Arm Hardest Hit in Latam by Russia’s Ukraine Invasion – IMF

Mexicans are angry about the ailing economy and rising inflation
A vendor chats with a customer at a stall at an outdoor market in Mexico City, Mexico January 23, 2022. Picture taken January 23, 2022. REUTERS/Luis Cortes

March 16, 2022

NEW YORK (Reuters) – The poorest across Latin America and the Caribbean will be hit hardest by the economic fallout from Russia’s invasion of Ukraine, with the region facing further inflationary pressures, a senior International Monetary Fund official said on Wednesday.

“High inflation, especially food inflation, is hitting the poor in our region the hardest. So that’s the biggest challenge the region will face,” Ilan Goldfajn, the head of the IMF’s Western Hemisphere Department, told Reuters.

The cost of US crude oil rose to its highest level since 2008 earlier this month, while the price of wheat, for which Ukraine and Russia account for 30% of global exports, hit a record high.

The current rise in wheat prices was triggered by the Russian invasion of Ukraine and subsequent sanctions against Moscow and trade disruptions. The World Bank said a number of developing countries are facing short-term wheat supply shortages due to their reliance on Ukrainian exports.

According to World Bank data, in 2018 Russia was the largest exporter of wheat, and Ukraine was the fifth largest.

“You have food and energy inflation on top of a high inflation legacy from the previous (COVID-related) shock,” Goldfajn said.

Supply chain bottlenecks linked to the pandemic had already sent Latin America on a monetary tightening path, with all major central banks raising interest rates to both combat inflation and protect against an expected outflow of capital seeking yield in the developed world.

Now they might have to pull even harder.

“We anticipate that given that the main channel (of economic transmission) of the conflict is energy and food inflation, central banks will eventually have to react and further defend their credibility,” Goldfajn said, adding that the past inflation expectations remain anchored in the region.

Further increases in borrowing costs, the income-crushing effects of inflation and a slowing global economy could undermine growth in the region, Goldfajn said.

With inflation-adjusted incomes falling and the global economy slowing, Latin America faces a similar backdrop to 2018-2019, when citizens took to the streets in protests that only stopped when pandemic lockdowns were imposed in 2020.

“Governments should continue to strengthen targeted social safety nets and try to expand them and expand coverage and reach,” Goldfajn said.

More social spending could be a major challenge for governments facing higher borrowing costs and tight fiscal positions after two years of lockdown, particularly in many countries in the Caribbean and Central America where commodities are mainly imported.

For some other countries in South America, the rise in commodity prices could be a macroeconomic lifeline, even if consumers are affected.

As the region’s largest grain exporters, Argentina and Brazil could benefit, while Colombia could benefit from its oil exports. Chile’s mining capacity should also provide tailwinds.

“The human suffering in the conflict and the negative global shock does not benefit anyone,” Goldfajn said.

“If you look at South America, (they) are exporting goods, which are exactly the ones that are affected globally, so there are extenuating factors. But you have to be able to seize the opportunity.”

(Reporting by Rodrigo Campos; Editing by Tim Ahmann) Arm Hardest Hit in Latam by Russia’s Ukraine Invasion – IMF


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