Latin American Economic Outlook Amidst the COVID-19 Lockdown Crisis
The Brief
Better described as a trainwreck, the global economic collapse that has been taking place for the past two and a half months, is yet to culminate in the orchestral crashing of the cymbals. As one of the most powerful economies pulled hard on the brakes in an attempt to curb a fast growing humanitarian crisis, the following cars began to derail and pile up; especially the emerging economies that heavily rely on trade with this nation.
China’s aggressive expansive policy through the Belt & Road Initiative, which roughly initiated around the turn of the milenia, established or strengthened trade relationships with developing countries that provided key commodities for the development of infrastructure and manufacturing. This solidified China’s status as the world’s producer of consumer goods, specifically focusing on supplying the rich nations’ higher consumer demands (Western Europe and the US).
China’s major role in the global economy became evident as the COVID-19 contagion put the country, and the economy, into sleep mode with a lockdown that lasted over 70 days. The upstream ripple effect that ran through the supply chain ruptured in the middle as an opposing wave ran downstream from the demand side, as consumers began to pause their habitual consumer behaviors due to precautionary measures and massive furloughs and layoffs.
While most developing economies primarily play a supporting role in the global economic system, the crashing of these two waves violently cast them to the margins as businesses in developed nations began to go lean as the nations’ containment measures were being set in place. Being left out in a rowboat to weather one of the most vicious economic storms since the early 20th century, developing nations that mainly rely on commodities exports and tourism took an early hit near the end of the year’s first quarter, even though they were yet to deal with the economic, social and humanitarian problems directly associated with dealing with the disease within their borders.
Even though reliable figures do not exist due to the heavily underfunded public health system that the majority of these countries have, the number of documented cases and deaths of COVID-19 in Latin American countries are increasing at a rate indicative of the middle stages of a significant contagion; although local authorities know that numbers are actually higher. As we enter the first weeks of the second quarter, we find the first symptoms of a dwindling economy as an extended period of decreased demand and prices of commodities, capital flight, and an ill-timed oil price war has kept Latin American countries against the ropes for nearly a month.
Let’s look at where Latin American economies stand, what national policies are being unleashed, how long until the bell rings, and what international organizations are putting on the plate.
Where Latin American Economies Stand Amidst the COVID-19 Economic Crisis
Walking into the year, the IMF had forecasted positive growth for 160 of its members; as of the beginning of the second week of April, that number has done a complete 180 and landed on its face with a projected 170 member countries with negative growth for the remainder of the year. The United Nations Commission for Latin American and the Caribbean (ECLAC) has forecasted a contraction of the regional GDP of -1.8%, although they state that a contraction of between -3% and -4% is not unlikely, much worse than the 2008-09 financial crisis. The ECLAC has predicted in a recent report a 10% increase in unemployment; this translates into an increase of an additional 45 million to the number of people living in poverty of and of about 23 million migrating to extreme poverty. We can speculate that this may widen the rift of inequalities and accentuate structural social problems, as vulnerable groups tend to carry the heaviest economic burden of these situations.
Internally, there are a variety of measures that countries have implemented to prop their economies up. Most noticeably, The US’ next door neighbor is taking a mixed stance amidst the situation. Being one of the two strongest economies in Latin America, Mexico was late out of the gates as containment measures were not set in place until late March, in an attempt to save the national economy from premature harm. Having already closed 2019 with a -0.1% growth of the GDP, a -6.6% decline is projected for 2020, making it one of the hardest hit amongst the Latin American nations. Openly rejecting bailouts for businesses in the form of tax breaks and liquidity guarantees, the government has stressed a focus on “social programs” for the recuperation of the economy; specifically through government funded infrastructure programs and handouts aimed at those living in poverty. Currently, 70% of formal jobs are sustained by small and micro businesses which produce about half of the entire country’s GDP. Faced with liquidity problems, many businesses are facing the possibility of closing doors and laying off their workforce. This focus on direct payment instead of propping up the private sector places Mexico as one of the countries with the lowest recovery rates for 2021 with a projected 3% growth of the GDP.
What International Organizations are Bringing to the Table for Relief
The International Monetary Fund stands at the fringe of internet stardom as their website has gone from a seldom visited site (mostly scholars, government officials and analysts) to an almost influencer status where almost all business owners, entrepreneurs and investors fanatically await email updates and tune into webinars. While the long term implications of the IMF’s intervention, and history, may be questioned; we will look at the information from a speculative standpoint. We must remember that progressively unfavorable exchange rates are putting increasing pressure on companies that buy imported products for manufacturing, rendering services or retail. Casting a net to stop capital flight is a measure that can stabilize these unfavorable conditions; therefore foreign investment is key to plugging the breached hull.
The IMF has stated that its focus will be on propping up developing nation’s stressed economies, this bolsters positive speculation on part of foreign investors, effectively opening a valve that trickles money back into central banks and tips exchange rates towards more convenient figures. When questioned if the IMF has the power to bailout the global economy, Kristalina Georgieva responded with the equivalence of “paper gold”, this measure might heighten confidence in foreign investors as the cap for liquidity is removed with the threat of the big gun. As of early April, out of the 90 nations that had approached the IMF for relief, 14 were Latin American countries; although specific nations were not named.
The Outlook
The following question now is: What can we expect to unfold?
With businesses in dire straits on a global scale, some are faring better than others as certain nations are adopting policies for injecting liquidity in the short term with a focus on a smoother recovery phase. The IMF has iterated time and again that fiscal policies can save lives and protect firms and people from the economic impacts.
Latin American lags behind many of the developed nations due to its limited fiscal elbow room; public spending is limited in volume and over time and fiscal measures in the two largest economies of the region have been basically non-existent. We can assume that we are nearing an inflection point in the way businesses function and interact with markets. With no clear lifeline being tossed out and fiscal pressures sustained, business owners are not only pivoting to adjust to the apparent shifts in consumer behavior but are also embarking on a search to source their resources for production; this not only entails renegotiation of credit lines with suppliers but also leads to creative solutions for the acquisition and implementation of human capital.
For business owners and entrepreneurs that operate in the Latin American markets; as goods and services providers or participants in the labor markets for manufacturing exports, should not be expecting injection of liquidity or significant tax reliefs. This will require creative and maybe even unorthodox financial strategies for managing operational expenses necessary for surviving what today is a liquidity problem that is slowly turning into a solvency issue.
References
Financial Times - 14 Latin American nations seek IMF help to combat big recession
Financial Times - Mexico's president shuns bailouts for businesses
LABS - UN says Latin America needs greater integration to fight COVID19
LABS - Issue #13 What Latin America is doing to prevent an economic disaster
Financial Times - Coronavirus Business Updates
IMF - The Great Lockdown - Worst Economic Downturn Since the Great Depression
IMF - Fiscal Policies to Contain the Damage from COVID-19
IMF - COVID-19 Poses Threat to Financial Stability
IMF- Confronting the Crisis: Priorities for the Global Economy
