REGIONAL REPORT
LATIN AMERICA | By Denise Marín
A Region In
Crisis Takes
A Fresh Hit
As governments scramble to
contain Covid-19, Latin America
must still reckon with deep-
seated economic shortcomings.
T
he Covid-19 pandemic profoundly complicates Latin
America’s response to an already existing accumula-
tion of economic challenges, including a historic
social deficit, a lack of fiscal balance in some coun-
tries and difficulty in raising productivity. The whole
region, including the Caribbean, has been growing below the
global average over the past several years. Now, the June outlook
from the International Monetary Fund (IMF) forecasts a 9.4%
decline in annual GDP in 2020; for 2021, the region is forecast
to achieve only a partial recovery of 3.7%.
The health crisis has brought to the front burner an agenda
of structural reforms, privatization and accelerated investment
in infrastructure and technology that some prominent experts
have been advocating for a long time. Latin America finds itself
pressed as never before to embrace these changes as a route to
greater competitiveness and economic recovery.
The biggest economies—Brazil, Mexico and Argentina—will
need more time to recover to their prepandemic growth rates.
Countries that built fiscal cushions before the Covid-19 crisis hit
may be on the road to recovery by late 2022. Those with strong
trade and investment ties to China, the only economic giant
delivering a positive GDP rate this year, may be favored as well.
Those more dependent on the US, however, will not see as
swift a recovery. The outlook also varies according to countries’
success at bending the Covid-infection curve, the robustness of
their social-protection mechanisms, their macroeconomic balances
and their degree of access to the international financial system.
Brazil’s government is pressing to conclude a program of tax
and administrative reforms and to sell its crown jewels in order
to lower its fiscal deficit and reduce the public debt, which
PH OT O C RE DI T T K
is now close to 100% of GDP. The current administration
is moving forward with water and sewage and transportation
concession plans. The announcement of major privatizations,
including the electrical giant Eletrobras, is expected by some
14_RR_LatAm_Oct20_final1.indd 57
Buenos Aires, Argentina, August
2020: People protesting against the
quarantine and the government’s
intention to reform justice.
to happen as soon as this month.
But some economists and policy advocates say that to attract
foreign investment, Brazil will have to radically change its
policies regarding the destruction of the Amazon rainforests.
The biggest Latin American economy is expected to contract
between 5% and 6% this year, a result that would be worse
without its highly productive agribusiness sector and the $57
billion the Treasury is sharing among vulnerable Brazilians from
April to December.
Next year, the economy may grow 3.5%, but only 2.5% the
following year, according to a September market report from
the Central Bank of Brazil. Infrastructure projects will inevitably
be a faster way for Latin America to get out of the crisis, given
its capacity to attract investments, increase competitiveness and
create jobs, says economist Otaviano Canuto, nonresident senior
fellow at the Brookings Institution and former vice president of
the World Bank. He argues that Brazil must rush its economic
reform agenda and maintain fiscal discipline to enjoy the abun-
dance of global liquidity.
CONTRASTING COVID RESPONSES
Mexico and Argentina have been grappling with quite dif-
ferent dilemmas since Covid-19 got inside their territories.
With its public debt around 60% of GDP, Mexico risks losing
its investment-grade status in 2021. According to the IMF,
Mexico’s fiscal response to the pandemic has been the smallest
among the G20 countries.
Given its close ties to the US economy, the fall in oil prices,
international financial market volatility and disruptions to global
supply chains, Mexico’s GDP should drop 10.5% this year and
expand only 3.3% in 2021, the IMF projects. The government is
pushing its trade agreement agenda and has announced the privati-
zation of Ecopetrol and electrical company ISA, but these will not
have a significant impact on the state’s fiscal imbalances.
October 2020 | Global Finance | 57
9/28/20 12:17 PM
 REGIONAL REPORT | LATIN AMERICA
Argentina took a dramatically different approach to Covid,
prioritizing control of the disease over business growth, even
though it faces one of the most challenging economic environ-
ments in the world. It did not expect to emerge from its reces-
sion this year; and to do so in the wake of Covid-19, it is again
relying on its competitive agricultural sector.
Economist Orlando Ferreres, president of Orlando J Ferreres
y Asociados (OJF), projects a 13% drop in GDP this year, about
three points lower than the last IMF estimate. For 2021, the fund
predicts a 3.9% expansion.
In the middle of the pandemic, the Argentinian government
reached an agreement with its foreign creditors to restructure its
debt of about $65 billion. The announcement eliminated the risk
of default and enabled the economic
team to reengage in negotiations with
the IMF, to which the country owes
$44 billion. A plan to jump-start
economic activity was released in
September.
“It will take months for Argentina
to reach a consensus with the IMF,”
says Ferreres. “But when it is signed,
it will reopen investment opportuni-
ties for the telecommunication, tech-
nology and e-commerce sectors.” Ocampo, Columbia: The US-China trade dispute
could relocate value chains to countries closer to
the American market, benefiting Colombia.
CRISIS AND
TRANSFORMATION
As a region, Latin America will certainly display a higher debt-to-
GDP ratio in 2021 and the following years due to the mounting
public expenses required to stanch both the economic and the
health effects of Covid-19. Most of the countries have opted to
reduce their basic interest rate and are exercising minimum con-
trol of the devaluation of their currencies, which raises concerns
about inflation but also makes their exports more competitive.
The Andean states have benefited from good macroeconomic
management in prior years and a recovery in mineral prices.
The Central Bank of Chile improved its estimate in September
for GDP loss in 2020 from a range of 5.5%-7.5% to 4.5%-5.5%
while lowering growth projections for next year from 4.75%-
6.25% to 4%-5%. Despite social challenges that have sparked mass
demonstrations and disorder, the country is the most competi-
tive of Latin America’s biggest economies, according to recent
research by Brazil’s National Confederation of Industry.
Colombia has been favored by the diversification of its agri-
business industry, despite the fall in oil and coal prices. The
manufacturing sector, too, has been recovering since May and
June, boosted by its ready-to-wear-clothing, petrochemical,
auto parts and chemical segments, says economist José Antonio
Ocampo, director of the Economic and Political Development
Concentration at Columbia University’s School of International
58 | Global Finance | October 2020
14_RR_LatAm_Oct20_final1.indd 58
and Public Affairs, and former Colombian minister of finance.
However, Colombia is expected to face a GDP loss of 6.5%-
10% for 2020, according to the Bancolombia Group.
“Because of the trade dispute between the US and China,
most of the value chains can be relocated from the East to coun-
tries closer to the American market,” says Ocampo. “Colombia
should benefit from it in terms of investments and exports.”
Another Andean state, Peru, is a point outside the curve.
Well-managed public accounts and low indebtedness will not
be enough to prevent a 12% drop in GDP this year, according
to the World Bank’s June forecast. The government responded
to the pandemic with a $230 monthly allowance to the poor-
est sector of the population for three months and adopted a
subsidized credit program for small and
midsize enterprises. Peru is caught in
two traps, however. The first one is the
presidential election in April 2021.
“The despair and frustration of the
Peruvians during the pandemic can
open space for populists in a country that
lacks the presence of solid parties,” warns
Carlos Parodi, director of the Economics
Department at Universidad del Pacifico.
“Investors are being cautious.”
The second obstacle centers on Peru’s
most important industry. The govern-
ment projects a 30% drop in investment
in the mining sector this year, following a fall of 17% in 2019,
due to popular protests against new projects in copper explora-
tion, even those approved by the environmental authorities.
Older projects, however, are still running and enjoying the
slight rise in mineral prices. Parodi expects the engines of eco-
nomic recovery to be fruit production and infrastructure projects
announced by the government: the Central Highway expansion,
two irrigation projects and two more metro lines.
“Peru has 98 different microclimates that are being explored
by Chilean and English investors in agribusiness,” Parodi says.
As in many other parts of the world, the lockdowns between
March and June brought changes to the Latin American economy
that are likely to be permanent. Consumers were forced to engage
with e-commerce as never before. This shift is pushing techno-
logical development, including new electronic payment systems.
Latin Americans over 14 years old purchasing through the
internet now represent 38.4% of the region’s population, accord-
ing to eMarketer. Electronic sales in the region are expected to
reach $83.6 billion this year, nearly 7 percentage points higher
than the 12.5% growth the research firm estimated in the fourth
PH OT O C RE DI T T K
quarter of 2019. The Statista platform projects that e-commerce
in the region will move $116 billion by 2023. Brazil now rep-
resents a 32.5% share of this market and Mexico 28.8%, placing
them at the forefront of the trend in the region. n
9/28/20 12:18 PM
Copyright of Global Finance is the property of Global Finance Joint Venture and its content
may not be copied or emailed to multiple sites or posted to a listserv without the copyright
holder's express written permission. However, users may print, download, or email articles for
individual use.