The strong U.S. dollar is a political and economic challenge for Latin American governments

The strong dollar plus reduced tax revenues during a likely recession accelerates Latin American budgets towards crisis.

Two weeks ago I wrote that fertilizer access and price had become a political stability issue in Latin America. Today I want to focus on another critical issue for politics and economics in the region over the final quarter of this year and into 2023: the strong US dollar.

If you focus on economics, you already know this story. The US dollar is at its strongest point in decades and nearly every currency in Latin America is suffering. It’s more expensive to import products from the US. It’s harder to pay off debt. Oil and gasoline prices, while dropping in dollars, aren’t dropping anywhere near as quickly in terms of local currencies.

The strong dollar plus reduced tax revenues during a likely recession accelerates Latin American budgets towards crisis. Governments will need to make decisions about cutting spending and raising taxes sooner than they would if the US dollar were weaker. Governments that may have had the fiscal space to make it through 2023 will now struggle with their budgets.

Backstory: Pre-pandemic, most governments failed to get their fiscal houses in order. Then, governments spent more during the pandemic to counter the impacts of the shutdown-induced recession, something that was absolutely necessary. This year, governments haven’t been able to engage in economic reforms as they’ve had to counter rising food and fuel costs. The delays are understandable given the political challenges to those reforms (protests, lots of protests), but at some point, the debt forces either major economic reforms or a default. 

Now, declining local currencies and a strong US dollar could pressure governments in the coming months, rather than give them room to delay for future years or future governments.

Incumbent administration popularity will be hit. Opposition politicians will use the moment to increase pressure. 

One place to think about this challenge is Argentina, where the presidential and legislative elections in late 2023 are going to be defined by how far the economy drops between now and the election. The strong dollar makes it harder for the Fernandez government to kick the can past the election. Argentina’s opposition, from their position in the Congress, will use the moment to force tough decisions on the current government that may have otherwise been dodged and pushed to a future administration.

While Argentina will probably be the extreme example for economic problems (when isn’t it?), a similar but less extreme story will play out in other countries. In Colombia, a new government has just taken office and made economic reform its first legislative priority, but is already having to reduce its goals. In Brazil, the likely Lula administration will have even fewer options for funding with a high dollar, reduced oil revenues and a likely recession. In Mexico, MORENA needs a strong 2023 to counter the lackluster economic performance from AMLO’s first four years in office prior to entering the next presidential election, and they aren’t going to get it.

The weak local currencies do have a few benefits for exporting companies as well as those receiving remittances in dollars. But those benefits don’t outweigh the costs, particularly in an environment of slow growth or recession.

Could the strong dollar trend reverse itself in early 2023? It’s possible. But at least for the next quarter, this is a trend that will define Latin American politics as countries prepare for the next year.