas Maduro, the successor of Hugo Chavez. Maduro, like his Brazilian peers, prefers the "populist" approach. That is bankrupting his country and "bribing" voters with subsidies rather than tackling economic troubles head on.
After the opposition party gained a majority in this months
Parliamentary elections hope was rekindled. A great many Venezuelans are hopeful that Madura will be replaced in the spring election. But, it's obvious he will fight with all his power. It's also still unclear whether the upcoming elections would even evolve into a new government. Even with a "new" government, the road to recovery is long.
Implications on the Bolivar: The currency is now practically worthless.
Time to be Bullish on the Latin Trio?
We're in the midst of a tectonic shift in the region which could see Latin America's leftist population dying. Unfortunately, we're not there yet. In Argentina, we have a new president but he still has no parliament majority. Thus, it will be difficult to execute much needed reforms to salvage the economy. In Brazil, despite the political scandals, the Workers' Party (with President Rousseff at the helm) is holding onto power. And in Venezuela, once again, we need the spring election and a new president. Only then can the economy be fixed and rebuilt after the years of pain from Hugo Chavez and his successor, Nicolas Maduro.
This leads us to believe that, perhaps, there needs to be more economic pain in those countries. That will put pressure on the public to abolish their socialist governments and embark on a new recovery path. The bottom line is we can expect more pain before the gain; the situation must get worse before it can get better.
Look for my post next week.
Best,
Lior Alkalay
INO.com Contributor - Forex
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
"We're in the midst of a tectonic shift in the region"
We've seen this show over and over again in Latin America.
I don't have any faith as to why this time we should view this as a "tectonic shift", rather than the usual farcical merry-go-round of lurches from left to right with bad governance from both sides.
Hope is great, but only time will tell and until then I'd rather not put my money in this old crapshoot.
South American economies always have the potential but never can transform that potential in real development... I can see at least one of these countries to default in the next few months.