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Brazil's economic plight could hinder a post-pandemic recovery in the region

The skyrocketing spread of the coronavirus in Brazil has thrust the country into what is likely to be its worst recession in more than 50 years. It also could threaten the economic prospects of its Latin American neighbors.

Brazil now has the No. 2 highest number of confirmed COVID-19 cases and the No. 3 highest total of deaths related to the disease. The rapid accent of the coronavirus has spurred economic estimates increasingly lower for the country. The central bank now expects GDP to slide 5% in 2020. Others, including the World Bank are even more pessimistic, with contraction estimates closer to 8%.

In its want to keep the economy moving, the government of President Jair Bolsonaro resisted calls for a nationwide lockdown. However, recent data suggests that the move hasn't helped the economy. GDP in the first quarter sank 1.5%. The Economy Ministry recently revealed that a record high number of Brazilians, nearly 1 million, filed for unemployment insurance in May, bringing the estimated unemployment rate to 12.6%. It also showed that the underemployment rate shot to an unprecedented 25.6%. The central bank expects Brazil to end the year with a 15% unemployment rate.

The potential impact of a severe and prolonged recession in Brazil likely would extend well beyond the country's own borders, experts note, with top trading partners like Argentina, Paraguay and Uruguay feeling the greatest pressure.

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Felipe Camargo, an economist at Oxford Economics, currently sees a GDP contraction of 7.5% for Brazil. Given that "supply chains in Latin America are very intertwined," this will restrict the ability of other countries in the region to recovery from their own economic slumps in the short term.

"Generally speaking, a fifth of each country's exports stay within the region, and much of this goes through Brazil at some point," he noted, highlighting the vitality of Brazilian domestic demand to regional supply chains.

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In Argentina, Brazil's largest regional trade partner, the impact will be felt in the auto industry, which will have spill-over effects on sectors like steel and mining, Camargo said. In 2018, 69% of Argentine car exports went to Brazil, according to the ADEFA carmakers' chamber. "The lack of Argentine demand for Brazilian cars in 2018 and 2019 hurt Brazil greatly," he said to illustrate that the trend works both ways.

Pablo Lavigne, LatAm Director at economic consultancy ABECEB, also believes Argentina will bear the brunt among Brazil's neighbors, since the blow comes on top of an already fragile economy.

Paraguay's trade revenue will suffer primarily due to lower income from reduced operations of Brazilian companies with assembly plants in the country, as these will be exporting less due to lower demand, ABECEB's Lavigne said, noting that Uruguay will also have to reduce its food exports.

In contrast, Peru and Chile are far more dependent on Asia than on Brazil, while Colombia and Mexico have closer commercial partnerships with the U.S., both Camargo and Lavigne pointed out. Even so, a severe contraction in Brazil could impact exporting sectors in these countries.

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The fact that the region was not greatly impacted by Brazil's worst recession in modern history, between 2014 and 2016, could mean that the effect of the current downturn could be limited, Alejandro Cuadrado, an emerging markets and Latin America strategist for BBVA, said.

"Brazil is very large and weighs heavily on regional calculations, but it's also tremendously closed off by any indicator you look at, and so are other Mercosur nations, so the impact from reduced trade would be limited" Cuadrado said, pointing to successful efforts from Uruguay and Paraguay to diversify exports in recent years.

While Brazil saw an average contraction of 2.1% between 2014 and 2016, Paraguay expanded by 4.1% and Uruguay by 1.8%, according to World Bank data.

In addition, Brazil has one of the largest stimulus packages in the region, and its bounce back in 2021 will be greatly aided by the real's more-than 20% devaluation against the U.S. dollar year-to-date, making its exports more competitive, ABECEB's Lavigne said.

The economic recovery of agricultural exporting countries, such as those in Mercosur, will likely be boosted next year by higher Asian demand for food products with higher traceability standards, Lavigne noted, although he does not expect an economic recovery to pre-coronavirus levels in the region until 2022.

As of June 9, US$1 was equivalent to 4.89 Brazilian reais.