In spite of the commodities boom, divergence shows deep-rooted structural problems and political risk.

FREMONT CA: Economists say the stark divergence, which is unprecedented in recent years, indicates a deep malaise in Latin America's economies. The region is emerging from the pandemic with more structural damage than previously thought.

In 2020, the combined impact of the pandemic on Latin America's people and economies was greater than in any other region. Following a struggle to obtain vaccines early last year, most Latin American governments were able to purchase sufficient stocks in 2021, and the region was concluded as the world most vaccinated by the end of the year.

Despite increased commodity prices, it risks resuming to mediocre growth, facing new problems: additional debt incurred during the pandemic, quickly rising inflation, and considerably higher political risk as voters penalise incumbents and choose populist outsiders.

Latin America is being treated by the market as though it has suffered a structural shock rather than a cyclical one. Alberto Ramos, Goldman Sachs, head of Latin America economics, emphasized that in 2021 the region shifted towards political extremes. Peru and Chile elected hard-left governments, while socialist candidates are leading the polls in Brazil and Colombia for presidential elections this year.

Predominantly, the correlation between commodity prices and currency strength has broken due to political risk in a period of rallying commodity prices. The political and policy risks are quite high in Columbia, Chile, Brazil, and Peru. Chile exemplified the trend. It elected a special assembly dominated by the left last May to rewrite the constitution, which is usually regarded as one of the most investor-friendly in the area. Gabriel Boric, as president promised to raise taxes by five percent of GDP to pay a significant increase in government spending, and impose limits on the mining industry and vowed to abolish the country’s private pension. Investors have seen the region's shift approaching political extremes. According to the central bank, around $50 billion has been withdrawn from the country since political unrest started in October 2019 and last year Peru suffered the biggest capital fight.

The region's currency instability in the face of a commodity boom points to much larger issues than political danger alone. In a commodities boom, one can only get rewarded with a stronger currency if the boom serves to make one wealthy as a nation. The markets anticipate that this commodities boom will not result in wealth, thus the currencies do not deserve to rise. It was a boon for a dozen commodities firms, but it did not convert into broader economic gain.