The Bank of Spain has released a new report on the performance of the Latam economy during the first half of this year. The document states that the current inflationary developments of several countries in the region could lead to institutional instability even as the region is still recovering from the Covid-19 pandemic.
Bank of Spain report finds Latam still vulnerable
The Bank of Spain recently released areport examining the overall economic situation in Latam after the Covid-19 pandemic. The report describes how the region’s economies fared in the first six months of the year and states that these countries are still vulnerable despite signs of recovery.
Inflation is one of the biggest problems the Banco de España has found, with rates near higher numbers than in the past 20 years; in May, inflation was 9.8% y/y. The biggest contributors to this rise in prices are necessities such as food and energy, which, combined with the decline in the exchange rate of native fiat money against the US dollar, presents a troubling panorama for the region in the short term.
Institutional instability may emerge
It explains that this may lead to a wave of institutional instability in Latam. The document reports that.
The potential for increased political and social instability (e.g., as a result of the loss of purchasing power that the most vulnerable households have suffered in recent quarters due to rising inflation) could severely hamper growth prospects in the region and impede the implementation of far-reaching economic reforms.
The past has shown that some economies in the region are dependent on political and institutional instability. Just recently, the dismissal of a key member of the Argentine government led to a negative change in the exchange rate of the country’s currency, causing citizens to take refuge in stable coins as an inflation hedge.
{But not all is bad, and the region has reportedly been quick to adapt monetary policy to contain inflation and currency devaluation. There has also been a positive evolution of bank credit as a result of the gradual improvement in the economy after the pandemic shock of Covid-19.
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