A survey carried out exclusively by Michael Viriato, at the request of the CNN Brasil Business , pointed out that all Latin American currencies have devalued more than 30% against the dollar in the last 10 years. In the period, the real devalued 61.95%, behind only the Argentine peso, which fell 96.20%.
Claudio de Moraes, finance professor at the Institute of Graduate Studies and Research in Administration at the Federal University of Rio de Janeiro (UFRJ), explains that the basket of currencies in emerging countries usually suffers from external and internal movements.
The coronavirus crisis was one of the impacts, in which investors looked for safer currencies, abandoning Latin American investments and migrating to the United States, for example.
Internally, Francisco Nobre, an economist at XP, explains that, specifically, in the long term, persistently higher interest rates and inflation tend to devalue currencies and lower the exchange rate.
In the last 10 years, interest rates and inflation in Latin American countries have been much higher compared to the United States. “So naturally the currencies have devalued over time and will not go back to 2012 levels.”
The interest differential points to a currency devaluation of:
- Brazil: 62%;
- Chile: 43%;
- Colombia: 57%;
- Peru: 30%
The account cannot be made with Argentina because the country changed the rate used as base interest, from LEBAC to LELIQ, in 2018.
In the short and medium term, there are also several factors that can influence the value of the currency. Such as political and economic risks, accumulation of public debt, exports, trade balance, economic growth and stock exchange performance.
In Latin America, the exchange rate also tends to be correlated with commodity prices, because of its importance to these economies. This was one of the reasons why the real was the fourth currency that appreciated the most against the dollar this year.
See how Latin American currencies operated between 2012 and 2022
See the total devaluation of the last 10 years
Josilmar Cordenonssi, from Universidade Presbiteriana Mackenzie, explains that the Argentine peso was the currency that depreciated the most against the dollar because, until December 31, 2021, the average annual inflation in the last ten years was 35%, which corresponds to a loss of 26% of the purchasing power of the weight from one year to the next.
Thus, 1 Argentine peso today buys less than 5% of products and services that were purchased at the end of 2011 and beginning of 2012.
The XP economist also points out that the country has a structural problem of economic and political instability. “In recent years, the market has lost a lot of confidence in the Argentine peso,” which also contributed to the drop.
Inflation in Argentina reached 6.27% in March, the highest rate in two decades. The situation – the result of years of populist policies in the country – has led to the impoverishment of the population.
In 2018, the Argentine currency depreciated by 102% against the dollar. The Mackenzie professor highlighted that the reasons were the gradual plans for adjustments in the public accounts of Mauricio Macri, elected in 2015.
“At the time, there was a lot of hope that Argentina could break with the Kirchnerist populism that had reigned in Argentina for more than a decade.” So much so that, at the beginning of the term, the country resumed its position in the capital market, receiving international investment.
However, in the following years, Macri focused on the adjustment of accounts and was vulnerable to external shocks, such as a very prolonged drought in the countryside, affecting the export sector and mainly to an increase in US interest rates, which occurred throughout 2018, explained Cordenonssi.
Thus, at the end of the term, highlighted the professor, seeing that the adjustments made until that moment would not be enough to counterbalance these adverse shocks, and that he would lose the elections in 2019 to the Peronists, investors (especially the Argentines themselves) withdrew the money country, which pulled the peso price down.
Peru, on the other hand, has adopted in recent years an inflation targeting policy that guarantees price stability, in addition to fiscal control so that the policy does not impact the exchange rate.
Peru’s central bank has an inflation target of 2% per year – similar to advanced countries such as the United States. And despite the political turmoil in the region, the country has managed to maintain an average inflation rate of 3.12% since 2012.
The country also sought international reserves so that it would not suffer from fluctuations abroad. Thus, the Peruvian sol fell between 2012 and 2022 by around 30% against the dollar.
The XP economist also points out that Peru’s economy is more dollarized compared to other countries. Many transactions are carried out in dollars, so much so that it is possible to open a dollar account in the country.
As a result, the Central Bank of the country has a larger dollar reserve in proportion to the local GDP (Gross Domestic Product), which was US$ 199.3 billion in 2021.
The real had been devaluing against the dollar in the last five years, to a value below what would be considered “fair”, said the XP economist.
He points to two main reasons for this: the Fed (the US central bank) kept interest rates considerably low for several years after the 2008 financial crisis and economic growth in Brazil was weak in the period.
However, in 2022, the currency appreciated 10.1% compared to the US currency, according to a survey by Austin Rating.
The current scenario of commodities also caused the real to appreciate. Brazil is one of the main producers in the agricultural and metallic sector, both of which have registered an increase in international prices. Therefore, the flow of investors also increases in the country.
Experts believe that as long as the Fed continues to raise interest rates and withdraw dollars from the economy, reversing the quantitative easying (purchase of long-term bonds), the dollar tends to appreciate against Latin American currencies.
And even if the economic perspectives in the countries improve, as in Argentina – due to the agreement with the IMF to restructure the public debt -, points out the XP analyst, the risks continue to be priced.
The Federal Reserve’s Federal Open Market Committee (FOMC) announced on May 4 that it raised the country’s interest rate by 0.5 percentage point, the highest in more than 22 years. With this, it becomes 0.75% to 1% per year.
In a statement after the meeting, the municipality also informed that it will begin to reduce its bond portfolio from June 1.
Francisco Nobre also highlighted that the world has become more risk averse, which has been harming emerging economies, due to the persistence of the war in Ukraine and more restrictive lockdown measures in China, in addition to the Fed’s policies.
“The real (which was stronger) remains positive in the year, but the other currencies have already returned almost all the value conquered”.
Thus, with exchange rates hostage to the risks associated with the international scenario, XP projected the exchange rate for the end of 2022 as follows:
- Real: US$ 5;
- Colombian Peso: US$ 3500;
- Chilean Peso: US$ 830;
- Argentine Peso: US$ 150;
- Peruvian Sol: US$3.70
*With information from Pedro Zanatta and João Malar, from CNN Brasil Business; and Luciana Toledo of CNN
Source: CNN Brasil