How will the Middle East tension impact Latin America's economy?

The crisis in the Middle East will likely have a limited impact on Latin America's economy in the short term, though significant risks persist if the ongoing conflict escalates.

Over the weekend, Iran launched an aerial attack against Israel using an estimated 300 drones and missiles in response to an Israeli airstrike on its consulate in Syrian capital Damascus on April 1.

The scenario in the Middle East, the region that drives global oil prices, has become increasingly tense since last October, when Palestinian political and military movement Hamas launched attacks in Israel, leading to the latter's retaliatory assault on the Gaza Strip. The scale of the military operation in Palestine and resulting heavy losses of civilian lives have, in turn, sparked a series of new conflicts and military threats in the region.

Iran was certainly expected to make a military response to the bombing of its consulate, but observers also anticipated that it would measure its retaliation carefully to maintain a balance between demonstrating an assertive reaction and avoiding excessive force that would escalate the conflict further.   

"At this stage, I think there will be little impact on Latin America. The reaction in financial and oil markets has been relatively sanguine – the interpretation seems to be that Iran’s strike was calibrated to prevent a significant escalation of tensions," William Jackson, chief emerging markets economist at Capital Economics, told BNamericas. 

"If tensions in the Middle East escalate, the main impact on Latin America would come via higher oil prices. In net terms, that would be positive for the region’s oil-producing economies, particularly Colombia and Ecuador, but negative for oil importers, which would face higher import bills," said Jackson.

The economist also suggested that the current international landscape is likely to help persuade the US government to renew its waiver on sanctions against Venezuela when the existing one expires on April 18, giving the green light to greater trade with the nation, a big petroleum producer, "given concerns about global oil prices and supply."

INTEREST RATES 

Analysts say that the turmoil in the Middle East will force oil prices upward and have consequent impacts on inflation, which will make it more challenging for the region's central banks to cut interest rates further in the coming months.

"The question is how long the tensions will continue and if they will escalate. If a scenario of conflict continues for a prolonged period, we could see very negative implications for inflation, because the Middle East situation has a direct impact on oil prices and that would practically remove any room for Latin American central banks to continue reducing their respective interest rates," Mário Sérgio Lima, an analyst at Medley Global Advisors, told BNamericas.

According to Lima, another negative direct effect on Latin America could be the increase in volatility in global capital markets, potentially obliging the postponement of some of the planned bidding processes for concessions and PPPs in the region, at the request of private sector agents, to provide more time to assess the economic and financial risks in the current landscape.