Covid-19 Hits Latin America
The pandemic worsens existing economic woes in the region
Throughout the first decade of this century, Latin America had been making good progress in generating higher incomes and adding millions of people to the ranks of the middle classes. Years or rapid economic growth, fueled by the commodity boom –the region is a large producer of hydrocarbons and metals– allowed for healthy GDP growth curves. When the commodity boom ended, however, the picture changed, in some cases radically.
Brazil entered into recession in 2015 and 2016, and the country was barely recovering from that before the pandemic struck. Argentina’s erratic economy met with severe currency devaluations and hard-to-manage inflation rates. Finally, Mexico’s lost its momentum from 2010 (5.1% GDP growth) to 2019 (0.4%), even though it did not fall into recession. The feeling in Mexico’s business community is that the current administration has failed to realize the country’s enormous potential over the last couple of years, while its state-owned oil company, Pemex, continues to struggle.
As a global crisis, the Covid-19 pandemic has not been limited to Latin America, but the virus has taken a particularly severe toll on the region. According to the International Monetary Fund in its June 2020 estimate, Latin America’s economy will contract by 9.4% this year, and recovery will be soft with just 3.7% growth in 2021. “Many of those previously part of the middle class are now low income population,” said Munir Jalil, executive director of macro research at BTG Pactual, a large Brazilian investment bank present across Latin America. “The key question is what should be done to recover to pre-pandemic levels.”
Beyond the very high levels of contagion in the region, what is making the pandemic such a tough ride in Latin America is the lack of stimulus packages for the average citizen to help weather the storm. “One of the key differences we see in the region versus the US, Europe or Asia is that governments in the two largest economies, Brazil and Mexico, have not allocated large incentive resources to reactivate the economy,” affirmed Rina Quijada, VP business development Latin America at IHS Markit. “In the US we are about to see the third stimulus package, and the first package alone was worth US$7 trillion, which is equivalent to the GDP of the whole of Latin America,” she emphasized.
Some countries have established help packages for low-income citizens, but not to the levels of the rich world. In Brazil, the monthly 600-real subsidy (US$107) has helped president Jair Bolsonaro offset his falling popularity, following what many see as a dismal management of the pandemic (as of the end of the austral winter in September, the country already had nearly 140,000 deaths from Covid-19). Meanwhile, despite the exceptionality of the situation, Mexico prefers not to deploy expensive packages.
“It is not so relevant to look at 2021 because there is a natural rebound after the pandemic. What matters is what is going to happen in 2022 and beyond. This is where we will see the long-term behavior of the countries.”
- Munir Jalil,
Executive Director - Macro Research,
BTG Pactual
Beyond the availability of funds and the willingness or not to allocate them to relief programs, Latin America faces another issue when it comes to implementing them: informality. Munir Jalil of BTG Pactual says that, with the exception of Chile, it is very difficult for governments to reach those people that are under the radar: “In countries like Peru and Colombia, we have seen good efforts to capture some information about these people and provide economic support. Moving forward, the next step is to ensure that these people maintain a relationship with their governments,” he argued, adding that a good initiative, albeit costly, would be to reform the labor market and establish unemployment benefits. “This way workers themselves will demand formal contracts from employers,” he continued.
BTG Pactual expects Brazil’s economy to contract by 5.5% this year. In Mexico, perhaps as a result of the lack of action in terms of stimulus, the estimate is a 9% fall, while Argentina is expected to record a severe 12% contraction in 2020. Of course, if the pandemic can be controlled, all these drops will be mitigated by a rebound effect in 2021, but what matters, says Jalil, is the figures from 2022 onwards. “This is where we will see the long-term behavior of countries.”
The pandemic will not be the only factor to weigh in Latin America, as the region will see elections across 2021 and 2022. A certain degree of political instability is to be expected with the current economic crisis, as shown by the failed attempt by Congress to oust president Vizcarra in Peru in September. "The arrival of new populist governments cannot be ruled out,” said Jalil.
Hopefully the region will be able to tackle the pandemic and implement sound economic policies, otherwise the pessimistic prediction that the 2015-2025 period could be a “lost decade” in Latin America may become a reality.
Image courtesy of Gabriel Ramos
“One of the key differences we see in the region versus the US, Europe or Asia is that governments in the two largest economies, Brazil and Mexico, have not allocated large incentive resources to reactivate the economy.”
- Rina Quijada,
VP Business Development Latin America,
IHS Markit