Shifting sands: Gauging the coronavirus economic fallout in LatAm

Making long-term economic forecasts is difficult, especially today, given the mire of uncertainty globally.

But researchers from firms like Moody’s Analytics help business decision-makers map the road ahead by analyzing myriad factors and producing growth estimates and associated projections.

This week, the firm outlined its forecasts for Latin America while stressing that they are subject to change over the coming weeks and months because of high uncertainty.

“As we know well, global conditions have changed and are changing constantly,” Moody’s Analytics director Alfredo Coutiño said.

“There are latent risks, there are risks that are materializing,” he said.

Coronavirus – described as a pandemic on Wednesday by the World Health Organization – is among the biggest risks. It poses a bigger economic threat to South America than to the rest of the region, because of the former’s heavy reliance on export revenue from trade with China.

Rating agency S&P expects coronavirus, which has led to a tightening in credit conditions, to peak next quarter, followed by a V or U-shaped recovery in 2021.

“The bottom line is that the duration of this…is going to be important to understand how deep the damage is at the end,” S&P managing director Roberto Sifon-Arevalo told a webcast. “The second thing is policy response.”

S&P expects most Latin American sovereign ratings to hold steady, with those in the higher end of the range better positioned to withstand shocks.

The region contracted around 0.2% in 2019, said Moody’s Analytics, citing as a major factor a sputtering South America – mainly Argentina and Venezuela – impacted by both external and internal factors. Mexico failed to spur growth, amid weak investment. A bright spot was a resurgent, but still underperforming, Brazil.

For 2020, the company expects the region to expand 1.2%, with private consumption, investment and government spending the motors of growth. The estimate is largely in line with that of the UN’s Eclac, which in December said growth should register at 1.3% in 2020. 

Net exports from Latin America dropped last year, a trend expected to continue through 2020, fueled by coronavirus-related disruption.  

In terms of regional growth, other headwinds come in the form of policy uncertainty and social protests, which gripped Chile and Colombia in the last quarter of 2019 and may flare up again this year if government policy responses are deemed to fall short. Regionally, a perceived inadequate response by authorities, in terms of healthcare provision, to the coronavirus outbreak may also spark unrest, Moody’s Analytics said.

Latent tensions exist in Latin America around salaries, education and healthcare, among other factors, and there is a risk of 15% or less of flareups resuming, Moody’s Analytics economist Jesse Rogers said during a webcast.

WHICH COUNTRIES WILL LEAD THE RECOVERY?

According to Moody’s Analytics, South America will lead the recovery this year.

Colombia, Peru and Brazil are forecast to expand fastest, followed by Chile, Uruguay and Mexico. 

As Brazil accounts for about 40% of Latin American GDP, the region’s fortunes are closely tied to that country, which could see growth of 2% this year.

Argentina will remain in recession but is expected to start a slow recovery toward the end of year, amid greater policy clarity. The recent drop in oil prices is expected to make Argentina’s challenge harder, as it could dampen E&P activity at the Vaca Muerta hydrocarbons deposit, which the government sees as a key dollar-generator. 

WHAT ABOUT CHINA?

Fallout from containment measures and weaker demand has put the global economy at risk of recession. South America, with its strong trade links with China, is particularly exposed – metals exporters Chile, Peru and Brazil chief among them.

Mexico and Central America, with closer links to the US, may escape relatively unscathed unless demand for their exports crumbles.

The number of new coronavirus cases in China has been falling and authorities there will tackle the issue of production, said S&P senior director Kim Eng Tan.

“Right now, with infections seemingly under control, the government is turning its focus on trying to bring the economy back up and already some people are talking about a major stimulus, this being a final, crucial year of China’s major economic plan.” 

But while China could ramp-up production again, the country could experience weak demand for its running shoes and electronic gadgets as consumers outside the country prepare for greater crisis.