All the economic reports published by international organizations repeat the warning: Latin America will be the region most affected by the coronavirus pandemic.
For the Economic Commission of Latin America and the Caribbean (ECLAC), this is the biggest economic crisis in a century in this part of the world.
While starting to detect unexpected positive signs, the World Bank estimated in a recently published report that the region’s Gross Domestic Product (GDP) will fall 7.9% in 2020, an unprecedented collapse in recent history.
But Abhijit Surya, a Latin American analyst at the Economist Group’s economic intelligence unit, warns: “There are countries that will recover very quickly, like Chile or Uruguay, and others that have many problems that they will not be able to overcome until probably 2023 or 2024 “.
In reality, determining when a country has recovered from a crisis is not easy, and economists have different ideas about which indicators to watch.
One of the most used is GDP, the total value of goods and services produced in a country in a given period.
Despite the doubts that the virus raises about the behavior of the economy, for which an effective vaccine is not yet available, the GDP of most Latin countries is expected to grow again in 2021.
But regional GDP will not return to pre-pandemic levels until at least 2023.
In some countries, this arduous path to recover lost wealth may be even longer.
Surya indicates that “countries that manage to maintain economic stimulus for longer will do better in recovery”.
As happened elsewhere, when the coronavirus reached countries in the region, governments began to adopt measures to support the economy, from direct aid to families launched in Brazil by President Jair Bolsonaro (without a party), to public debt purchase programs adopted by the central banks of Chile and Colombia.
The aim was to support growth and activity at a time when the virus was depressing them mercilessly.
But the persistence of the pandemic will force countries to maintain this extra effort and no one knows for how long.
In the words of Martín Rama, chief economist for the World Bank region: “When the pandemic started, the stimuli were applied as if it were a sprint. Now we see that it will be another marathon.”
Who is better equipped for a long-distance run with these characteristics?
To answer this question, in addition to Surya, two other economists dedicated to analyzing Latin countries were heard, Alberto Ramos, from Goldman Sachs bank, and William Jackson, an analyst at British consultancy Capital Economics.
Experts have clearly pointed out that one of the most important factors is a country’s level of indebtedness. Because the bigger the debt, the smaller the margin you will have to continue to support your companies and citizens and thus promote economic recovery.
Criteria were also taken into account, such as the drop in GDP in 2020, predictions of GDP recovery to pre-pandemic levels and the proportional relationship between the public deficit (ratio between tax collection and government spending) and GDP.
Based on the assessment of the three experts, together with these indices, the report identified the Latin American countries with the worst economic prognosis in the pandemic, presented below, in alphabetical order.
With one of the longest and most rigid quarantines in the region, Argentina is one of the economies that has suffered the most and the World Bank estimates that the country will close 2020 with 12.3% less in its GDP and almost twice the poor than in the beginning. of the year.
President Alberto Fernández’s government has applied stimulus measures in the amount of 3.5% of GDP, but Argentina, burdened by solvency problems for decades, cannot sustain this effort indefinitely.
Surya points out that, “at some point, they will have to withdraw the stimulus, because it is not fiscally sustainable”.
Fernández took a break at the beginning of the year when he agreed with creditors to restructure more than US $ 66 billion (R $ 364 billion) of overdue debts.
William Jackson of Capital Economics says that “the government acted quickly in restructuring the debt, but in reality it postponed a problem that will arise again in the middle of the decade”.
Alberto Ramos, of Goldman Sachs, is also not optimistic. “Argentina has a lot of difficulty and uncertainty, despite the restructuring, because it has a big fiscal deficit that is being monetized, and this is generating a lot of exchange pressure”.
This dynamic threatens to aggravate the inflationary spiral, raising prices, in which the Argentine economy has been stuck for years, which is a brake on its growth.
In addition, there are exchange and price controls that hinder economic activity and, in the opinion of analysts, discourage potential investors.
The World Bank believes that Argentina’s GDP will not return to its pre-pandemic level until 2023.
Ecuador also recently agreed to a restructuring of its debt, which today amounts to 68.9% of GDP. A very big obstacle to making the fiscal effort required by the current situation.
With a fiscal deficit that skyrocketed to 8.9% this year, Ecuador faces the difficult challenge of increasing its tax revenue without further suffocating its already shaky economy.
“We can see a return to austerity while the economy is still suffering,” says Jackson.
World Bank analysts note that the Ecuadorian economy needs “structural reforms”, but when President Lenín Moreno tried to raise fuel taxes in October 2019 to increase state revenues, he faced massive protests that forced him to back down.
Ramos warns that “the climate of political tension continues in the country and may affect growth”.
Ecuador is another candidate not to recover its 2019 GDP by at least 2023.
The recovery is also likely to be slower in Mexico. But unlike Argentina or Ecuador, your burden will not be a debt.
President Andrés Manuel López Obrador came to power promising to clean up public accounts and reduce the public deficit, and the pandemic does not seem to have diverted him from his objective.
“Under normal circumstances, that’s fine, but now you need more public spending,” says Surya.
The Mexican government has been one of the most reluctant to implement measures to support the economy, which probably partly explains why Mexico’s GDP will fall by around 10% in 2020.
The fall in tourism, fundamental for the country, has also hit the economy, and experts agree that this will be one of the last sectors to recover.
The fall in oil prices also does not help Mexico, which, paradoxically, may also be facing its great opportunity.
Transport problems and the potential danger of customs restrictions have led to “a global trend to bring supply chains closer to markets, and Mexico is very close to the large market that is the United States,” says Surya.
But, according to Ramos, from Goldman Sachs, the López Obrador government “did not create the most favorable environment for business”.
Without official figures for years, the World Bank does not include Venezuela in its analysis, but according to Jackson, from Capital Economics, in a context of low oil prices, “things will only get worse in a country that was already a tragedy before the pandemic”.
The Economist Group’s economic intelligence unit “believes that the country will lose about 30% of its GDP this year in 2020, which with what has been lost since Nicolás Maduro came to power will accumulate a fall of close to 70%”. In its latest report, the International Monetary Fund (IMF) predicts that the drop will be 25%.
The Venezuelan government blames the United States’ sanctions for its economic problems, while most observers blame the government’s poor economic policy and serious structural problems in the Venezuelan economy.
No report predicts when Venezuela’s GDP will stop falling and when it will recover to its 2019 level.
According to the United Nations (UN), a third of Venezuelans do not receive enough food and millions have left the country in recent years.
Analysts heard by the report were not very optimistic about Brazil’s prospects, but they did place the country at a lower level of risk among its peers in the region.
Brazil is counted against having the proportionately second largest public debt in Latin America, which corresponds to 91.5% of GDP, according to the IMF, and also to the large fiscal deficit, which should be R $ 861 billion, corresponding to 12% of GDP, according to the most recent forecast by the Ministry of Economy, released at the end of September.
At the same time, Brazil has one of the lowest GDP growth forecasts for 2020 in Latin America. In its latest report, the World Bank predicted a 5.4% contraction, down from 8% in June. “Brazil is going to be one of the (Latin) economies with the best performance this year”, says Surya, of the Economist Group.
In Surya’s opinion, Brazil has not adopted in the country a lockdown nationally, as in other countries, in addition to having been released credit lines for companies and emergency aid for individuals, it softened the economic impact of the pandemic.
Surya also points out that Brazil “has one of the best health systems in Latin America”. However, he says that the prognosis for the country is not clear.
“The issue is fiscal sustainability. Bolsonaro promised an adjustment in public accounts, but what happened during the pandemic is that it was necessary to apply massive spending policies. The question is whether this will be controlled.”
Goldman Sachs’ Ramos says the country will not be able to maintain economic stimulus policies for much longer.
“Brazil has made very little progress in the necessary fiscal reforms. The deficit has increased due to the stimulus to the economy, which will make it close the year with an index close to 17% of GDP and with a debt close to 100% of GDP. This does not allow for great prospects for improvement in 2021 or 2022 “, says Ramos.
In addition, “there is a lot of political and institutional noise around this, which also does not help”, because the country needs to contain the expansion of public debt. “This requires spending cuts and political capital to implement the necessary measures.”
Unexpected positive data
Despite the bleak outlook, the latest World Bank report pointed to some unexpected positive aspects for Latin America.
World trade is returning to pre-pandemic levels, which favors countries in the region that depend on exports of raw materials, whose prices in international markets have remained, perhaps favored by the vigorous recovery of Chinese demand.
The volume of remittances was also maintained. Despite a sharp initial decline, Latin immigrants continue to send money home, which has helped many to support their families in their countries of origin.
The stimulus measures applied by governments and central banks were also more “robust” than expected.