Latin American economy will suffer its biggest setback in 120 years in 2020

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The pandemic will have devastating effects on the Latin American economy. The bloc’s GDP will plummet 9.1% this year (the worst index since 120 years ago), unemployment will rise to 13.5%, poverty will reach 37.7% of the population (seven more points) and inequality will continue to increase in what is already the most unequal region on the planet. The blow will be so severe that, at the end of the year, GDP per capita will fall back to the level of a decade ago and the poverty rate will return to the level of 2006. In summary, the balance presented this Tuesday by the United Nations agency for the development of Latin America and the Caribbean, ECLAC, indicates that the continent is on track to lose, in just one year, “a decade in economic terms and almost a decade and a half in social terms”.

GDP per capita, the best measure of the population’s material well-being, will fall even further: up to 9.9%, a level not seen since 2010. By sub-region, the biggest drop in income per inhabitant will occur in South America (9.4% ), followed by Central America and Mexico (8.4%). And the depth of the fall in April and May, the toughest months in the different quarantines, “indicates that the reactivation of growth will be slower than expected”. The investment dynamics is not exactly a good omen: it is suffering a “significant drop” after a gloomy second quarter, says the body led by Alicia Bárcena.

Latin America is “undoubtedly” facing the “strongest economic and social crisis that the region has suffered in several decades, highlighting the structural weaknesses of the economies”, warn ECLAC technicians, based in Santiago, Chile . Weaknesses that have limited the possibilities of responding to the health crisis in countries that suffer from poor and equitable health systems, high informality at work – which amplifies a coup like that of the coronavirus – and lean social protection systems. In view of this, ECLAC economists recommend that Governments put aside the adjustment strategies that guided official policies in recent years and bet on expansive fiscal and monetary plans, even more than those already approved in recent months.

Thus, says the UN body, the fall in supply and demand could be partially neutralized in a context of low productivity and stagnant or negative growth. The problem is that, despite the introduction of new monetary income ―public and private debt purchases, the so-called QE (of quantitative easing, or quantitative easing), unprecedented so far in the primer of the region’s central banks― and tax authorities (Brazil is the emerging country that pulls the most from deficit, largely financed by the issuing institution, according to the latest data from the Institute of International Finance), the room for maneuver in Latin America is notably lower than that of rich countries.

Recession economies

Whether or not a step is taken in politics, the future looks bleak. Latin American economies have reached the pandemic, except in some cases, in difficulties. After a five-year period of minimal growth, in the first quarter of this year, GDP was already negative in nine of the 20 countries in the region, another eight showed a clear trend of deceleration. Reason: the retraction of demand, both domestic and foreign, with China, which at that time was in the midst of a crisis. The restrictions of the pandemic, with the consequent partial or total stoppage of the production of goods and services, aggravated this situation.

Private consumption was by far the most affected component of demand. “There has been an accelerated deterioration in household spending due to the context of mandatory confinement imposed by the authorities in many countries, the voluntary social isolation of people and the suspension of many non-priority activities”, point out ECLAC technicians. Added to this is the drop in household income due to job losses. Although partially offset by aid programs by States – more timid, however, than in other parts of the emerging and developed world – this decline threatens to slow the recovery than might be expected in the case of a typical recession: in an economy so dependent on consumption, less predisposition (and capacity) for spending today always means less growth tomorrow.

The evolution of the labor market “reinforces” the bad prospects for consumption: with unemployment clearly rising and a “recomposition of jobs towards lower quality jobs, such as self-employment” in progress, the average income has not stopped to get worse, darkening the horizon.

At the same time, the region suffered a significant deterioration in its prospects abroad, both due to the fall in the prices of primary products – which continue to be its main source of foreign exchange: the promises of diversification remained in this, in mere promises – and the crisis in its main customers . “In the context of worsening average terms of trade in the region, which will fall 4.7% in 2020, the negative shock will focus on hydrocarbon-exporting economies, while food and metals exporters will be less affected,” warns ECLAC. Exports will decrease 23%, while imports will drop 25% due to the fall in activity and income. And the most affected sub-region will again be South America, whose terms of trade will decrease by almost 8%.

The good news is that, unlike other major recessions in the past, the economic crisis is not – so far – having a domino effect on banks: a financial crisis seems, for now, to be ruled out. And this is a significant point for the hope of a region in which the solvency of the financial sector has been, and remains, a major cause for concern. Inflation, another historic workhorse for Latin American countries, is also under control, except in Venezuela and Argentina, which have dragged their own dynamics long before the term covid-19 started to appear in the media.

Strong drop in revenue

The blow to the public deficit, which will reach 8.4% in 2020, will come from both sides: public spending will grow at the same time as cash inflows weaken: with the formal economy paralyzed or, at least, cluttered for weeks, Tax revenues were clearly reduced. The debt of the countries in the region, which at the end of 2019 was 46%, will close 2020 above 55%. A huge effort that will have to be paid in the future, but which will have served to prevent a complete collapse of the economy.

If it has not been possible to do more, it is precisely because of the lack of muscle as a result of the eternal fragility of tax collection in a region that already collected much less in taxes than other comparable blocs: if Latin America would have plugged that hole when it could, in recent years, his room for maneuver today – when facing the “biggest fiscal challenge since the public debt crisis of the early 1980s” – would be much greater.

“Total revenues in Latin America and the Caribbean have historically been insufficient to cover public spending, which leads to a deficit bias in the management of fiscal accounts, with all the risks that this entails. And the last decade has not been an exception to this trend: countries’ revenues have managed to keep up with the growth in public spending, ”says the ECLAC document. “The challenge is not just to increase the tax pressure, but to do it progressively, so that the tax system also contributes to reducing inequalities.” In 2018, the last year for which data are available, tax collection in Latin America and the Caribbean rose to 23% of GDP, compared with more than 34% of the Organization for Cooperation and Development (OECD) average. Another challenge in a horizon full of them.

Source: El País

The pandemic will have devastating effects on the Latin American economy. The bloc’s GDP will plummet 9.1% this year (the worst index since 120 years ago), unemployment will rise to 13.5%, poverty will reach 37.7% of the population (seven more points) and inequality will continue to increase in what is already the most unequal region on the planet. The blow will be so severe that, at the end of the year, GDP per capita will fall back to the level of a decade ago and the poverty rate will return to the level of 2006. In summary, the balance presented this Tuesday by the United Nations agency for the development of Latin America and the Caribbean, ECLAC, indicates that the continent is on track to lose, in just one year, “a decade in economic terms and almost a decade and a half in social terms”.

GDP per capita, the best measure of the population’s material well-being, will fall even further: up to 9.9%, a level not seen since 2010. By sub-region, the biggest drop in income per inhabitant will occur in South America (9.4% ), followed by Central America and Mexico (8.4%). And the depth of the fall in April and May, the toughest months in the different quarantines, “indicates that the reactivation of growth will be slower than expected”. The investment dynamics is not exactly a good omen: it is suffering a “significant drop” after a gloomy second quarter, says the body led by Alicia Bárcena.

Latin America is “undoubtedly” facing the “strongest economic and social crisis that the region has suffered in several decades, highlighting the structural weaknesses of the economies”, warn ECLAC technicians, based in Santiago, Chile . Weaknesses that have limited the possibilities of responding to the health crisis in countries that suffer from poor and equitable health systems, high informality at work – which amplifies a coup like that of the coronavirus – and lean social protection systems. In view of this, ECLAC economists recommend that Governments put aside the adjustment strategies that guided official policies in recent years and bet on expansive fiscal and monetary plans, even more than those already approved in recent months.

Thus, says the UN body, the fall in supply and demand could be partially neutralized in a context of low productivity and stagnant or negative growth. The problem is that, despite the introduction of new monetary income ―public and private debt purchases, the so-called QE (of quantitative easing, or quantitative easing), unprecedented so far in the primer of the region’s central banks― and tax authorities (Brazil is the emerging country that pulls the most from deficit, largely financed by the issuing institution, according to the latest data from the Institute of International Finance), the room for maneuver in Latin America is notably lower than that of rich countries.

Recession economies

Whether or not a step is taken in politics, the future looks bleak. Latin American economies have reached the pandemic, except in some cases, in difficulties. After a five-year period of minimal growth, in the first quarter of this year, GDP was already negative in nine of the 20 countries in the region, another eight showed a clear trend of deceleration. Reason: the retraction of demand, both domestic and foreign, with China, which at that time was in the midst of a crisis. The restrictions of the pandemic, with the consequent partial or total stoppage of the production of goods and services, aggravated this situation.

Private consumption was by far the most affected component of demand. “There has been an accelerated deterioration in household spending due to the context of mandatory confinement imposed by the authorities in many countries, the voluntary social isolation of people and the suspension of many non-priority activities”, point out ECLAC technicians. Added to this is the drop in household income due to job losses. Although partially offset by aid programs by States – more timid, however, than in other parts of the emerging and developed world – this decline threatens to slow the recovery than might be expected in the case of a typical recession: in an economy so dependent on consumption, less predisposition (and capacity) for spending today always means less growth tomorrow.

The evolution of the labor market “reinforces” the bad prospects for consumption: with unemployment clearly rising and a “recomposition of jobs towards lower quality jobs, such as self-employment” in progress, the average income has not stopped to get worse, darkening the horizon.

At the same time, the region suffered a significant deterioration in its prospects abroad, both due to the fall in the prices of primary products – which continue to be its main source of foreign exchange: the promises of diversification remained in this, in mere promises – and the crisis in its main customers . “In the context of worsening average terms of trade in the region, which will fall 4.7% in 2020, the negative shock will focus on hydrocarbon-exporting economies, while food and metals exporters will be less affected,” warns ECLAC. Exports will decrease 23%, while imports will drop 25% due to the fall in activity and income. And the most affected sub-region will again be South America, whose terms of trade will decrease by almost 8%.

The good news is that, unlike other major recessions in the past, the economic crisis is not – so far – having a domino effect on banks: a financial crisis seems, for now, to be ruled out. And this is a significant point for the hope of a region in which the solvency of the financial sector has been, and remains, a major cause for concern. Inflation, another historic workhorse for Latin American countries, is also under control, except in Venezuela and Argentina, which have dragged their own dynamics long before the term covid-19 started to appear in the media.

Strong drop in revenue

The blow to the public deficit, which will reach 8.4% in 2020, will come from both sides: public spending will grow at the same time as cash inflows weaken: with the formal economy paralyzed or, at least, cluttered for weeks, Tax revenues were clearly reduced. The debt of the countries in the region, which at the end of 2019 was 46%, will close 2020 above 55%. A huge effort that will have to be paid in the future, but which will have served to prevent a complete collapse of the economy.

If it has not been possible to do more, it is precisely because of the lack of muscle as a result of the eternal fragility of tax collection in a region that already collected much less in taxes than other comparable blocs: if Latin America would have plugged that hole when it could, in recent years, his room for maneuver today – when facing the “biggest fiscal challenge since the public debt crisis of the early 1980s” – would be much greater.

“Total revenues in Latin America and the Caribbean have historically been insufficient to cover public spending, which leads to a deficit bias in the management of fiscal accounts, with all the risks that this entails. And the last decade has not been an exception to this trend: countries’ revenues have managed to keep up with the growth in public spending, ”says the ECLAC document. “The challenge is not just to increase the tax pressure, but to do it progressively, so that the tax system also contributes to reducing inequalities.” In 2018, the last year for which data are available, tax collection in Latin America and the Caribbean rose to 23% of GDP, compared with more than 34% of the Organization for Cooperation and Development (OECD) average. Another challenge in a horizon full of them.

Source: El País

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