We’ve seen this movie before and it rarely ends well.
I’m writing this post from the veranda of my father-in-law’s home in Tepoztlan, a beautiful, mystical town just 60 kilometers south of Mexico City. Ringed by serrated mountain ridges, upon one of which overhangs the Aztec Tepozteco pyramid, Tepoztlan is famed for being the reputed birthplace of Quetzalcoatl, the Aztec feathered serpent god. The temperature right now is an agreeable 24 degrees Celsius (75 degrees Fahrenheit) — perfect Christmas weather!
Mexico is the Mos Eisley of the pandemic era: you don’t even need a negative PCR to get through border control. This has helped boost the country’s tourism sector, which was the third largest globally last year, but it hasn’t helped to keep Covid at bay.
My wife and I landed in Mexico City just over a week ago on a direct flight from Barcelona. It was our first flight in two years. Every seat on board was occupied. We masked up heavily and thankfully appear to have avoided recatching Covid-19, after coming down with the virus in August. That means we can now focus on catching up, mostly outdoors, with relatives and friends we haven’t seen for two and a half years.
Mexico City is in celebratory mood. After months of Covid-19 restrictions, the city was given a full bill of health by the public health authorities just in time for Christmas festivities. And the city’s residents are making the most of it. Just about every restaurant we’ve been past at lunch or dinner time has been packed to the rafters. Based on conversations we have had with friends and family, most people seem quite content (or in some cases desperate) to resume some semblance of normal life, often under the false assumption that the vaccines provide them with strong protection against catching the virus.
Mexico, like pretty much much all of Latin America (and let’s face it, most of the world) has been through the grinder. Many people — probably significantly more than the official statistics suggest — have been taken by Covid-19.
Arturo, the 60-year old gardener who for many years tended my father-in-law’s smallish garden, succumbed in just over a week. As far as we know, he was in sound health and looked a good ten years younger than his actual age. That was in August. A month later Berta, who cleans my father-in-law’s house a few times a week, caught the virus and ended up in critical condition in a Cuernavaca hospital. It was a close thing but she made it through in the end.
Many others in Tepoztlan didn’t. A couple of days ago, Berta told me she had lost many friends and family members to Covid in the last wave, during the height of summer. Some of them were in their thirties and forties.
Covid Central
Latin America and the Caribbean has the highest official death toll from Covid-19 of any region on the planet. It accounts for just under 10% of the global population but around 20% of global Covid-19 cases and almost a third of deaths.
It’s not hard to see why. Local economies, like sharks, simply cannot afford to stop moving. In most cases, restrictions are not as stringent as they are in Europe. As I wrote on Wolf Street in May 2020, as the first Covid wave began to hammer the region, “locking down entire cities or countries and paying millions of non-essential workers not to work for weeks on end while healthcare workers battle to contain the virus is a luxury only afforded to countries with first-world economies, huge public debt capacities, relatively stable currencies and big central banks.”
For many workers in Latin America and the Caribbean, not working for just a few days spells ruin, quickly followed by hunger. The number of people suffering from hunger in the region rose by 13.8 million in 2020, to 60 million, according to the United Nation’s Food and Agriculture Organization. That is the equivalent of roughly 10% of the region’s population. The hardest hit country, unsurprisingly, is Haiti, where a mind-blowing 46% of the population suffers from undernourishment. Hyperinflationary Venezuela has the highest levels of hunger in South America, with 27% of the population affected.
In total, 267 million people — the equivalent of 40% of the region’s entire — experienced moderate or severe food insecurity in 2020, 60 million more than in 2019.* It was the highest rise of any world region. Although the pandemic has sharply exacerbated the situation, hunger has been rising in Latin America and the Caribbean since 2014.
“We must say it loud and clear: Latin America and the Caribbean is facing a critical situation in terms of food security. There has been an almost 79 percent hike in the number of people living in hunger from 2014 to 2020”, said Julio Berdegué, FAO’s Regional Representative.
Inflation Making Matters Worse
Soaring inflation in the region is compounding these problems, as I reported for NC on December 10. Food prices account for a much larger share of inflation indexes in Latin America than in advanced economies, meaning that surging food prices have played a larger role in overall inflation.
Here in Mexico, many of the shops my wife and I have visited in recent days have put up signs informing customers that rising wholesale prices have left the owners little choice but to raise their prices too. Consumer price inflation in Mexico reached its highest level in 20 years (7.3%) in November, and is expected to continue to rise in the first half of December, according to a Reuters survey of Mexican economists.
In Chile and Peru, consumer price inflation is at 13- and 12-year highs respectively. Latin America as a whole will end the year with the highest price increases in the world, according to the IMF, which forecasts regional inflation of 9.3% for 2021.
High inflation is not only eroding the purchasing power of workers’ wages; it is also eating into people’s rainy day funds. In stagflation-hit Brazil a toxic cocktail of high inflation and falling nominal wages are draining the savings Brazilians were able to accumulate during the worst phase of the coronavirus pandemic, when the payment of emergency aid to the poorest and the reduction of consumption led to a sharp increase in savings rates, Rio Times reports.
Unprecedented Public Debt
Brazil’s government, unlike Mexico’s, loosened its purse strings significantly last year. As a result, its public debt to GDP ratio surged a whopping 15 percentage points, from 74% to a record high of 89%. Other countries in the region did the same, with the result that the region’s gross debt is now equivalent to 77% of GDP, according to the United Nations Economic Commission for Latin America and the Caribbean (CEPAL). The total service costs of that debt — that is, the interest countries have to pay on it — represents a staggering 59% of the total revenues the region’s economies earn from their export of goods and services, reports El País.
Paying down that debt at a time of rising interest rates, a strengthening dollar and quite possibly a fresh round of lockdowns, at least in the northern hemisphere, will be exceptionally difficult. Most of the debt was sold on the global markets, through the issuance of sovereign bonds. The main buyers, according to El País were large Wall Street banks and investment funds.
In other words, the fate of Latin America’s embattled economies once again lies in the hands of Wall Street firms. We’ve seen this movie before and it rarely ends well.
The one silver lining this time around is that the region’s largest economies, such as Brazil, Mexico and Chile, issue most of their debt in local currencies. As a result, they are less likely to face a full-on debt crisis. In the case of Brazil local bonds account for around 90% of sovereign debt; in Mexico, it’s around 70% and in Chile it’s around 75%. Unfortunately, the same cannot be said for smaller, weaker economies in the region, which have little choice but to issue debt in dollars or euros.
Since the virus crisis began there have been six defaults on foreign currency-denominated bonds. Ecuador was first, followed by Argentina, then Suriname, Belize, and Suriname twice more.
Conditions are now tightening for everyone. After a year of relative recovery from the bloodbath of 2020, economic growth is expected to slow sharply in the coming months. The Federal Reserve has signaled that it will soon begin tightening its monetary policy, a prospect that terrifies the heads of state and finance ministers of all Latin American countries. A Fed hike would raise the costs of their dollar-denominated and could trigger an outflow of foreign capital, which in turn would heap yet more pressure on their currencies, making it even harder for both governments and companies to service their debt denominated in dollars or other foreign currencies. Rinse and repeat.
In October, the IMF unveiled a $650 billion allocation of Special Drawing Rights (SDRs), $44 billion of which went to LatAm countries. The newly minted money is a tiny drop in the ocean of what is needed and most of it went to high-income countries anyway.
* Moderate food insecurity is broadly associated with the inability to regularly eat healthy, nutritious diets, according to Our World in Data: “High prevalence of moderate food insecurity is therefore an important indicator of poor dietary quality, and the development of health outcomes such as micronutrient deficiencies. Severe food insecurity is more strongly related to insufficient quantity of food (energy) and therefore strongly related to undernourishment or hunger.”
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This is terribly grim, but thanks for reporting on it. Here in Uruguay I’m surprised at how much construction I see, both private and public. Lots of road work and renovation of parks in the public sphere, and lots of new construction and renovation of old Construction in the private housing Sector
I hope any building boom is funded by ‘natural’ demand and growth. As Michael Pettis has pointed out in a nice twitter thread today, the use of open capital accounts in developing countries is a recipe for unsustainable booms followed by panic outflows.
Not sure about Latin America as a whole, but Mexico reported four months of consecutive growth in the construction sector in November. That said, the sector had been in a deep rut for two years after AMLO’s cancellation, in 2019, of a $13 billion project to build a new airport for Mexico City. The Mexico City Council also cancelled and suspended many projects over concerns that many developers were breaking, or at least bending, local laws and regulations. It also issued far fewer permits for new projects.
Here in Baja Sur we are experiencing a huge building boom of homes, condos, and luxury hotels that is outpacing the infrastructure. Now that working remotely is the new normal, foreigners are overrunning the real estate market and land prices for desirable areas have more than doubled in the last year, and gentrification is pricing locals out of the market and creating a housing crisis.
As Pettis (and in another recent article, Bill Mitchell), has pointed out, the worst thing any developing country can do is take on foreign currency loans (public or private) for this type of construction boom, unless the development is clearly going to generate real productivity growth in the economy. So I think its always worth looking under the hood to see where the finance is coming from. But I’d trust AMLO over this more than most governments.
That cancelled airport project, initiated by the previous President Pena Nieto, is located in another state (Estado de Mexico), and is so far away from the Capital, that it would add another day’s commute time to anyone planning a visit to Mexico City (CDMX). It was another of Mr. Pena Nieto’s corrupt megaprojects, like the failed project for a high speed train between Mexico City and Cuernavaca (where Mr. Pena Nieto built his retirement mansion/estate).
You’re right, Timothy. It was an absolute boondoggle. And yes, its planned location was in the adjacent state of Estado de Mexico, Peña Nieto’s home state, not Mexico City. Thanks for the correction.
The ambition of the NAIM project was not just to build an airport but an “aerotropolis” — a vast multimodal “airport city” — around the airport, which investors hoped would become the biggest transport/infrastructure hub in the whole of Latin America, connecting up with the massive new port built in Veracruz. The investors behind the NAIM project included Mexico’s richest man, Carlos Slim; large Mexican corporations such as ICA, Prodemex, GIA, and Grupo Hermes, which is owned by Carlos Hank, a billionaire banker with close ties both to Peña Nieto as well as AMLO; and The Atlacomulco Group, a secretive political network operating in Estado de Mexico. They were very closely connected to Peña Nieto, who launched the NAIM project, and are alleged to have bought up much of the land on which the new airport and surrounding aerotropolis was to be built.
Actually, the cancelled airport project was 10 miles further away from the city center than the existing airport, at most half an hour more by car without additional infrastructure. There has been no project at all, not even in discussion, for a train from Mexico City to Cuernavaca. There IS a new airport under construction which is much further away and the IS a railway line being built towards the sitting president’s ranch, but neither of these are connected with the name of Mr. Peña Nieto, corrupt as he was.
Well here in Uruguay I’m hoping at least we will be The High Ground where the most fit and talented people nearby South American country gather in order to pursue the best opportunities available. It’s a brutal calculus for sure. But perhaps this is a place that can nurture a future Renaissance. We have to keep the light burning summer as things are going to get quite ugly. Here we have the advantages of a stable economy, society, and political Arena with a thriving Port in a small governable nation that grows its own food. I can only hope for the best
The tragedy of the system. Everyone knows there is a huge logical disconnect where money and debt are concerned but nobody wants to tackle an ancient system that has evolved like a thicket of denial. Money is such a useful invention and the whole debt system seemed logical once when everyone simply accepted that “money” had its own value. That acceptance had no logic to it whatsoever, it was merely customary to use money without really thinking about it. I have yet to see much conversation on the reality that money is just a convenience in and of itself and certainly nothing to do with “a cost of money” or “interest” or some goddamn “lost opportunity” excuse. Borrowing money should be like tapping a keg of beer. When it’s empty, just tap another one. I’m convinced the reason this seems untenable is because everyone is clinging to the illusion that profits, from economic activity, are certainly more valuable than losses. But are they?