Latin America and Caribbean region stares at deepest economic recession

June 9, 2020 12:09 PM

The good news for the region is that in spite of the ongoing global pandemic and absence of a vaccine, relaxation of lockdowns and reopening of businesses all over the world are expected to rally commodity prices in the short to medium-term.

For example in Nicaragua, a nation of 6.4 million, has been in the COVID 19 denial mode (Image: Reuters)

By Ravi Bangar

The World Bank released the “Global Economic Prospects” report on June 8. The report assesses the impact of COVID 19 on the global economy and analyses possible courses and outcomes. The pandemic and the lockdowns have caused a severe economic shutdown and have disrupted billions of lives and are jeopardizing decades of development progress. The report’s findings describe a global economy suffering a “devastating blow”. Its baseline forecast envisions the “deepest global recession” of 5.2% contraction in global GDP in 2020—the deepest global recession in eight decades, despite unprecedented policy support. It describes the COVID-19 recession as the first since 1870 to be triggered solely by a pandemic. The speed and depth with which it has struck suggest the possibility of a sluggish recovery. It adds that for many emerging markets and developing countries effective financial support and mitigation measures are particularly hard to achieve as a substantial share of employment is in informal sectors.

For example in Nicaragua, a nation of 6.4 million, has been in the COVID 19 denial mode and one of the last countries to resist adopting the strict measures that have been put in place around much of the world to curb the spread of COVID 19. The Sandinista government insists it has the virus firmly under control, with the lowest Covid-19 death toll in Central America. There are reports of nocturnal “express burials” in the country. The signs are everywhere that the coronavirus is raging across Nicaragua. Throughout the pandemic, the government not only allowed mass events — it organized them.

Significantly, in Nicaraguan cities, 80 % of workers have informal jobs. There it is just the wholesale shop owners mainly Arabs, Salvadoreans and Chinese with deep pockets and better resources to leverage technology who are able to comply with quarantine requirements. As compared to small shopkeepers who find it extremely difficult to close shops as they depend on daily earnings to sustain families and meet the costs of their businesses.

It states that economic disruptions are likely to be more severe and protracted in those countries with larger domestic outbreaks, greater exposure to international spillovers (particularly through exposure to global commodity and financial markets, global value chains, and tourism), and larger pre-existing challenges such as informality.

In the report, the growth forecasts for all regions have been drastically downgraded. Latin America and the Caribbean (LAC), inter alia, in particular, have large downgrades partly because of the size of their domestic outbreaks and exposure to global spillovers. Multiple deep recessions triggered by the pandemic are likely to leave lasting scars through multiple channels, including lower investment; erosion of the human capital of the unemployed; and a retreat from global trade and supply linkages. These effects may well lower potential growth and labour productivity in the longer term. Per capita incomes in all emerging and developing economies are expected to contract in 2020, likely causing many millions to fall back into poverty.

It finds that in Latin America and Caribbean, COVID-19 has sharply worsened economic conditions. The regional economy is projected to contract by 7.2 % this year, a much steeper decline than during the global financial crisis, reflecting the impact of the measures necessary to slow the spread of the pandemic, significant deterioration in financing conditions and commodity prices, and spillovers from a global recession.

In many countries in the region, equity market valuations have plunged and currencies have depreciated sharply. Risk premia in sovereign bond markets have risen across the region, with investors differentiating according to credit risk.

The report adds that in response to the crisis, a range of policy measures have been implemented to counter deteriorating economic and financing conditions. The monetary policy response has been multipronged, including liquidity provision; temporary loosening of reserve requirements for banks; policy interest rate cuts; establishment of temporary swap lines with the U.S. Federal Reserve to provide U.S. dollar liquidity (Brazil and Mexico); and foreign exchange market intervention. Chile and Colombia have launched asset purchasing programs modelled on quantitative easing in advanced economies, the first in the region.

Fiscal stimulus plans have been announced in numerous countries (e.g., Chile, Colombia, Costa Rica, Panama, Peru, Uruguay, and across the Caribbean), including somewhere public finances are already strained (Argentina, Brazil, El Salvador). In some countries, tax deadlines have been delayed and loan and utility payments temporarily suspended.

In the region, energy-exporting countries face an unprecedented public health crisis (Brazil, Chile, Venezuela, Mexico, Ecuador, Colombia etc.), but their fiscal positions with few exceptions were already strained even before the recent collapse in oil revenues (Brazil, Venezuela, Ecuador etc.). For some of them, current low oil prices provide an opportunity to implement energy-pricing policies that yield efficiency and fiscal gains over the medium term. Last week, Venezuela introduced a dual pricing system of petrol at the pump. Venezuelans can purchase up to 120 litres of gasoline at a heavily subsidized price of 5,000 bolivares (2.5 U.S. cents) per litre, and 50 U.S. cents per litre thereafter. The change effectively ended decades of heavy subsidies in Venezuela, where cheap fuel has long been considered a birthright of sorts. While there was confusion and chaos when the new system kicked in but nothing of the scale of reforms in 1989 led to a violent uprising known as the Caracazo.

The sharp fall in global commodity prices is a headwind for much of the region, and particularly for oil and gas producers given the plunge in global energy prices. Despite the OPEC+ videoconferencing meeting of 6 June decision to sustain supply cuts of 9.7 million barrels per day till end July, oil prices failed to rally much. Gulf oil producers(Saudi Arabia, UAE and Kuwait), which pledged voluntary production cuts of 1.18 million barrels per day that began in June, have clarified they have plans to extend those reductions beyond this month. Those were in addition to the agreement between the OPEC+. The prospects of a ramp-up in output from the US shale-oil producers as prices of the crude climb, a refusal by Mexico to adhere to production cuts and reports that Libya has restarted production at its largest oil field, have also undercut optimism about an extension of the historic output-cut agreement beyond July. The next OPEC+ meeting is scheduled in early December.

The report finds that the abrupt slowdown in the U.S. and China disrupted supply chains for Mexico and Brazil and caused a sharp drop in exports from commodity-producing economies such as Chile and Peru. The severe contraction in the United States in the second quarter has affected Central America through trade and remittance channels. Tourism, on which numerous Caribbean countries and Mexico rely heavily, plummeted in the first half of the year.

The region in 2020 as per the report is projected to contract by 7.2 per cent, much more steeply than during the global financial crisis of the 1980s Latin American debt crisis. In Brazil, the economy is projected to contract by 8.0 per cent. In Argentina, stringent COVID-19 mitigation measures, together with lower export demand and the impacts of uncertainty related to on-going debt negotiations, will contribute to a projected GDP contraction of 7.3 per cent. A recovery to 2.1 per cent growth in 2021 hinges on a bounceback in domestic demand, which would result from the restoration of confidence. Colombia, together with Ecuador and Bolivia, are highly exposed to the plunge in oil and gas prices. However, Colombia, with more robust economic momentum in the lead up to the pandemic is projected to contract by 4.9 per cent, while Ecuador’s economy is envisaged to contract by 7.4 per cent. In Chile and Peru, weak export demand, falling copper prices will result in deeply negative growth in both countries—of 4.3 and 12.0 per cent, respectively.

As for the outlook for the region, the report says is exceptionally uncertain. The impact will be highly dependent on the magnitude and duration of the pandemic. The baseline forecast assumes ushering in recovery in activity, and that commodity prices will firm as global demand stabilizes. A normalization of domestic and global conditions is envisaged to allow growth to recover to a moderate 2.8 per cent in 2021.

The good news for the region is that in spite of the ongoing global pandemic and absence of a vaccine, relaxation of lockdowns and reopening of businesses all over the world are expected to rally commodity prices in the short to medium-term.

On the supply chain front, the re-shoring or near-shoring of production and likely benefits for Latin American countries will critically depend on streamlining policy, taming bureaucratic hurdles, reducing labour costs, enhancing IPR protection and improvement in competitiveness.

(The author is Former Ambassador to Colombia and Ecuador, High Commissioner to Cyprus, Deputy Permanent Representative to the WTO and Deputy High Commissioner to Singapore. At the Ministry, he headed Multilateral Economic Relations, West Africa and East & Southern Africa Divisions. The views expressed are personal.)

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