Impact from COVID-19 in Latin America: widespread shock but with different recoveries
Latin America has been one of the regions most affected by the spread of COVID-19, both in terms of health and economy. To date, five of the ten countries with the highest number of deaths per million people are Latin American. Furthermore, the GDP of the region will contract close to 9% this year, almost twice as much as the average decline expected on a global level (5%).
Structural weaknesses, such as deficiencies in the health care systems and high levels of informality and overcrowding are the reasons behind the severity of the crisis in the region. Before the emergency, the capacity of the health care systems to treat seriously ill patients was very limited (see graphic below). Additionally, high levels of informality and overcrowding in the region made the COVID-19 prevention protocols less effective.
In the face of the high level of vulnerability in terms of health, Latin American governments implemented more drastic and longer quarantines than the rest of the world. As a consequence, the gridlock of economic activity was more widespread and caused a big fall in income, both for households and businesses.
Thus, even though many countries in the region will experience a strong economic recession this year, the contraction will be more severe in Peru, Ecuador and Argentina. Firstly, the economic contraction has been stronger in these countries due to the severity of their containment measures: only essential activities were permitted, such as financial services, and the sale and production of food and medicine. Moreover, the reactivation of the economy was slower here, seeing as longer quarantines were implemented (nation-wide and for over 80 days). Secondly, for the remainder of the year, the capacity of reactivating the economy by higher public spending is limited. In the case of Argentina and Ecuador, this is due to restricted access to external financing and limited room for expansive economic policy. Whereas, in Peru, despite possessing the fiscal resources, low levels of execution and delays in the implementation of measures will limit the impact of the public stimulus.
Starting next year, three factors will determine the different rate of economic recovery for the countries of the region: 1) the control of the virus, 2) the space for expansive economic policy, and 3) the political environment. Firstly, the capacity of the governments to contain the expansion of the virus will be key to avoid new measure of restriction of movement which would slow down economic recovery. In recent weeks, deaths caused by COVID-19 in countries like Peru, Colombia and Chile have started to decrease. In contrast, in Argentina and Brazil, the number of deaths continues to show an upward trend.
Secondly, in Argentina, Ecuador and Bolivia, the public sector will have little room to implement expansive economic policy to boost aggregate demand. Even though the fiscal balance sheets in all of the countries of the region will deteriorate, in the aforementioned public debt will reach a level which will hinder the access to financing. To make matters worse, these countries don’t have room to apply expansive monetary policy, either. In contrast, Chile and Peru will have less of an urgent need to withdraw their economic stimuli, since they have more space in their fiscal sphere and monetary policy.
Thirdly, the political front could be a significant limitation to the economic recovery of countries like Peru, Argentina, Bolivia, Ecuador and Brazil, due to the difficulties in reaching basic consensuses as well as the uncertainty, which would affect private investment. Furthermore, given the context of strong social unrest and the political crisis, there’s a risk a government with populist tendencies is elected in Bolivia (where the general election should be taking place in October 2020), Peru, Chile and Ecuador (where the general election is taking place in 2021) which could propose policies affecting several economic sectors.
In summary, the countries that are likely to take longer to reach their pre-crisis GDP are Argentina, Ecuador and Bolivia.
Due to this context, the challenges that the new administrations in the region will have to face are going to be enormous, since social unrest will increase in an environment of reduced fiscal space to attend to citizens’ demands. The crisis caused by COVID-19 is going to increase poverty and inequality across the region, after several years of registering improvements. This will lead to citizens demanding better public services and better social protection. To attend to this, in a context of less fiscal space, it will be key to achieve a minimum of political agreements to implement effective and sustainable measures.
De acuerdo con el sondeo empresarial realizado durante la semana del 12 al 16 de octubre a los clientes del SAE, siete de cada diez ejecutivos califica al riesgo regulatorio desde el Congreso con el máximo grado de preocupación para la toma de decisiones de inversión en sus organizaciones empresariales en los próximos 12 meses.
La crisis ocasionada por el COVID-19 generará un severo deterioro de las cuentas fiscales en el Perú. Si no se implementan medidas, el incremento de la deuda pública sería insostenible. Si se implementan algunas medidas tributarias, se podría estabilizar la deuda pública alrededor de 40% del PBI. Aún hay espacio para generar mejoras adicionales y estabilizar la deuda pública en el límite legal de 30% del PBI.
Economic recovery continued to lose impulse in September. However, in September there were some positive signs on the economic and public health fronts. The above is positive news, but it is still too soon to expect an acceleration of economic recovery towards the end of the year.