Inflation, the crude effect of a distant war that strikes Latin Americans

The oil and grain prices produced by Latin America soared due to the war in Ukraine, a situation that at first glance seems positive for the regional economy but has a counterpart: it is the return of galloping inflation, of food and fuel through the roof.

The IMF issued a warning: the Russian invasion of Ukraine causes a shockwave that triggers the cost of food and energy, with “substantial impacts in some cases”.

The shaking is widespread in a region that has an average annual inflation rate of 8%, with extremes of more than 50% in Argentina, more than 10% and rising in Brazil, and endemic hyperinflation in Venezuela.

Some Latin American nations are net importers of oil, so the sharp increase in energy products - crude oil hit its all-time high of $147.5 a barrel 10 days ago - hurts their finances.

Others, such as Colombia, which has its main export in crude oil, or Mexico, whose oil basket rose in price, will try to compensate for the increase in food with the extras of black gold.

However, no country will be safe from the inflationary scourge that came with the war.

- Uncertainty in agriculture -

Russia's share of the Latin American trade balance is small: Moscow imports 3.18% of what it consumes and exports 1.48% to this part of the world, according to the World Bank (WB). But both Russia and Ukraine are major exporters of grain and oil, the two products that have risen the most because of fears of war shortages and sanctions on Russian trade.

The analyst of the Brazilian firm SAFRAS & Mercado Luis Fernando Gutierrez Roque illustrates the two sides of the coin.

“The conflict tends to reduce corn and wheat exports from both countries (Russia and Ukraine), which favors other major producers and exporters, such as Brazil,” he says.

But Russia is Brazil's main supplier of fertilizers, which depends on this input to ensure its production.

“We have no guarantee on the issue of maritime freight transport”, which was seriously disturbed by the war, “nor in that of the supply of fertilizers,” Cesario Ramalho, president of the Brazilian Association of Maize Producers (Abramilho), told AFP

The concern is shared in Argentina, the world's largest soy producer, as well as in other traditional agricultural countries in the region such as Uruguay and Paraguay, and even in Ecuador, which exports 21% of its banana production to Russia.

A report by the Rosario Stock Exchange highlighted “the” Russian “influence on world fertilizer prices”, as it is the main supplier, with some 35 million tons per year.

- Energy strikes even -

The significant increase in crude oil has hit almost all countries, including some producers who have to import derivatives.

“The increase in the price of our primary exports can be a positive factor, although the lower growth of the world economy will conspire against the rest of our foreign sales, and we will have to face a rising bill for energy imports,” exemplified economist Victor Beker, from the University of Belgrano from Argentina.

Brazil, Gutierrez Roque explains, will suffer like others “the main effect” of the war, which is “inflation derived from the rise in oil, raw materials and productive inputs for agriculture.”

In fact, 10 days ago, state-owned Petrobras announced gasoline and diesel increases of 18.8% and 24.9% respectively, “as a result of the war between Russia and Ukraine”. In Paraguay, the increase in fuel prices was even greater: 70% since the conflict began.

In Mexico, the government expects to use oil surpluses to subsidize fuels and contain inflation from 7.07% to 12 months in January.

Indeed, the Mexican crude oil blend jumped to almost $120 per barrel compared to the $55 forecast in the 2022 budget.

“However, Mexico is also a major importer of gasoline, which exceeds the volume of crude oil exports, so the net effect on the country's finances would end up being negative,” warned Benito Berber, chief economist for Latin America at NATIXIS.

“The cost to the Mexican consumer will be that of higher inflation” through gasoline, food and also “financial volatility that already impacts the value of the peso,” he added.

Colombia, the fourth regional economy, is “one of the few countries that have any positive impact of this conflict,” notes Luis Fernando Mejía, director of the Fedesarrollo study center, referring to oil prices, which accounts for 40% of Colombian exports.

bur-mr/llu