After the US Fed expanded money supply by an unprecedented 25% during COVID, a liquidity squeeze was inevitable. Starting in Q1, 2023, for the first time in over 75 years, US money supply is shrinking. Like a large scale game of musical chairs, the first victims, US regional banks, are falling on their backsides. If the Fed is serious about taming inflation, then more pain lies ahead for the fragmented US banking industry, the beleaguered commercial real-estate sector, and possibly the US government.
“When America sneezes, Latin America catches a cold” is a time-tested adage—but is it to be repeated this time around? A US recession in 2023 cannot be avoided. Thankfully, the same may not hold true for much of Latin America, where COVID was fought mostly with fiscal measures, not monetary policies. Neither Latin American corporations nor governments are as indebted as their American, Chinese or European counterparts so monetary policy levers barely move the needle on economic performance. When inflation hit in late 2021, Latin America’s leading central banks acted quickly to raise rates, six to nine months ahead of the US Fed.
In Brazil, Mexico, Peru, Chile and Colombia, higher rates are a welcome counterbalance to governing populists. In 2023, obligations in the region’s six largest economies will increase 34% (US$86 billion) to a whopping US$340 billion. That leaves little money in the coffers to fund some of the fanciful ideas being cooked up in Los Pinos, La Casa de Nariño, or O Palácio da Alvorada.
The combination of high real domestic interest rates and higher than average commodity prices has helped strengthen currencies in Brazil, Mexico, Peru and now Chile. Strong currencies help keep consumer spending trucking along and please multinationals trying to recoup anticipated dips in US revenues this year. Latin America will expand by 1.5% in 2023, double the rate of the US economy. Latin American consumption, however, will expand by roughly 6%, when measured in USD.
The US liquidity squeeze has impacted Latin America’s nascent venture capital industry. After growing at over 40% per year for a decade, VC deployment will drop by 2/3 this year. That is a painful blow to the digital economy that has spearheaded much of Latin America’s homegrown innovation in fields like fintech, e-commerce and logistics. But the vast majority of Latin American businesses, even the storied multi-latinas, carry reasonable debt levels on their balance sheets. Devaluations in the past helped wean Latin America off of dollar debt. Today, most LatAm businesses rely on domestic sources of debt to fuel their growth. That discipline combined with an heroic effort by independently minded Central Banks in the region may be enough to stave off a US-led economic flu and break a painful pattern of contagion.
An Additional Resource
If you’d be interested in a more in-depth discussion of the financial liquidity challenge facing Latin America that includes in-depth industry analysis, please view our recent webinar on this topic below.
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