Pandemic drives technological overhaul of LatAm economies

The pandemic has pushed digital transformation, and technology has helped sustain remittance flows and increased access to financial markets in Latin America and the Caribbean, according to a World Bank report.

“The negatives are pretty obvious, so we’ve tried to come up with some positives. I have no doubt on the negatives but we wanted to make the case that especially because of technology there could be some openings,” Martin Rama (pictured), World Bank chief economist for Latin America and the Caribbean, told BNamericas.

Digitization

In the post-pandemic scenario digital currencies and payment systems could broaden the tax base, but the region needs to close the digital divide first, Rama said. 

On the upside, half the population is ready for digitization and several countries are advancing measures to close digital gaps, according to Rama.

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“We’ve seen this in the past in India but now we are seeing that on steroids. People are scared of going out or can’t go out, everyone’s using deliveries” through apps, said Rama. “So it’s happening on a grand scale and it’s not like we’re going back to the way things were before.”

Several digital currencies were launched in 2021 in the Caribbean, and the ECCB has just launched its DCash pilot in all eight member countries. Rama said such digital currencies enable diversification and reduce sales costs.

Digital platforms will also help formalize work because they enable users to register, which makes them liable to pay taxes but also eligible for social benefits and pensions.

“Formalization offers the prospect of widening the tax base without having to increase tax rates. It is one of the big opportunities for the region, to make changes in finance, labor markets, formalization and trade integration,” Rama said.

Countries will have to rebuild their finances because they can’t lower health expenditures during a pandemic. Also, with schools having been shut for months in many countries, education and rising unemployment become priorities.

A report by the Economic Commission for Latin America and the Caribbean (Eclac) found that the average regional unemployment rate for 2020 is 10.7%.

Remittances

The World Bank’s prediction of a 19.3% drop in remittances due to the pandemic has not materialized. Guatemala registered consecutively rising flows and is on course for another record this year. 

Remittances in the country are projected to reach almost US$12bn and account for 14% of GDP. In Honduras, remittances accounted for 21.5% of GDP in 2019 and are projected to be 24% in 2020, according to the World Bank.

Jobs mostly done by migrants like construction and food processing were considered essential in the US, enabling workers to keep sending money. Remittances to Mexico and the Dominican Republic increased at least 25% year-on-year in 2020.

“Most likely migrants will continue to have the means to support their relatives. Will remittances hold at relatively high levels? Yes, I think so,” Rama said.

Access to financial markets

The region issued more debt in financial markets in 2020 than in 2019. But Rama said this scenario will change as developed economies rebound and inflationary pressures rise.

As the stimulus packages kick in, rising imports to the US will represent another problem, as the country will run a current account deficit and the dollar appreciates. Countries with debt in US dollars will then face higher repayments. Hence, debt management will become key.

“The second priority is to think about a path to fiscal consolidation. Some path needs to be charted and that will be one of the most difficult decisions for policy-makers in the region over the next couple of years,” Rama said.

Fiscal measures many countries have taken to fight the pandemic have led to median regional fiscal debt above 8% of GDP. “It is too early to conclude that the financial sectors of the region have emerged unscathed from the crisis,” according to the report.

Funding from the World Bank, the Inter-American Development Bank (IDB) and Latin American development bank CAF could provide some support. Costa Rica and Guatemala have considered such deals, but they require legislative approval.

Outlook

GDP for Latin America and the Caribbean is expected to fall 6.7% for 2020 and grow 4.4% this year. Globally, economies rebound faster than expected, and Peru and Panama are the highlights in the region, according to Rama.

Peru benefits from high commodity prices and a history of fiscal responsibility. “In the case of Peru it depends on mining a lot and the prices of commodities are relatively good. [Also,] Peru has solid fiscal discipline. It could issue a 100-year bond in a week where it saw three presidents” taking over, Rama said. 

According to World Bank estimates, Panama and Peru will grow respectively 9.9% and 8.1% this year. Guyana’s economy will continue to expand well above 40% due to oil production. 

Tourism-dependent Caribbean countries will struggle. The economies of Argentina, Ecuador, Suriname, and Haiti are expected to contract.

Photo credit: World Bank