Prospects of a rapid economic recovery in Latin America have evaporated as the region grapples with the full impact of the coronavirus crisis. A slow transition back to normal activity could mean that it may be 2023 before GDP again reaches pre-COVID-19 levels, recently published estimates suggest.
Latin America and the Caribbean are expected to see GDP contract 9.4% in 2020, according to an International Monetary Fund report from June. Latin America’s $5 trillion GDP could rebound at a pace of 3.7% in 2021 if the crisis abates.
By contrast, the IMF predicts higher GDP growth in advanced economies and most other emerging markets in 2021.
From $5.119 trillion produced in 2019, total GDP in LatAm will only surpass the $5.0 trillion threshold once again by year-end 2023, according to a collection of market estimates averaged by Focus Economics in June.
“It will take years for Latin America to recover,” Luciano Rostagno, chief Latin America strategist with Japanese investment bank Mizuho Bank Ltd., told S&P Global Market Intelligence. “Potential growth rate will be lower, and you will probably only reach the pre-crisis levels in 2023.”
V-shaped recoveries, once the norm in Latin America, have become less frequent, according to Martin Castellano, head of Latam research with the Institute of International Finance.
“In past crises, deep recessions were usually followed by a very strong recovery phase. What we have seen during more recent downturns was a much more anemic recovery,” he told S&P Global Market Intelligence, adding that periods of fast economic recovery have now been “left behind.”
“The region was already struggling to grow before COVID,” he said.
Brazil, Mexico and Argentina are bracing for GDP declines of around 10% this year, and GDP growth of between 3% and 4% in 2021, according to IMF estimates.
Governments face a complex decision
Latin America is currently the pandemic hot spot, with its six largest economies accounting for more than 22% of global cases and around half of new reported deaths in the world. “Conquering the pandemic will be a quixotic quest for Brazil,” Ronaldo Patah, chief investment officer with UBS Brazil, said in a recent report.
Although several countries are trying to ease lockdown measures, the persistence in the number of cases could result in longer and stricter isolation measures ahead.
“In Latam we are one month earlier in the cycle of the virus,” Mizuho Bank’s Rostagno said. “Governments acted in a timely manner to curb the spread … but isolation measures implemented in March are causing much harm to the economy.”
The prolonged health crisis, as the IMF noted, hinders prospects of recovery. “For economies still struggling to control infection rates, the need to continue lockdowns and social distancing will take an additional toll on activity,” the fund warned in its report.
“Relaxing measures will temper the effects on the economy but on the other hand, the health system might collapse. It’s a conundrum, a very tough situation and a complex decision to make,” Rostagno added. “It is inevitable that we will have long term effects coming.”
Economic and fiscal response capacity
The pandemic is likely to expose the varying degrees of economic and fiscal response capacity available among countries in the region.
“We still see economies with stronger policy support, such as Chile and Peru, having smaller permanent GDP losses than those where support has been limited or ineffective, such as Mexico,” S&P Global Ratings Senior Economist Elijah Oliveros-Rosen said in a June 30 report.
Although both countries are still struggling to tame the pandemic, Chile and Peru are expected to recover faster, as their economies are largely tied to the Chinese turnaround and its demand for copper. They also have a proven capacity to place international debt under current circumstances, which paves the way for a smoother comeback.
Chile’s economy is expected to contract 7.5% this year followed by a 5.0% recovery in the next, whereas Peru will be harder hit, dropping 13.9% followed by 6.5% GDP growth in 2021, according to IMF data.
Meanwhile, countries across the region face mounting fiscal pressures as they attempt to provide relief for companies and households. Pre-existing fiscal constraints and a large share of an informal economy cramp governments’ ability to effectively reach troubled sectors.
“The [state] margin to sustain economic activity is much tighter in Latin America,” IIF’s Castellano said. “Higher tax burdens and debt levels than in the past already pose challenges to the private sector.”
“Companies that would be profitable in a normal environment are closing doors for good. That is an additional cost and a drag on growth and recovery,” he said.
