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Latin America feels US rate rise pain

By SERGIO HELD in Bogota, Colombia | China Daily | Updated: 2022-08-12 09:44

People look at exchange rates, in Buenos Aires, Argentina on July 26, 2022. [Photo/Agencies]

The rapid rise of interest rates in the United States is having significant spillover effects on Latin American economies that either rely on the dollar or have seen their currencies devalued in the face of a stronger greenback, according to analysts.

The US benchmark interest rate now stands at a decade-high range of 2.25 to 2.5 percent after the Federal Reserve's latest increase by 0.75 percentage point on July 28 as part of an effort to rein in soaring inflation. More raises could be coming before the end of the year. The last round of such steep hikes was largely cited as causing the 1997 financial crisis in developing economies.

"The rise in interest rates affects the emerging world, because the emerging world is indebted in dollars," said Miguel Boggiano, CEO and chief investment officer at Carta Financiera, a specialized web portal focused on the economy and finance in Argentina.

A major effect is that the dollar has been strengthening against all currencies in the world and this means that emerging countries will find it more difficult to return dollars when the dollar becomes more expensive in local currency.

Boggiano said beyond what the Federal Reserve does in Washington, Buenos Aires is far from resolving its own economic problems as the current economic situation of Argentina is so complex.

Amid a political and economic crisis, Argentina had three finance ministers in just over a month. The current minister, Sergio Massa, was sworn in on Aug 3. Inflation in Argentina between June 2021 and June 2022 was 64 percent. Consumer prices in neighboring Chile increased by 13 percent over the same period, more than four times the target.

Funding cost raised

Interest rate increases in the US raise the cost of funding for all other countries, said Alberto Bernal, chief emerging markets and global strategist at financial services firm XP Investments.

"The funding costs of public debt bonds, such as the interest rate of public debt bonds throughout Latin America, have increased significantly, as in the case of Colombia and Brazil," he said.

"In the weakest countries, such as Argentina, we have already started to see some very complicated effects in terms of exchange crises because there are no dollars, and people are beginning to feel the need to exchange their pesos for dollars, and this generates a strong increase in inflation and inflationary expectations."

Latin American government bonds have been largely reduced as higher borrowing costs deter sales, reported Bloomberg.

The Colombian peso is among the currencies that have been devalued the most so far this year. In June, the Colombian peso lost 5.5 percent of its value.

Bernal explained that historically and structurally, Colombia has a current account deficit much higher than the rest of the countries in Latin America, and that is a vulnerability when interest rates rise.

As for the near future, analysts such as Bernal are closely tracking inflation in the US. Monthly inflation in the US was 1 percent in June and the annual figure was 9.1 percent, the highest since 1981. The US Labor Department reported on Wednesday that consumer inflation in July surged 8.5 percent from a year ago.

The writer is a freelance journalist for China Daily.

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