MAPFRE Economics sees institutional strength as a key factor in Latin America

The term ‘supply shock’ was coined in the 70s during the oil crisis (1973-1979). It was used to describe any disruption not considered part of the economy’s ordinary behavior. In this case, OPEC decided to increase crude oil prices at the same time as it approved embargoes on the West, resulting in an increase in industrial prices and, as a result, an inflationary environment.

The current pricing situation in Europe is not much different from what was seen 50 years ago: having overcome the worst of the pandemic, the war in Ukraine has increased pressure on supply chains and raw materials, resulting in a general increase in prices. The short-term impact of the geopolitical conflict in Eastern Europe has spread almost worldwide: from the USA (where inflation is actually more of a ‘demand shock’) to Latin America, a region that has suffered periods of serious inflation in recent decades. In this case, however, South America has been one of the few regions to get ahead of the most immediate effects of the geopolitical crisis.

Even so, this region will nonetheless face significant challenges in the coming months, generated by market uncertainty, restrictive monetary policy, the inflationary trend and the supply crisis. This was one of the questions posed at the workshop “Global recovery outlook: the economy and trade in Latin America”, held as part of the 7th Multi-Latin Business Conference held by Fundación Iberoamericana Empresarial and Universidad Internacional Menéndez Pelayo in Santander, with the participation of Manuel Aguilera, managing director of MAPFRE Economics, along with renowned economists including Rafael Doménech (BBVA), Juan Cerruti (Banco Santander), Manuel Balmaseda (formerly chief economist at Cemex), Juan Antonio Mielgo (Telefónica) and Fazia Pusterla (BID).

Latin America has sought to dispel the ghosts of decades past in recent years. The weak growth situation prior to the pandemic remains to this day (with a symbolic recovery of just 0.03%). Any period of recovery requires several years to really take root, according to the head of MAPFRE Economics, although the region has managed to get ahead of most developed countries when it comes to monetary policy.

In this sense, past experience has come in handy to Latin American central banks, enabling them to get ahead of the immediate macroeconomic problems and increase interest rates before their European and US counterparts. In the opinion of Manuel Aguilera, the main objective of a more aggressive policy has placed an emphasis on “the need to maintain the interest rate” and, therefore, the value of local currencies, ultimately “controlling the impact of inflation”.

This policy has also been supported by the fact that, faced with the low penetration of credit in the economy, the impact of tightening monetary policy on citizens is lower (despite interest rate hikes up to five times higher than in other regions with similar prices levels).

The challenges of the future

The major challenge, however, facing the region (despite not being quite as exposed to the conflict in Ukraine), as has been mentioned previously, is the issue of growth and the need to attract investment. The pandemic laid bare a number of weaknesses in the South American economy, such as the scarcity of domestic savings and the excessive reliance on foreign savings. In fact, Aguilera indicated that the management of the health crisis (around 2% of GDP) had led to “shortcomings in savings and investment capacity”.

Therefore, the future appears ambiguous: while there are concerns about future growth, the head of MAPFRE Economics emphasized institutional strength and the importance of encouraging public-private collaboration between different countries in the region to address tax reforms that catalyze the economy as needed in the coming years.