This is a quick note here on Latin American economies where currency issues are the main story. Argentina has been most often in the news, but the slowdown in Brazil should be top on the radar. I also note that some European banks are pulling the plug on their Latin American investments, ostensibly to raise capital. But this could be in reaction to recent nationalisations in Bolivia and Argentina and the threat that more could be coming.
Some of the links in Spanish highlight the stories. Let’s start with the currencies. The Brazilian Real was remarkably strong during the initial years of the crisis, so much so that Brazil began to complain about currency wars started by western countries printing money to reflate their depressed economies. Now the currency wars have given way as Brazil’s economy has slowed and interest rates have declined. The Real is now at 2.07 per US dollar at its lowest level in three years and the momentum is down.
In Argentina, the government is managing the official currency rate, propping up the peso at artificially elevated levels to mask the true levels of inflation. The currency trades at 4.49 pesos to the dollar (which compares to the 1 for 1 peg that Argentina broke a decade ago when it defaulted). The government has needed to introduce a whole battery of subsidies and price controls to counteract this, a major reason for their privatisation of YPF. Now the unofficial rate for the currency has reached a full 37% percent below the official rate. The US dollar trades on the black market for 6.15 pesos. The currency black market in Argentina is not huge. However, some economists are talking about a sharp devaluation coming.
The weakening currencies are an outgrowth of weakening economies. And this has created friction in the so-called free trade zone of Mercosur that includes Argentina, Brazil, Paraguay and Uruguay. Recently, Brazil announced plans to end automatic import licensing for ten agricultural products in retaliation for Argentina’s rising trade barriers. Bilateral protectionism has been increasing since 2008, when Argentina began restricting imports from Brazil on white goods like ovens and refrigerators. According to the Financial Times, Brazilian shoes worth $47.8 million are stockpiled on the border because of the latest controls introduced by Argentina. And the Brazilian state-owned oil giant Petrobras is clearly alarmed by the YPF expropriation. So the overall picture is of economic weakness and increasing friction. The slowdown in Brazil has been acute and bears watching as Brazil is one of the largest emerging markets.
Finally there is the bank exit story. Both BBVA, a large Spanish bank, and HSBC, the British/Asian giant have announced plans to pull out of a number of Latin American countries. These are two of the most active international banks in Latin America, so their withdrawal is a watershed. The question is whether it signals European weakness because of the need for European banks to retrench and raise capital or whether it is a sign of Latin American weakness because foreign investors are pulling in their horns due to concerns about protectionism. Right now, it seems to be the former. BBVA has couched its withdrawal in terms of concentrating on its core business. HSBC said "we seek to focus on our operations where we see the greatest potential for sustainable growth for HSBC," suggesting similar concerns. But, this exodus is also something to note because, if we see other such asset sales, we should assume there is more to it than just banks raising capital.
My overall read here is that Latin America is slowing and none of these countries can provide any incremental pick up in the global economy as a result. From an investment standpoint, those of you looking to diversify out of the developed economies need to know that the economic situation in the emerging economies is decelerating just as it is in the developed ones. Mexico is the outlier so far, with industrial production increasing at the fastest pace in nearly two years. However, if the US fiscal cliff impacts US growth, Mexico too will fall.