How far will Latin American currencies plummet?

No, I don't have the answer to the subject of this newsletter. In fact, any mental exercise on the future of foreign exchange tends to be mere futurology. But I was able to gather some facts and insights about what has built the scenario so far, which can help you understand what may happen next.

Enjoy it! (Any complaint or suggestion please let me know on fabiane.menezes@ebanx.com)

Here is the shareable link of this newsletter.

Economic tension is global, but the Brazilian currency is plummeting further

Since the beginning of 2020 until this Monday, the dollar has risen 42% against the real (BRL). The Mexican peso (MXN) and the Colombian peso (COL) lost 25.4% and 19.80% of their value against the dollar in the same period.

The economic tension generated by the new coronavirus only speeded up a movement that started in 2018, of investors searching for more secure assets amid a likely global economic slowdown fueled by the United States-China commercial dispute.

In general, it is the fiscal fragility, aggravated by the new crisis, and the political tensions that are leading to a further deterioration in expectations about Latin American economies and, consequently, to a greater fall in their currencies against the US dollar.

Another reason for the negative performance of emerging currencies, according to a Bank of America (Bofa) report, is that the coronavirus pandemic led investors to rescue their applications earlier in the emerging markets this year, which also has an effect on exchange rates. 

Instead of waiting for May, as they have done for the past 12 years, investors began repatriating their money in March and April, which put pressure on the exchange rate and caused the real and other emerging market currencies to lose even more value in that period.

The biggest concern of global investors is not exactly the level of the exchange rate (high or low), but its stability. With the exchange rate stable (even high), investors could still profit by arbitrating interest rates, that is, taking money at low-interest rates, in developed countries, converting it to the currency of emerging countries, and investing in those with the highest rates interest.

The problem is that, as a way to combat the crisis, emerging countries are implementing an aggressive monetary policy that brings interest rates down. With each new cut, another wave of investors will rescue their investments in these countries and repatriate their money to their homeland, pressuring the exchange rate and threatening the profitability of those who are still investing in emerging countries.

This cycle is one of the reasons why analysts do not see the position of emerging currencies against the dollar changing anytime soon. 

In addition, during the coronavirus crisis, many companies in emerging countries are failing to export and, therefore, are not bringing dollars into their economies, which only worsens the scenario and also makes the dollar rise.

(One more) political crisis in Brazil

In all this context, though, the Brazilian currency has plummeted more than other emerging currencies.

While Mexico’s vulnerability is due to rising idiosyncratic risks of the Andrés Manuel López Obrador (AMLO) government, such as the lack of reforms intended to attract investment and boost productivity, in Brazil, the political tensions in Brasilia combined with the environment of low-interest rates and weak growth have been a determining factor for the surge in the dollar, even after the approval of the Social Security Reform last year.

Last week, Brazil lost its second health minister amid the COVID-19 pandemic. With less than a month in office, Nelson Teich called for resignation. Teich took office on April 17th, after Luiz Henrique Mandetta left Jair Bolsonaro's government.

Teich did not give details about his resignation, but political analysts say that his main disagreement with Bolsonaro was the usage of chloroquine in the treatment of COVID-19.

Like the U.S. President Donald Trump, Bolsonaro is an enthusiast of the drug indicated to treat malaria, lupus, and other diseases. Both Mandetta and Teich, however, like many scientists, have always asked for caution when prescribing the drug, since there is still no conclusive research to prove its effectiveness against the new coronavirus.

In general, what the former ministers advocate, as well as scientists, is that chloroquine and hydroxychloroquine should be used only in the context of controlled tests. Bolsonaro, in his turn, wants the Ministry of Health to effectively recommend the use of the drug, even without scientific proof of the drug against COVID-19 so far.

According to political analysts, Teich would have said that “he would not tear his medical degree”, referring to the pressure of the Brazilian president for him to sign, on behalf of the Ministry of Health, a recommendation for the use of chloroquine in treatment against COVID-19.

In addition to the problems directly related to the new coronavirus crisis and the unorthodox way in which the Bolsonaro government has dealt with it, there is also the gravest political crisis of the Brazilian president’s administration so far, triggered by the well-known former judge Sergio Moro.

He gained notoriety behind the so-called 'Car Wash' (Lava Jato) Operation against corruption that led to the imprisonment of former president Luiz Inácio Lula da Silva, among other politicians and businessmen.

Three weeks ago, Moro left the post of Minister of Justice after an alleged attempt by Bolsonaro to hamper police investigations, which some claim implicate his sons, by sacking the chief of the federal police Mauricio Valeixo, an appointee of Moro.

“It is not a matter of whom [to appoint], but why to change [the head of police] and allow political interferences to be made within the scope of the federal police. The President said he wanted someone whom he could call to and access information. This is not the role of the federal police,” Moro said during the resignation speech.

Bolsonaro’s family is being investigated over alleged links to Rio de Janeiro’s underworld, as well as the suspected targeting of Bolsonaro’s political foes with digital “fake news”– they deny all these accusations.

Moro was one of the stars of Bolsonaro’s government due to his record fighting corruption as a federal judge. Bolsonaro originally touted him as a “super minister” in charge of implementing a law-and-order agenda. His exit is another blow to Bolsonaro’s government.

As we say in Portuguese, investors and entrepreneurs have been experiencing a 7 a 1 diário¹ with the unfolding of the political crisis in the midst of the crisis of COVID-19.

What you don't want to miss in Latin America this week is:

GDP previews indicate the size of the impact of COVID-19 in Latin America

Among the main Latin American economies, Brazil, Mexico, and Colombia registered an economic contraction in the first quarter of 2020 compared to the previous quarter, according to preliminary figures from their official statistical institutes and monetary authorities: -1.4%, -1.95% and -2.4%, respectively. Chile's economy, in its turn, has stalled, has neither grown nor shrunk in relation to the previous quarter. Besides the countries that have already disclosed their GDP previews, two other important economies in the region will do the same during this week: Peru (on Thursday), and Argentina (on Wednesday).

Marcelo Claure, from SotfBank, talks about venture capital in Latin America

It will be this Wednesday, May 20th, at BRT 6:30 pm (EDT 5:30 pm), on the third panel of Brazil at Silicon Valley (BSV), the conference designed by Brazilian students from Stanford and Berkeley universities which migrated to a digital format because of the COVID-19 pandemic this year. In this panel, which will be broadcast in English on BSV's official YouTube channel, Marcelo Claure, COO of SoftBank Group Corp. and CEO of SoftBank International will speak with Ana Paula Assis, General Director of IBM Latin America, about the future of entrepreneurship in the region.

Latin Americans on Facebook's Oversight Board will face a huge responsibility

Facebook has recently announced the first 20 names that will compose its Oversight Board and two of them hail from Latin America: Brazilian Ronaldo Lemos and Colombian Catalina-Botero Marino. Lemos, a lawyer specialized in digital law and a Professor at the Rio de Janeiro State University (UERJ) told LABS that Facebook’s invitation made him happy, “at the same time aware of the enormous responsibility” at hands.

Tech offers Latin America prospect of fairer healthcare

›› Financial Times Can the application of digital technologies to healthcare broaden access and improve the quality of medical treatment for Latin America’s tens of millions of impoverished citizens? Or will the new technologies become the preserve of a privileged few? FT tries to answer these questions by interviewing Latin American entrepreneurs.

A British music studio bets on Latin American rhythms with a U.K. feel to it

›› LABS Due to the huge size of the U.S. market, Latin American musicians received a lot of attention worldwide, and even in places where they are not properly considered mainstream, their trending styles – i.e. reggaeton and its related genres and subgenres –  are influencing a host of other local scenes. On Da Beat, a London-based music studio and talent management company with roots in UK rap noticed latent demand and its team is now working on developing acts of Latin origin in Britain.

A basic income scheme for the developing world

›› Financial Times If the emergency aid scheme structured by Brazil to help the poorest during the pandemic became permanent it would set a global example, as ‘bolsa familia’ did in the 2000s. That is the idea that the Brazillian economist and a senior fellow at the Peterson Institute for International Economics Monica de Bolle defends in an article published on Monday.

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