Ohen russia invaded Ukraine in February, it was not just Ukrainians who suffered. Prices of wheat, oil and other commodities that the two countries produce in large quantities have soared, inflicting severe hardship on cash-strapped countries that rely on imports. Some world leaders, however, have seen the bright side. “This crisis is a good opportunity for us,” Jair Bolsonaro, president of Brazil, said in March. Likewise, last month, Alberto Fernández, the president of Argentina, declared that his country was “a reservoir of what the world needs right now: food and energy”.

Latin American economies are indeed more resilient to war than many other emerging markets. But households across the region are seeing their budgets strained by war-induced inflation. This shock comes on top of several recent misfortunes. And in the medium term, the outlook for some Latin American economies is stormy.

Even before the war, 2022 promised to bring its share of discomfort to the emerging world. At the start of the year, output remained below pre-pandemic trends in many economies, and debt burdens were significantly higher. Supply chain problems and rising prices have strangled household consumption, while rising interest rates in rich countries have diverted capital from poor countries, increasing financial pressure on businesses and governments who were already trying to make ends meet.

Latin America seemed to be among the most troubled places. In January the IMF predicted that its growth in 2022 would be the weakest of any region in the world. Inflation jumped in Argentina and Brazil. In its most recent forecast, the IMF has revised down its projections for economic growth in rich countries this year by 0.6 percentage point, and that of emerging economies by a full percentage point.

Against this backdrop, Latin America has done quite well over the past three months or so. Wheat and oil prices have risen more than 20% since the start of the war. This is good news for Argentina, the third wheat exporter in the Americas after the United States and Canada. High oil and gas prices are also giving a boost to hydrocarbon exporters, such as Brazil and Colombia. Although the outlook has darkened for most countries, IMF has revised upwards its growth forecasts this year for Argentina, Brazil, Peru and Colombia.

Elsewhere in the emerging world, soaring food and energy prices threaten to turn a difficult macroeconomic situation into a dire one. In Sri Lanka, for example, the drain on hard currency reserves caused by rising oil import prices forced the government to default on its external debt in April. In much of Latin America, by contrast, foreign purchases of expensive commodities provided a steady inflow of hard currency, allowing individuals and businesses to buy imports on good terms. Many of the region’s currencies appreciated against the dollar, in stark contrast to most other emerging countries (see chart on next page).

This has given politicians some leeway to try to shield voters from the pain of high food and energy prices – a luxury that many other countries cannot afford. The Pakistani government, for example, is cutting fuel subsidies in a desperate attempt to avoid a fate similar to that of Sri Lanka. In Mexico, by contrast, increased revenues from oil exports helped offset some of the increased cost of domestic fuel subsidies. The governments of Colombia and Chile maintain subsidies, while in Peru the government has reduced the consumption tax on food and energy. Across Latin America, politicians have taken action representing about 0.3% of gdpon average, in an attempt to protect households from the effects of war.

All is not rosy. Even after its upward revisions, the IMF expects Latin America to grow slower this year than any other part of the emerging world except Eastern Europe. Brazil will likely struggle to grow more than 1% this year, despite high commodity prices. Expensive food and energy, while useful for exporters, fuel inflation. Consumer prices are rising at double-digit rates in Chile and Brazil, and are well above central bank targets in other major Latin American economies. Central bankers raised interest rates to prevent soaring prices translating into a wider loss of confidence in governments’ control of inflation – a significant risk in a region with a history of devastating inflation . But higher rates also weigh on investment and growth.

Conditions could deteriorate further if inflation in wealthy economies proves more persistent than expected, forcing central banks to raise rates more than markets expect. In the 1980s, when the United States made its last attempt to get a serious inflation problem under control, the consequences for Latin America were dire: a wave of debt crises and a lost economic decade. Macroeconomic policy across the Americas has since improved. But the combined pressure of several shocks today has left economies vulnerable.

The region cannot afford another crisis. Latin America suffered a larger decline gdp in 2020 than any other part of the world. The pandemic has led to sacrificed investments, missed school hours and lower productivity growth. This risks depressing economic growth in the years to come; indeed, the IMF estimates that in 2024, production across Latin America is likely to remain around 5% lower than the pre-pandemic trend. Recent hardships have fallen hardest on the poor.

In countries with extreme inequality, these unequally distributed costs could aggravate political instability. The elections in Colombia and Brazil should certainly yield winners ill-equipped to meet the challenges of the moment. And if governments remain unable to come to the aid of struggling Latin Americans – a daunting challenge given global headwinds, high commodity prices or not – then frustration in the region will only grow.

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