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Economic Research: Latin American Economies Are Last In And Last Out Of The Pandemic


Economic Research: Latin American Economies Are Last In And Last Out Of The Pandemic

Latin America is now the global epicenter of the COVID-19 pandemic, with the number of new daily reported infections increasing, or remaining close to recent peaks, in most major countries. In some countries, this has meant the extension of stringent lockdowns, and in others, it has meant a slower relaxation of those measures. Across the board, households and businesses are more cautious. As a result, S&P Global Economics has lowered its GDP projection for Latin America by just over 2 percentage points to a contraction of roughly 7.5% in 2020. We expect growth to be just shy of 4% in 2021. Risks are mostly to the downside and tied to the evolution of the pandemic.

Table 1

Latin America: GDP Growth And S&P Global's Forecasts
(%) 2018 2019 2020 2021 2022 2023

Argentina

(2.5) (2.2) (8.5) 2.9 2.7 2.4

Brazil

1.3 1.1 (7.0) 3.5 3.3 2.9

Chile

4.0 1.0 (6.5) 5.5 3.5 3.3

Colombia

2.5 3.3 (5.0) 4.5 3.6 3.3

Mexico

2.2 (0.3) (8.5) 3.0 2.3 2.0
LatAm 5 1.5 0.5 (7.4) 3.5 3.0 2.6

Peru

4.0 2.2 (12.0) 10.5 5.5 4.0
LatAm 6 1.5 0.6 (7.7) 3.9 3.1 2.7
Source: S&P Global Ratings. Note: the LatAm GDP aggregate forecasts are based on PPP GDP weights. LatAm 5 excludes Peru.

Table 2

Changes In Base Forecasts From April 2020
(%) 2020 2021

Argentina

(1.5) 0.3

Brazil

(2.4) 0.2

Chile

(2.6) 0.9

Colombia

(2.4) 0.4

Mexico

(1.8) 0.1
LatAm 5 (2.1) 0.3

Peru

(8.9) 5.0
LatAm 6 (2.5) 0.5

Latin American Countries Will Likely Be The Last To Start Recovering From The Pandemic

Latin America was among the last regions to be hit by the pandemic, with most major economies confirming their first COVID-19 cases in March, a bit over two months after China and about one month after Europe and the U.S. (see chart 1). As a result, and because of the lack of success so far in containing the spread of the virus, Latin America is likely to be one of the last regions to exit the pandemic.

Chart 1

image

Brazil has the highest number of new daily cases in the region, currently around 40,000, up from about 20,000 at the beginning of June. However, in per capita terms, Chile is by far the highest, with about 250 new daily cases per million inhabitants, surpassing about 180 in Brazil. While varying levels of testing in Latin America--which, with the exception of Chile, are generally low by global standards--reduce the reliability of reported cases data, it's clear that in all cases infection curves are either still steepening, or not flattening fast enough to contain the virus just yet.

We assume that the virus will be broadly contained by the end of the third quarter of this year, with mostly isolated periodic infections from that point on. We also do not expect a return to stringent nationwide lockdowns in places where they have already been relaxed. However, there is a high degree of uncertainty regarding this scenario, which means it's a major downside risk to our GDP projections.

The Pandemic's Impact On Economic Activity So Far

Several lessons from the COVID-19 pandemic help us understand how we got to where we are in the economic downturn and what the likely paths of activity are. Three lessons stand out.

The first is that despite entering the pandemic at a later stage than most of the rest of the world, Latin America economies were severely hit at the onset of the spread of the virus abroad. This was due to the collapse in external demand, in particular from China and the U.S., as well as from the abrupt tightening in financial conditions and decline in commodity prices.

Economies with high exposure to Chinese demand, such as Chile and Peru, experienced a severe hit to exports early in the first quarter, as did oil producers such as Colombia, much before COVID-19 cases started being reported in the region. Countries exposed to the U.S., such as Mexico, experienced a drop in their exports later toward the end of the first quarter, but it was still very severe.

The second lesson is that the toll COVID-19 has taken on Latin American economies is far from uniform, though April was the worst month for all countries in terms of the drop in economic activity. The economy that suffered the most in April was Peru, contracting a whopping 24% month over month. By contrast, Chile seems to have fared the best, with a 8.7% contraction in GDP--about one-third that of Peru (see chart 2). In both cases, nationwide lockdowns started at around the same time, in the middle of March, and both were hit by the slump in Chinese demand for metals. The distinction in this case has to do with Peru's key fishing sector being brought to a halt by the pandemic.

Chart 2

image

The third lesson is that even as lockdowns have started to ease to some extent in most countries in the region, high-frequency data shows that returning to pre-COVID-19 levels will be a lengthy process. An index we constructed from Google Mobility Data in retail centers, transit systems, and the workplace, which tracks mobile usage in those locations, suggests that activity at the end of June is still a median of about 50% below pre-COVID-19 levels, only a moderate improvement from 65% at the beginning of April (see chart 3).

Chart 3

image

Based on these lessons, we can conclude that even as lockdowns continue to get relaxed, the recovery in activity will be slow, uneven across the region, and heavily influenced by external demand and financial conditions. We generally expect the pickup in activity in the third quarter to be underwhelming compared with other regions.

Chart 4

image

Latin American Countries Will Have Some Of The Weakest Recoveries In Emerging Markets

The depth of the economic downturn, combined with a slow transition back to normal levels of activity, will mean that Latin American economies will face relatively high permanent losses in income. In places where policy support is limited or ineffective, permanent losses will be greater. By the end of 2023, we expect these losses for most countries in the region to be 6%-7% of GDP.

Lack of policy support will put Mexico on the higher end of losses at about 7.5% of GDP. Conversely, ample stimulus directed at curbing the impact on labor and investment dynamics will help Chile have a smaller income loss of about 4.5% of GDP (see chart 5). Permanent losses are due primarily to losses in the levels of capital stock, in light of severe deterioration in balance sheets which will hold back investment, but also due to significant damage to labor market dynamics.

Chart 5

image

Our GDP Forecasts

Argentina.  We forecast the third consecutive year of economic contraction in 2020, with GDP falling 8.5%. Structural economic weakness that preceded the pandemic, and the government's lack of access to international credit markets since the string of defaults that started at the end of 2019, means that this year's downturn will be deeper, and the recovery will take longer, than most other major economies in the region.

Brazil.  We expect GDP to decline by 7% this year and then grow 3.5% in 2021. Risks are firmly to the downside given the country has become a global epicenter of COVID-19 infections. The government's positive reform momentum that preceded the pandemic will likely take a step back, at least temporarily, as fiscal efforts are concentrated on supporting workers and companies heavily affected by the downturn.

Chile.  We see growth contracting 6.5% in 2020, but then recovering to 5.5% in 2021. The sizable fiscal stimulus the government implemented, combined with a recovery in Chinese demand, underlies our assumptions for the Chilean economy to be among the better placed Latin American economies to start recovering in the second half of this year. However, the country is still undergoing significant political change, including rewriting its constitution, which poses downside risk to our longer-term growth outlook.

Colombia.  We expect the economy to contract 5% this year and expand 4.5% in 2021. Risks to our forecast are to the downside due to volatility in oil markets, a recent increase in infections, and a sharp deterioration in the labor market.

Mexico.  We forecast an 8.5% drop in GDP this year and 3% growth in 2021. We expect Mexico to have among the weakest economic recoveries in emerging markets from the COVID-19 pandemic for several reasons. First, the economy had structural weaknesses before the pandemic, with a mild contraction in 2019 due to unfavorable investment dynamics. Second, the policy response has been relatively small, with fiscal stimulus so far amounting to about 1% of GDP, mostly focused on direct transfers, and with limited support to small and medium enterprises.

Furthermore, the infection curve remains very steep, with the number of new daily cases currently around 6,000, twice the amount at the beginning of June. The worsening situation could delay the further relaxation of lockdowns and prompt other countries to impose travel bans on Mexico.

Peru.  We now see the economy contracting 12% this year and then growing 10.5% in 2021. The Peruvian economy has been the hardest hit this year in Latin America by the fallout of the pandemic. This has been due to the slump in demand for metals, as well as a stalling in the country's key fishing season. We see a strong bounce in activity in 2021 because of the stimulus measures put in place (roughly 12% of GDP) and an expected strong recovery in Chinese demand, Peru's top destination for exports.

Appendix

Table 3

Latin America: CPI Inflation And S&P Global's Forecasts (Year-End)
(% change year over year) 2019 2020 2021 2022 2023

Argentina

53.8 40.0 35.0 30.0 25.0

Brazil

4.3 1.7 3.5 3.8 4.0

Chile

3.0 2.3 3.0 3.0 3.0

Colombia

3.8 2.5 3.5 3.0 3.0

Mexico

2.8 2.9 3.5 3.0 3.0

Peru

1.9 2.0 2.5 2.0 2.0
Sources: Oxford Economics and 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 45.0 38.0 32.0 27.0

Brazil

3.7 2.7 3.2 3.9 3.9

Chile

2.3 2.9 2.8 3.0 3.0

Colombia

3.5 3.3 3.6 3.2 3.0

Mexico

3.6 3.1 3.4 3.2 3.1

Peru

2.1 2.0 2.3 2.0 2.0
Sources: Oxford Economics and 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 2.25 3.50 4.50 5.00

Chile

1.75 0.50 1.50 2.00 2.50

Colombia

4.25 2.50 3.50 4.00 4.50

Mexico

7.25 4.00 5.00 5.50 5.50

Peru

2.25 0.25 1.50 2.00 2.50
Sources: Oxford Economics and 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 85.00 115.00 125.00 135.00

Brazil

4.03 5.00 4.95 4.90 4.90

Chile

745 800 785 775 775

Colombia

3,277 3,750 3,700 3,700 3,700

Mexico

18.93 22.00 21.50 21.00 21.00

Peru

3.31 3.45 3.40 3.40 3.40
Sources: Oxford Economics and 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 72.00 100.00 120.00 130.00

Brazil

3.94 4.94 4.97 4.92 4.90

Chile

703 805 795 780 775

Colombia

3,281 3,750 3,825 3,800 3,800

Mexico

19.25 21.75 21.75 21.25 21.00

Peru

3.34 3.45 3.42 3.40 3.40
Sources: Oxford Economics and S&P Global Ratings.

Table 8

Latin America: Unemployment Rate
(% average) 2019 2020 2021 2022 2023

Argentina

9.8 12.8 11.1 9.8 9.6

Brazil

11.9 13.6 13.1 12.4 11.8

Chile

7.2 9.5 8.4 7.1 6.8

Colombia

11.0 12.7 12.1 10.8 10.4

Mexico

3.5 5.5 4.7 4.2 4.1

Peru

6.6 8.5 8.0 7.5 6.7
Sources: Oxford Economics and S&P Global Ratings.

A Note On Our COVID-19 Assumptions

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

This report does not constitute a rating action.

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.

Latin America Senior Economist:Elijah Oliveros-Rosen, New York (1) 212-438-2228;
elijah.oliveros@spglobal.com

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