May 14, 2022

Report Explores Latin America's Outlook Amid the Ukraine War

Those who have experience working in Latin America will appreciate the following statements from a report published by The Economist Intelligence Unit (EIU): "There is a strong correlation between commodity prices and Latin America's economic growth. Commodity booms, fostered by strong global demand, have been a key driver of economic growth in a region that remains dependent on exports of a small number of basic goods."

Titled The outlook for Latin America amid the Ukraine war: Can the region grow faster? the report importantly explains that growth in Latin American economies has stagnated since the last commodity "supercycle" in 2014. However, following Russia's invasion of Ukraine, spiking commodities prices could in theory be the catalyst for faster growth rates in the region.

To help gauge which countries in Latin America are better placed than others to withstand, and even thrive in, the current global environment, the EIU created a heat map (see below) "that assesses the region's performance in seven key areas." The criteria the EIU thinks are most useful include inflation, public debt, public-sector interest payments as percentage of total revenue, the current-account balance, commodity dependence, and its own assessments of political stability risk and legal and regulatory risk.

The report's key findings include:
  • The five countries best placed to take advantage of the current global economic environment this year are Bolivia, Ecuador, Paraguay, Chile, and Peru.
  • The commodity price spike that began in 2021 and gained further momentum on the back of the Ukraine crisis will bring some boost to these export-dependent economies.
  • The five countries most vulnerable to the global economic impact of the Ukraine crisis are El Salvador, the Dominican Republic, Nicaragua, Costa Rica, and Panama.
  • All the above countries have entered into the crisis with relatively high levels of public debt, substantial external imbalances, and high inflation, and none is a major commodity exporter
  • Even for the big commodity exporters, the outlook is not trouble-free. Spiking inflation is adding to the pain of consumers who were hit hard by the pandemic, and driving pressure for increased government support, at a time when governments are under market pressure to narrow fiscal deficits and get a grip on public debt ratios that spiked amid the pandemic

The EIU correctly notes: "The reverberations of the Russia-Ukraine crisis are being felt across the world in commodity markets, financial markets and supply chains. These developments will have important ramifications for Latin America's economy in 2022 and in years to come."

Do you find this report useful in identifying which countries are positioned to take advantage of the current global global economic environment and which are most vulnerable to the global economic impact of the the Ukraine crisis?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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