COVID-19 hits Latin America at an extremely difficult time for its economies. In 2019, the region was the most poorly performing in the world, growing by a mere 0.1 percent. While recovery seemed to be in the cards for 2020, the onset of the COVID-19 pandemic has made this highly unlikely given the notable vulnerabilities of the region’s economies.
In spite of reform efforts by several of the region’s administrations in the past decade, Latin American economies remain largely dependent on external factors, namely exports and external investment. COVID-19 and the subsequent world economic slowdown—if not shutdown—will harm both. A significant drop in exports to the United States, China and Europe, which constitute the major export destinations outside the region for the majority of its economies, is certain. In addition, lower demand for commodities—the region’s key exports—due to declining purchasing power in markets across the world as jobs are lost, will probably lead commodity prices to drop. Brazilian exports to China, for example, have already declined in the past few weeks. In Colombia, Peru, Bolivia, Paraguay and Uruguay—which are least prepared to face the COVID-19 pandemic according to the International Monetary Fund—commodity exports represent between 10 percent and 20 percent of GDP.
Social distancing and reduced demand will inevitably hit the service sector, which makes up over half of Latin American GDP. This is particularly true with regard to services that are not transferable to the digital environment, such as the tourism sector. This will disproportionately hurt the smaller economies of the region, especially those in the Caribbean, in which services related to tourism can account for over 30 percent of GDP in certain island nations. For Central America and the Caribbean, an additional implication will be the decline in remittances—assuming these are connected to jobs lost in parts of the developed word. Remittances in those countries account for approximately 10 percent of GDP based on figures from the Economist Intelligence Unit.
Several additional factors make for an even more pessimistic scenario. Firstly, the drop in oil prices will severely worsen the economic impact of the pandemic for oil exporting countries, such as Venezuela and Ecuador, aggravating the pre-existing humanitarian crisis in the former. Secondly, while governments across the region have responded in different ways to the pandemic so far in terms of the health measures implemented, a consensus over the need for fiscal stimuli seems to be emerging (including in the G20 which includes the region’s three largest economies). Plans to support consumption such as direct cash transfers and compensation for payroll cuts are already being developed and implemented across Latin America. However, in a region where several countries are already severely indebted, some in the process of negotiating debt restructuring (notably Argentina) and others with limited access to credit, financing such policies will prove strenuous and will leave marks on public finances for the years to come. According to the Economist Intelligence Unit, the median public debt/GDP ratio in Latin America is almost 60 percent. Third, it remains to be seen how the general stagnation of economic activity will affect the informal sector, which in certain countries in the region can amount to over 50 percent of the economy.
Facing COVID-19 will be an unprecedented economic and political challenge for Latin America. The political instability that has characterized the region in the past decade, most recently the 2019 protests and the acute polarization over controversial populist governments, such as in Brazil and Mexico, attest to the low levels of public trust. Against this backdrop, the implementation of the response to the pandemic—including the health, humanitarian and economic aspects—may prove harder in Latin America than in other regions, possibly delaying the return of (already lukewarm) confidence in the region’s markets. In a time when Latin America‘s growth is extremely dependent on investment, innovation and infrastructure development, isolation—the key to fighting the pandemic—is probably the last thing that the region’s economy needs.
Elena Lazarou, Associate Fellow, U.S. and the Americas Program, Chatham House