There has been little outrage in Latin America. Although Brazil and Mexico have lodged official protests, they have essentially remained calm. While it is inconceivable that the US could implement such a measure across the board, it cannot be ruled out that it could be repeated in isolated cases. Heads of government who cannot rule this out for themselves will ensure that security measures are maximised to avoid endangering personal integrity.
In the short term, the coup in Venezuela is undoubtedly causing uncertainty and fear. In the medium and long term, however, the US will increasingly be perceived as a threat, including by ‘friendly’ states that the US leadership will find it difficult to accuse of drug trafficking.
It seems that the US’s desire for access to strategic raw materials justifies military intervention. The US’s repeated attempts to acquire Danish resources are proof of how challenging the faltering giant is becoming for the rest of the world.
The Economic Outlook for Latin America Is Positive
Rising prices of copper, aluminium and many other raw materials extracted in Latin America, as well as energy sources, are leading to higher corporate profits and tax revenues.
Significant falls in inflation rates may lead to further interest rate cuts. I am particularly optimistic about Brazil, where interest rates are almost 10% above the inflation rate, which is hampering economic development. The BCB (Banco Central do Brasil) is critical of political ambitions and is seeking to prevent further increases in debt.
There are also signs of economic recovery in Chile after a pro-business president was elected with a strong mandate from the population.
Investments in infrastructure, data centres, power lines and technology require vast quantities of metals, a large proportion of which are mined in Latin America. This has led to rising prices and margins, as capacities have not increased as a result of the commodity price recession of the last 13 years. In fact, they have shrunk, as some mines are nearing the end of their life cycle. Demand has risen faster than expected over the last two years, meaning there could be a physical shortage as early as 2026. This is bad news for companies around the world that rely on these raw materials. It is also bad news for inflation in the coming years.
What About Political Convergence in Latin America, and With Europe Too?
The assertiveness of US foreign policy will prompt Latin American countries to unite and reconsider their position on China, a key customer and investor for all Latin American countries. As with Europe, unity towards the US offers Latin America a better chance of not being steamrollered than if each country were to go it alone.
The EU-Mercosur agreement could still take a positive turn as a result of the US attack. Improved economic ties could benefit both blocs.
Outlook for Emerging Market Currencies
Inflation has fallen significantly in almost all emerging markets and is now well below interest rates. This should lead to falling interest rates across the board. This will boost economic activity in these countries and push up bond prices, attracting international capital seeking to participate in these developments. I therefore expect EM currencies to rise against the USD. However, against the euro, this rise could be modest or non-existent if the USD also weakens against the euro, as I expect it to do.
I hope you enjoyed reading this, and I wish you a happy new year!
