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BUSINESS GUARDIAN www.guardian.co.tt MARCH 17 • 2016
Older Latin Americans still have vivid memories
of hyperinflation. One recalled changing money
in dark doorways in the mid-1980s in Bolivia
and being handed a chunk of greasy banknotes
secured by rubber bands. Peru went through
a futile currency reform in which the sol lost
three zeros and briefly was renamed the inti, which promptly
racked up more zeroes.
Hyperinflation destroys businesses, undermines political systems
and hits the poor especially hard. Latin America should have
learned this painful lesson. So when, in Caracas recently, that
same Latin American was given a large shoebox packed tightly
with banknotes in return for a few hundred dollars, he received
it with an eerie sense of déjà vu and dismay.
Official statistics put the rise in the consumer-price index in
Venezuela last year at 181 per cent , the world s highest, and the
International Monetary Fund forecasts 720 per cent this year.
Venezuela is extreme in its economic mismanagement, but, while
the rest of the world worries about deflation, across Latin America
prices are rising.
In Argentina inflation is forecast to spike from 27 per cent to
33 per cent at an annual rate, in Brazil it stands at around 10.5
per cent , in Uruguay it is only one point lower and in Colombia
it has climbed to 7.6 per cent . In Chile, Mexico and Peru it also
has ticked up.
The reasons vary somewhat. In Argentina and Venezuela
inflation is mainly the result of printing money to finance indis-
criminate subsidies. Ironically, it is rising now in Argentina partly
because the new government of President Mauricio Macri is
cutting those subsidies.
In Brazil, too, the government cut subsidies on electricity and
gasoline in 2015, but the main reason inflation is so high there,
even though the economy is in deep recession, is price indexation,
according to Edmar Bacha, an economist who helped tame chronic
inflation in the 1990s. By law the minimum wage was raised in
January by 11.6 per cent , and that in turn has a big influence
on other wages and the prices of services, as well as on pensions.
Those elements, plus past fiscal laxity, have made a mockery of
the Central Bank s unambitious inflation target of between 2.5
per cent and 6.5 per cent .
Elsewhere the rise in inflation is the result of currency depre-
ciation, which is driving up the price of imports. This is also a
factor in Argentina and Brazil. Though very large, these depreciations
are healthy: They are the way that Latin America s economies
are adjusting to sharply lower prices for their commodity exports.
However, they pose a dilemma for central banks that are com-
mitted to inflation targeting. In Brazil, Chile, Colombia and Peru,
central bankers began raising interest rates last year even as their
economies slowed or were stagnant. Argentina, too, put up its
interest rate last month.
The good news is that the rate at which currency depreciation
in Latin America is passed through into domestic price increases
is much lower than in the past, according to Alejandro Werner
of the IMF.
The fund s research shows that before 1999, when several Latin
American countries floated their previously fixed currencies and
adopted inflation targeting, large depreciations were associated
with high rates of inflation. Now the average pass-through in
these countries is below 10 per cent ---ie, if the currency depreciates
by 10 per cent, domestic prices will rise by less than one per
cent. Mexico s central bank also raised its interest rate last month,
even though inflation is below its target.
The peso has been clobbered by the fall in oil prices and by
the weakness of manufacturing in the United States, to which
Mexico s economy is closely linked. Because the peso is very
liquid and trades round the clock offshore, betting against it
seems to be "the path of least resistance" for currency traders,
said Luis Arcentales of Morgan Stanley.
The currency depreciations of the past two years are the first
big test for inflation targeting in Latin America. One can argue
whether individual central banks should have tightened monetary
policy earlier or later. The big picture is that those countries that
have been serious about inflation targeting are adapting to a
tougher external environment at much less cost than those that
have not been.
They, at least, have learned the lessons of the 1980s. Reuters
In Latin America, the
return of an old enemy
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