Brazil will struggle to take advantage of commodities boom, says World Bank vice president

Brazil and Latin America are likely to have difficulties in taking advantage of the rise in the price of commodities, such as food and fuel, generated by the War in Ukraine, says Carlos Felipe Jaramillo, vice president of the World Bank for Latin America and the Caribbean.

“In normal times, this could be a positive thing, especially for big food and oil producers. But most crops have already been harvested or are already pre-sold. Most farmers close sales months in advance. So, the rise in prices generated by the war in the last month will not be taken advantage of.”

Another problem pointed out by Jamarillo is the drought in the Southern Cone, which could be the strongest in 90 years. “With that, the ability to produce more grains and take advantage of high prices is also at risk,” he warns.

For him, another issue is that the rise in prices complicates the resumption of the post-pandemic economy.

“Families, who were barely recovering from the severe crisis of the last two years, unexpectedly have to deal with rising food and energy prices.”

in conversation with the SheetJamarillo also commented that electoral uncertainty undermines Brazil’s prospects in 2022. For this year, the World Bank forecasts that the country will grow 0.7%, while Latin America and the Caribbean should advance 2.3%.

What are the prospects for Brazil and Latin America? The uncertainty about the elections and the worsening of the external environment are the two major factors that impact our prospects for Brazil and the region in 2022.

We had to lower our growth forecast for Latin America in 2022 from 2.7% to 2.3% as a result of the aftermath of the Ukrainian War, which affects the region in different ways.

Brazil had very good growth in 2021, at 4.6%. But for this year, we estimate a growth of 0.7%. And this is largely because the external environment has turned out to be more negative than we anticipated, especially with changes in commodity prices and the expectation of a continued rise in interest rates around the world. And also because of the election in Brazil, which introduces a lot of uncertainty among investors.

Could candidates from Brazil do something to calm market uncertainties? To some extent, it helps if candidates publicize their programs in advance, such as showing how they will manage the economy. I’m not so optimistic about the presidential elections. No one can eliminate uncertainties, especially in the present age. In recent years, many elections have become more contested and there is more polarization in Latin America. We will have to live with high levels of uncertainty until election day.

Can Brazil and the countries in the region take advantage of the rise in commodity prices? I’m less optimistic about it. In normal times, this could be a mostly positive thing, especially for big food and oil producers. But I am concerned because I have been in conversations with ministers from countries like Brazil, Argentina, Paraguay and Uruguay, and most of the crops have already been harvested or are already pre-sold. Most farmers close sales months in advance. So, the high prices generated by the war in the last month will not be taken advantage of by them and will end up being captured much further down the production chains.

Another important thing is that we have a major drought in the Southern Cone, which could be the worst in 90 years. As a result, the ability to produce more grain and take advantage of rising prices is also at risk. This has a strong connection with climate change, which is beginning to have a major impact on agriculture in the region.

The same thing goes for oil: we don’t have many big producers in the region, especially since Venezuela’s production has dropped a lot in recent years. Maybe Ecuador has some benefit, but they also sell oil months in advance and at locked prices. Colombia and Mexico also export some oil, and could profit if prices remain high throughout the year.

Despite the advantages to a few countries, the general impact of the rise in oil prices is very negative for the region. First, most countries in Latin America and the Caribbean are importers of oil, which is used for many different things. And rising prices affect families. There is a very negative impact on national economies and on households, which were barely recovering from the severe crisis of the last two years and unexpectedly have to deal with rising food and energy prices. So I think the result will be very negative for most of Latin America.

At the meetings of the IMF and the World Bank, there were many comments about the fragmentation of the global economy into blocks and the effort of rich countries to seek closer suppliers (near-shoring). Can this move benefit Latin America? It is still very difficult to say how the future will evolve. On the one hand, there is the trend towards more near-shoring, which can be potentially positive for several countries, as our region is close to major markets such as the US and Canada.

We’ve seen some private investors make some moves towards Mexico, and they’re considering other countries. The closer to the US, the better, which brings opportunities to Central American countries, Colombia and the Dominican Republic.

However, it is difficult to predict at this point whether this will be a big thing. And I’m worried about the negative impact this has on global trade. Globalization and the massive increase in trade over the last 20 or 30 years have been extremely good for development and poverty reduction in many Latin American countries. So I’m concerned that this could lead to a lot of restrictions on trade, which could impact growth. I hope we can keep trade flowing so that Latin America continues to benefit.

What can governments do to alleviate the problems of high inflation and unemployment? This year 2022 has proven to be a difficult year on these fronts for all the governments I have spoken to. Many of them are trying to manage the price hikes by reducing some taxes on food and fuel, giving subsidies and supporting poor families, which I think is a good thing. Brazil was one of those countries that had a strong and very good response to avoid a lot of human suffering that would have occurred if the governments had not been there, particularly with transfer programs like Bolsa Família, which the World Bank has always supported. On the other hand, many countries spent a lot of money, and this led to an increase in demand to the point of raising some prices.

On unemployment, it worries me that the biggest losers are still the most vulnerable. In particular, women who had to go home to take care of children, and poor people who belong to traditionally discriminated groups, such as Afro-descendants and indigenous people. Their unemployment rates are much higher and they are not going down. Governments still need to have specific programs to help these groups.

What are the projections for Argentina and Venezuela this year? We don’t really know what happens in Venezuela. We closed our office there ten years ago. We see from afar, with great concern, that the economy has plummeted dramatically and poverty levels have worsened.

Regarding Argentina, I see it as good news that the country has reached an agreement with the IMF, because this has been the number one source of uncertainty for the economy, in the eyes of investors. This removes the uncertainty for a while and we are going to see more investment and good growth for some time. But not everything is resolved in Argentina. They still have a lot of debt and very high inflation, around 50% [ao ano].

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Carlos Felipe Jaramillo, 59

Vice President of the World Bank for the Latin America and Caribbean region, responsible for the bank’s operations in 31 countries. He has been director of the institution for the African region and a public servant in Colombia (with positions in the Ministry of Finance, Central Bank and Ministry of Commerce). Born in Colombia, he holds a master’s and doctorate in development economics from Stanford University (USA).