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The Devaluation of the National Currency Is Increasing the External Debt in Latin America

Currency devaluation and external debt are wreaking havoc on the economy of Latin American countries, a region that lives in constant trouble .

Screen presenting financial market data

Photo: Freepik

LatinAmerican Post | David García Pedraza

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Leer en español: La devaluación de la moneda nacional está aumentando la deuda externa en Latinoamérica

Politics and economics are usually close to each other when it comes to projects, ideas, and social aspirations. However, when talking about crisis, uncertainty, and coverage of needs to become a single discipline.

During the Covid-19 pandemic, many countries chose to increase their foreign debt and receive international loans to combat the social crisis brought about by the health crisis. However, the crisis due to the war in Ukraine and the increase in the price of the dollar mean that the debt now rises automatically, and the risk of default (non-payment of loans) seems to increase.

The Pandemic as the Beginning of a New Crisis

It seems that the comfort zone of Latin American societies is to remain in crisis, and coronavirus contributed to this constant. With the announcement by governments to close borders, stay in quarantine and increase aid to the most vulnerable population, it was to be expected that each nation would request financial aid and loans from international organizations such as the International Monetary Fund (IMF). Although this does not mean that some countries, such as Argentina and Brazil, have not been facing previous internal financial crises.

To be competitive, financially stable, and reliable for foreign investment, a nation must on several occasions request loans from organizations such as the IMF or the Inter-American Development Bank (IDB), in regional cases. These three pillars were greatly affected by the crisis caused by the pandemic, for which the Latin American countries were almost forced to request money from these organizations. Unfortunately, for trying to solve a problem, they face two more in 2022: the payment of the debt and the devaluation of the local currency thanks to the external debt that could not solve the economic problem left by Covid-19 -19, in addition to another unexpected factor: the rise of the dollar.

It may interest you: Why Is the Price of the Dollar Increasing in Latin America?

With the behavior of the US currency, the base currency for the credits that the IMF and the IDB grant, foreign debts have become a constant problem for developing nations, and even for countries that make up the OECD (the so-called group of rich countries). An example is Colombia, where the dollar reached the historical maximum of $4,627.43, registered on July 13, 2022, and that little by little begins to fall. In addition, another factor must be taken into account, which is the change of government that this country will have in two weeks, a mandate tilted to the left, which creates uncertainty in internal and external markets.

The Photograph of the External Debt of the Region

According to the World Bank, the first three countries in the region that have the highest external debt, based on the Gross National Income contrasted with the credits acquired by each nation, are Panama, Nicaragua and El Salvador, with 220%, 98 % and 78% respectively. On the other hand, the least indebted countries are Guatemala, Peru, and Brazil with 33%, 38% and 39%.

It is noteworthy that Argentina, center of the headlines since May, is in fourth place among the most indebted countries with 68%, and the general average of Latin American and Caribbean countries is 49%.

Currency Devaluation as a Crisis Within Another

One of the most striking cases is that of Colombia, where the dollar reached record highs, attributed to the change of government and political position. However, other factors such as the Federal Reserve rate hike are unknown. Likewise, the world is waiting for an economic recession due to the weakening of US manufacturing, the geopolitical crisis in Russia and Ukraine, and the effects of the post-pandemic.

Added to this behavior is that of the Argentine peso, where the dollar has also reached historical highs, with a jump of $60 Argentine pesos so far in July. This caused it to increase its external debt by 6,488 million dollars more than at the end of 2021, leaving the balance of 274,355 million dollars, according to the National Institute of Statistics and Censuses.

The case of Chile stands out, where, according to data from Bloomberg, the Chilean peso has had a decline of 10.37% in relation to the dollar, being the seventh most devalued currency of the so-called emerging currencies. Thus, Chile's external debt stands at 238,324 million dollars, according to the Central Bank, which establishes this debt as the highest in the last six years, due to the commitments acquired both in the public sector and in the private. Balances that the current president, Gabriel Boric, has had to study in detail.

Stability in Some Nations

In Peru and Brazil, despite the increase in the dollar, the currencies have been relatively calm, so the external debt of both countries has not been affected. Peru's is 102.5 billion dollars and Brazil's is 1.3 billion dollars, according to the financial portal Ceicdata and the Central Bank of each nation. In these cases, the debt has not grown because the currency has not been devalued. According to economist Sergio Godoy, head of Chile's STF Capital, this is because high oil prices have favored the stability of the Brazilian Real, and in the case of Peru's Nuevo Sol, the Central Bank of that country buys dollars when the exchange rate goes down and sells them when it goes up.

The constant change in the US currency, plus the conflicts that remain in Europe and the improvisation of the management of the post-Covid-19 economy, have the financial sector on edge, with a recession just around the corner. Several analysts have advised against getting involved in large debts on a personal level (such as buying houses and vehicles). On the other hand, at the macro level, governments should not increase their debts either, just like private companies.