For the better part of 30 years, Argentina has been making economic headlines for the wrong reasons. Its persistent and serious economic and social crisis led the country to default on its international sovereign debt in 2001, 2014 and, most recently, 2020.

The ongoing credit and currency crisis has left Argentina with the equivalent of only about 5% of GDP currently available in credit lines and mortgages; more functional economies tend to have the equivalent of at least 100% of GDP available.

Yet, opportunities within traditional sectors are opening up this year following a slew of initial shock-therapy measures implemented by the country’s controversial President, Javier Milei.

Even a minor improvement in economic conditions could generate a flurry of opportunity, says Matias Bellani, managing director in Argentina for global logistics and frieght company Craft.

“Argentina is an emerging market in the most hardcore sense,” he adds. “There are obvious risks associated with doing business. In the past years, we had to renegotiate payments and income with foreign partners since there was no certainty surrounding our ability to send and receive money.”

Yet, even in the most difficult years, Craft’s business importing and exporting commodities, chemicals and raw industrial materials for the automobile industry continued to function. “As foreign trade stabilizes, I can only see this growing at a very fast pace,” he says.

Latin America offers a wealth of contradictions: One of the regions least prone to all-out war of the type currently playing out in the Middle East and Europe, yet plagued by wobbly infrastructure, corruption, criminality, structural poverty and declining social standards.

Thus, it is no surprise that Latin American countries were some of the worst affected Covid-19. Like elsewhere, travel and aviation were among the sectors hardest hit; unlike elsewhere,  both have made a strong comeback.

PhocusWright, a specialized travel market research company, found that Latin America surpassed its pre-pandemic travel revenue by 29% at the end of 2023, reaching $62.1 billion. “Growth in the region will remain strong, and we forecast that by the end of 2024, the total market revenue should be $71.7 billion,” says Carolina Sass de Haro, PhocusWright’s senior analyst for the Latin American market and a managing partner of MAPIE, a Brazilian consultancy specializing in the tourism sector.

Oxford Economics forecasts slightly weaker economic growth in Latin America in 2024, but still predicts the region will outperform most advanced economies—with travel and tourism key drivers of economic growth.

Bolstering that growth will be strong US demand, the source of 48% of the Latin American inbound travel market, Oxford Economics predicts; American visitors spent an average 17% more in 2023 than they did in 2019. Intraregional travel will account for 34% of market share in 2024, the firm says; in many of the region’s countries, the domestic market is stronger than the foreign.

This is particularly the case in aviation. Latin America’s load factor is currently 84.7%: the highest in the world, according to the International Air Transport Association (IATA).

According to Peter Cerda, IATA’s vice president for the Americas, last year was a success for airlines in Latin America. “Traffic rose 28.6%, capacity climbed 25%” and the airlines “did a really good job not only recuperating the lost capacity and connectivity but increasing it and bringing new connectivity between cities that didn’t exist in the past.”

Two Western Hemisphere subregions have fully recovered from the pandemic as defined by international tourist arrivals, according to the UN World Tourism Organization: Central America is 5% above 2019 levels, and the Caribbean is 1% over. South America still trails at -6%, although that number is markedly better than the worldwide average of -12%.

“In the Americas, including North America, the overall contribution of tourism to regional GDP is 0.5%,” says Sandra Carvão, UNWTO’s chief of Tourism Market Intelligence and Competitiveness. “It sounds small, but you have countries that do not depend on tourism like the US or Brazil. The US has a big weight, and tourism makes up a smaller percentage of total GDP there. This is very different compared, for example, the Bahamas, where tourism is 15% of the local GDP; Jamaica, where it’s 10%; or Mexico, where it’s 7%.”

Mexico, Central America and the Caribbean benefit from their proximity to the US and the strength of the US dollar. According to Oxford Economics, travelers originating in the US comprise 82% of arrivals in Mexico, 49% in the Caribbean, and 33% in Central America based on 2023 trend numbers.

“Mexico plays a big part in total Latin American numbers,” says PhocusWright’s de Haro. “It was able to position itself very differently during the pandemic and it remained open while most countries closed their borders. This led to a very rapid recovery of tourism, propelled by the outbound US market.”

That in turn bolstered Mexico’s position as the top tourism market in Latin America, representing 51% of the regional total, de Haro adds. Mexico’s tourism revenue came to $8.9 billion in 2019, dropping by half in 2020 but already recovering to pre-pandemic levels in 2021. “As of mid-2023, we forecast Mexican tourism sales to reach $15 billion, inching toward double the pre-pandemic levels.”

Other major success stories, albeit smaller in absolute numbers, include El Salvador (up 36% from 2019 levels), Guatemala (+26%), and Honduras (+23%).

South America is seeing healthy but generally less dramatic numbers. Colombia should welcome 29% more international arrivals in 2024 than in 2019, according to IATA; the country has already seen an increase of 18% in international flight capacity compared to the pre-Covid-19 period, despite the fact that two of its airlines have ceased operations. Countering the trend, Peru can expect international arrivals to shrink by 28% from 2019 levels, largely due to civil unrest there and issues surrounding tourist access to Machu Picchu.

And Argentina’s current sharp recession skews the numbers. IATA forecasts 10% more international arrivals this year than in 2019, but with inflation out of control at 211.4% and the Argentine peso crumbling—it was devalued by 54% in December—the tourism sector is actually shrinking in US dollar terms.

“We run the numbers multiple times a year for Argentina because of the inflation and exchange rate fluctuations, and it’s simply disheartening,” says de Haro. “Argentina’s tourism sector was worth $1 billion in 2016. Despite gains in both absolute numbers and in pesos-value through the years, the sector was worth only $317 million by 2019. It fell drastically to $37 million in 2020. Tourism grew by 72% between 2021 and 2022, and it sustained growth in 2023, but we now forecast it’ll end 2024 generating only $121 million.”

Brazil may be Latin America’s most complex story. According to the International Monetary Fund, the economy grew 3.1% in 2023 to become the world’s ninth largest. But lingering infrastructue deficiencies, an undervalued currency, persistent fiscal imbalances, high corporate taxation, and labor and regulatory burdens point to a meager 0.4% growth in 2024, the IMF forecasts.

The country’s tourism and aviation sectors are heavily propped up by the domestic market, which by most estimates represented anywhere from 75% to 90% of the $9.9 billion total in 2023. But Brazil’s domestic air travel capacity is now 15% greater than in 2019, according to IATA, and despite the country’s undervalued currency, PhocusWright predicts travel-sector revenue will grow by 17% in US dollar terms, to $11.6 billion in 2024.

“The outlook is very promising,” says Ana Carolina de Souza, head of the Brazilian Association of Travel Agents, a 2,500-business-strong trade group. “Despite the infrastructural gaps, the entire tourism sector structure has improved, further professionalized, and streamlined to better cater to travelers. We obviously hope to attract even more international tourists, but the biggest growth driver is still the domestic one.”

Another optimistic voice is that of Daniel Topper, CEO of (OTA) Zarpo, a package-oriented Brazilian online travel agency that focuses heavily on the domestic market.

“The quality and resilience of the Brazilian market are strong,” he says. “This means we cater to several niches, but mostly domestically.” Zarpo grew by a double-digit percentage in 2023 to a  revenue of BRL150 million ($31 million), Topper reports.

Serra Verde Express, Brazil’s largest tourist-train operator, runs the famous Curitiba-Morretes line through a mountainous section of rare Atlantic rainforest. The company enjoyed 17% revenue growth over pre-pandemic levels in 2023 and expects further growth of 12% this year. The numbers are telling because rail travel demand is vastly underserved in Brazil. And while the line is known internationally among fans of train journeys, domestic tourists were responsible for 97% of passenger sales in 2023.

The upshot is that despite Brazil’s tourism potential, the country receives an average of only six million foreign visitors per year; by comparison, the Dominican Republic saw 10 million international arrivals in 2023. Brazil’s problems, including lack of adequate infrastructure across the travel industry and poor air connectivity, are common throughout the region.

“Airlines are poorly impacted across Latin America due to undervalued local currencies against costs fixed in US dollars, poor infrastructure, extremely heavy taxation, and overregulation,” says IATA’s Cerda. “However, there are also many opportunities, with ample room for policy flexibilization, public-private partnerships, competitiveness, passenger experience, and—crucially—improved connectivity among both first- and second-tier city pairs.”

The introduction of narrow-body, long-range twin jets like the Airbus 321XLR should open the door to new routes into the region that previously did not make economic sense, Cerda notes. “Despite the challenges, I am very optimistic about the regional prospects in 2024,” he concludes.

The UN, through its Economic Commission for Latin America and the Caribbean (ECLAC), released new data regarding foreign direct investment (FDI) in July. Latin America attracted a record-breaking US$224.58 billion in 2022. For the first time since 2013, the region attracted more than US$200 billion in FDI.

But more recent data from individual central banks shows that the inflow of capitals might be slowing down, making the  outlook uncertain.

Argentina has an upcoming election—and some of the candidates are not helping allay market concerns. Mexico and Colombia remain largely dependent on the US. And Brazil, still remains an open question mark for worldwide investors, as it reasserts its more traditional protaganist with Luiz Inácio Lula da Silva at the helm.

“There are positive developments in the region, despite the fact Latin America as a whole remains an outlier,” says. Paloma Lopes, an economist and investment advisor at Valor Investimentos, one of the top offices for Brazilian investment management powerhouse XP Inc.

Despite the record numbers, Latin America only captured 8% of last year’s total global foreign investment, putting it behind every other region in the globe. Just two countries managed to snag nearly two-thirds of the capital coming to the area: Brazil attracted 41% of that total (approximately US$92.1 billion) followed by Mexico, pulling 18% (approximately US$40.4 billion) of the regional share.

“Rightfully or not, Latin America suffers from lower levels of investor confidence based on its 20th-century history,” she adds.

According to Marcos Piellusch, finance professor at the Administration Institute Foundation arm of the University of São Paulo (FIA-USP), because Latin America relies heavily on exports to China, where the economy is slowing down, there is an increased perception of the risk associated with regional investment.

“In no way does this mean Latin exports to China will halt—the Chinese have ample appetite and need for commodity exports from Latin America,” Piellusch explains. “But we don’t know exactly how slower Chinese growth may negatively affect commerce on both sides.”

China is only one concern. In Europe, inflationary pressures persist, and interest rates are going up, slowing growth even further than previously forecast, and Germany now offically in a recession.

“The monetary policy in the US, on the other hand, makes it currently very attractive to investors both as a risk-aversion measure, as well as an opportunity for increased base-level earnings. That is the reason why it’s somewhat natural for capital to be flowing out of emerging markets in spite of a favorable outlook for Latin America,” Piellusch says.

And notwithstanding possible slow-downs, China is keeping its options open and forging ahead on its continued courtship of Latin America with heavy direct investment and wooing countries throughout the area with enticing preferential trade-deals. Sources at the Ministry of Foreign Affairs of Uruguay stated with no uncertain words in September that the country may forge ahead on a unilateral trade-deal with China even if this means exiting South America’s Mercosur trade bloc. According to a study by the Council on Foreign Relations (CFR), a New York-based think tank, China is already Latin America’s largest trading partner and has invested over US$73 billion in the region’s raw materials sector alone since the beginning of this century.

The country is also the largest partner and mastermind in the emerging-economies BRICS political grouping—along Brazil and India—and has pushed the group to announce an ambitious expansion at the end of August, which includes some odd-ducklings like Iran and Ethiopia, but also Argentina (at the behest of Brazil) and heavyweight Saudi Arabia.

Argentina, one of the largest markets in the region, remains a major point of concern and an unknown in the greater Latin equation. “The economic crisis in Argentina is at staggering levels, with hyperinflation and an extremely high base interest-rate making life even more difficult for its impoverished population,” Lopes says.

According to her, “Argentina has entered a seemingly eternal loop where the economy keeps hurting its politics, but its politics keep harming the national economy.”

Adding to the uncertainties in the southernmost country in the western hemisphere are looming presidential elections on October 22nd, which are almost certain to require a second-round of voting.

Leading the polls is the extreme-right economist Javier Milei, who advocates “an anarchic form of capitalism in a fully dollarized economy” as the way to salvage the country.

Among other things, he also favors dropping the Mercosu (of which Argentina is a founding member along with Brazil, Paraguay, and Uruguay) precisely at a moment when the Southern Bloc is edging towards a free-trade agreement with the European Union (EU). Milei also says he does not plan to accept Brazil’s President Lula’s negotiated invitation for Argentina to join the BRICS.

If elected, Milei plans to pivot Argentina away from the Global South, focusing its economic efforts on “agreements and partnerships with the US and Israel.”

“It doesn’t bode well if he wins and follows through with his plans,” Piellusch argues. “The Argentinian economy, despite its state, is still very important for Latin America. Whatever happens there has repercussions throughout the region. Even though the population has lost significant purchasing power over the years, we are still talking about a market of 40 million potential consumers,” he adds.

For Tomaz Paoliello, professor and coordinator of the Pontifical Catholic University of São Paulo’s (PUC-SP) global governance and international policy formulation master’s program, Argentina has great potential to “make or break Latin America,” swaying regional trends either way.

“Argentina still is a highly developed and educated country and this creates significant opportunity. If the country remains a functioning partner of Mercosur and helps the bloc reach a trade deal with the EU, this can lead to a positive impact both throughout South America and in Europe. However, Argentina also currently carries an aura of “damaged goods,” which is unfavorable for the whole of South America. Brazil is making a real effort to include Argentina in international forums and to improve their neighbor’s image in investors’ eyes, because of the deep historical, economic, and political integration between the two nations.

“A recovered Argentina can significantly boost Latin America’s economy. However, if that doesn’t materialize, remaining at its current state may not be the absolute worst prospect for the country or the region, considering all the noise on the campaign trail regarding the option of a drastic break with established norms,” says Paoliello.

Structural factors continue to hamper local development.

Criminality and corruption continue to heavily plague almost every country in the region with important exceptions in Uruguay and Chile. In Ecuador, presidential candidate (and the runner-up in polls) Fernando Villavivencio was assassinated at a campaign event in early August—just 10 days before the first-round of voting.

“Criminality and corruption exact a heavy toll across the region,” Paoliello explains. “Investors need to factor bribery, heavy security, and a high rate of cargo theft into the cost of doing business in Latin America,” he says.

Chronic infrastructural problems affecting freight routes, roads, ports, waterways and railways are also common themes in large swathes of the hemisphere.

“Those issues could, however, easily turn into major opportunities for growth and investment, if there’s also a little bit of political will,” argues Paloma Lopes.

According to the economist, major infrastructure developments necessarily require large direct investment. “If the region is open to international partnerships this could translate into very large sums of FDI,” she explains.

Yet, for all the conditionals impeding a more assertive Latin American take-off, analysts agree the region presents great—and safer—opportunities when compared to other emerging areas.

“Latin America continues to be extremely safe when compared to other developing markets. Political stability, democracy, personal freedoms, and human development indicators are much more deeply rooted here than in Africa, the Middle East, and parts of Asia,” says Paoliello.

“From a financial standpoint, Latin America continues to be extremely attractive for FDI. You have large consumer markets, who are relatively well-educated, along with a sizable middle-class that is finally starting to receive government incentives after the Covid-19 hiatus, which concentrated government expenditure on the lower-income classes. There’s appetite for internal consumption and a young, dynamic, workforce available in the region. That is not something you find everywhere,” Lopes adds.

When Luiz Inácio Lula da Silva (or Lula) won the Brazilian presidency in November 2022 by a slim 1.8% margin, Latin America’s leftward swing seemed complete. For the second time this century the region experienced a so-called “pink tide.”

However, most polls indicate that the current shift is more of an anti-incumbent movement than it is a lasting ideological realignment. Put simply, conservative governments failed to deliver sufficient growth and were punished accordingly by voters.

The window of opportunity for a more concerted regional articulation built around common political goals may be narrow, but it is also one of the faster paths to better economic results.

Regional Integration

Take the Mercosur trading bloc comprised of Argentina, Brazil, Paraguay, and Uruguay (Venezuela is currently suspended, the remaining eight South American countries are associated members, while Mexico and New Zealand are observer members): it aims to establish full free trade and movement across the region and encompasses a territory of over 19.9 million sq. km (an area 15% larger than Russia and more than double that of the US). Though still an imperfect customs union and relegated to marginal status during the tenure of Lula’s predecessor Jair Bolsonaro, Mercosur delivered a combined GDP of over $5 trillion in 2022, making the bloc the world’s fifth largest economy.

Other regional economic integration mechanisms include the creation of the Community of Latin American and Caribbean States (Celac) in 2010, the Union of South America (Unasur) in 2008, and the Latin American Integration Association (Aladi) in 1980.

Aladi’s 1982 Agreement on Reciprocal Payments and Credits (CCR) mechanism among Latin America’s central banks is arguably one of the region’s greatest success stories. The CCR allowed Latin countries to trade with each other while minimizing the need for international reserve currencies such as the US dollar. Members register their trade credits and subtract owed amounts over a period of time. Thus, hard currency is only necessary for liquidating the smaller sums of the regional trade balance. Brazil—the economic powerhouse behind the CCR— rescinded its participation in the agreement in 2019 under Bolsonaro.

“Withdrawing unilaterally from the CCR was especially damaging for Brazil,” explains Unasur’s former director of economic affairs Pedro Silva Barros, because it was the principal beneficiary of the arrangement. “Brazil is by far the region’s largest and most diversified economy and a net exporter to other Latin American countries. The CCR enabled countries with fewer resources or with difficulties in securing hard currencies—such as Argentina and Venezuela—to maintain higher import flows from Brazil.”

Pink Alliances, Green Tints

Since taking office in January, President Lula has indicated his desire to rekindle a modern version of the CCR and imbue Mercosur with renewed impetus. He is not alone in that enterprise. Fernandez’s Argentina is especially interested in a payment system based on a supranational currency.

“This is very different from the euro,” warns Brazil’s Applied Economics Research Institute (Ipea) coordinator and former UN Economic Commission for Latin America and the Caribbean (Eclac) director Renato Baumann. “What is being discussed is a common currency—possibly a virtual one—that wouldn’t supplant national currencies, but instead be used for intra-bloc trade to avoid external hard currencies,” he explains.

The pink tide this time around also has a decidedly greenish tint as leftist governments throughout the region prioritize fighting climate change and environmental degradation. Lula’s Brazil is hosting a summit of Amazon nations later in 2023 and hopes to host the UN’s Climate Change Conference in 2025, a sharp reversal from Bolsonaro’s refusal to protect the Amazon and its indigenous peoples. The latter derailed free trade agreement (FTA) negotiations between Mercosur and the EU in 2020, meaning talks can now resume.

Seeing Red And Yellow in Uruguay

Spurned by Bolsonaro and with Mercosur morose, Uruguay’s President Luis Lacalle Pou turned away from Latin America and towards China. Uruguay has formally started negotiating an FTA with the Asian giant—which could have serious implications for Mercosur—and China has overtaken Brazil as the top importer and exporter to the small South American nation.

According to Baumann, these developments are not entirely unexpected. “Uruguay has formally renounced its industrial efforts and is content with its place as a commodity and services exporter, so China’s cheap imports do not pose a threat to its industry,” he says.

“The move by Uruguay has a lot to do with Bolsonaro’s lack of interest in Mercosur, and his personal dislike for the current Argentine president. If the two largest members of the bloc are not talking, there’s very little hope for the smaller ones,” Baumann says.

China’s inroads into Latin America are part of a broader pattern of increasingly intense Chinese-US strategic competition explains Dr. Cui Shoujun, a professor and director of Latin American studies at the Renmin University of China in Beijing.

“As a global power and global south country, China needs Latin America to deal with numerous international issues. Latin America is a partner in promoting world governance and the rise of the global south. Economically, Latin America is rich with natural resources, which China needs for its manufacturing industry. Signing an FTA with Uruguay may catalyze ongoing talks with others,” he says.

According to Ipea’s Baumann, China’s courtship of Uruguay is part of its global strategy of becoming an alternative to the West and making the Chinese currency—the yuan—more global.

But Chinese ambitions in the region do not stop at Mercosur. An Ecuador-China FTA has been negotiated this past January with China set to finance six hydroelectric projects across South America to the tune of some $3 billion. Ecuador, on the other hand, is supplying cheap oil to PetroChina in a debt repayment program.

“Even though there is nothing precluding Uruguay from signing an independent trade pact with China per Mercosur agreements, it would almost certainly mean the country would have to leave the bloc. Tariff-free goods from China could otherwise enter Uruguay and, from there, freely cross into the other member countries. This would signify a complete demise of both Brazilian and Argentine industries,” Baumann says.

Lula is trying to counter China’s moves by prioritizing the FTA with the EU and reviving Latin American integration. According to Silva Barros, Brazil’s isolation came at a cost: lower intra-regional commerce. “South American commerce is low, but extremely important for Brazil—it used to comprise 19% of all Brazilian exports in 2011, but is now at 13%,” he says.

“This decrease has not been compensated by export gains to other parts of the world, principally because Brazil’s exports to Latin America comprise more specialized goods with higher intrinsic added value than the country’s exports to other regions,” Silva Barros adds.

Brazil’s average value per exported metric ton (AVET) to South America is $1,600—compare that to Brazil’s $260 AVET to China, and it becomes clear how important regional trade is for Latin America’s largest country.

“South America is also an extremely preferential market for Brazil. While the region imports only 1.6% of the global output, it currently absorbs 13% of Brazil’s exports—and 35% of that volume is made up of goods of either medium-high or high technological added value,” Silva Barros notes.

So, how does Brazil solve the Sino-Uruguayan conundrum? According to Baumann, the best way forward is for Lula’s government to deepen relations with both Argentina and Uruguay.

“Oil and liquid gas pipelines connecting the three countries would be significant incentives for the other Mercosur members to focus on local strategy instead of Asian trade. Brazil can further sweeten the deal by providing access incentives to the burgeoning Uruguayan services sector. But the initiative must come from Brazil, which represents around 75% of the bloc’s GDP,” he says.

Silva Barros adds a cautionary warning should Mercosur fragment: “Lack of integration means South America becomes open to external actors and another stage in the disputes of bigger world powers. There is no such thing as a power vacuum, once a player is out another one takes its place. This can be seen in Venezuela: the influence of Argentina, Brazil, Mexico, and the US dwindled only to be swiftly replaced by that of Turkey, Russia, and Iran. Integration goes beyond trade issues and could very well mean the stability and maintenance of peace for all of South America.”

Markets have reacted with surprising good cheer to the election in Brazil that put left-leaning Luiz Inácio Lula da Silva in charge.

The São Paulo stock exchange (Bovespa) had its best first trading day after a presidential election in Brazil’s modern history—the Ibovespa index rose by 1.31% on Monday, and by an added 0.77% on Tuesday. For comparison, the index fell by 4.4% when Lula was first elected in 2002, and by 2.24% when Jair Bolsonaro was elected in 2018.

The Brazilian real (BRL) also saw its sharpest value increase against the US dollar on a first post-election trading day, rising 2.6% on Monday and another 0.92% on Tuesday. The currency had been absorbing the brunt of market worries concerning Bolsonaro’s erratic and unpredictable policies—even with market-darling neoliberal Paulo Guedes by his side as Minister of Economy—and a storm of problems, including poverty, joblessness, inequality and declining purchasing power had further taken a toll, leaving the currency undervalued.

Normally markets don’t cheer for leftist leaders, but there are several factors fueling market optimism in Brazil and making it follow a separate path from international markets this week. First, any left-wing urge for social spending will be tempered by the composition of the new Congress, which will include a significant portion of Bolsonaro supporters in both houses.

Lula comes to power on the wings of a coalition of 10 parties that came together to defeat an increasingly authoritarian Bolsonaro, and many of these parties are slightly right of center. So is Lula’s pick for vice-president, former Sao Paulo-state governor Geraldo Alckmin, who in the 2006 presidential elections was defeated by Lula himself in the run-off. Alckmin is slated to have a much more prominent role in Lula’s term than most vice-presidents, and he has already been appointed head of the transition team.

Second, Lula will abolish the so-called “secret budget”—a parallel budget that was one of the more bizarre features of the Bolsonaro administration to gain support in Congress. The budget was dubbed secret by the local press because money slated for health or educational spending needed not have the amount, objective, or names of those who approved it made public, rendering the oversight of billions of reais of federal spending virtually impossible. Beyond the risks of blowing the budget ceiling, there is mounting suspicion that at least part of these funds were funneled into the political campaigns of presidential allies.

Finally, despite Brazil’s record agribusiness exports, Bolsonaro’s disregard for ESG had relegated the country—a former champion of environmental agreements—to the sidelines of the sustainability debate. The position triggered fears in the commodity sector of possible organized retaliation against Brazilian agricultural products. Lula has a much stronger diplomatic reach than his predecessor and has pledged to put Brazil back in the forefront of environmental protections.

There are several challenges ahead for Lula. Most pressing is the federal budget to fund spending into 2024, which needs to be approved by the current Congress. None of the priorities signaled by Lula during his campaign (and almost none of the social programs Bolsonaro had pledged to carry over from the pandemic emergency) are contemplated in the version currently being discussed by Congress. Lula will have less than two months to articulate changes that will allow him to govern once he assumes office on January 1—and this will have to be done despite a hostile outgoing president.

The expected world downturn and recession in 2023 will also affect Lula’s ability to enact reforms while mitigating recession and inflation. If Lula fails to produce popular reforms and create social stimulus for the lower classes, or if the country’s economy contracts, his government will lose support too early in his term, hampering his ability to effectively govern.

Brazilians voted Sunday in the most polarizing elections the country has seen since it transitioned back to democracy in 1988. Former two-term leftist president Luiz Inácio Lula da Silva, known as Lula, won the run-off elections by a thin margin (50.9%) against the conservative right-wing incumbent Jair Bolsonaro (49.1%). This is the first time a sitting president was not reelected for a second term in office in modern Brazilian history.

But while Bolsonaro may be going, he is not going quietly. His supporters put up roadblocks across the country, and business associations have warned that industrial supplies are already being impacted.

Despite Brazil’s enormous size (larger than the continental US, all of Europe, or Australia) and population (215 million inhabitants), the country tallied the results of almost 124 million votes cast Sunday within approximately three hours of polling stations closing. Its electronic balloting system, which can be independently audited and verified, has won praise the world over since it was introduced, in Brazil’s 1998 elections.

It was nevertheless the target of continuous accusations of fraud vulnerabilities by Bolsonaro in the months before the vote. Internal and international reviews of the system yielded fresh testimony to the security and integrity of the electronic machines, the claims inflamed social divisions. Many wondered whether Bolsonaro would accept a loss or instead emulate the actions of his former ally, Donald Trump.

For two days after Brazil’s Supreme Electoral Court (TSE, in its local acronym) had declared Lula the president-elect, Bolsonaro kept silent, perhaps in the hopes support would emerge. Instead, he was blindsided by some of his staunchest allies who were quick to concede defeat and signal they would not spread political narratives that could undermine the democratic process. Both the presidents of the Senate and Chamber of Deputies (the Brazilian equivalent of the US House of Representatives) congratulated Lula within minutes of the results being announced.

Foreign governments that wished to mitigate the risk of further turmoil in a world already shook by the pandemic and the Russian war on Ukraine, sent a cascade of congratulatory messages and recognition of Lula’s victory through Sunday night and into the week. The White House put out a statement by President Joseph Biden congratulating Lula and praising the transparency of the polls less than 40 minutes after the TSE officialized the results.

Finally, in a two-minute scripted speech that did not mention his rival, Bolsonaro signaled he would not contest the results. Still, Bolsonaro’s silence had been read by some supporters as a green light to protest the election results. Shortly after midnight on Monday, truck drivers started blocking highways across the country. The Federal Highway Patrol, an agency whose director, Silvinei Vasques, is a Bolsonaro ally, received no instructions to respond to these actions. Vasques had already come under fire for stopping vehicles for “traffic inspections” in the heavily pro-Lula northeastern states—inspections that delayed thousands of voters in getting to the polls.

By the time Bolsonaro made his speech, more than 65 partial or complete roadblocks were in place in 22 of Brazil’s 26 states, as well as the Federal District, which encompasses the capital, Brasília. According to economist Denis Medina, a professor at the College of Commerce of São Paulo, the blockades put critical fuel and food supplies at risk, particularly if they persist. The Supreme Court has empowered state police forces to dismantle the blockades.  

The threat to the constitutionally mandated transition of power seems to have been resolved for now. After President Bolsonaro’s short speech Nov. 1, his chief of staff said the team had been allowed to initiate transition arrangements with Lula’s team.

No one knows Brazil’s volatility—in economics, in politics, in society—better than Brazilians themselves. Locals often explain these ups and downs with the popular adage “Brazil is not for amateurs.”

Just three weeks before a pivotal general election, this wry cliché is being cited so often by economists and political commentators that it increasingly sounds like a motto to explain away the seemingly impossible choices facing the nation.

The coming presidential vote has two extremely polarizing candidates pitted against one another–and many Brazilians wish neither were the frontrunners for the country’s top job. The incumbent president, Jair Bolsonaro, a right-wing populist whose tenure has been marked by pro-gun, misogynistic and homophobic rants, along with support for scientifically debunked methods of containing the Covid-19 crisis, is trying to secure a second term in office.

Bolsonaro’s main adversary is the former liberal left-wing two-term populist president Luiz Inácio “Lula” da Silva. (The Brazilian Constitution limits presidential candidates to two consecutive presidential terms but doesn’t preclude candidates from future nonconsecutive runs after serving their initial two terms.) Lula is credited with reducing enormous income inequalities deeply expanding the country’s fiscal deficit. And while Brazil’s economy did well during his two terms in office—thanks to the early-2000s sustained commodity boom—his tenure was marred by deeply divisive rhetoric against the middle and upper classes, who were financing his reforms, as well as continuous corruption scandals that saw Lula land in jail and be barred from public office. He later had the entire ruling against him expunged by the Supreme Federal Court, on the basis of legal misconduct and political persecution by the chief prosecutor and his team.

Although other candidates are running, the latest polls suggest there is no stopping Bolsonaro and Lula from being the de facto two candidates left standing if no one garners the 50%-plus-one vote needed to avoid a runoff.

Optimistic Signs

Brazil’s gloom has been somewhat lifted over the past few weeks by improved economic data pouring in—though most economists treat it with extreme caution and predict a much more challenging 2023 in a globally difficult environment, irrespective of who wins the election.

Whereas earlier in 2022, Brazil was expected to grow a meager 0.8%, the country’s GDP growth has been revised up by its central bank and the International Monetary Fund to 2.5% this year. Inflation, meanwhile, is being revised down. The leading national consumer inflation index (IPCA) decreased steadily during July and August, from June’s peak of 9.25% to August’s 7.02%. The Central Bank of Brazil, in its weekly Focus market report of September 9, estimated that 2022 would end with an annual inflation rate of 6.4%.

“Such lower inflation rates do not come without consequences,” warns Nicola Tingas, chief economist of the Financial Credit Association (Acrefi). “The primary source of lower inflation forecasts comes from the government’s aggressive tax cuts on gas prices—not only at the federal level, but also by capping state taxes on fuels.”

Nonetheless, the strategy presents three problems, Tingas says. It widens the fiscal deficit, which has always been a problem in Brazil; it forces individual states into higher debt by depriving them of part of the tax they collect; and it creates uncertainty about next year, when tax cuts on fuel are due to end.

Although gas prices have been continually falling at the pump and currently stand at a national average of 4.99 Brazilian reais a liter (about $3.67/gallon), consumers have had but little respite in the price of food, which rose an average of 9.83% in 2022, or clothing, which rose 11.02%. Brazilians have seen the price of kitchen staples similarly skyrocket. At the end of July, year-on-year price increases grew by 75% for onions, 74% for strawberries, and 66% for both milk and potatoes.

This has had another adverse effect on the country’s fiscal outlook, as the government expanded its handouts and social incentive programs to various constituencies.

“This would be common in an electoral year, but the scope of welfare and the fact that the two main candidates keep promising to maintain and even expand these programs in 2023 are worrisome,” says Tingas. “We are already predicting BRL300 to BRL400 billion (about $57 billion to $76 billion) in fiscal deficits for the coming year.”

Another tool being used by the government to try to tame inflation is the continuous rise of the central bank’s interest rate, known as the Selic rate, currently standing at 13.75%. According to Patrícia Krause, chief Latin America economist at French global credit insurer Coface, the current interest rate is high, but tolerable. “A high interest rate can cap economic growth, but it is also an important tool in a volatile market with high inflationary trends and uncertainties,” she says.

Overall, this year’s trend is cautiously optimistic, as Coface upwardly revised Brazil’s credit rating to B from a previous C, even though the firm remains concerned about the country’s fiscal situation, mainly due to a worsening indebtedness of families and an increase in the government’s assistance programs.

According to Krause, Coface doesn’t see additional room for an interest hike this year and expects 2023 to end with the central bank’s Selic rate at 12%. “This isn’t to say there aren’t troubles on the horizon. We expect delinquency rates to increase in Brazil next year, even with a lower inflation rate of 5.3%. And we are currently forecasting only 0.2% GDP growth for 2023 amid more global uncertainty.”

Caution On The Path Ahead

Although the consensus points to marginal GDP growth in 2023, not all economists agree that this is a certain path.

“Many variables are changing right now across the globe and in the country that inform our perspectives. But the transition between 2.5% approximate growth in 2022 to a drop of more than 0.5% without clear perspectives for 2023 seems a bit arbitrary, despite the various economic models used to make such forecasts,” says Roberto Macedo, who currently coordinates the faculty of economics at FAC-SP and is a professor at the University of São Paulo.

“We have seen a lot of stimuli toward increased consumption during the pandemic, and that is already having some effect; the level of savings has recently decreased from its all-time high in 2020,” he says. “We have also seen a post-pandemic recovery in the services industry, but that hasn’t translated into a recovery—both in qualitative and quantitative terms—of employment.”

“We tend to talk a lot about the pandemic recession, but the fact is that Brazil has not faced a crisis. It has been in a constant depression since 2014. Even with the better-than-forecast growth this year, our GDP will still be lower than it was back then. It would take a growth rate of approximately 2% next year to put us back where we were eight years ago.

Brazil is far from the impressive growth it experienced in the 1960s, which sometimes surpassed double-digit rates. Sluggish economic output and over 20 years of hyperinflation in the 1970s led to increased poverty.

“Lula’s distributive economic policies closed some of that gap in the early 2000s at the expense of increased taxation,” says Macedo. “That was possible back then because of the sustained economic boon in commodities. Despite the recent uptick in commodity demand, all signs currently point to a very different scenario: China’s decreased growth and trade balance should mean less demand for much of Brazil’s exports.”

If he is right, 2023 could prove difficult for Brazil’s recovery as it starts a new political cycle. The national currency, the real, is undervalued by all standards, even after accounting for the strongest US dollar in over 20 years.

“The currency has absorbed the market risk associated with the widening fiscal deficit and the institutional political crisis that has plagued the country for almost eight years,” says Acrefi’s Tingas.

The devalued currency partially offset some of the pandemic woes by making Brazilian exports cheaper internationally. However, it helped increase inflation due to the higher price of imports. Worse yet, it takes away some of the incentives for modernizing Brazilian industry and infrastructure while exports grow despite a lack of competitiveness.

There’s a real danger of Brazil falling into the downward spiral that led Argentina to the terrible economic grounds where it currently stands, warns Macedo. Perpetual populist measures create unsurmountable fiscal deficits. That—along with a lack of government investment, high-interest, and a devalued currency—would not bode well for any economy.

“Argentina was one of the greatest economies of the early 20th century,” he says. “It is a cautionary tale of how ill-advised and populist measures can break a country—even a great one. What we see in the dynamics of Argentina and Brazil is that while the former constantly pursues a past that doesn’t come back, the latter keeps chasing a future that won’t materialize.”

Brazil, for the moment, seems to have found some breathing space, even amid global chaos. But unless a tight fiscal policy that doesn’t leave much room for political favors is pursued—irrespective of who wins October’s election—the country risks sliding back into stagnation and remaining far away from the promised future it wants.

Brazil may be going through a turbulent political and economic period, but the country continues to be a center for innovation in Latin America. The South American powerhouse has seen revolutions in financial services, communications, agribusiness and aviation in the last few years. Nonetheless, how the nation’s government, corporates and financial institutions operate regarding environmental, social and governance (ESG) concerns remains a sticking point.

In a nation where the current administration has become identified with poor environmental practices in the eyes of domestic and foreign stakeholders, good ESG management has become an urgent matter for businesses eager to dissociate themselves from the images of deforestation and degraded biomes. In the case of Brazil’s potent agribusiness sector, transparency, innovation and high adherence to ESG best practices are the only way to stay ahead of foreign competition that politicizes the country’s environmental status. Moreover, the industry’s adoption of ESG practices is imperative if it wants unhindered access to the international market for Brazilian produce.

According to an unnamed investment fund manager who counts Brazilian agricultural producers among the fund’s credit-lending clients, Brazil has done a terrible PR job institutionally. “This definitely affects Brazilian producers and processors in their access to the international investment markets,” says the manager. “We do not yet see off-takers reducing their appetite for Brazilian commodities, but robust and transparent official information channels are much needed at this point.”

Of course, the fastest way for the country to improve its global image would be through strong government action. “Honestly, we do not foresee that happening in the near future; so it is up to market players and businesses to provide investors with data in a constant and trustable manner,” the fund manager adds.

But in many ways, corporates and agribusiness have already understood this message, according to the authors of a KPMG study titled The Time Has Come. The authors found that 85% of the 100 largest Brazilian companies already publish continuously updated ESG reports—making Brazil second in Latin America only to Mexico (which has a 100% publishing rate) for providing such timely data.

In fact, Latin America is the global leader in sustainability reporting by businesses that could threaten biodiversity, with an overall average of 31% of national top 100 companies reporting. Asia Pacific (23%) comes second, followed by Europe (22%) and the Middle East and Africa (19%), while North America (13%) trails last.

The study considers the largest 100 Brazilian companies and compares them to the largest 100 companies in other countries, according to Nelmara Arbex, KPMG’s lead partner in ESG Advisory in Brazil.

“Globally, big companies are the ones that publish the most sustainability reports,” she explains. “This shows that the biggest Brazilian companies—many of which are subsidiaries of multinationals—are aligned with the global movement on transparency. This is good. However, these companies do not represent the great majority of Brazilian companies, which mostly do not publish such reports.”

On the other hand, Arbex adds, many of those companies of all scales not publishing reports already have some sort of ESG management in place. “They do not have this information organized or coordinated with their business strategy … and they miss an opportunity to gain important reputational [value], which would enable them to enter new markets, gain access to certain types of loans, and attract talent and consumers.”

By all measures, ESG is a good investment strategy: It benefits communities and businesses while creating deeper synergies between them and their markets.

However, ESG’s benefits involve enormous investment in education, human resources, infrastructure and technology. The Brazilian Development Bank estimates that the nation will need domestic and foreign direct investment of at least $1.3 trillion by 2030 to modernize current infrastructure to be more sustainable. It is a high figure even by international standards. Global ESG investment is likely to reach up to $50 trillion by 2025, according to Bloomberg Intelligence, meaning Brazil would need to attract more than 2% of that alone.

“[Brazil] has one of the strictest environmental laws in the world. Combined with food security issues in other parts of the planet, there is no doubt we will see more investors coming [into the country]—but of course with many more ESG filters embedded into their offers,” says the investment fund manager.

ESG-linked requirements by investors are a strong national and global trend, according to KPMG’s Arbex. “For the past 15 years, investment managers have been changing their risk-assessment matrixes and increasingly inserting ESG aspects to evaluate the businesses in which they invest. In Brazil, the central bank and other regulatory bodies have published clear directives regarding such evaluation for financial institutions and investors.”

The most significant innovations in Brazil relate to alliances between private businesses, citizens and specialist organizations vying for a common goal, such as the protection of the Amazonian ecosystem, the safeguarding of public and tuition-free education, or the defense of a public health system, she adds. “At [the UN] COP26, we saw these alliances becoming very active to keep Brazil on track towards decarbonization domestically and as part of the international carbon market. These alliances are important forms of articulation and long-term projects in Brazil.”

Payment and Banking Innovations

Much attention is devoted to the private and third-sector approach to ESG and the clusters of high-tech agribusiness forming close to the country’s greenbelt, and churning out new technologies that increase agricultural productivity without expanding the size of agricultural land. However, it is impossible to speak of innovation in Brazil without looking at its financial sector.

Brazil is forging ahead nimbly in innovative banking and payment methods. The country already has a robust electronic payment system and secure financial institutions with some of the world’s largest proportional revenues.

Pix—a free, state-owned electronic instant payment system that lets people who do not hold credit or debit cards use their phones to pay for almost anything—debuted in 2020 and is already a successful market disruptor. The system has reached over 112 million users and has the fastest adoption rate among payment systems globally, reports Folha de S. Paulo, Brazil’s largest daily newspaper.

All financial institutions with more than 500,000 active customer accounts in Brazil are obliged to provide their clients access to the payments system free of charge.

The platform permits users to receive electronic bills for prescheduled payments and withdraw cash from ATMs, while enabling merchants to credit customers electronically for cash transactions. Additional functions are planned and await deployment.

The widespread use of payment machines and apps spawned by Pix has spurred further innovation. The fintech CloudWalk, which offers the InfinitePay payment terminal, recently announced its intention to start rewarding customers with cashback in cryptocurrency in return for using the company’s payment app. The company expects to hand out up to 1 million Brazilian reais (about $178,000) in cryptocurrency rewards monthly.

Fueling these fintech innovations is Brazil’s Open Banking initiative that allows customers to selectively share portions of their financial, personal and credit records with various credit bureaus and with lending and financial institutions. The client controls how much and what information is shared and can switch accounts within the same financial institution without all the red tape this usually entails.

The portable banking scheme, whose latest phase was rolled out in October, promises that cheap and nonbureaucratic credit facilities will be more amply available. For financial institutions, it means more business and better insights into the creditworthiness of individuals and companies.

Once Brazil’s financial industry completes the fourth and final phase, which should start in December, clients will be able to simultaneously send requests for credit facilities and loans to various financial institutions and receive an almost immediate response of all approved offers, with tools to compare interest rates and repayment terms. Brazilian authorities hope that Open Banking increases the competition among institutions while lowering fees for consumers and businesses—all in a faster, more secure, transparent and less bureaucratic manner.

On September 7, Brazil marked its 199th Independence Day, but Brazilians, who did not fight for independence from Portuguese colonizers, seldom celebrate it.

Yet this year, nonchalance became muted anxiety: A planned countrywide strike by truck drivers supporting President Jair Bolsonaro loomed large, with the potential to cause disruptions to food and fuel supplies at a time when the country is seeing skyrocketing price increases in both. The strike had one loud and clear demand: Fuel prices need to go down. Just days earlier, Petrobras, the country’s state-owned mega oil producer and international player, announced its fifth price hike for fuels this year.

Even though Petrobras is controlled by the federal government and produces enough oil to supply all of Brazil’s demand and still export a surplus, it follows a dollarized price scheme for the domestic market, making oil produced and sold within Brazil extremely vulnerable to currency shocks. According to the Extended National Consumer Price Index (IPCA), an inflation-measuring index of consumer prices compiled by national statistics institute IBGE, gasoline prices have increased by 31.09% from January to August alone.

According to the government, inflation in 2021 stood at 5.7% at the end of August, but for ordinary Brazilians the actual situation feels harsher. Over the past 12 months, most food items became much more expensive. The price comparison between the first half of 2021 and that of 2020 saw the big price hikes for consumer staples such as rice (46.21%), beans (48%), corn (77%) and soybeans (79%). Despite record agricultural production, the items that saw sharpest domestic price increases are, for the most part, also those for which Brazil is a top producer: With the currency at a historic low, and an international market avid to buy Brazil’s produce in hard currency, domestic supplies have gotten short shrift.

Inflationary pressures are rising around the world. However, the situation in Brazil seems to be especially intense due to a confluence of events, including a brisk, market-led devaluation of over 24% of the national currency, the Brazilian real (BRL). Further more, Brazil entered the early days of the pandemic with historically low interest rates and then lowered them to 2% per annum to counter deflationary trends early in the pandemic. When the currency devalued, the low interest rates helped fuel inflation.  

However, even amid this chaos, Brazil’s economic woes have been softened by their enormous commodity output. Brazil is the world’s fourth-largest producer of crops and is expected to reach the top position within the next decade. It is the number one producer and exporter of soybeans. The nation’s stellar agricultural and mineral commodity portfolio makes it the world’s largest exporter of beef, chicken, coffee, sugar and corn.

“The sector was responsible for BRL380 billion ($73.8 billion) in 2019 and for BRL516 billion in 2020. That’s an increase of almost 36% year on year in local currency,” says Eduardo Daher, executive director of ABAG, the Brazilian Association of Agribusiness. “The forecast for 2021 is a total of BRL750 billion. That’ll correspond to 26.6% of the national GDP in 2021.”

José Ronaldo Souza Jr., director of macroeconomic studies and policies at the Institute for Applied Economic Research (IPEA), a government think tank, explains that commodity prices are intrinsically connected with Brazilian economic cycles. “Unlike in the past, where Brazil’s growth was capped by foreign debt, that variable no longer exists. Previously, you used commodity exports to alleviate the country’s foreign account deficits. This allowed Brazil to grow,” he says. “The fact that such caps no longer exist means growth comes from the cycles within the commodities sector itself. For now, the cycle seems to be favorable and to be stimulating the economy.”

The last long commodity cycle—in the early 2000s, just as former president Lula da Silva came into power—propelled Brazil to the position of sixth-largest world economy, ahead of the UK. The current cycle may not be as long or as strong. “So far, we don’t have the elements to forecast an extremely long commodity cycle such as we had in the early 2000s, but this is difficult to predict,” explains Souza. But it might suffice to jump-start and sustain an economic recovery through the turbulence of the 2022 presidential elections.

“The economy will have to find its growth trajectory and the agribusiness sector will continue to be strategic [for Brazil],” says Kátia Abreu, senator for the northern Brazilian state of Tocantins and a former minister of agriculture during President Dilma Rousseff’s term. She adds that agribusiness “will supply 100% of domestic demand while still being a relevant food supplier to various countries post Covid-19, making Brazil a contributing force in guaranteeing global food security.”

Another effect of the growing importance of agricultural commodities in the Brazilian economy is the creation of high-quality jobs in operating complex machines used both in planning and in the fields. The country has seen technopoles—high-tech manufacturing clusters—spring up around its green belt, with innovative ag-tech startups making Brazil an international leader in the field.

Patricia Bueno, CEO of innovation governance consultancy EasyHub, agribusiness innovation counselor for the Commercial Association of the state of São Paulo and a former specialist in innovation and R&D in various multinational agribusiness companies, explains the trend: “Twenty percent of permanent jobs in Brazil are in the agribusiness sector. In 2020, it was the leading sector creating new jobs. The new technologies mean rural workers are increasingly being trained for more complex functions.”

The heated commodity demand also extends to mining commodities, such as iron ore, where Brazil is an export leader. Despite tumbling prices for the ore in recent weeks, the sector is expected to be a positive component in the country’s recovery path.

“Mineral commodities should play a decisive role in the recovery of the Brazilian economy. We increased our export value by 91% in the first half of 2021 when compared to the first semester of 2020: $27.6 billion against $14.4 billion,” says Flávio Penido, the presiding director at the Brazilian Institute for Mining (Ibram), a private commercial association of 120 businesses responsible for 85% of Brazil’s mining output.

It’s undeniable that the new international commodity cycle is a boon for Brazil. However, the country has many structural and political problems to solve. Brazil has one of the world’s highest income inequality distributions on the planet, capping its internal market. It also needs to better diversify its economy, to be less exposed to external cycles it cannot control and less dependent on its exports to China. Finally, environmental sustainability issues need to be tackled seriously, along with an urgent infrastructure revamping and taxation, political and fiscal reforms. Only then will the country be able to attract more international direct investment, clean up its international image and reduce economic bottlenecks.

Brazil has very recently seen the advantages that having such vast agricultural lands and mineral riches can bring, and the country can improve productivity by investing in tech without destroying its precious biomes. It has also seen that even if commodities can propel the country into the top economies of the world, it can only sustain continued economic growth in the long term with reforms.

This cautionary tale has been told as recently as 2015, when the fiscal situation in Brazil generated the worst economic crisis in the country’s history.

Commodities can keep Brazil afloat as the world learns to deal with Covid-19. Some reforms—notably in the labor market—have been made, but much remains to be done. The question is how much appetite for concessions and changes the political and upper classes will have, just three months ahead of an election year that promises to be even more polarizing than the last one.

When the Bahamas got hit by hurricane Dorian in 2019, a string of islands named Abaco, on the north of the country-archipelago, got especially battered before the storm moved on to strike the better-known island of Grand Bahama to the east. Hundreds lost power and communications for days and almost 13,000 families lost their homes. Total damage was assessed at about US$3.4 billion, or more than 25% of the country’s annual pre-pandemic GDP of US$13.579 billion per International Monetary Fund (IMF) figures.

People were desperate for help, yet government aid trickled out slowly, and people couldn’t get cash or rely on the physical or electronic banking infrastructure. This led to several looting events, especially in the Abaco chain, as well as a major flow of displaced people to the capital city of Nassau, which was largely spared.

The trauma caused by Dorian is often touted by officials from the Central Bank of the Bahamas as one of the biggest advantages to the country’s pioneer launch of the world’s first officially issued and central bank-backed digital currency (a CBDC)–the Sand Dollar. Beyond serving as a means of digitally storing money directly at central banks and using it anywhere, digital currencies and wallets need not rely on Internet connections for payment transfers, which can be authenticated on-device via token technology, making it very convenient as a payment and storage method even when banks are not accessible—as in the days and weeks after Dorian in Abaco and the Grand Bahama.

The Sand dollar is for all intents and purposes Bahamian dollars by a different name only. The program launched in October 2020 but is only now starting to be implemented in earnest, with several commercial banking systems and payment providers connecting to mobile Sand Dollar wallets, and a renewed push to enroll individuals on the various platforms.

Because it is an extension of the country’s fiat currency, the Sand dollar carries the same guarantees as the regular Bahamian dollar, which is pegged at a one-to-one ratio to the US dollar. “A CBDC is as trustworthy as the regular currency issued by the specific central bank backing it,” says Henri Arslanian, Global Crypto Leader and Partner at PwC. “What is special about CBDC is that it is central bank money. CBDC is de facto equivalent to a bank note, but in digital format. For the first time in our generation, we are seeing the emergence of a new form of central bank money,” he explains.

While the launch of the first CBDC is headline-grabbing, the move doesn’t come without some controversy. A high-ranking Western diplomat based on the islands and following the implementation of the Sand Dollar, who was not authorized to speak to the press, tells of local bankers wary of the lax enforcement of ID requirements to open digital Sand Dollar wallets. “There is a growing perception that because ID enforcement is lax, the digital currency could, with time, become a possible tax evasion mechanism for individuals who open wallets under forged IDs. Another preoccupation is related to how acquisition of Sand Dollars may become a path to Bahamian fiscal domicile, and, again, a path to home-country tax evasion,” says the diplomat.

Tomer Ravid, crypto entrepreneur and CEO at BloxTax, a cryptocurrency tax and anti-money laundering (AML) platform and auditing firm, is skeptical of that. “Blockchain technology is very, very safe, and works based on consensus. Everything is transparent, some would argue too transparent. If I know your wallet, I can see every transaction and amount you have. By design, CBDCs will be permission-based blockchains, which means the central bank has even more control of what is happening,” he says.

For now, the Bahamas has two levels of enrolment available to individuals: tier one users are not required to present any form of ID or link a bank account to open their Sand Dollar digital wallet, but they are only allowed to hold up to $500 at any given time in their e-wallet and are limited to a monthly transaction volume of $1,500. Tier two users are required to produce a government-issued ID and can link a bank account to their wallets. In exchange for the added layer of scrutiny, they can hold up to $8,000 in e-money with a monthly transaction limit of $10,000.

According to the diplomat, there is mounting evidence that the government ID requirement often means showing a regular utility bill in the country without any further checks to see if the user is the person named therein.

“Even if that is the case,” says Ravid, “the amount you can hold as an individual is so low and available only domestically and in local currency that it hardly seems to be relevant in terms of trans-national illegal activities at this point, especially given the amount of Bahamian dollars in circulation.”.

Arslanian concurs. “If you are a criminal, you are much better off using old-fashioned cash,” he says. “Even with cryptocurrencies like Bitcoin, it is still possible to trace and track movements across the blockchain over a time frame if you know what you are looking for.”

PwC’s Global CBDC Index report from April 2021 puts the Central Bank of the Bahamas and the Sand Dollar at the number one spot in the maturity of their CBDC-project development. According to the study, the islands lead the rank by a margin of more than 10% over the second most mature project—in Cambodia—with 92 points versus 83 points on a scale that peaks at 100.

However advanced the Sand Dollar, both Arslanian and Ravid caution that the Bahamas is too small an economy and in a peculiar geographical situation to serve as a major model for the implementation of other CBDCs.

“The impact of the Sand Dollar is very limited, which doesn’t mean it’s irrelevant,” says Ravid. According to both crypto specialists the player to watch for is China. “China may not have launched officially yet, but they’ve been experimenting and planning the e-renminbi since 2014 […] They have already piloted the project with millions of users, and its sheer scale may change the landscape for CBDC,” Arslanian says.

“China has been quietly working on this for years and they have done everything right. They understand the power of having their own currency as a cheap alternative to other reserve currencies, and a digital currency could allow them to expand the use of the yuan internationally in a much simpler, cheaper, and faster way than moving cash or relying on international clearing houses,” Ravid argues.

There may be other motives connected to the launch of CBDCs: more precise control of the economy and economic planning.

“CBDCs will be huge. Picture the amount of economic planning it’ll give to central bankers. Suddenly you’ll be able to know exactly how much people are spending on things like coffee. More than that, depending on the implementation, you could know which type of coffee people are buying. That will allow governments to plan their economy in really specific terms,” says Ravid.

“CBDCs will give new tools for governments to manage the economy. In a situation like Covid-19, with a slumping economy, for example, you could disburse stimulus money that has a use by date. Either you spend that money helping quick start the economy, or it disappears from your digital wallet. You can even program the money to be usable on only certain types of goods or merchants,” Arslanian explains.

 “As everything else, the new tools made available by the introduction of CBDCs could also be twisted to further tighten the grip of non-democratic and oppressive regimes over their populations,” the Bahamas-based diplomat points out, “however, the level of detail and control [introduced by CBDCs] could truly be a boon for central-bankers and other economy-planning stakeholders.”

E-money also has an enormous disruption potential: transactions are carried out directly at the central bank level and can bypass retail banks for simple everyday transactions.

Ravid believes we are witnessing the early days of a new world in economics. “The Bahamas is very, very small, but it’s the first project to launch. It’s almost like a guinea pig for the rest of the world. And everybody is watching.”