Aurelia Butler

What was good for copper was good for Chile’s peso. The fortunes of the currency of the world’s largest copper exporter were closely tied to the price of its main export.Last year the pattern broke. World copper prices rose 25 per cent in 2021, but the Chilean peso’s value crashed by nearly 17 per cent against the US dollar — one of the worst performances by any major emerging market currency.Chile’s experience was not unusual. Despite a strong global rise in commodity prices last year, the currencies of all major Latin American economies weakened, some dramatically. The Colombian peso lost 16 per cent of its value against the dollar, while the Peruvian sol weakened by more than 9 per cent. Brazil’s real suffered its fifth consecutive year of devaluation, losing nearly 7 per cent.Economists say the striking divergence — unprecedented in recent years — points to a deep sickness in Latin America’s economies. “It’s very bad news,” said Ernesto Revilla, chief Latin America economist at Citi. “This shows the region is coming out of the pandemic with deeper structural damage than we thought.”The pandemic’s combined impact on Latin America’s people and economies was greater than in any other region in 2020. After a struggle to procure vaccines early last year, most Latin American governments managed to buy sufficient stocks during 2021 and the region ended the year as the world’s most vaccinated. However, while the most serious health effects of the pandemic are fading, the economic damage looks much longer-lasting. Latin America was already the emerging world’s slowest-growing region before the pandemic, managing just 0.9 per cent year-on-year increases in GDP on average from 2014 to 2019, according to Goldman Sachs data. Now, despite higher commodity prices, it risks settling back into mediocre growth, this time with fresh problems: extra debt taken on during the pandemic, rapidly rising inflation and much greater political risk as voters punish incumbents and swing towards populist outsiders.“The market is treating Latin America as if it had suffered a structural shock and not a cyclical shock,” said Revilla.

Alberto Ramos, head of Latin America economics at Goldman Sachs, highlighted the region’s lurch towards political extremes in 2021. Peru and Chile elected hard left governments and socialist candidates are leading the polls for presidential elections this year in Brazil and Colombia.“In a period of rallying commodity prices, the correlation [between commodity prices and currency strength] has broken because of political risk, to a large extent,” he said. “In Colombia, Chile, Peru and Brazil, the political and policy risks are quite high.”Chile epitomised the trend. It elected last May a special assembly dominated by the left to rewrite the constitution, which is widely regarded as one of the region’s most investor-friendly. Seven months later, voters chose Gabriel Boric, a hard-left millennial former student activist, as president.Boric has vowed to abolish the country’s private pension system, raise taxes by 5 per cent of gross domestic product to fund a big increase in public spending and impose restrictions on the mining industry. Investors have noticed the region’s drift towards political extremes. About $50bn has been pulled out of the country since political unrest erupted in October 2019, according to the central bank. Peru suffered the biggest capital flight last year since records began in 1970, with some $15bn leaving the country.The exception to the weak currency rule in Latin America has been Mexico, whose leftwing populist president has pursued nationalist and interventionist policies but also free trade with the US and fiscal discipline. Reflecting this, the Mexican peso fell only 4.5 per cent against the dollar last year, by far the best performance of any major Latin American currency.“Mexico is the best home in a bad neighbourhood,” said Citi’s Revilla, pointing to President Andrés Manuel López Obrador’s austerity, the country’s relatively low levels of government debt and the likelihood that it would keep its investment grade rating. “The problems in Mexico are not short-term macro ones, but long-term ones of very low growth as a consequence of [López Obrador’s] economic policies.”Those advantages have kept investors interested in Mexico, at least in the short term. But in the remainder of Latin America, the outlook for economies and currencies remains bleak. In Brazil, the region’s largest economy, President Jair Bolsonaro has largely abandoned efforts to push through major structural reforms or big privatisations and is boosting spending to try to improve dire poll ratings and prepare the way for a re-election campaign. The gloom on Faria Lima, Brazil’s Wall Street, is palpable. Also weighing on sentiment is uncertainty about what sort of economic policies leftist icon Luiz Inácio “Lula” da Silva, the current poll leader for October’s presidential election, would pursue if elected.Lula’s former finance minister Guido Mantega argued in a recent article written at the behest of his former boss that a new Lula government should launch an “ambitious” investment programme, champion state-led industrial policies and aim to create a “social welfare state” — none of which went down well with markets.Marcos Casarin, chief Latin America economist at Oxford Economics, noted that “there is a lot of bad news already priced into the [currencies] of Brazil, Colombia and Chile”.But he believes the weakness of the region’s currencies in the face of a commodity boom points to much bigger challenges than political risk alone. “You only get rewarded with a stronger currency in a commodities boom if the boom serves to make you richer as a nation,” he said.“The markets are foreseeing that this commodities boom didn’t bring prosperity, so the currencies didn’t deserve to go up. It was a boom for a dozen [commodities] companies but it didn’t translate into wider economic prosperity.” More

BEIJING (Reuters) – China’s economy rebounded in 2021 with its best growth in a decade, helped by robust exports, but there are signs that momentum is slowing on weakening consumption and a property downturn, pointing to the need for more policy support.Growth in the fourth quarter hit a one-and-a-half-year low, government data showed on Monday shortly after the central bank moved to prop up the economy with a cut to a key lending rate for the first time since early 2020.The world’s second-largest economy is struggling with a rapidly cooling property sector, as well as sporadic small-scale COVID-19 outbreaks that could deal a blow to its factories and supply chains.Several Chinese cities went on high alert ahead of the Lunar New Year holiday travel season, as the Omicron variant reached more areas including the capital Beijing.The economy grew 8.1% last year – its best expansion since 2011 – and faster than a forecast 8.0%. The pace was well above a government target of “above 6%” and 2020’s revised growth of 2.2%. The economy recorded its weakest growth in 44 years in 2020 but staged a faster recovery than other major economies.Gross domestic product grew 4.0% in the final quarter, National Bureau of Statistics (NBS) data showed, faster than expected but still its weakest pace since the second quarter of 2020. Growth was 4.9% in the third quarter.”At present, the downward pressure on China’s economy is still relatively big, and growth of residents’ employment and income is restricted,” Ning Jizhe, head of the NBS, told a news conference.On a quarter-on-quarter basis, GDP rose 1.6% in October-December, compared with expectations for a 1.1% rise and a revised 0.7% gain in the previous quarter.China’s economy got off to a strong start in 2021 but economists expect growth to slow in the coming months.The central bank unexpectedly cut the borrowing costs of its medium-term loans for the first time since April 2020, leading some analysts to expect more policy easing this year to guard against developers’ mounting risk of defaults.The People’s Bank of China said it was lowering the interest rate on 700 billion yuan ($110.2 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85%. It also cut the 7-day reverse repo rate.”Economic momentum remains weak amid repeated virus outbreaks and a struggling property sector. As such, we anticipate another 20 bps of cuts to PBOC policy rates during the first half of this year,” said analysts at Capital Economics, in a note.But Nomura said in a note the space left for future rate cuts this year was small: “We expect another 10 bp rate cut before mid-2022.”Global share markets were choppy on Monday and benchmark Dalian and Singapore iron ore futures fell after signs of continuing economic weakness in top steel producer China.In a video speech to a World Economic Forum event on Monday, President Xi Jinping said the overall momentum of China’s economy was sound and that countries should strengthen policy coordination and prevent the world economy from dipping again.Adding to another long-term concern for the economy, mainland China’s birth rate dropped to a record low of 7.52 per 1,000 people in 2021, NBS data also showed on Monday, extending a downward trend that led Beijing last year to begin allowing couples to have up to three children.PROPERTY, RETAIL SALES SLOW China’s property market has slowed in recent months as regulators stepped up a campaign to cut high rates of borrowing, triggering defaults at some heavily indebted companies.Property investment dropped 13.9% in December from a year earlier, falling at the fastest pace since early 2020, according to Reuters calculations based on official data. Investment grew 4.4% in 2021, the slowest since 2016.Weak consumption data also clouded the outlook, with retail sales in December missing expectations with only a 1.7% increase from a year earlier, the slowest pace since August 2020.”The biggest challenge this year for policymakers is how to stabilise the economy at a 5-5.5% range against the backdrop of dynamic zero-COVID policy,” said Nie Wen, chief economist at Hwabao Trust in Shanghai.A bright spot was industrial output, up an annual 4.3% in December, picking up from a 3.8% increase in November, and better than a 3.6% increase in a Reuters poll.China’s refinery output hit a new record in 2021, as did aluminium and coal production.Fixed asset investment rose 4.9% in 2021, compared with the 4.8% increase tipped by analysts and 5.2% in the first 11 months of the year.Booming shipments to coronavirus-hit economies overseas were a key boost to China’s growth last year, with net exports accounting for more than a quarter of GDP growth in Q4 and the country logging its biggest trade surplus in 2021 since records started in 1950.The outsized role that net exports played in last year’s GDP growth also underscored the relative weakness in other drivers. By contrast, net exports were a drag on overall growth in 2018, when the economy relied more on consumption and investment.However, the support from export growth may not last. It has been slowing as an overseas surge in demand for goods eases and high costs pressure exporters. More

BEIJING (Reuters) – Chinese President Xi Jinping said on Monday that countries should strengthen economic policy coordination and prevent the world economy from dipping again. The world should foster new opportunities amidst the crises caused by COVID-19, he told the World Economic Forum’s virtual Davos Agenda conference, which is taking place after the WEF postponed its in-person annual meeting because of the pandemic. More

European stocks rose on Monday as traders weighed recent data showing persistently high rates of US inflation and looked ahead to corporate earnings picking up this week.The regional Stoxx 600 index ticked up 0.6 per cent in morning dealings after declining 1 per cent over the course of last week. London’s FTSE 100 climbed 0.7 per cent, Germany’s Dax was up 0.5 per cent and France’s Cac 40 rose 0.7 per cent. Across the Atlantic, where markets will remain closed on Monday for Martin Luther King Jr. day, investors have been assessing the implications of rising wages, declining rates of unemployment and record rates of inflation, with questions mounting about whether Federal Reserve officials will tighten monetary policy faster than planned. Data last week showed that US consumer prices rose at an annual pace of 7 per cent last month, the fastest rate of increase in almost 40 years.The Fed is expected to raise rates at least three times in 2022. However, some officials at the central bank have suggested more rate increases could be necessary this year if inflation continued to surge. So-called “speculative” technology stocks have suffered in particular, with the Nasdaq Composite index off 4.8 per cent so far this year. Wall Street’s broad-based S&P 500 gauge has slipped 2.2 per cent over the same period. US earnings season got off to a disappointing start on Friday, when shares in JPMorgan closed down more than 6 per cent after the bank said rising costs would curtail profits in 2022 even as it posted record full-year earnings of $48.3bn. Banks including Goldman Sachs, Morgan Stanley and Bank of America report fourth-quarter numbers later this week.Data on Friday also showed retail sales in the US declined 1.9 per cent in December — the most in 10 months.Steve Blitz, chief US economist at TS Lombard, said in a note that December’s figures suggested the US economy was “transitioning from its supercharged Covid cycle to something that will eventually look a bit more ‘normal’”.“The challenge for investors is to see through this transition away from the Covid cycle, this downshift in activity, and keep confident the economy is transiting to a very different (better) economy than what existed pre-Covid,” he added.In government debt markets, the yield on the two-year US Treasury note — which closely tracks interest rate expectations — on Friday rose to 0.97 per cent, its highest level since February 2020. Bond yields move inversely to their prices.The 10-year German Bund yield rose 0.02 percentage points on Monday to minus 0.03 per cent. In Asian equity markets, Hong Kong’s Hang Seng traded 0.7 per cent lower, while Tokyo’s Nikkei 225 added 0.7 per cent. The Bank of Japan’s latest two-day monetary policy meeting started on Monday, with a decision due on Tuesday.South Korea’s tech-heavy Kospi index shed 1 per cent, while Australia’s S&P/ASX 200 rose 0.3 per cent. The mixed moves came after China’s National Bureau of Statistics said on Monday that the economy expanded 4 per cent year on year in the fourth quarter, exceeding economists’ expectations, but marking its slowest pace in 18 months. The People’s Bank of China also lowered its one-year policy loans rate on Monday by 10 basis points to 2.85 per cent and the rate on seven-day reverse repurchase agreements to 2.1 per cent.Brent crude, the oil benchmark, was flat at $86.07 per barrel on Monday, not far from its 2021 peak of $86.70 and its 2018 high of $86.74. More

BRUSSELS (Reuters) – Euro zone finance ministers will start a discussion on Monday on how to change the often-broken EU fiscal rules so that governments actually observe them, a euro zone official said.The European Union’s Stability and Growth Pact is meant to stop governments borrowing too much in order to safeguard the value of the euro common currency. But the rules have often been disregarded, leading in part to the 2010 sovereign debt crisis, with little attempt made to enforce them by applying financial penalties.”The discussion is starting from the realisation that sanctions have not seen that much use. No use, to be precise,” the senior euro zone official said.To appease financial markets as the debt crisis peaked, euro zone countries agreed in 2011 to make financial sanctions for running excessive deficits and debt more automatic and less subject to political discretion.They also introduced the possibility of fines for governments not addressing other economic imbalances such as an excessive current account gap or surplus.But despite continued breaches of the borrowing rules by France, Italy, Spain or Portugal and Germany’s persistently large current account surpluses, the European Commission has never moved to punish any country.”After the financial crisis, there was a lot of emphasis on stronger enforcement, greatly related to the turmoil on financial markets and market pressure,” the official said.”This time we live in a very different world and the whole debate is shaping differently – it is not about how to strengthen enforcement, but how to adapt the framework so that it recognises certain lessons learned and accommodates the new political priorities that have emerged.”Those include a huge EU investment plan to “green” the economy to prevent climate change, for which some argue EU fiscal rules should provide an incentive.After the COVID-19 pandemic, some euro zone countries are also saddled with large public debt that cannot be reduced in line with current requirements without plunging their economies into recession, so a new debt reduction rule is needed.Some ideas include setting individual debt reduction paths for each euro zone country rather than a blanket rule for all.”There is recognition this time that implementation of the rules depends on national ownership. There is strong agreement on this and much of the discussion goes on how to strengthen ownership,” the senior official said. More

WASHINGTON (Reuters) – The U.S. Treasury took key steps over the past year to address longstanding economic injustices facing Americans of color, but still has “much more work” ahead to narrow the racial wealth divide, Treasury Secretary Janet Yellen said on Monday.Yellen told a meeting hosted by Rev. Al Sharpton and his National Action Network rights group that Treasury was working to right economic wrongs called out by slain civil rights leader Martin Luther King Jr in his “I Have a Dream” speech in 1963.”He knew that economic injustice was bound up in the larger injustice he fought against. From Reconstruction, to Jim Crow, to the present day, our economy has never worked fairly for Black Americans – or, really, for any American of color,” Yellen said told a breakfast in King’s honor.Jim Crow refers to laws put in place in Southern states in the decades after the 1861-65 U.S. Civil War to legalize racial segregation and disenfranchise Black citizens.Over the past year, she said, Treasury completed its first equity review, hired its most diverse leadership team ever, and named its first counselor on racial equity while building a COVID-19 rescue plan to better serve communities of color.In addition, Treasury also pumped $9 billion dollars into Community Development Financial Institutions and Minority Depository Institutions, while trying to get corporations more engaged in those institutions and underserved communities.”Of course, no one program and no one administration can make good on the hopes and aspirations that Dr. King had for our country,” Yellen said. “There is still much more work Treasury needs to do to narrow the racial wealth divide.”Federal Reserve data show white households owned 85.5% of the wealth of the United States in 2019, although they comprise 60% of the population, while Black households owned 4.2% and Latino households owned 3.1%. Those numbers are little changed from 30 years ago, according to USAFacts.org, a non-partisan non-profit organization. More