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Economic Research: For Latin America, The Path To Economic Recovery From COVID-19 Remains Uncertain

Economic Research: For Latin America, The Path To Economic Recovery From COVID-19 Remains Uncertain

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.

We think the COVID-19 outbreak and associated economic and financial implications will push Latin America into a recession in 2020, with the region recording its weakest growth since the GFC. We forecast Latin America's GDP to contract 1.3% in 2020, and then bounce back to 2.7% growth in 2021. This compares with our previous forecast for growth of 1.5% for 2020 and 2.0% for 2021.

Table 1

Latin America: GDP Growth And S&P Global's Forecasts
(%) 2018 2019 2020 2021 2022 2023
Argentina (2.5) (2.1) (2.5) 2.4 2.0 2.0
Brazil 1.3 1.1 (0.7) 2.9 2.5 2.5
Chile 4.0 1.0 (0.2) 3.0 2.6 3.0
Colombia 2.5 3.3 0.7 3.8 3.2 3.2
Mexico 2.1 (0.1) (2.5) 2.2 1.8 1.8
LatAm 5 1.4 0.6 (1.3) 2.7 2.3 2.3
Note: The LatAm GDP aggregate forecasts are based on PPP GDP weights. Source: S&P Global Ratings.

Table 2

Changes in Base Forecasts From Fourth-Quarter 2019
(%) 2020 2021
Argentina (1.5) 0.9
Brazil (2.7) 0.7
Chile (2.6) 0.1
Colombia (2.5) 0.5
Mexico (3.5) 0.6
LatAm 5 (2.8) 0.7

The COVID-19 pandemic has evolved into an economic crisis, affecting Latin American economies through a number of transmission channels. The associated shock to global demand has deepened the drop in commodity prices--oil in particular, severely lowered goods and services trade, disrupted supply chains, and tightened financial conditions abruptly. Furthermore, the spread of COVID-19 across Latin America has also resulted in a direct, short-term hit to GDP growth from social distancing policies, whether government mandated or self-imposed (see table 4), in an attempt to curb infection rates.

Chart 1


Exactly how much all of these shocks will impact GDP growth in the major economies of Latin America is highly uncertain. But we believe the depth of the recession could be on par with the GFC, if not worse for countries with structural weaknesses (see table 3). That said, we expect the length of the recession will be much shorter than that during the GFC--we see a two-quarter-long recession for 2020 versus six quarters during the GFC. Any further signs that the recession will be deeper and/or longer than we currently anticipate would lead us to reassess our GDP projections.

Table 3

Select Asset Prices, Global Financial Crisis Versus COVID-19 Pandemic
Economic crisis Oil price top-to-bottom decrease VIX Bottom-to-top increase (points EM sovereign bond spreads increase (bps) LatAm corporate bond spreads increase Real exchange rate depreciation (standard deviation)
GFC 70% ($100 decrease per barrel) 65 650 800 1.7
COVID-19 60% ($40 decrease per barrel) 70 385 570 0.8
Bps--Basis points. Note: We define GFC as the period between Dec. 1, 2017, and June 30, 2019. COVID-19 is the period between mid-January 2020 to date. We use J.P. Morgan EMBI Bond Spread for the EM sovereign bond spread calculation. For LatAm corporate bond spreads we use ICE BofA Latin America Emerging Markets Corporate Bond Option-Adjusted Spread Index. For the real exchange rate depreciation we take an average of Brazil, Chile, Colombia, and Mexico; and standard deviations are calculated based on 15 years of data. Source: Bloomberg, S&P Global Ratings.

The Starting Point To An Economic Crisis Does Matter

Most major Latin American economies are headed into the COVID-19 pandemic with structurally weaker economies than during the GFC. Average economic growth is markedly slower--growth in the past five years averaged 0.7% in Latin America compared with 4.3% in the five years before the GFC. Fixed investment has been either declining or slowing across most of the region in recent years, and elevated social tensions have resulted in disruptions to economic activity and uncertainty over political direction in several countries. We are particularly concerned about how Mexico enters this p. Its economy contracted in 2019 (albeit by a mild 0.1% decline in GDP), fixed investment fell nearly 5%, and private sector confidence in the current government remains very low.

Chart 2


Public Health Response Will Be Key In Defining Economic Recovery

The initial economic policy response to the COVID-19 pandemic in Latin America was similar to other parts of the world: emergency interest rate cuts and programs designed to boost liquidity, followed by fiscal stimulus measures in some countries, most notably in Chile, where a 5% of GDP recovery package was announced. These measures will help curb the fall in demand and reinvigorate the economic recovery once the pandemic wanes. However, the public health policy response, which has diverged across the region, will determine the length of the health crisis, and, as a result, affect the length of the economic crisis.

Table 4

Select COVID-19 Statistics
Country Confirmed COVID-19 cases Confirmed COVID-19-related deaths Death rate (%)
Brazil 4,630 163 3.5
Chile 2,449 8 0.3
Mexico 993 20 2
Argentina 820 23 2.8
Colombia 798 14 1.8
Data as of March 30, 2020. Source: Bloomberg.

We have seen two different public health policy approaches in Latin America. The first group includes Argentina, Chile, and Colombia, where governments were quick to act in implementing social distancing policies, such as strict quarantines, restricting travel, closing borders, and mandating nonessential workers to stay home. These countries are more likely to better manage the pandemic, and therefore, start the economic recovery sooner. On the other hand, the second group includes Brazil and Mexico (among others), where the executive branch initially publically opposed social distancing measures, which resulted in a delayed public health strategy. The federal governments of these countries may have been reluctant to implement social distancing policies due to the sizeable impact these can have on employment and economic growth. We estimate the impact of one month of social distancing would result in a reduction of annual GDP growth of roughly 1.5%-2.0%, and this only includes the impact on consumption (see table 5). But failure to contain the virus outbreak could mean more-prolonged periods of social distancing policies, a higher human cost, and other policies that would further restrict economic activity, such as travel bans by other countries. A longer health crisis would make a rapid economic recovery a less likely scenario.

Table 5

Impact Of One Month Of Social Distancing On Annual GDP Growth
Consumer spending categories (%) Chile mild scenario Chile severe scenario Colombia mild scenario Colombia severe scenario Mexico mild scenario Mexico severe scenario
Durable goods (0.2) (0.4) (0.1) (0.2) (0.1) (0.2)
Nondurable goods (0.6) (0.6) (0.6) (0.6) (0.6) (0.6)
Services (0.7) (1.0) (0.8) (1.2) (0.8) (1.2)
Total impact on annual GDP growth (1.4) (1.9) (1.5) (2.0) (1.4) (1.9)
Note: Mild scenario assumptions: durable goods decline by 40%, nondurable goods decline by 25%, and one-third of services decline by 75%, versus previrus outbreak trends. Severe scenario assumptions: durable goods decline by 75%, nondurable goods by 25%, and one-half of all services decline by 75%, versus previrus trends. Source: Haver, S&P Global Ratings.

One way to illustrate how challenging the pandemic could get in places where social distancing policies have been delayed, such as Mexico, is by comparing the infection curve with that of other places like China or Italy. If Mexico's infection curve would resemble that of China's, where some of the strictest social distancing policies were implemented, Mexico's confirmed cases would reach more than 1,700 by the end of April from about 1,000 at the end of March based on confirmed cases. Conversely, if Mexico's curve were to follow the steeper curve of Italy, where social distancing policies were delayed, Mexico would have over 44,000 cases by the end of April.

Chart 3


Our GDP Forecasts


We forecast a third consecutive year of economic contraction in 2020, with GDP falling 2.5%. The Argentinian government has been in default since the end of 2019--this means that access to international credit markets was already restricted before the COVID-19 pandemic. We anticipate a hit to short-term economic growth due to social distancing policies, mostly in late-first through second-quarter this year, followed by a recovery in the second half of 2020.


We expect GDP growth to decline by 0.7% this year, but then recover to 2.9% in 2021. The risks to our short-term outlook are firmly to the downside since Brazil has become one of the emerging markets outside of Asia with the highest confirmed cases of COVID-19--this will increase pressure for longer periods of social distancing policies.


We see growth contracting 0.2% in 2020, then recovering to 3% in 2021. The sizeable fiscal stimulus the government implemented, combined with a recovery in Chinese demand, underline our assumptions for the Chilean economy to recover quickly starting in the second half of this year. But the country is still undergoing significant political changes, including rewriting its constitution, posing downside risk to our growth outlook.


We expect growth to slow to 0.7% this year from 3.3% in 2019. Colombia is one of the few major Latin American economies where we see positive growth in 2020, mainly because it's starting from a high base of strong growth in 2019. In comparison, Colombia's economy grew 1.1% in 2009 amid the GFC.


We forecast a 2.5% contraction this year and 2.2% growth in 2021, which implies a mild recovery because we see U.S. growth above 3% next year. The risks to our forecast are firmly to the downside, in light of structural economic weaknesses before the pandemic started and a delayed, and potentially ineffective, public health response to the outbreak, which could prolong the economic crisis.


Table 6

Latin America Consumer Price Index Inflation And S&P Global Ratings' Forecasts
(Year-end % change year-over year) 2019 2020 2021 2022 2023
Argentina 53.8 40 30 25 20
Brazil 4.3 4 3.8 4 4
Chile 3 3.9 3 3 3
Colombia 3.8 3.9 3 3 3
Mexico 2.8 3.5 3.1 3 3
Source: Oxford Economics, S&P Global Ratings.

Table 7

Latin America Consumer Price Index Inflation And S&P Global Ratings' Forecasts (Average)
(%) 2019 2020 2021 2022 2023
Argentina 53.5 47 33 28 22
Brazil 3.7 4.2 3.8 3.9 4
Chile 2.3 3.7 3.2 3 3
Colombia 3.5 3.6 3.2 3 3
Mexico 3.6 3.9 3.2 3 3
Source: Oxford Economics, S&P Global Ratings.

Table 8

Latin America Central Bank Policy Interest Rates And S&P Global Ratings' Forecasts (Year-End)
2019 2020 2021 2022 2023
Argentina 55 35 30 25 25
Brazil 4.5 3.75 4.75 5.5 5.5
Chile 1.75 1 1.75 2 2.5
Colombia 4.25 3.5 4.25 4.25 4.25
Mexico 7.25 5.5 5.5 5.5 5.5
Source: Oxford Economics, S&P Global Ratings.

Table 9

Latin America Year-End Exchange Rates And S&P Global Ratings' Forecasts (Versus U.S. Dollar)
2019 2020 2021 2022 2023
Argentina 59.89 85 95 100 100
Brazil 4.03 4.8 4.7 4.6 4.55
Chile 745 815 800 785 785
Colombia 3,277 3,850 3,800 3,800 3,800
Mexico 18.93 22 21.5 21 21
Source: Oxford Economics, S&P Global Ratings.

Table 10

Latin America Average Exchange Rates And S&P Global Ratings' Forecasts (Versus U.S. Dollar)
2019 2020 2021 2022 2023
Argentina 47.97 75 90 97.5 100
Brazil 3.94 4.85 4.75 4.65 4.57
Chile 703 825 805 790 785
Colombia 3,281 3,750 3,825 3,800 3,800
Mexico 19.25 22 21.75 21.25 21
Source: Oxford Economics, S&P Global Ratings.

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

Latin America Senior Economist:Elijah Oliveros-Rosen, New York (1) 212-438-2228;

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