Latin America is the world’s worst-hit region by the coronavirus pandemic and its economy faces a slow and painful recovery, with a growing risk that worsening poverty and inequality will trigger political upheaval, economists have warned.
By the end of this year, the region’s output will still be 4.8 per cent below its pre-pandemic level, the worst performance in the world, according to IMF forecasts. Carlos Felipe Jaramillo, World Bank head for Latin America and the Caribbean, believes it will not recover its pre-pandemic gross domestic product level until at least 2023.
“2020 was a disastrous year . . . and we’re very concerned for what that means for poverty and inequality,” Mr Jaramillo told the Financial Times. “2021 should be better but it will only be a very gradual recovery, I don’t think we’re expecting anywhere a quick bounceback.”
The sluggish recovery is largely a problem of Latin America’s own making; global economic dynamics are favourable as central banks in advanced economies continue to pump huge volumes of stimulus into financial markets and China’s speedy recovery boosts commodity prices.
Latin America was already the world’s slowest-growing region before the pandemic, and economists identify three main challenges in the coming year: the continuing spread of the virus, constraints on the amount of fiscal stimulus the region can afford, and a lack of political support for structural reforms that could help boost growth.
Latin America is home to just over 8 per cent of the world’s population but it has suffered more than a quarter of all coronavirus deaths, despite lockdowns in countries such as Peru and Argentina which crippled their economies.
Yet there is little chance vaccines will be rolled out speedily enough to help boost growth this year. Chile is the only nation in the region that has so far secured enough vaccines to inoculate its entire population; in most countries only a small minority will receive jabs in 2021.
Marcos Casarin, Latin America chief economist at Oxford Economics, said some governments in the region had in effect given up trying to restrain the spread of the virus, even if they were not prepared to admit that publicly. An economic recovery is under way and “the assumption we’ve made is that urban mobility should return to normal by around September”, he added.
But Latin America’s poor economic performance in recent years has left it with the developing world’s highest average government debt-to-GDP ratio, constraining room for fiscal stimulus, economists warn.
In Brazil, its biggest economy, President Jair Bolsonaro spent lavishly last year on emergency aid for the poor. This boosted his popularity but increased the country’s budget deficit — fuelling investors’ concerns about the sustainability of its public finances.
With debt already exceeding 90 per cent of GDP and the highest total debt of any emerging market outside China, Brazil faces an unpleasant choice: shun stimulus and stunt the recovery or keep spending and risk a revolt by investors.
For now, Mr Bolsonaro has decided against more stimulus — last week he claimed that “the country is broke and there is nothing I can do” — but as he looks to his re-election campaign in 2022, there will be an increasing temptation to spend.
“Brazil faces another year of living dangerously,” said Alejo Czerwonko, chief investment officer for Latin America at UBS Wealth Management. “Failure to rein in spending cannot be ruled out.”
Meanwhile, its Congress remains deadlocked over structural reforms to overhaul Brazil’s byzantine tax code and rein in public spending.
Assuming that there is no extra spending, most forecasters expect Brazil’s recovery to be among the weakest in the region, with growth of just 3.2 per cent this year after a fall of 4.9 per cent last year, according to Citi.
Nonetheless “Brazil is likely to be among the first countries to cross the line [in terms of recovering to pre-pandemic levels] because it suffered the least”, said Mr Casarín.
In Mexico, the region’s second-biggest economy, investors’ worries are about parsimony rather than profligacy. President Andrés Manuel López Obrador has refused to allow big additional spending. This led to a much worse recession last year, with a fall in GDP of about 9 per cent, but left the country with a far smaller budget deficit to finance.
However Mr López Obrador’s preference for state intervention in the economy and his perceived hostility to the private sector is likely to lead to a “gradual worsening of the business climate”, Mr Czerwonko warned.
In the meantime, the region’s debt pariahs, Argentina and Ecuador, have restructured foreign borrowings but are grappling with domestic political tensions.
Claudio Irigoyen, chief Latin America economist at Bank of America, believes Argentina could benefit economically this year if it reaches a successful deal with the IMF, adding: “Relative to expectations it can do well, but that’s because there are very low expectations.”
In Ecuador, opposition to austerity is mounting and the presidential election next month may return a leftwing populist, Andrés Arauz, who has pledged to tear up the IMF agreement. Peru and Chile also face elections this year with heightened political risks.
Latin America’s main hope for economic recovery is to address longstanding wealth inequalities; the UN Economic Commission on Latin America calls it the “world’s most unequal region”.
The World Bank’s Mr Jaramillo believes that various initiatives to improve broadband access for the less privileged, to bring in tax reforms to increase revenues and improve public services, and to free small and medium-sized businesses from excessive regulation, are all promising.
“This crisis has been particularly harsh on the poorest and particularly comfortable for the middle class [and] upper middle class,” Mr Jaramillo said. “It’s become evident in most countries that this is really just not something that should be sustainable for too long.”