A Region In Crisis Takes A Fresh Hit

As governments scramble to contain Covid-19, Latin America must still reckon with deep-seated economic shortcomings.

The Covid-19 pandemic profoundly complicates Latin America’s response to an already existing accumulation of economic challenges, including a historic social deficit, a lack of fiscal balance in some countries and difficulty in raising productivity. The whole region, including the Caribbean, has been growing below the global average over the past several years. Now, the June outlook from the International Monetary Fund (IMF) forecasts a 9.4% decline in annual GDP in 2020; for 2021, the region is forecast to achieve only a partial recovery of 3.7%.

The health crisis has brought to the front burner an agenda of structural reforms, privatization and accelerated investment in infrastructure and technology that some prominent experts have been advocating for a long time. Latin America finds itself pressed as never before to embrace these changes as a route to greater competitiveness and economic recovery.

The biggest economies—Brazil, Mexico and Argentina—will need more time to recover to their prepandemic growth rates. Countries that built fiscal cushions before the Covid-19 crisis hit may be on the road to recovery by late 2022. Those with strong trade and investment ties to China, the only economic giant delivering a positive GDP rate this year, may be favored as well.

Those more dependent on the US, however, will not see as swift a recovery. The outlook also varies according to countries’ success at bending the Covid-infection curve, the robustness of their social-protection mechanisms, their macroeconomic balances and their degree of access to the international financial system.

Brazil’s government is pressing to conclude a program of tax and administrative reforms and to sell its crown jewels in order to lower its fiscal deficit and reduce the public debt, which is now close to 100% of GDP. The current administration is moving forward with water and sewage and transportation concession plans. The announcement of major privatizations, including the electrical giant Eletrobras, is expected by some to happen as soon as this month.

But some economists and policy advocates say that to attract foreign investment, Brazil will have to radically change its policies regarding the destruction of the Amazon rainforests. The biggest Latin American economy is expected to contract between 5% and 6% this year, a result that would be worse without its highly productive agribusiness sector and the $57 billion the Treasury is sharing among vulnerable Brazilians from April to December.

Next year, the economy may grow 3.5%, but only 2.5% the following year, according to a September market report from the Central Bank of Brazil. Infrastructure projects will inevitably be a faster way for Latin America to get out of the crisis, given its capacity to attract investments, increase competitiveness and create jobs, says economist Otaviano Canuto, nonresident senior fellow at the Brookings Institution and former vice president of the World Bank. He argues that Brazil must rush its economic reform agenda and maintain fiscal discipline to enjoy the abundance of global liquidity.

Contrasting Covid Responses

Mexico and Argentina have been grappling with quite different dilemmas since Covid-19 got inside their territories. With its public debt around 60% of GDP, Mexico risks losing its investment-grade status in 2021. According to the IMF, Mexico’s fiscal response to the pandemic has been the smallest among the G20 countries.

Given its close ties to the US economy, the fall in oil prices, international financial market volatility and disruptions to global supply chains, Mexico’s GDP should drop 10.5% this year and expand only 3.3% in 2021, the IMF projects. The government is pushing its trade agreement agenda and has announced the privatization of Ecopetrol and electrical company ISA, but these will not have a significant impact on the state’s fiscal imbalances.

Argentina took a dramatically different approach to Covid, prioritizing control of the disease over business growth, even though it faces one of the most challenging economic environments in the world. It did not expect to emerge from its recession this year; and to do so in the wake of Covid-19, it is again relying on its competitive agricultural sector.

Economist Orlando Ferreres, president of Orlando J Ferreres y Asociados (OJF), projects a 13% drop in GDP this year, about three points lower than the last IMF estimate. For 2021, the fund predicts a 3.9% expansion.

In the middle of the pandemic, the Argentinian government reached an agreement with its foreign creditors to restructure its debt of about $65 billion. The announcement eliminated the risk of default and enabled the economic team to reengage in negotiations with the IMF, to which the country owes $44 billion. A plan to jump-start economic activity was released in September.

“It will take months for Argentina to reach a consensus with the IMF,” says Ferreres. “But when it is signed, it will reopen investment opportunities for the telecommunication, technology and e-commerce sectors.”

Crisis And Transformation

As a region, Latin America will certainly display a higher debt-to-GDP ratio in 2021 and the following years due to the mounting public expenses required to stanch both the economic and the health effects of Covid-19. Most of the countries have opted to reduce their basic interest rate and are exercising minimum control of the devaluation of their currencies, which raises concerns about inflation but also makes their exports more competitive.

The Andean states have benefited from good macroeconomic management in prior years and a recovery in mineral prices. The Central Bank of Chile improved its estimate in September for GDP loss in 2020 from a range of 5.5%-7.5% to 4.5%-5.5% while lowering growth projections for next year from 4.75%-6.25% to 4%-5%. Despite social challenges that have sparked mass demonstrations and disorder, the country is the most competitive of Latin America’s biggest economies, according to recent research by Brazil’s National Confederation of Industry.

Colombia has been favored by the diversification of its agribusiness industry, despite the fall in oil and coal prices. The manufacturing sector, too, has been recovering since May and June, boosted by its ready-to-wear-clothing, petrochemical, auto parts and chemical segments, says economist José Antonio Ocampo, director of the Economic and Political Development Concentration at Columbia University’s School of International and Public Affairs, and former Colombian minister of finance. However, Colombia is expected to face a GDP loss of 6.5%-10% for 2020, according to the Bancolombia Group.

“Because of the trade dispute between the US and China, most of the value chains can be relocated from the East to countries closer to the American market,” says Ocampo. “Colombia should benefit from it in terms of investments and exports.”

Another Andean state, Peru, is a point outside the curve. Well-managed public accounts and low indebtedness will not be enough to prevent a 12% drop in GDP this year, according to the World Bank’s June forecast. The government responded to the pandemic with a $230 monthly allowance to the poorest sector of the population for three months and adopted a subsidized credit program for small and midsize enterprises. Peru is caught in two traps, however. The first one is the presidential election in April 2021.

“The despair and frustration of the Peruvians during the pandemic can open space for populists in a country that lacks the presence of solid parties,” warns Carlos Parodi, director of the Economics Department at Universidad del Pacifico. “Investors are being cautious.”

The second obstacle centers on Peru’s most important industry. The government projects a 30% drop in investment in the mining sector this year, following a fall of 17% in 2019, due to popular protests against new projects in copper exploration, even those approved by the environmental authorities.

Older projects, however, are still running and enjoying the slight rise in mineral prices. Parodi expects the engines of economic recovery to be fruit production and infrastructure projects announced by the government: the Central Highway expansion, two irrigation projects and two more metro lines.

“Peru has 98 different microclimates that are being explored by Chilean and English investors in agribusiness,” Parodi says.

As in many other parts of the world, the lockdowns between March and June brought changes to the Latin American economy that are likely to be permanent. Consumers were forced to engage with e-commerce as never before. This shift is pushing technological development, including new electronic payment systems.

Latin Americans over 14 years old purchasing through the internet now represent 38.4% of the region’s population, according to eMarketer. Electronic sales in the region are expected to reach $83.6 billion this year, nearly 7 percentage points higher than the 12.5% growth the research firm estimated in the fourth quarter of 2019. The Statista platform projects that e-commerce in the region will move $116 billion by 2023. Brazil now represents a 32.5% share of this market and Mexico 28.8%, placing them at the forefront of the trend in the region.