Alphacast Highlight - Monetary Unwinding in LATAM
By Milagros Ricchini (mricchini@alphacast.io)
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During 2020 and 2021, massive amounts of liquidity were injected by the Central Banks to moderate the impact of the crisis and help finance the fiscal cushions, but with the hike in worldwide inflation, this has already started to reverse.
Colombia is the country in the region with the highest Monetary Base/GDP ratio, increasing 3 p.p. during the pandemic and currently reverted 2p.p. from that increase, while in terms of M2/GDP the increase during the pandemic reached 10 p.p. and is now 6 p.p. down from its highest point. Monetary Base and M2 have stabilized in real terms for some time, meaning that the contraction in terms of GDP is mostly explained by growth and not due to a fall in the aggregates.
Mexico increased 3 p.p. the Monetary Base/GDP ratio during the pandemic and maintained that level since, and something similar happened to the M2 ratio, which increased by 6 p.p. during the pandemic and then remained stable in that place. Mexico ranks second in terms of money base/GDP and fourth in M2s, which means it doesn't have such a developed financial market as other countries in the region.
Third in Monetary Base/GDP ranking is Peru, with an important hike of 4 p.p. in 2020 from which it reversed 2 p.p., and something similar happened with M2, with an important increase during the pandemic until half of 2021, when it began decreasing near to pre-pandemic levels. The Monetary Aggregate Change charts show an active monetary policy from Peru's Central Bank, being expansionary until 1Q-21 and then shifting to a contractionary policy, but still 20% up from January 2020.
Chile stands out as the one with the most active Central Bank. During the pandemic, the Monetary Base in terms of GDP rose 8 p.p. and by half of 2022, it already went down 6 p.p. from that peak. M2 shows a different behavior as Chile has the most developed financial market in the region (it has the highest M2/GDP ratio), which provides more stability to the economy along the different phases of the economic cycle. Thus, the change in M2 wasn't as sharp as the Monetary Base's, but it began a descending path from 2021 on due to the weakening of the financial system caused by the withdrawal of pension funds (a measure approved three times during the Covid pandemic).
On the other hand, Argentina had almost a 3 p.p. hike in the Monetary Base/GDP ratio, shifting to a downwards path in 2021, already returning to pre-pandemic levels. In terms of the M2/GDP ratio, it has the least developed financial market, and even after its increase in 2020 this indicator remains the lowest in the region. Despite the behavior of the Monetary Aggregates in terms of GDP, their change in constant prices shows Argentina's Monetary Base contracted during 2022 and is 12% down from January 2020, too late too little to control the acceleration of price increases, while M2 is still 16% up.
Uruguay didn't show an active response during the pandemic in terms of Monetary Base or M2/GDP, but in 2022 there is a slight contraction of the Monetary Base probably due to the hike in inflation in the country, region, and the world in general. Uruguay has one of the lowest ratios of Monetary Base and M2 in terms of GDP in the region and through the first fall in 2022 measured at constant prices, M2 followed an upward path throughout the last year, which may be a signal of gradual financial development.
Lastly, Brazil's Central Bank seems to have had an active response to the crisis as the Monetary Base/GDP ratio rose 2 p.p. during 2020 and since 2021 began decreasing at a more gradual rate, occupying the last place in the region in terms of this indicator. The M2/GDP ratio tells a different story, to August 2022 Brazil occupies the second place, showing a more developed financial market than most of the countries of the region, keeping a stable position after the increase during the pandemic of around 50%.
