- Cristina J. Orgaz @cjorgaz
- BBC World News
An avalanche of dollars in the world’s leading economy. So we could imagine what exactly has happened in the United States in the last year.
The stimuli launched by the Donald Trump government to alleviate the effects of the economic crisis caused by the coronavirus included the sending of substantial checks to workers or generous loans to companies.
A is fiscal expenditure of the public coffers the efforts of the Federal Reserve were added to maintain the liquidity of the banking system and that the entities could continue lending.
But that money did not come out of a vault. It was created of its own to be able to face the situation.
Government and central bank they printed money at unprecedented speed in recent United States history.
So much so that only from January to November of this year the United States money supply it has grown by almost 24%.
According to data from the Fed, the volume of dollars has gone from US $ 15.33 trillion at the end of 2019 to US $ 19.1 trillion at the end of November.
So this money growth, which is usually a slow and steady process, has run amok in 2020.
“In my opinion, the dollar is going through a cyclical phase of weakness, similar to the relative depression during the 1970s, early 1990s and the great financial crisis at the end of the 2000s “, explains Olivia Álvarez, an analyst at Monex Europe.
Effects on the economy
The first effect of this new money supply in circulation is that it could generate inflation in the United States.
The second is a accelerated devaluation of the dollar against many currencies, that according to several analysts consulted by BBC Mundo, will offer an unexpected respite to the economies of Latin America, devastated by the effects of the covid-19 pandemic.
In some countries of the region the effects will be felt strongly; others have so many challenges ahead, experts say, that one fall of the dollar between 10% and the 15% against your currencies it will not have any impact.
“Latin American currencies are generally broad beneficiaries of the depreciation of the dollar. This effect is particularly relevant for highly indebted countries such as Argentina, “adds Álvarez.
Keith Wade, chief economist at Schroders, agrees with her.
“They especially benefit through easier financing than reduces pressure on your coins. This allows for looser domestic monetary policies and also reduces the burden of dollar-denominated external debt, “says Wade.
These are the effects that the depreciation of the dollar will have on various economies in the region:
Argentina and the dollar
One of the factors that keeps the Argentine economy under the yoke is its excessive dependence on the dollar and the volume of public debt issued in that currency, instead of in pesos.
When the peso / dollar exchange rate rose, the burden of those obligations was increasing.
Now that the dollar is falling, it is easy to wonder how this might affect the part of your debt denominated in hard currency.
“If you look at the challenges that Argentina has at the moment, which are quite big, a weakening of the dollar of between 10% and 15%, to be honest, it will not be a major change, says Claudia Calich, Emerging Markets Specialist at M&G Investments.
The country has yet to continue negotiating debt restructuring with the IMF and the state of its finances is very little room for maneuver to face the ravages of covid-19.
“A weak dollar helps Argentina up to a point,” says Joseph Mouawad, Carmignac’s emerging fixed income manager, but “the mix of policies and credibility is still missing for a sustainable recovery.”
Felipe Villarroel, manager of TwentyFour AM, explains the limited benefits for Argentina in another way:
“Argentina is a country that exports a lot of agriculture and in this case the impact of a depreciation of the dollar is less important. It’s going to help a bit, but there are other factors like having a bad harvest that is going to make the year horrible regardless of the currency. “
Chile and copper
A cheaper dollar benefits commodity prices.
Chile, the world’s leading copper producer, It should benefit from the reactivation of the Chinese economy, but also from the depreciation of the dollar.
The metal last week reached its highest price in two and a half years, at US $ 3.22 per pound.
“This has to do more than anything with China and the rest of the Asian countries, which are large consumers of copper that have bought again. The economy of the Asian giant is almost as before the pandemic and that is very good for Chile, “says Villarroel.
However, many political uncertainties weigh.
“There is a lot of uncertainty that what will happen with the new Constitution. Chile’s macroeconomic indicators” were better before, “recalls the manager.
“What happened at the political level has brought economic consequences on investment and other indicators. But on the other hand, the raw materials are on the rise, which is positive. ”
“The forecasts do not believe that they are too good, but neither too bad”, sentence Villarroel.
According to the Chilean government estimates, mining will contribute to the public coffers this year a total of 2,873 million dollars.
Mexico and exports
Mexico is one of the main trading partners of the United States.
How will you benefit from a weak dollar?
Mexico is definitely the big winner in the region.
Its factories are very US oriented.
70% of its exports go to the US manufacturing industry, which obviously benefits greatly from the weak dollar.
Additionally, Mouawad says, the country is benefiting from trade uncertainty with China and the fact that the new trade agreement between Mexico, the US and Canada was recently approved.
For Claudia Calich, to the extent that the US economy and the arrival of the vaccine contribute to a rebound in growth next year, this will be extremely positive for Mexico.
Finally, we must not forget that if global economies reactivate, it is likely that we will see a rise in oil prices.
“We have already seen a small rebound in the barrel of crude. That could potentially be beneficial for Mexico as well or indirectly. for its state oil company, Pemex“, dice Calich.
Venezuela and oil
A weak dollar favors the prices of commodities.
That is why we might think that a higher oil price it could bring more money to the Venezuelan coffers.
But regardless of whether this happens or not, economists agree that the problems that drag Venezuela they are too big for something like that to straighten your economic indicators.
“Venezuela has a very special situation, even more than Argentina. The depreciation of the dollar won’t really help the situation there. As long as the US sanctions remain in place, what the dollar does is more or less irrelevant “, believes Mouawad.
In the same sense, Claudia Calich thinks.
“Honestly, Venezuela has so many problems and the distortions are so so deep that what the dollar does is absolutely irrelevant. I think the most important question will be whether the arrival of Biden to the presidency, for example, will change something in terms of American policy towards the country, “he says.
Ecuador, Panama and the dollarized economies
With the numbers ahead, it is clear that there is a greater amount of dollars going around in the economy.
According to IMF data, 62% of all money in circulation in the world It is denominated in dollars.
A small percentage of this figure corresponds to dollarized economies.
Panama it adopted the dollar in 1904, shortly after its independence from Colombia.
Almost a century later, Ecuador and El Salvador they followed suit in 2000 and 2001, respectively.
“Of course, dollarized economies they are the most favored by the weakness of the dollar, as this alleviates the stress on their funding, “says Mouawad.
The manager of the French firm Carmignac recalls that Ecuador will benefit a lot thanks to some strong oil prices that go hand in hand with the weakness of the dollar.
However, Ecuador still faces some political uncertainty with next year’s elections (they will be in February) and the possibility of renegotiate the agreement with the IMF.
“Arguably, a weaker dollar will be positive for the country, but given the challenges ahead, the depreciation will have a marginal benefit to its economy,” Calich believes.
At case of Panama, the analyst recalls that the country has been greatly affected by the less ship traffic through the Canal due to the coronavirus pandemic.
Thanks to reforms in the past, “its economy is relatively in good shape and it will benefit a bit from the dollar situation, but global economic recovery and trade will be the key drivers.”
Peru and the institutions
The country is going through a period of political turmoil that recently led it to have 3 presidents in just over a week: Martín Vizcarra, Manuel Merino and Francisco Sagasti.
The situation has led one of the largest credit rating agencies in the world to downgrade perspectives of Peru from “stable” to “negative”.
“Recurring political tensions since 2016, reflected in four presidents (including three in November 2020), two congresses, and high cabinet turnover, have stalled reform progress and slowed growth economic, “the agency says in its report.
“Political instability in the coming years cannot be ruled out,” he adds.
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