The focus on the global pandemic caused by the SARS-CoV2 virus shifted from China, where the lockdown of Wuhan was lifted early April but new outbreaks threaten the recovery, to Europe and later to the United States that saw an unprecedented wave of infections leaving the country in shock.
Latin America has not taken center stage in this global pandemic, but has by no means been able to escape the devastating effects of the crisis. Indeed, the virus is everywhere.
At this point, it is still unclear whether the region needs to brace itself for “peak corona”, or whether it will be able escape the impact seen in other parts of the world.
Whilst we are still confronted with a lot of unknowns, it seems likely that the peak of this pandemic in most Latin American countries is still ahead of us, with rising numbers in terms of reported infections and deaths caused by the virus.
“The Affinitas member firms in Chile, Colombia, Mexico and Peru have been reporting on the broad range of emergency measures and initial policy responses to the crisis, offering insights, legal perspectives and practical advice on the impact of specific regulations that will impact business operations in each country. An overview of these rapidly developing responses are aggregated on the Affinitas resource center on COVID-19, where we provide comparative overviews on the labor and tax measure across the four jurisdictions in the Pacific Alliance, and link to the country-specific resource centers created by the member firms.”
According to the tally kept by Johns Hopkins University, as of April 19th, Chile counts 10,088 confirmed cases, with 133 deaths; Colombia saw 3,621 confirmed cases and 166 deaths. Mexico, which was more measured in its response to the crisis, currently counts 7,497 confirmed cases and 650 deaths on that same day, whilst Peru, saw 15,628 confirmed cases, 400 deaths. There is widespread suspicion, however, that because of slow reporting and low testing capacities, the real numbers are much higher. Officials in Mexico have put the real number of cases up to eight times higher than the confirmed figures.
Mitigating the economic impact of the pandemic
It did not take long for this major health crisis to warp into a full-blown economic crisis, that might be unparalleled in recent history. Governments and central banks around the world have announced jaw-dropping rescue plans and stimulus efforts to fight the economic effects of the crisis.
On March 25th, the US senate a passed a US$2.2 trillion response bill intended to bring relief to the American economy. On April 9th, after several failed attempts, EU finance ministers finally agreed a EUR 540 billion (US$590 billion) economic stimulus and support package, and further contemplates the possibility of issuing so-called ‘coronabonds’ to assist the member states with their economic recovery plans.
Latin America lacks the political institutions and monetary instruments to formulate a regional response, and indeed vary greatly from one country to another, as the the impact of the crisis on key sectors and reseem to indicate:
- Chile: On April 8th, Chilean President Piñera announced the second phase of the economic emergency plan that will put the country’s fiscal deficit at 8 percent of GDP. The plan includes a new US$3 billion guarantee fund for small companies, a fund of up to US$2 billion for workers in low-income and informal sectors of the economy to access emergency jobs and benefits. These measures come on top of a US$11.7 billion plan first phase announced on March 19. Chile’s Central Bank has gradually lowered its interest rates, currently standing at 0.5%, and started offering credit lines to non-banking financial institutions.
- Colombia: In Colombia, where the national quarantine will be extended to April 27th, a series of economic relief measures are being implemented, including accelerated tax refunds and a grace period on mortgage and loan payments for SMEs, special credit lines for heavily affected strategic industry sectors, and cash transfers to 3 million low-income families. These measures come at a high cost. The Colombian government has asked for a total of US$14 billion in loans from international lenders, including up to US$11 billion from the IMF, and $3 billion collectively from the World Bank, Inter-American Development Bank, and the CAF – Development Bank of Latin America.
- Mexico: In Mexico, president Lopez Obrador’s measured response is less audacious, as he seems to stick to his plans and doubles down on recently launched social programs, selected large-scale infrastructure projects (notably the Mayan Train, the Dos Bocas oil refinery and Santa Lucia airport), and cash injections into embattled NOC PEMEX. The government seems reluctant to take on new debt to finance public spending and is tapping money previously allocated to public trusts and other existing government funds . Yet, Mexico’s economy seems particularly vulnerable to the effects of this crisis, with the tourism sector -responsible for 8.5% of GDP- shutting down completely, and its vital supply chains and trade with the US potentially disrupted by the impact of the emergency measures on both sides of the border. The Labor Ministry revealed on April 8 that the country had already lost 347,000 jobs as a result of the pandemic. Bank of America is now forecasting an 8% contraction of the economy in 2020 and foresees further credit ratings downgrades down the line.
- Peru: Initially perceived as one of the Latin American countries that was most exposed to the effects of the crisis because of its extensive trade flows with China, Peru reacted quickly to the crisis and put together one of the largest and most pervasive economic stimulus plans in the region. The measures announced mount up to 12% of GDP and are made possible amongst others because of the large savings the country accumulated in the past decade and its ability to easily tap international debt markets if needed. Markets seem to react favorable to these strong fiscal stimulus packages, with the Sol outperforming other currencies in the region.
But once the scope and severity of the economic consequences of this health crisis are becoming clear, the region will need to go beyond emergency responses, assess the mid- and long-term impact of this shock and strategize for its recovery.
Sector-specific impact hit Latin America’s drivers of growth
When we look at the impact of the crisis on key sectors and recent drivers of economic growth in Latin America, it becomes clear the region will be exposed to a series of important shocks and subsequent adjustments.
With international travel halted, the tourism and hospitality sector is without any doubt one of the hardest-hit sectors by the outbreak of the virus, with obvious and severe short-term disruptions. But it seems very possible we will see long-term subdued demand. The decrease in visitors from the US and China, the world’s most important outbound markets, will be difficult to overcome, even if domestic demand picks up again. The World Travel and Tourism Council has already warned that international travel will decrease by an expected 25% in 2020, cutting 50 million jobs worldwide as a result. New corporate policies and shifts in consumer behavior could well prevent a full recovery, even in the long run. This will impact the economic viability of the weaker players in the aviation industry, and restrain future investments in hospitality infrastructure, real estate and construction.
Along similar lines, it is clear that the Sports & Entertainment sectors will suffer equally dire consequences. As this sector relies on large gatherings, close human interaction and international mobility, the impact will be important. On the other side of the same coin, e-sports and digital (home) entertainment will fully come to maturity and offer alternative growth options.
Another strong driver of growth and economic activity in Latin America is the Energy and Natural resources sector. The impact of reduced demand (the IEA sees the deepest fall in demand in 25 years, with global oil demand expected to fall by a record 9.3 mb/d year-on-year in 2020) seems to go hand-in-hand with failed attempts by OPEC and its allies to cut productions sufficiently to curb falling global crude oil prices. The macro-economic and geopolitical effects of the crisis are furthermore expected to exacerbate the trend of de-globalisation and falling commodity prices. Increased protectionism, fueled by a new generation of populist political leaders in the large economies across the region, risks fracturing international supply chains and weaken the exports component of growth.
The end of the commodity “super-cycle”, already well under way before this crisis, will now likely lead to drastically falling prices in copper and other metals, minerals, and agricultural output. Mining corporations and agribusiness, especially in the Andean countries that benefitted greatly from an unusual and prolonged period of strong demand, will not come out unscathed.
Another key sector that is seeing drastic consequences of the COVID-19 pandemic is the automotive sector. Initial concerns about disrupted supply chains because of restricted exports from China quickly descended into a general manufacturing freeze that saw assembly plants close down around the world, leaving millions of workers furloughed or made redundant. Depressed consumer demand will put further financial pressures on automakers, already leading to speculation about potential M&A activity in the sector.
Any economic recovery attempt in Latin America will likely be hamstrung by the evil twins of corruption and organized crime. Transparency International already raised alarm over increased corruption risks, in particular in public procurement processes during this state of emergency. And in a recent article published by Americas Quarterly, experts expect criminal enterprises to quickly adapt and diversify as a reaction to the crisis, with increased activity in areas such as counterfeited medical supplies, cybercrime and new extortion schemes.
Silver linings in the Low Touch Economy
Economic silver linings will have to be sought in the Healthcare and Life Sciences sectors, that will probably benefit from a short-term boost created by the search for protection (medical devices and supplies), care (hospitals, medicine) and solutions (vaccines). But also in the mid- and long term, we can expect support for investments in public healthcare systems, private and public investment in R&D and technology that will allow us to avoid the general level of unpreparedness that has so far characterized this outbreak.
Finally, it is becoming abundantly clear that the most profound and transformative effect of this crisis will be an acceleration of the digital transformation of all spheres of human activity. When we wake up from this crisis, our world will be very different from the one we lived in prior to COVID-19. The term “Low Touch Economy” has already been coined, and anticipates unprecedented levels of change and disruption. We are already redefining the world of work, social interaction, public governance and economic production. The pace of change we have seen in recent years will drastically speed up, and make way for a series of shocks and abrupt changes in public policy, geopolitics, human behavior and economic dynamics.
And in that change process, there is also opportunity. Latin America is seeing interesting hubs of innovation and technology; the region’s eCommerce sector is one of the fastest growing in the world and its Fintech ecosystem is also widely recognized. The region’s young and urban population is getting attention and investments from the global technology industry (“Latin America is primed to be the next global tech hotspot” – World Economic Forum). If its education system can meet this opportunity and structural reform can carry the momentum, a new generation of talent can embrace this momentous change and reemerge from this crisis with renewed hope and plenty of business opportunities.
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