Why This Commodity Crunch Is Different

Welcome back to Foreign Policy’s Latin America Brief.

The highlights this week: Global price shocks ripple through Latin America, White House officials take a surprise visit to Venezuela, and Chile sells a pathbreaking green bond on the eve of Gabriel Boric’s inauguration.

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As the war in Ukraine and the West’s unprecedented retaliatory sanctions and boycotts on Russia rock the global economy, some observers pointed out that Latin America could be hit less severely than other emerging-market regions. World commodity prices are continuing a rise that began with coronavirus-related supply chain disruptions, and many countries in the region are major commodities exporters. They are also less reliant on Russian and Ukrainian wheat than are Africa and the Middle East.

Indeed, between Jan. 1 and March 9 of this year, a prominent index fund of stocks from Brazil, Chile, Colombia, Mexico, and Peru increased over 16 percent in value, while a similar index fund for the developed world fell. The relative optimism in Latin American markets is reminiscent of the last sustained rise in global commodity prices from around 2003 to 2013, when Latin American economies boomed and millions of people moved out of poverty.

Then, the price hike was in part driven by China’s rapid growth after it entered the World Trade Organization in 2001. As China continued to industrialize, raw materials were in high demand.

Today’s high prices, however, are due more to sudden economic shortages and disruptions than a boom elsewhere in the world that lifts Latin American boats as well. And, to add reasons for caution, this is unfolding just as the U.S. Federal Reserve has signaled it will soon begin to raise interest rates.

During the previous boom, the Fed carried out two dramatic reductions in interest rates after the dot-com bust and then the 2008 financial crisis. Now, it is expected to raise them as part of the phaseout of U.S. pandemic policies. This is a move that often makes foreign investors flee emerging economies, because they see higher returns guaranteed in the more stable U.S. market. In response, Latin American central banks are raising their interest rates, too. And while that may calm investors from abroad, it stifles new job creation at home.

Chile’s incoming finance minister, Mario Marcel—who takes office on Friday when Gabriel Boric is inaugurated as the country’s youngest-ever president—acknowledged the tensions to reporters on Monday.

Chile is the world’s No. 1 producer of copper, whose price hit an all-time high last week. But Chile can’t choose to benefit from “only one part of the raw materials price shift,” Marcel said. Chile is an oil importer, and high oil prices could drive up inflation across the economy. J.P. Morgan even warned that Chile might experience stagflation this year.

In fact, even the region’s biggest crude oil exporters, such as Brazil and Colombia, import large amounts of refined petroleum. So while these countries still technically qualify as net oil exporters, they import enough that high oil prices could push up the cost of other goods in their economies. That’s after year-on-year inflation in Brazil, Chile, Colombia, Mexico, and Peru clocked in at 8.3 percent last year, the largest jump in 15 years.

High oil prices in particular will complicate economic plans for countries like Ecuador and Argentina. Both are scheduled to remove fuel subsidies this year as part of required budget-cutting in their loan programs with the International Monetary Fund. But doing so could spark mass protests—as in Ecuador in 2019—and IMF loan programs might need to be renegotiated altogether.

In Brazil, President Jair Bolsonaro and many lawmakers have pressured state oil company Petrobras to take a financial loss in order to guarantee lower oil prices for consumers, prompting concerns about government meddling. On Thursday, Petrobras announced it is raising the prices at which it sells gas and diesel inside Brazil at a rate that did not pass along the full rise in international market prices to consumers, while Brazilian senators moved to establish a new fund to stabilize oil prices.

Taken together, the outlook is one of high prices for both fuel and food, and a new roller coaster of economic uncertainty and potential political unrest. The economic fallout of the war in Ukraine “will be very hard. It will be a strong impact in people’s pockets,” the United Nations Economic Commission for Latin America and the Caribbean’s Alicia Bárcena said Tuesday.

Despite the grim prognosis, no Latin American leaders have argued the oil price shock should hasten the energy transition to renewable alternatives, as European Union leaders have. Boric—a vocal environmental advocate—may be a noteworthy exception to this silence in his comments at his inauguration Friday.

Friday, March 11: Gabriel Boric is inaugurated president of Chile.

Wednesday, March 16: Colombia holds legislative elections to elect 102 members of the Senate and 166 members of the House of Representatives.

Sunday, April 3: Costa Rica holds a presidential runoff election.

Surprise talks. In a dramatic diplomatic U-turn, a U.S. delegation held talks directly with Venezuelan President Nicolás Maduro last weekend. National Security Council Senior Director for the Western Hemisphere Juan González became the first While House official to visit Venezuela since the late 1990s.

Washington was reportedly seeking to free up Venezuelan oil for U.S. and international markets in the wake of boycotts on Russia—and after the de facto leaders of oil giants Saudi Arabia and United Arab Emirates, who are close both to the United States and Russia, had rebuffed U.S. President Joe Biden’s requests for phone calls in recent weeks. (The White House disputes this.)

Venezuelan crude does not currently reach U.S. markets due to U.S. sanctions on the country over Maduro’s anti-democratic actions and human rights abuses. But a diplomatic detente between the countries—with some concessions from Maduro—could give Washington justification for sanctions relief.

Indeed, shortly after the surprise talks, Venezuela released two Americans it had contentiously detained. Maduro also said he would return to stalled negotiations in Mexico City with Venezuela’s opposition, which seeks guarantees about human rights and the conditions for upcoming elections in the country.

A new arrangement with Maduro could offer a much-needed breakthrough for both the United States and suffering Venezuelans, Tulane sociologist David Smilde wrote in Foreign Policy this week, but it is crucial that it include robust steps such as “benchmarks for humanitarian improvements, restoring the rule of law, and an election calendar.”

U.S.-Colombia allyship. At the White House Thursday, Biden named Colombia a major non-NATO ally of the United States, a move that facilitates trade and military exchanges between the two countries.

In accompanying remarks, Biden praised his Colombian counterpart Iván Duque’s vocal opposition to Russia’s invasion in Ukraine. He also said the two countries aimed to sign a declaration at the Summit of the Americas in June on a joint regional approach to managing migration.

New abortion penalties. Going against the trend of new permissions for abortion granted in Colombia, Argentina, and Mexico over the past 15 months, Guatemala’s Congress approved a bill this week that would mandate up to 10 years of jail time for women who get abortions, as well as explicitly ban same-sex marriage and classroom education about sexual diversity. The law would amount to the harshest punishments for abortion of almost any country in Latin America. In El Salvador, women have been given decadeslong prison sentences.

The Seattle International Foundation’s Eric Olson told the New York Times that Guatemalan President Alejandro Giammattei, who vocally advocated for the bill and is expected to sign it into law, may be trying to cater to a conservative base at a moment of low popularity. He participated in a ceremony on Wednesday declaring Guatemala the “pro-life” capital of Latin America. A prominent evangelical group based in Washington, the Family Research Council, said its representatives attended the event.

Medical marijuana. Costa Rica became the 11th Latin American country to legalize medical marijuana on March 2. The new law also legalizes the cultivation of hemp for industrial use, such as in textiles.

President Carlos Alvarado vetoed an earlier version of the bill for not containing sufficient limits on individual marijuana consumption, suggesting that future attempts to allow recreational use may be stymied, just as they were in Mexico’s Congress last year.

Even so, both candidates in Costa Rica’s presidential runoff election, centrist José María Figueres and center-right Rodrigo Chaves, say they support the legalization of recreational use.

A view of a statue in honor of “Women who fight” placed by feminist collectives at the roundabout of Paseo de la Reforma Avenue, from where an effigy of Christopher Columbus had been removed, in Mexico City, on Oct. 7, 2021.PEDRO PARDO/AFP via Getty Images

Feminist traces. Feminist protest has visually reshaped Mexico City in the last few years through graffiti, new barricades erected after major marches, and new monuments, Bloomberg reports.

They include a carved silhouette of a woman with her fist raised to the sky that activists installed atop a monument in a prominent traffic roundabout. An original version made of wood was installed last September, and activists installed a replacement made of steel ahead of International Women’s Day on March 8.

Chilean Minister of the Environment Carolina Schmidt is seen onstage ahead of the start of the United Nations climate summit in Glasgow, Scotland, on Oct. 31, 2021.Christopher Furlong/Getty Images

This week, Chile became the first country in the world to issue a sovereign bond that will pay a penalty to investors if the government fails to meet a climate target. So-called sustainability-linked bonds have been issued by a handful of companies around the world so far, but not by governments. Uruguay is planning to issue its own in the coming months.

The bond sale of $2 billion adheres to Chile’s commitments as part of the Paris climate change agreement, which stipulate that the country emit no more than 95 metric tons of carbon dioxide equivalent by 2030 and that 60 percent of electric power in the country come from renewable sources by 2032.

“Green bonds”—used to finance part of a government’s or company’s decarbonization plan—have grown in popularity in Latin America in recent years, with $9.4 billion of such bonds issued in 2020, up 33 percent from the previous year, according to the Climate Bonds Initiative (CBI). Those bonds, however, do not include financial penalties for failure to reach green goals like Chile’s.

A recurrent criticism about green bonds is that oversight and enforcement of borrowers’ sustainable activities is often lax. In Europe, a world leader in issuing green bonds, European Central Bank Executive Board member Isabel Schnabel warned they carry the risk of “greenwashing,” or being inaccurately marketed as climate-friendly.

Globally, green bond sales hit a record high of $513 billion last year, according to Bloomberg. Recent analysis by McKinsey found that $9.2 trillion per year through 2050 is needed in order to reach net-zero carbon emissions by that year.

In Latin America, most green bond funding so far has been devoted to energy projects, followed by transportation, CBI research found. The Guatemalan firm Corporación Multi Inversiones, for example, issued a bond to finance onshore wind, solar, and hydropower projects, while Chile issued a green bond for funding projects including electrified metro lines and buses.

Boric, for his part, campaigned on pledges to carry out significant investment in meeting Chile’s climate change goals and to use the financial system to help accelerate those goals through methods such as carbon and plastic taxes.