The countries with the lowest inflation in Latin America (and what it says about their economies)

While Venezuela is in one of the worst hyperinflations in recent history and Argentina suffers the blow of annual inflation of 54%, the rest of Latin America has managed to prevent prices from skyrocketing out of control.

The countries with the lowest inflation in Latin America. Image: BBC Mundo
The countries with the lowest inflation in Latin America. Image: BBC Mundo

Not only has inflation remained low in the region, but some countries even border on 0%. Does this mean that the lower a country's inflation, the better its economy?

No, say the experts. The same level of inflation can be positive in one country and negative in another, making comparisons confusing. That explains why there is no ideal inflation that works as a standard measure.

"Sometimes low inflation may be telling you that the engines of growth are turning off," explains Ramón Pineda, Economic Affairs Officer at the Economic Development Division of the Economic Commission for Latin America and the Caribbean (ECLAC), in dialogue with BBC Mundo.

In that sense, if household consumption and business investment weaken, "very low inflation can be bad news because it reflects a slowdown.

In Latin America, the countries with the lowest inflation in August (compared to the same period last year) are El Salvador (-0.5%), Ecuador (0.3%) and Panama (1.1%), three economies whose official currency is the dollar.

"Since they have dollarized economies, these countries are not exposed to exchange rate volatilities and that benefits them," says Pineda. However, they must face the challenge of growth.

"The low levels of inflation in El Salvador and Ecuador show that demand remains weak.

Andrew Powell, a senior advisor to the Research Department of the Inter-American Development Bank (IDB), says that in general, if inflation is low but positive, there is no big problem.

"The serious thing is when there is persistent deflation and in that case, the countries need an adjustment," he says in dialogue with BBC Mundo.

25 years of low inflation

With a population of just 6.4 million, El Salvador faces a complex economic situation, with slow economic growth (2.5% in 2018), low tax collection and high indebtedness (70.7% of Gross Domestic Product (GDP).

One of its greatest challenges is to modernize the agricultural sector in the northern part of the country, where 75% of extreme poverty is concentrated and generate more jobs, while more than 20% of its GDP depends on remittances.

"We have had 25 years of low inflation," economist and consultant César Villalona told BBC Mundo.

"That is why it is not surprising that in August inflation was negative. Here there is no excess circulation or danger of devaluation.

The country's problems are other, he explains, such as low salaries and pensions, low growth and little investment.

"Low inflation is positive because it doesn't make things more expensive for people and entrepreneurs have low costs," he says.

But on the other hand, he adds, as entrepreneurs do not have many profits, they prefer to invest in other countries.

"If we had higher inflation, close to 3% or 4%, that would be a good sign".

Crisis, debt, and adjustment

"What Ecuador's low inflation in recent years shows is a slowdown in economic activity," explains Ramón Pineda.

According to estimates by the Central Bank of Ecuador, the country's economy will grow this year only 0.2%, while international organizations predict that it could even be negative.

"We always said that the (adjustment) measures were going to slow down the economy," said the manager of the Ecuadorian Central Bank, Verónica Artola, in statements to the Quito newspaper El Comercio.

As the country faces excessive indebtedness, the government decided to restrict public spending, reducing public institutions, eliminating fuel subsidies and releasing the price of higher octane gasoline, among other measures.

Panama grows below potential

On the contrary, Panama has been one of the fastest growing economies in Latin America, averaging 5.6% per year over the past five years. At the same time, the increase in the price level has remained below 1% in the last four years. How, then, can such low inflation be explained?

"Panama is growing below potential," Alejandro Santos, head of mission in Panama and division chief in the Western Hemisphere Department of the International Monetary Fund (IMF), told BBC Mundo.

"The country has a potential growth of 5.5%, but we have lowered the projection to 4.5% this year.

The economist explains that global trade tensions affect traffic expectations in the Panama Canal. That makes people think twice before investing, which doesn't help business.

In other countries, the exchange rate is depreciated when there is turbulence, as a mechanism for absorbing the external shock.

But since Panama is a dollarized economy, it is more exposed to these ups and downs. "When the dollar tends to depreciate, the adjustment translates into lower demand and lower inflation," he notes.

The ghost of the past: high inflation

"Historically, high inflation has been a much greater concern for Latin America. It erodes real wages, and particularly hits informal workers, who have little capacity to renegotiate their wages," Benjamin Gedan, senior advisor for the Latin American Program at the Washington-based Wilson Center for Studies, tells BBC Mundo.

Average inflation in Latin America, he explains, has been growing from 5% in December to 8.1% in the first five months of the year (excluding Venezuela).

"But the trends are not uniform, nor are their causes.

Just look at the case of Argentina, where "the very high inflation is partly the result of the dramatic depreciation of the peso and increases in the cost of public services," among other reasons.

At the other extreme, he adds, "persistent low inflation can be a sign of depressed economic activity.

Source: BBC Mundo

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