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The Madero pedestrian street of Mexico City. Despite challenges ahead, Latin America won't return to its lost deacde of the 1980s, two World Bank economists say. (Photo: Mexico City Government/PUEC-UNAM)
Wednesday, August 31, 2022
Trade Talk

World Bank: No Risk of Latin American Lost Decade Again


Peru instability threatens energy investments, Fitch warns.

BY LATINVEX STAFF

Latin America isn’t at risk of a 1980s-style crisis, according to an analysis by Carlos Felipe Jaramillo, World Bank Vice President for Latin America and the Caribbean, and Marcello Estevão, the bank’s Global Director, Macroeconomics, Trade & Investment.

“The region’s biggest risk at present is not another “lost decade” fueled by financial crises, but rather a decade of missed opportunities,” they write in a blog posted on the bank’s web site.

The debt crises of the 1970s and 1980s were searing experiences that find an echo in today’s troubles. Then, as now, Latin American countries had large debt loads. Then, as now, the global economy experienced unique macroeconomic shocks that sent inflation soaring (the Arab oil embargo then; the pandemic and Ukraine war now). And then, as now, central banks around the world – especially the US Federal Reserve – were raising rates to fight inflation, they point out.

“There is one key difference, however, between then and now: Latin American countries are much better prepared to react to these shocks today than they were four decades ago , owing in no small part to the enormous improvements that have been made in economic and financial policy across the region,” Jaramillo and Estevão say.  “While the U.S. Fed has been accused of being “behind the curve,” most Latin American central banks have moved quickly to quell inflation and guide their economies back to target inflation levels.”

Moving early to raise rates has helped keep exchange rates in check and the region’s economies have undergone structural improvements that make them more resilient today than during the 1980s, they argue.

“The establishment of independent central banks, the adoption of floating exchange rates and inflation-targeting regimes, and the strengthening of policy institutions have all bolstered most Latin financial systems,” Jaramillo and Estevão say.  “With more predictable inflation and stable currencies, local debt markets have become the main source of government funding, creating greater stability by reducing reliance on dollar-denominated debt (which is vulnerable to exchange-rate shocks) and short-term financing. This explains why the larger economies in the region have been able to implement large countercyclical programs to protect families and firms from the worst impacts of the pandemic crisis – a fiscal response that would have been unthinkable in recent decades.”

Although Latin America is not likely to experience massive economic contraction or spiraling unemployment, it does risk prolonging the economic stagnation of the last decade, they warn.

FITCH: POLICY INSTABILITY MAY CURTAIL ENERGY INVESTMENTS

Social conflicts, regulatory risks and low business confidence are likely to constrain investment in Peru's energy sector, following a similar pullback in mining, Fitch Ratings says.

“The recent political crisis in Peru has caused already-weak business confidence and expectations to plunge to levels not seen since the Global Financial Crisis of 2008-2009,” the ratings agency says.”

Economic activity in Peru's metals and mining sector contracted 3.5% yoy in the first five months of 2022. Fitch has lowered its 2022 GDP growth forecast to 2.3% from 2.5%, reflecting lower mining production.

“Tighter fiscal and monetary policies, higher oil prices, declining copper prices and social unrest are key factors that will weigh on growth,” Fitch warns.

MOBILE BROADBAND PENETRATION COULD LIFT GDP PER CAPITA BY 1.7%

According to an independent study conducted by Telecom Advisory Services, commissioned by Millicom (Tigo), a 10% increase in mobile broadband penetration in Latin America could create more than 6.5 million jobs and increase GDP per capita by 1.7%.

The findings show a significant opportunity for a region that is still struggling to recover from the economic impact of the COVID-19 pandemic. The analysis identifies high spectrum costs – a common regional issue – as the biggest hurdle to digitalization.

"The conclusions of this study are clear: to accelerate the development of the telecommunications industry and the digital economy, governments in the region must modernize their regulatory frameworks to attract investment in the sector. Above all, the reduction of spectrum prices and of regulatory and tax charges would produce the greatest stimulus for investment," Millicom (Tigo) EVP, Chief External Affairs Officer, Karim Lesina said in a statement.

Unlike member countries of the Organization for Economic Co-operation and Development (OECD), many governments in Latin America continue to view spectrum as a source of income rather than as a lever to spur faster digital adoption, economic growth, and job creation. As a result, the cost of spectrum in Latin America is 1.7 times greater on average than in Europe.

According to Raul Katz, President of Telecom Advisory Services and co-author of the study, every country in the region should develop a digitalization and connectivity plan that focuses less on income generation and more on connectivity expansion. The report also highlights that digital highways are just as important to economic growth as physical infrastructure such as airports, roads, and bridges.

"This study empirically demonstrates that, beyond the contribution of digitalization within the context of a pandemic, digitalization is essential for the future economic recovery of Latin America," Katz said. "Nevertheless, the acceleration of development in the telecommunications industry and the digital economy, as key requirements for economic recovery, will only result from a significant increase in sustainable investments in the sector, an acceleration in the pace of innovation, and greater human capital development. All of which requires an adequate public policy framework to facilitate such advances, and follow-through to ensure these are put into practice."

BRAZIL SOCCER CLUBS POISED FOR GOLD RUSH

A new law allowing soccer clubs in Brazil to seek outside investment is attracting hundreds of millions of dollars to a country renowned as football's biggest source of talent, a change that could see Brazilian teams rival Europe's top tier, Reuters reports.

The surge of fresh, mostly foreign, cash coincides with an agreement last May by Brazil's largest clubs to create a league modeled on Britain's Premier League that will centralize talks to sell transmission rights and marketing contracts.

Together, the recent developments have spawned a funding bonanza for the Brazilian teams, which have long been fan-owned operations closed to outside investors, Reuters points out.


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