Key indicators for moderate economic growth in Latin America in 2022

The regional framework

COVID-19 arrived in Latin America (LATAM) in the middle of the first months of 2020, in March of that year. This pandemic generated great impacts on global trade, generating a drop of up to approximately 10,5%.

During the first quarter of 2021, global trade registered a 5,3% drop, which was reflected in foreign trade activities in several countries. To date, there are new variants of COVID-19, such as omicron, deltacron, among others, that would affect foreign trade and generate great uncertainties in supply chains.

According to the Economic Commission for Latin America and the Caribbean (ECLAC) (2021), Alicia Bárcena Ibarra, Executive Secretary, indicates that the countries of the LATAM region will present an asymmetric and heterogeneous recovery, as a result of the great uncertainty caused by the crisis derived from the COVID-19 pandemic.

Moreover, the  2021 was a year of recovery and record exports of various products, services and finances for countries in the region, where central banks have responded with interest rate hikes to contain inflation.

Analysis of key indicators for moderate economic growth in LATAM

In LATAM, the average gross domestic product (GDP) of the countries in this region increased by 5,9% in 2021, according to estimates by ECLAC (2021). However, for 2022, it is estimated that the region will have moderate growth of around 3%, thanks to its main trading partners, the United States, China, the EU, among others.

With a few exceptions and socioeconomic uncertainties, Latin Americans are suffering from a loss of purchasing power due to disruptions in supply chains, which have caused the costs of goods and services to rise.

 On the other hand, during 2021 many political events occurred that had an effect on financial markets, as well as capital rounds or private investments.

Below are some key indicators to look back on 2021 and project moderate economic growth for LATAM in 2022.:

• Major funding raised by startups in the region

According to an analysis by the research firm CBInsights (2021), 2021 marked a record of investment in Latin American organizations valued as “unicorns”, that is, those that raised well over US$1,000 billion in financing.

A unicorn company is one that reaches a valuation of US$1,000 without having a presence on the stock market. These companies have a great ally in social networks, commercial strategies such as consumer centric, a global and accelerated expansion mentality, team diversity, and resistance to uncertainties as part of everyday life.

An example would be UBER in the United States, from its creation in 2009 until 2019, it was not listed on the stock market, but it was its internal and external strategies that led to it being a decacorn company. Decacorns are those successful companies that started as startups and are valued at more than US$10,000 billion.

In 2021, Brazil has been the main beneficiary for 16 unicorns, Mexico follows with 7, among others.s. Thus, a total of US$14,800 billion in financing raised for startups in LATAM is detailed, according to CBInsights.

A successful case occurred in Chile, the organization or better known as The Not Company, this company has been valued at US$SD 1,500 million, with financiers such as Jeff Bezos, tennis player Roger Federer and Lewis Hamilton, the Formula 1 driver.

• Brazil's historic increase in monetary policy rate

The Brazilian Central Bank raised the monetary policy rate more than any other country in 2021, reaching 9,25%.

The interest rate is known to be used as a reference in financial transactions ranging from mortgage loans to loans to organizations. It is also an instrument to contain inflation.

Latin America's largest economy, Brazil, closed November with annual inflation of 10,74%, the highest since 2003. Mexico and Chile, among others, then raised their interest rates, and experts expect the increases to continue until inflation moderates..

It should be noted that the highest interest rate in Latin America is Argentina after Venezuela, the country suffering from 51,2% inflation. However, the central bank of this country did not raise the rate throughout the past year.

• Fall and depreciation of the Peruvian sol against the dollar

In 2021, the election of Peruvian President Pedro Castillo, who came to power in a union with a radical leftist party, generated an intense reaction and uncertainty in world markets, leading the exchange rate of the national currency to its largest drop in 7 years.

On the other hand, the sol (Peru's currency) recovered somewhat from its fall, its annual depreciation until December 24 was 11% against the US dollar.

Likewise, due to the rise of the dollar, there are economic agents - companies, investors and the general public - that buy dollars, their demand increases and, therefore, the price rises. For example, the export sector, despite everything, is benefited by the rise of the dollar since the income will be in favor of the dollar currency; however, if it is an exporter that imports inputs from abroad for its finished products, this is affected.

PTherefore, the rise in the exchange rate benefits certain business groups that have completely dollarized trade flows, with products that do not require imported inputs. However, it affects businessmen and entrepreneurs who depend on imports for their export products as well as for national trade.

• The elimination and reconversion of the Venezuelan currency

Another important event for LATAM, although for many experts it is not something positive or new, was that in the third reconversion under the Chavista regime in the Bolivarian Republic of Venezuela, the authorities eliminated 6 zeros from the bolivar, and called it the digital bolivar.

Therefore, some economists and the Central Bank of Venezuela itself announced last week that the plains territory will reach inflation below 2022% in the first quarter of 50, which would technically indicate its exit from hyperinflation.

• The relationship between public debt and taxes in Latin America during 2021

A very worrying aspect that would not allow economic growth to advance in LATAMA is the financial capacity of nations to pay off public debt. Economics professionals use this indicator: the interaction of debt and taxes.

According to the Organisation for Economic Co-operation and Development (OECD), the figure for the area has been increasing since 2007, when it was at 223%, up to its most recent figure of 320%.

LATAM is the most indebted developing region in the world and monetary policy choices in developed territories, coupled with an impending economic slowdown in 2022, have presidents concerned about their ability to invest in their populations and in projects that drive development. Therefore, political actors who can manage public debt and taxes in their countries well are needed.

• The annual economic loss due to mental health disorders

With forced lockdowns, loss of income and paralysis in education, mental disorders among children and adolescents have become a painful topic of conversation.

 Throughout 2021, the United Nations Children's Fund, in conjunction with the London School of Economics They have conducted an analysis that measures how much the economies of Latin America and the Caribbean lose every year due to psychological health disorders in young people. The result: US$ 30,600 billion in economic losses for the nations.

 Likewise, the lack of activity in psychological health in Latin America and the Caribbean has had a high price for the peace of children and the economies of nations, even more so as a result of COVID-19.

The United Nations Children's Fund (UNICEF) is calling on governments to urgently invest in the mental health of children and adolescents and to break the silence surrounding mental illness by tackling stigma and promoting a better understanding of mental health and taking the experiences of children and young people seriously.

• The rise and power of the Bitcoin price in El Salvador

On September 7, El Salvador marked a milestone by making Bitcoin, the world's most widely valued and popular cryptocurrency, a national currency on par with the U.S. dollar.

From that date through Dec. 24, the value of the currency rose 6,8%. Salvadorans have welcomed the currency with mixed attitudes, as enthusiasts predict a surge in foreign investment since the election. Thousands also took to the streets to protest against it.

For global observers, however, the dangers outweigh the likely benefits, as the Central American territory could become a hub for laundering illicit money, one of the many theories.

Conclusions

LATAM governments should support unicorn companies, given that in 2021 they represented prosperity for both parties, the company and the interest group. In other words, these companies create jobs and generate social growth.

Furthermore, the pandemic has exacerbated deep-rooted structural problems in the region's economy and aggravated social inequalities, prompting urgent calls for governments to implement a structural economic transformation to reverse years of slow growth.

In summary, it is very important that the region can make the most of the opportunities arising from the current situation, pave the way for optimism, in particular to a new cycle of better negotiations of trade agreements between the countries of the region, as well as to the rise and support of entrepreneurship, promoting the specialization of startups and technological investment, and fostering the energy transition towards a greener and more sustainable economy.

Mayron Ponce de León Sierra is a Data Analyst at the Directorate of the Origin Unit in the Ministry of Foreign Trade and Tourism of Peru. PhD candidate in Global Business Administration at URP.

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Highlighted

• BBC (2021). Bitcoin: El Salvador becomes the first country in the world to adopt the cryptocurrency as legal tender on Tuesday. Available on https://www.bbc.com/mundo/noticias-america-latina-58441561
• Bloomberg Line (2021). 2021: The Year of Unicorns and the Boom in Startup Investment in Mexico. Available in https://www.bloomberglinea.com/2021/12/23/2021-el-ano-de-los-unicornios-y-el-boom-de-la-inversion-de-startups-en-mexico/ 
• ECLAC (2021). Trade in the region will see a significant increase in 2021, but recovery will be asymmetric and heterogeneous in a context of uncertainty. Available in https://www.cepal.org/es/comunicados/comercio-la-region-tendra-importante-alza-2021-pero-recuperacion-sera-asimetrica
• Maritime World (2021). Omicron variant threatens the nascent recovery of global trade. Available in https://www.mundomaritimo.cl/noticias/variante-omicron-amenaza-la-incipiente-recuperacion-del-comercio-mundial
• UNICEF (2021). More than US$30 billion are lost in the economies of Latin America and the Caribbean each year due to mental health disorders among young people. Available in https://www.unicef.org/nicaragua/comunicados-prensa/m%C3%A1s-de-us30-mil-millones-se-pierden-en-las-econom%C3%ADas-de-am%C3%A9rica-latina-y-el
• Blanco Estévez, A. (2021). Latin America post COVID-19: risks and opportunities of the new economic cycle. Available in http://www.realinstitutoelcano.org/wps/portal/rielcano_es/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_es/zonas_es/ari65-2021-blanco-america-latina-post-covid-19-riesgos-y-oportunidades-nuevo-ciclo-economico