What’s good for copper is good for the Chilean peso. The fortunes of the currency of the world’s largest copper exporter are closely linked to the prices of its main exports.

Last year, that pattern broke. World copper prices are up 25% in 2021, but the Chilean peso is down nearly 17% against the dollar – one of the worst performers of all major emerging market currencies.

Chile’s experience is not unusual. Currencies of all major Latin American economies have weakened sharply despite strong gains in global commodity prices last year.

The Colombian peso depreciated 16% against the dollar and the Peruvian sol fell by more than 9%. The Brazilian real depreciated for the fifth year in a row, down nearly 7%.

Economists say the striking disparity — unprecedented in recent years — suggests Latin America’s economies are mired in a serious disease.

“This is very bad news,” said Ernesto Revella, Citi’s chief Latin America economist. “This shows that the region is emerging from the pandemic with more structural damage than we thought.”

In 2020, the combined impact of the pandemic on people and economies in Latin America is greater than in any other region. After struggling to procure vaccines early last year, most Latin American governments managed to buy enough stocks in 2021, with the region ending the year as the world’s No. 1 most vaccinated.

However, while the worst health effects of the pandemic are fading, the economic damage looks much more lasting. Before the pandemic, Latin America was already the slowest-growing region in the emerging world, averaging just 0.9 percent year-on-year GDP growth from 2014 to 2019, according to Goldman Sachs.

Now, despite rising commodity prices, it threatens to return to mediocre growth, this time with new problems: taking on additional debt during the pandemic, rapidly rising inflation, and growing inflation as voters punish incumbents and Turning to populist outsiders and greater political risk.

“The market sees Latin America as having suffered a structural shock rather than a cyclical one,” Revella said.

Alberto Ramos, head of Latin America economics at Goldman Sachs, stressed that the region will go to political extremes in 2021. Peru and Chile were elected as far-left governments, and socialist candidates led the polls in this year’s presidential elections in Brazil and Colombia.

“During times of rising commodity prices, correlation [between commodity prices and currency strength] Much of the breakdown is due to political risk,” he said. “In Colombia, Chile, Peru and Brazil, political and policy risk is quite high. “

Chile epitomizes this trend. It elected a leftist-dominated special assembly last May to rewrite the constitution, widely regarded as one of the most investor-friendly in the region.After seven months, voters chose Gabriel Porick, a far-left millennial former student activist, serving as president.

Porick has vowed to scrap the country’s private pension system, raise taxes to 5% of gross domestic product to fund a sharp increase in public spending and impose restrictions on the mining industry.

Investors have noticed that the region is heading for political extremes. According to the central bank, about $50 billion has been withdrawn from the country since the political unrest erupted in October 2019. Peru suffered its biggest capital flight last year since records began in 1970, with about $15 billion flowing out of the country.

The exception to the Latin American currency weakness rule is Mexico, whose left-wing populist president pursues nationalist and interventionist policies but also pursues free trade and fiscal discipline with the United States. Reflecting this, the Mexican peso fell just 4.5% against the dollar last year, by far the best performer among major Latin American currencies.

Citigroup’s Revira pointed to President Andrés Manuel López Obrador’s austerity policies, the country’s relatively low levels of government debt and its potential The likelihood of maintaining its investment-grade rating, “Mexico is the best home in a bad neighborhood,” said. “Mexico’s problem isn’t a short-term macro problem, it’s a long-term problem of very slow growth, which is due to [López Obrador’s] economic policy. “

Those advantages keep investors interested in Mexico, at least in the short term. But elsewhere in Latin America, the economic and currency outlook remains bleak.

In Brazil, the region’s largest economy, President Jair Bolsonaro has largely abandoned efforts to push for major structural reforms or mass privatizations and is ramping up spending to try to boost dire polls Ratings and paving the way for re-election.

The pessimism of Brazil’s Wall Street Faria Lima is palpable. The economic policies of Luiz Inácio “Lula” da Silva, the current poll leader in October’s presidential election, also weighed on sentiment.

Lula’s former finance minister, Guido Mantega, in a recent article at the request of his former boss, argued that the new Lula government should launch an “ambitious” investment plan, championing State-led industrial policy and aims to create a “social welfare state” – none of which perform well with the market.

“A lot of the bad news has been reflected in the [currencies] Brazil, Colombia and Chile”.

But he argues that weakness in the region’s currencies in the face of the commodities boom indicates a bigger challenge than political risk. “If prosperity helps make you richer as a country, you will only get stronger monetary returns in the commodity boom,” he said.

“The market foresaw this commodity boom and it didn’t bring the boom, so the currency shouldn’t go up. It was a boom for a dozen people [commodities] companies, but it has not translated into broader economic prosperity. “