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Economic Research: Economic Recovery From The COVID-19 Pandemic Will Be Uneven Across Latin America


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Economic Research: Economic Recovery From The COVID-19 Pandemic Will Be Uneven Across Latin America

We have made another round of downward GDP growth revisions across the globe as social distancing policies are extended and data come in showing the severity of the economic impact of the COVID-19 pandemic (see "COVID-19 Deals A Larger, Longer Hit To Global GDP," published on April 16, 2020, on RatingsDirect). We now forecast Latin American GDP to contract by a bit more than 5% this year, rising slightly to over 3% in 2021.

Table 1

Latin America: GDP Growth And S&P Global's Forecasts
(%) 2018 2019 2020 2021 2022 2023
Argentina (2.5) (2.2) (7.0) 2.6 2.5 2.4
Brazil 1.3 1.1 (4.6) 3.3 2.9 2.8
Chile 4.0 1.0 (3.9) 4.6 3.2 3.2
Colombia 2.5 3.3 (2.6) 4.1 3.4 3.3
Mexico 2.1 (0.1) (6.7) 2.9 2.3 2.0
LatAm 5 1.5 0.6 (5.3) 3.2 2.7 2.6
Peru 4.0 2.2 (3.1) 5.5 3.8 3.7
LatAm 6 1.5 0.6 (5.2) 3.4 2.8 2.6
Note: the LatAm GDP aggregate forecasts are based on PPP GDP weights. LatAm 5 excludes Peru. Source: S&P Global Ratings.

Table 2

Changes In Base Forecasts From First-Quarter 2020
(%) 2020 2021
Argentina (4.5) 0.2
Brazil (3.9) 0.4
Chile (3.7) 1.6
Colombia (3.3) 0.3
Mexico (4.2) 0.8
LatAm 5 (4) 0.5
Peru (4.6) 2.0
LatAm 6 (4.1) 0.5

Most Latin American economies have implemented lockdowns to varying degrees--either at the federal or state level--since mid- to late-March. Given the path of infection rates, which have yet to level off sustainably in the region, full relaxation of social distancing is still likely months away. We previously estimated that every month of a strict lockdown lowers annual GDP growth by 1.5%-2.0% (see, "For Latin America, The Path To Economic Recovery From COVID-19 Remains Uncertain," March 31, 2020). That now seems to be closer to 3.0%,given the severity of the pullback in consumption on discretionary spending and services, as well as the halt on investment. For most Latin American countries, we assume relatively strict lockdowns will remain in place through most of the second quarter, only gradually being relaxed towards the end of the second quarter or early in the third quarter.

Chart 1


Chart 2


We expect the second quarter to be the worst quarter of the COVID-19-related downturn for Latin American economies, since most strict social distancing policies are likely to stay in place, not only in the region, but also with key trading partners. The q/q annualized contraction in the second quarter will be roughly 3x as severe (close to 30%) as the worst quarter during the global financial crisis, which for most Latin American economies was either fourth-quarter 2018 or first-quarter 2019.

We anticipate uneven recoveries across Latin America, with stronger recoveries in Chile and Peru due to the combination of more-effective viral outbreak containment policies and robust economic responses that will help more rapidly repair damage to labor market and investment dynamics. Chile has slashed interest rates by 125 basis points (bps) to 0.50% this year and announced combined fiscal stimulus packages that amount to nearly 7% of GDP, geared at increasing unemployment benefits and supporting small and medium enterprises (SMEs). Peru has lowered its policy rate by 200 bps to 0.25%, and announced combined fiscal measures totaling nearly 12% % of GDP, also supporting the labor market and SMEs.

Conversely, we see weaker recoveries in places such as Mexico, where pre-existing economic weakness, delays in virus-containment measures that risk prolonging the crisis, and limited economic policy responses that likely mean it will take longer to repair the damage done to labor market and investment. While the central bank has cut rates by 125 bps this year to 6.50% (with more cuts likely in coming months), the fiscal response has been limited, especially towards SMEs, where investment has been weak for several years. We anticipate recoveries in Brazil and Colombia in the middle of the pack (see chart 3), helped by moderate monetary and fiscal stimulus packages, and relatively more-positive pre-pandemic macroeconomic dynamics.

Chart 3


As a benchmark, we can look at the Great Recession, which was not as deep as we believe the COVID-19 downturn will be (a third in the magnitude of the contraction), but longer in duration (three times longer taking the U.S. recession). Among the major Latin American economies, Brazil took 11 quarters to return to its pre-financial crisis trend levels, Peru took 16 quarters, and the rest did not return to this level (see chart 4). The recoveries in Brazil and Peru were fostered by a rapid recovery in commodity prices--The Commodity Research Bureau Index rose by 80% from early 2009 through early 2011 to near historically high prices for most major commodities. We do not seecommodity prices returning to such high levels any time soon.

Chart 4


Our GDP Forecasts


We forecast a third consecutive year of an economic contraction in 2020, with GDP falling 7%. The government has been in default since year-end 2019, so access to international credit markets was already restricted before the pandemic. The structural economic weakness seen before the pandemic indicates this year's downturn will be deeper and the recovery will take longer than most other major economies in the region.


We expect GDP to fall by 4.6% this year, but then recover to 3.3% in 2021. Brazil has become one of the emerging markets outside of Asia with the highest confirmed cases of COVID-19, which will further pressure social distancing policies. The government's positive reform momentum preceding the COVID-19 pandemic will likely take a step back, at least temporarily, as fiscal efforts are concentrated on supporting workers and companies most severely affected by the downturn.


We see the economy shrinking 3.9% in 2020, then recovering to 4.6% in 2021. The sizeable fiscal stimulus the government implemented, combined with a recovery in Chinese demand, underline our assumptions for the Chilean economy to be among the better-placed Latin American economies for recovery in the second half of 2020. Chile is still undergoing significant political changes, however, including rewriting its constitution, which poses downside risk to our longer-term growth outlook.


We expect GDP to contract 2.6% this year, and then expand 4.1% in 2021. Colombia's milder contraction is mainly due to its starting from a high base of strong growth in 2019 that trended above 3%.


We forecast a 6.7% contraction this year and 2.9% growth in 2021. We see a particularly weak economic recovery from the pandemic downturn. The economy had a mild contraction in 2019 due to weak investment, which deepened this year's contraction, causing severe damage to the labor market and SMEs. Its policy response has been relatively weak, with fiscal stimulus so far amounting to about 1% of GDP, mostly focused on direct transfers, and with limited support to SMEs. Furthermore, viral outbreak containment measures were delayed as the executive branch initially resisted social distancing measures, which risks prolonging the length of the health and economic crisis. Under this context, Mexico is likely to suffer permanent impairments to its capital stock, as well as displacement of a segment of formal workers to the informal sector, where productivity levels are lower.


We see GDP falling 3.1% in 2020, then recovering to 5.5% in 2021. Peru has enacted the largest fiscal stimulus as a share of GDP (roughly 12%) among the major Latin American economies. It was also was among the first to implement strict social distancing policies, starting March 15. Peru will also benefit from the strong recovery we expect from the Chinese economy--its top destination for exports.

We acknowledge a high degree of uncertainty about the rate of the spread and peak of the virus. Some regional 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 the pandemic have pushed the global economy into recession. As the situation evolves, we will update our assumptions and estimates accordingly.


Table 3

Latin America: CPI Inflation And S&P Global's Forecasts
(% year-over-year) 2018 2019 2020 2021 2022 2023
Argentina 47.6 53.8 40.0 30.0 25.0 20.0
Brazil 3.7 4.3 3.0 4.3 4.0 4.0
Chile 2.1 3.0 3.0 3.6 3.0 3.0
Colombia 3.2 3.8 3.4 3.7 3.0 3.0
Mexico 4.8 2.8 3.0 3.5 3.0 3.0
Peru 2.2 1.9 2.0 2.5 2.0 2.0
Source: Oxford Economics, S&P Global Ratings.

Table 4

Latin America: CPI Inflation And S&P Global Ratings' Forecasts (Average)
(%) 2019 2020 2021 2022 2023
Argentina 53.5 47.0 33.0 28.0 22.0
Brazil 3.7 3.3 3.8 4.1 4.0
Chile 2.3 3.2 3.5 3.2 3.0
Colombia 3.5 3.3 3.6 3.2 3.0
Mexico 3.6 3.2 3.4 3.2 3.1
Peru 2.1 2.0 2.3 2.0 2.0
Source: Oxford Economics, S&P Global Ratings.

Table 5

Latin America: Central Bank Policy Interest Rates And S&P Global Ratings' Forecasts (Year-End)
(%) 2019 2020 2021 2022 2023
Argentina 55.00 30.00 27.00 25.00 25.00
Brazil 4.50 3.25 4.00 4.50 5.00
Chile 1.75 0.50 1.50 2.00 2.50
Colombia 4.25 3.00 3.50 4.00 4.50
Mexico 7.25 5.00 5.00 5.50 5.50
Peru 2.25 0.25 1.50 2.00 2.50
Source: Oxford Economics, S&P Global Ratings.

Table 6

Latin America: Year-End Exchange Rates And S&P Global Ratings' Forecasts (Versus U.S. Dollar)
2019 2020 2021 2022 2023
Argentina 59.89 85.00 95.00 100.00 100.00
Brazil 4.03 4.90 4.75 4.65 4.55
Chile 745 815 800 785 785
Colombia 3,277 3,850 3,800 3,800 3,800
Mexico 18.93 22.00 21.50 21.00 21.00
Peru 3.31 3.45 3.40 3.40 3.40
Source: Oxford Economics, S&P Global Ratings.

Table 7

Latin America: Average Exchange Rates And S&P Global Ratings' Forecasts (Versus U.S. Dollar)
2019 2020 2021 2022 2023
Argentina 47.97 75.00 90.00 97.50 100.00
Brazil 3.94 4.90 4.80 4.70 4.60
Chile 703 825 805 790 785
Colombia 3,281 3,750 3,825 3,800 3,800
Mexico 19.25 22.00 21.75 21.25 21.00
Peru 3.34 3.45 3.42 3.40 3.40
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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