Covid-19: Economic impact in Latin America and Caribbean

November 12, 2020 11:10 AM

The relatively large human toll is evident from the number of cases; with only 8.2 per cent of the world population, the region had 28 per cent of cases and 34 per cent of deaths, by end-September.

The restrictions in economic activities caused by the pandemic are having a dramatic socio‑economic impact on the most vulnerable groups. (Photo source: Reuters)

By Syed Ali

As the world confronts the worst peace-time recession in a century, COVID-19 has hit Latin America and the Caribbean (LAC) region harder than other parts of the world, both in human and economic terms. The relatively large human toll is evident from the number of cases; with only 8.2 per cent of the world population, the region had 28 per cent of cases and 34 per cent of deaths, by end-September. As the countries started to dismantle the restrictions despite the spread of the virus, the impact on the region’s Fiscal solvency, Growth, and Stability became alarmingly conspicuous. The LAC region is experiencing the biggest contraction in the emerging markets and developing economies. The IMF World Economic Outlook has reported a GDP contraction of 8.1 per cent in Latin America in 2020. Unfortunately, since 2014, the region has been experiencing the weakest period of growth since 1950. Therefore, this recent GDP contraction comes as a severe blow to a déjà dwindling economy, exacerbating the health infrastructure and, consequently, social conditions.

Making matters worse is a sharp decline in global demand, a considerable reduction in commodity prices, financial volatility, and additional impacts associated with lower investment, reduction in tourism, and a potential decrease in remittances compounds an ever complex scenario. The restrictions in economic activities caused by the pandemic are having a dramatic socio‑economic impact on the most vulnerable groups. Close to 60% of workers in LAC are in the informal sector and many are self-employed in a subsistence, daily living economy, and thus are at the risk of slipping back into poverty; increasing unemployment to 13.5% at the end of 2020.

Most LAC countries responded to the coronavirus (COVID-19) crisis with supportive monetary and fiscal measures from the beginning of the lockdown. Fiscal policy is playing an essential role in mitigating negative economic and social effects and will continue to be pivotal in the subsequent economic recovery. However, countries’ ability to react to the pandemic with fiscal policy depends on their fiscal space and their access to international financial markets. Therefore, the scenario for most LAC economies become bleak because their already slowing economy had weakened their fiscal capacity to endure the blow induced by the COVID19 lockdowns. Moreover, the exports based demand mainly originating from developed economies has also reduced coupled with a decrease in commodity prices making matters worse for the LAC region due to their structural dependence on commodity exports.

Commodity prices have experienced a sharp decline since the outbreak of the pandemic. Crude oil prices plummeted by 50% in April, while the coal price showed a more modest decline of 17%. Most mineral and metal prices saw a decline, although this varied strongly. Platinum saw the strongest decrease (23%), followed by copper and zinc (15%). Gold, instead, increased by 15% as a safe-haven asset. The FAO Food Price Index also experienced a downward trend, with sugar and vegetable oil prices showing the strongest declines of 14.3% and 5.2% respectively.

The current contraction is, however, caused not only by falling prices but also by a decline in export volume. The global reduction in the total volume of international trade in 2020 is estimated to be 13% to 32%, which is mainly explained by the slowdown in consumption and economic activity in China, the United States of America (USA), and Europe. The volumes of Latin America’s commodity exports are most affected by the strong decline in demand from their principal trading partners; China and the USA. This reduction is caused by reduced travel and demand for fuel, as well as by the closedown of the Chinese manufacturing and technology industries, which use a large percentage of the metals mined in Latin America.

Another impact of the COVID-19 crisis that may affect commodity chains in both the short and the long term is the decline in foreign investment and the fact that many planned investments by multinationals have been put on hold. Since the start of the pandemic, the global value of cross border mining deals has gone down by 32%. In Peru, market analysts expect a 10-30% reduction in mining investment in 2020. The London-based mining giant Anglo American has delayed a US$1.5bn investment in the development of the Quellaveco copper mine in the Peruvian highlands. There are also alarming reports about high levels of capital flight across the region. The figures available for Colombia, reports that foreign investors redirected US$115.7m out of the country – representing about 16% of their total investment portfolio in Colombia.

This sudden fall in commodity prices, export volumes, FDI redirection, and growing unemployment strongly affects Latin American economies. This increases the pressure on government budgets, which need to remain large enough to deal with the pandemic; it also affects governments’ abilities to pay their debts or secure financing from external sources. In order to jumpstart the economies the focus on the commodity market may prove to be low-hanging fruit, however, further focus on diversification and sustainability of production and markets is an important lesson from the pandemic.

In a recent conversation between the Indian Foreign Minister S. Jaishankar, his counterpart from Argentina stressed the need for diversification during his speech, this indicates that identification of a long term solution has been made, however, implementation needs to be followed immediately in order for Latin America’s sustainable economic independence post the COVID pandemic.

(The author is an independent analyst on Latin American affairs. Twitter @Alinyst. Views are personal).

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