In a region with soaring poverty rates, high population density and lagging health care, COVID-19 poses a tremendous risk to Latin America and the Caribbean. According to a JPMorgan report assessing the fallout from the COVID-19 pandemic, the multinational bank expects GDP to contract over two percent across the region and three percent in Colombia, Brazil and Mexico.
Many governments have taken measures to protect their citizens from the economic fallout of the virus. Chile for example, announced a $12 billion economic plan—that equals roughly 4.7 percent of the country’s GDP—with three main objectives: strengthen the Health system’s budget, protect family income, and protect jobs and employers. In El Salvador, President Nayib Bukele suspended utility, mortgage and credit card payments for three months for all Salvadorans, and will provide a $300 stimulus payment to approximately 1.5 million households affected by the virus.
But while these measures are working to provide immediate relief to citizens, the economic fallout of the virus is expected to cause the biggest single-quarter decline since the Great Recession (2008-2009).
To further discuss COVID-19’s effects on Latin American economies, here are three expert predictions on the sectors most likely to be affected, the country that stands to be one of the biggest economic victims of the pandemic, and the likelihood the region will receive foreign assistance from one of its biggest allies.
Elena Lazarou, Associate Fellow, U.S. and the Americas Program, Chatham House
COVID-19 hits Latin America at an extremely difficult time for its 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. 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.
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, disproportionately hurting the smaller economies of the region, especially those in the Caribbean. 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.
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; 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; 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. 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.
Jude Webber, Mexico and Central America Correspondent, Financial Times
Latin America is headed for an unprecedented economic contraction, likely to be deeper than both debt crises in the 1980s—the region’s “lost decade”—and the Great Recession. Some market estimates put the region’s contraction at 3.8 percent. Lower oil and commodity prices, exports, tourism, remittances and foreign direct investment are all on the cards and will pummel regional economies. Mexico is particularly exposed because of its interdependence on the United States.
AMLO has been painfully slow to acknowledge the crisis and even slower to act, announcing to date only a few measures, including front-loading pensions payments and plans to roll out one million loans to small business owners. He is reluctant to loosen the fiscal discipline he takes pride in, and has yet to heed increasing calls from the business community to provide tax breaks, to preserve jobs. He plans to announce a package of measures on April 5, when he makes his first quarterly state of the nation speech. But AMLO has painted himself into a corner: he feels compelled to reassure Mexicans that the crisis will soon be over but appears to not grasp the magnitude of spending that will be required. The crisis could finally put his determination to balance no new debt and no new taxes with his priority for social and infrastructure projects to the test; he will probably, reluctantly, have to abandon this year’s planned fiscal surplus, at the very least. Market forecasts are for a contraction of as much as seven percent of GDP this year.
State finances are, to some extent, shielded this year by the finance ministry’s annual oil hedge. But coronavirus is not the only problem Mexico faces: the oil price crash will make next year’s hedge difficult and has only complicated the outlook for state oil company Pemex. AMLO’s instinct is to double down—seeking to increase production at Pemex and to press on with construction of his new refinery, even though both could be money-losing. Politically, this all spells trouble too: AMLO faces midterm elections next year with an economy potentially in free fall and his popularity—for the first time—falling below his disapproval rating.
Margaret Myers, Director of the Asia & Latin Americas Program, Inter-American Dialogue
Given the region’s deep economic ties to China, including extensive reliance on China as a market for raw materials and other exports, Latin America’s economic prospects are largely tied to China’s own recovery.
The region has factored prominently in China’s global coronavirus outreach, including through increasingly extensive donations and sales of personal protective equipment and diagnostic technologies. But it’s unclear whether China will also be of much help to ailing economies in the coming months. Chinese trade was hugely beneficial to the region after the 2008 global financial crisis, helping Latin America weather that storm. But China has refrained from issuing the sort of massive, four trillion yuan stimulus applied post-2008—which boosted Chinese demand for Latin American goods—instead opting for comparatively conservative measures aimed at growing consumer demand, ensuring business operations, and encouraging employment, among other things. Chinese sovereign lending to the region might also be limited in a post-COVID-19 scenario. Policy banks loans to Latin American countries have been dropping for over five years, as China rethinks its approach to regional investment.
As all look to China for signs of renewal, the region’s major commodity exporters will continue to grapple with sluggish demand and low commodities prices. For others, such as Mexico’s automotive industry, the effect has been dramatic, with major implications for local employment.