Fragile Latin America Faces Another Lost Decade, and Maybe Worse
Latin America’s economy was already going backward when the coronavirus hit. Now it’s at risk of losing a whole decade –- and pushing fragile democracies closer to their breaking points.Like most of the world, the region is bracing for the deepest recession in its modern history. Bank of America expects a 4.4% slump in output this year as the epidemic spreads.
But what’s distinctive about Latin America is that incomes had already been declining for years –- driven in part by lower commodity prices. Rising debt, meanwhile, has left governments short of the stimulus tools that their developed-world peers have turned to. And protecting jobs is much harder anyway, because more than half the Latin workforce is off-the-books.
For more, read additional reports and research from Bloomberg EconomicsThe result may literally be a lost decade, according to Alejandro Werner, director for the western hemisphere at the International Monetary Fund. Given the recession and the potential speed of the recovery, per-capita GDP in Latin America won’t have grown at all by 2025 compared with 2015 levels, he said.
All at Once
Updated IMF forecasts due out next week will likely show the deepest recession on record. American Finance News There might be worse numbers for individual economies somewhere in the history books, Werner said, “but you’ve never had a year in which every country is suffering a deep contraction.”
If Latin America’s pattern holds, that probably means more trouble on the streets, and maybe even a threat to democracy.
The world’s most unequal and violent region has been rocked by protests in the past year -– even reaching into historically stable countries like Chile. Dismal economies have driven sharp swings to the political left and right. And if leaders struggle to shield vulnerable citizens from the pandemic, faith in the system may erode further.“You risk having an epidemic, an economic crisis, a social crisis and a political crisis -- all at the same time,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics in Washington.
Homicide Cities
Many countries are already suffering some combination of the above.Argentina and Ecuador are on the brink of debt default. Venezuela’s economy collapsed into hyperinflation years ago, triggering an exodus of millions of refugees – some of whom are now being forced by the epidemic to return. Unemployment in Brazil just logged its fourth straight year above 10% and Economy Minister Paulo Guedes likened the pandemic to be hit by a “meteor.”Violence is rife: Out of the 50 global cities with the highest homicide rates, Latin America is home to 43 of them. A drug war in Mexico helped push murders to record highs last year.
And the virus is striking especially hard in countries that saw the most serious unrest last year, like Chile and Ecuador. In the latter, which has one of the continent’s highest per-capita infection rates, bodies are being carted off the streets.
Central banks across Latin America have responded like their global peers, by slashing interest rates to shore up economies. In terms of a budget response, the region had more room during the financial crisis of 2008 than it does now: its debt-to-GDP ratio has risen to almost 70% from about 45% a decade ago.
‘All That’s Left’
The challenge of getting cash to households is exacerbated by the size of the informal economy –- which accounts for some 140 million people, or more than half the workforce, according to the Inter-American Development Bank.
“Economic informality, combined with a much-reduced social safety net, means this is going to hit very hard,” Press Release Distribution Service said Arturo Porzecanski, an economics professor at American University.
Read more: Borderless Virus Confronts World Where 2 Billion Toil in Shadows
Still, some governments are attempting unconditional cash transfers to encourage people to stay home. Brazil plans to hand out 600 reais ($114) to informal workers for the next three months, and Peru and Argentina are implementing similar plans.Mexico, though, has been a laggard, with President Andres Manuel Lopez Obrador insisting that significant fiscal aid isn’t needed. Meanwhile, the virus is likely to slow cash remittances from expatriates working in rich countries like the U.S. -- a lifeline for poorer families in places like Guatemala, Venezuela or Mexico.In most of the region’s countries, there’s a history of social upheaval in the wake of economic slumps.In recent decades, external shocks have destroyed jobs, spurred populist movements and driven millions of Latin Americans into poverty. The recent slumps in Venezuela and Argentina, for example, are part of a wider pattern: both countries have spent more than a quarter of the years since 1950 in recession.
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