A new study on the performance of Latin American (Latam) economies during the first half of the year has been released by the Bank of Spain. Even if the region is still recovering from the Covid-19 outbreak, the study claims that the present inflationary development that several of the region’s countries have could result in institutional instability.
The area’s inflation rate in May was 9.8 per cent year on year. The primary drivers of this price increase are basic necessities like food and electricity, which when paired with a decline in the value of local fiat currencies relative to the dollar, paint an unsettling picture for the area in the near future.
With rates being close to the highest figure over the past 20 years, inflation is one of the major difficulties the Bank of Spain identified. According to the paper, Latam may see a wave of institutional instability as a result
Some economies in the area have historically proven to be defenceless on institutional and political volatility. Recent resignations of some influential government officials in Argentina caused a decline in the value of the country’s fiat currency, leading people to turn to stablecoins as an inflation hedge.
The report explained that the region’s growth prospects could be severely hampered and the implementation of significant economic reforms could be curtailed by a potential increase in political and social instability (for instance, as a result of the loss of purchasing power that the most vulnerable households have been experiencing recently due to the rise in inflation).
On the other hand, the survey discovered that the area has adapted its monetary policy quickly to stop inflation and depreciation. Additionally, as a result of the economy’s gradual recovery from the Covid-19 pandemic shock, there has been a favourable evolution of bank lending.