Covid in Latin America: Another Lost Decade?

5 November 2020

Saddled with high debt, Latin America’s real per capita GDP stagnated between 1980 and 1995, despite a healthy global economic environment. A lost decade (Chart above). The region has suffered greatly during the ongoing Coronavirus crisis, and the economic consequences have been enormous. Despite having only 8% of the world’s population, the area accounts for 34% of total Covid deaths. Indeed, while the IMF projects global and Emerging Market GDP will contract 4.4% and 3.3% respectively in 2020, Latin American output is forecasted to decline 8.1%. What lies behind the region’s inability to cope with the health emergency? Has the pandemic shed light on structural issues leading to the region’s chronic economic underperformance? Will the 2020’s be another lost decade for Latin America?

Latam Covid Experience: Cry for Me!

The Chart above highlights the toll Covid-19 has taken in Latin America. The tragic death count far exceeds that in Asia and most Emerging market economies in Europe. It is worth noting, however, the loss of life has been far lower in Uruguay, Paraguay, and a few other nations than in the rest of the region.

The IMF has identified many reasons for this poor performance (I strongly recommend their excellent report entitled “Pandemic Persistence Clouds the Recovery”). Johns Hopkins has rated 195 countries health care care systems’ ability to cope with pandemics. The quality of care differs widely in the region. Argentina, Brazil, Mexico, Peru, and Chile, for example, all rank within the top 43 nations (ok, but should be better). However, others score less well: Bolivia 131, Uruguay 89, Paraguay 75.

In addition, the mobilisation of, and wide-spread access to, health resources is critical durinf a pandemic. On this front, Latin America’s deficiency is revealed by its poor track-record on Covid testing — the Chart above illustrates no country has performed well. Comparison of the two Charts underscores the importance of testing. Despite its low Johns Hopkins score, Uruguay has tested relatively more, and its death toll is low. At the other extreme, Mexico’s extremely poor testing performance coincides with its very high fatality rate. Critically, the combination of Latin America’s inadequate testing and high death rate suggests the level of infection in the region is likely far higher than measured so far. Sadly, more bad news likely lies ahead.

Many point to the region’s weak public sector institutions for the failure to mobilise health care resources, especially to the poor and most vulnerable. The World Bank rates Latin America’s government effectiveness well below the advanced nations, as well as the Asia/Pacific economies (Chart above). Sadly, Brazil has lived down to expectations. As an aside, the regional institutional weaknesses are likely to hamper its ability to cope with climate change, arguably the next health emergency (see my blog “Markets Are Ignoring Climate Change”).

Important structural features of Latin America’s labour market have contributed to the high incidence of Covid-19. The Chart above illustrates Latin America has a very high share of jobs in contact-intensive sectors: much larger than in both advanced and emerging economies. In addition, the following Chart shows that relatively few people can work remotely. As we will see, Latin America’s large informal economy, which are not suitable for tele-working, tend to be low paying. Thus, low-income workers are being hit hardest. In addition, poorer Latin American have less access to on-line banking and shopping; requiring frequent trips to local markets and financial institutions (to access support payments, etc.). All have added to high infection rates amongst the most vulnerable.

Using Fiscal Space to Offset Covid Impact

Latin American governments have implemented large-scale monetary and fiscal stimulus in an attempt to offset the impact of economic lockdown. Indeed, the Chart above indicates budgetary efforts have been largest in Peru, Brazil, Bolivia, and Chile. Noteably, Mexico (along with Ecuador and Uruguay) has taken a far more conservative approach to both fiscal and monetary expansion. Despite the impact on public finances, Latin governments must maintain the stimulus into 2021. Fortunately, public sector debt in most countries is low enough to make this feasible. With the exception of Brazil and Argentina (with pre-crisis debt/GDP ratios of 90%), the level of public sector liabilities range from only 26% in Peru to 59% in Bolivia.

As a result of the macro-measures, the Chart above illustrates economic activity has begun to recover in recent months. Nevertheless, reflecting the region’s difficulty in coping with the Covid emergency, Latin America suffered the sharpest recession, and its recovery lags far behind both Asia and Emerging Europe.

Moreover, the high level of Covid infection has required Latin America to adopt amongst the most restrictive lockdown measures in the world (Chart above). And, the persistence of the pandemic in the region has prevented much easing of these constraints compared to the rest of the world; thereby, imposing a significant headwind to economic recovery in 2021.

Long Covid: A Lost Decade Ahead?

We are learning that the health consequences of Covid-19 can linger. Likewise, economies may take a long time to recover fully from the Covid shock. At the outset, it’s worth noting Latin American economies were experiencing a secular slowdown even prior to the pandemic. The Chart above illustrates trend GDP growth has weakened across the region in recent years. Likewise, Latin America lags even further behind the Asian economies. And, as the USA has been outperforming, Latam’s per capita GDP has been diverging from the powerhouse to the North.

The Covid pandemic could impact adversely Latin America’s long-term growth prospect through many channels. The Charts above illustrate the uniquely destructive nature of the current recession. First of all, the decline in ouput has far exceeded that of past slumps. And, unlike previous downturns, the fall in employment has been larger than the contraction in output.

Furthermore, the job losses have hit low-income groups hardest. The Charts above indicate that employment has decline most amongst the less educated and those working in the informal segment of the economy. Both groups are the poorest and most vulnerable. Assuredly, therefore, the pandemic will lead to greater inequality and poverty. The following two Charts indicate that even prior to the crisis many Latin American countries had the most unequal income distributions and highest levels of poverty in the world.

In addition, Latin America’s long-term prospects would also suffer if the pandemic leads to extended period of low commodity prices. The following Chart illustrates the region’s heavy reliance on primary products, especially relative to other Emerging Market regions.

Likewise, much of the region, especially the Caribbean islands, are highly reliant on tourism. If, as seems likely, the hospitality sector is one of the last to fully recover, this could remain a headwind (not of the lovely tropical variety) for an extended period.

Strategic Considerations

  • Latin America’s poor Covid track record will require lockdown restrictions to remain in place longer than elsewhere. As a result, regional growth will underperform EM areas again in 2021. Additional monetary and fiscal stimulus will be require to sustain the courrent recovery.
  • The pandemic has revealed many structural headwinds confronting Latam economies. Sadly, I anticipate real per capita GDP may not be fully restored to 2019 levels until 2028 — a lost decade.
  • Most of the region’s currencies are already significantly undervalued (Chart above). There will be opportunities once a vaccine emerges. However, widespread innoculation in the region may not take place until 2022. For now, I remain cautious.
  • Reflecting its high fatality rate and poor testing track record, I fear troubles may still lie ahead in Mexico. I anticipate substantial interest rate reductions in the coming year (below 2%).
  • Despite its poor handling of the pandemic, Brazil’s economy has performed better than I expected, reflecting its large fiscal stimulus. With less fiscal space than its neighbours, I anticipate Brazil will underperform next year.
  • The overvalued Peruvian sol appears highly vulnerable. The Chilean peso would be my top choice near term.