How the recession will impact LatAm countries differently

The COVID-19 pandemic will this year produce an economic recession in Latin America that is likely to be one of the largest the region has ever seen. The question is how deep it will be and which countries will be hardest hit. 

To find out more about the impact that the recession will have on different nations in the region, BNamericas conducted an email interview with George Dib, who is an economist for Latin America at Allianz Research.

BNamericas: In terms of Latin America, which countries will be most affected by the crisis and which ones are more resilient and able to get out of the crisis faster?

Dib: In Latin America, recession is unavoidable, and is likely to be the strongest on record, due to a triple shock. The China trade and commodity price shock (mostly impacting Chile, Peru and Brazil), the oil price shock (Ecuador, Colombia) and lastly the stronger shock of confinement measures on virtually all economies, with a stronger blow on countries depending on remittances and tourism. 

Overall, we expect a contraction of -3.8% in 2020 in the Latin American continent in our baseline scenario (in our downside scenario of prolonged sanitary crisis we expect -8%). Monetary policy easing will help cushion the blow but won’t prevent recession from happening. Few countries have fiscal leeway (Chile, Peru, Mexico to a lesser extent). Those with healthier fiscal accounts, such as Peru, are better equipped to weather the storm. Many others will have to resort to emergency IMF lending, especially in Central America and the Caribbean. To sum up, most at-risk countries are oil exporters, tourism destinations and lower-income Central American countries.  

BNamericas: Countries like Chile and Brazil had seen different degrees of social discontent before the pandemic. Once the worst of the health crisis is over, do you foresee a higher risk of social discontent due to the recession?

Dib: This is indeed a high risk in Latin America that we cannot overlook. We believe it is one of the “seven sins” of this crisis. The crisis could disproportionately affect vulnerable populations, especially in Chile or Brazil, where inequality is high and where the redistribution system could still be perfected. 

In theory, what would be needed now is effective fiscal stimulus on top of support to consumer purchasing power (cash in hand, vouchers, tax relief). However Brazil cannot afford profligate spending due to its high debt burden and fiscal deficit. While monetary policy has reacted swiftly (emergency rate cuts and considering asset purchases) fiscal spending represents a medium-term risk for Brazil. 

BNamericas: In Brazil, before the health crisis, we had an agenda in the government and congress that was very favorable to economic reforms, privatizations and concessions. Could this agenda now change?

Dib: The pension reform was successfully passed last year, which was a cause for cautious optimism in Brazil. But the window for reform in Brazil was narrowing with municipal elections approaching; public administration reform was contentious, and so was the privatization of Eletrobras and the adaptation of pension reform to the state and municipal systems. Tax simplification, independence of the central bank and privatizations were within reach. 

But exceptional times require exceptional measures. In the short term and in 2020, the focus will be on avoiding structural economic damage, protecting the most vulnerable and help companies withstand the shock. But we should mind medium-term risks: Even the announced fiscal stimulus in Brazil (3.4% of GDP) shows Brazil cannot afford what Peru can (12%), let alone adopt “Whatever it takes” policies like the U.S. where fiscal spending should reach 10% of GDP. This is due to Brazil’s high debt burden and fiscal deficit: costly borrowing today could weigh on its capacity to repay tomorrow. 

BNamericas: The Brazilian government has in recent years worked hard to attract investments from private firms to the infrastructure, energy, and oil and gas sectors. With the current crisis, there have been calls (including from the private sector) for the government to step in and invest more in such projects. Can we expect a more active government in terms of long-term investments in the next few years due to the recession?

Dib: The privatization trend is likely to be hampered by the current crisis. UNCTAD predicts a drop in global FDI flows by up to -40% over 2020-2021. Brazil, one of the most attractive destinations for FDI, could be hit hard. From a domestic point of view, investment will also halt as companies focus on limiting economic damages from the global recession and lockdowns. 

We do not expect a return to normalcy before mid-2021, which means that Brazil’s privatizations drive could only see a full-steam restart then. Yet what this crisis shows is the need for more and better public investment in health infrastructure: prevention, hospital beds, medical equipment, staff.