What does the impact of COVID19 mean on Latin American economies?

Not only has the Coronavirus pandemic affected different countries at different times, it has also affected economies in different ways and magnitudes. Only recently, the United Kingdom was named as the G7 nation that would be hardest hit by the pandemic, given how its economy is structured with an emphasis on sectors that have been materially affected by the crisis – like hospitality for instance.

One region that is currently undergoing a huge amount of strain from the virus is Latin America. The rate of infection there is high and it is having a direct effect on the populations of its various countries – as well as its economy. Here, in this article, we examine what the impact of COVID19 on the wider Latin American economy could be and what it could mean for the future of the region.

But first, to understand the situation fully, it is necessary to look at the recent past. In doing so, we understand how the economies of Latin America were faring before the virus spread to all corners of the globe. In short, many of the region’s countries were suffering from very high public debt and very slow growth. In fact, in some countries, growth was close to zero over a number of years. And now, with the virus locking down large numbers of the population in the region, the implication of high public debt and no growth means that governments across the Latin America have very little room for manoeuvre with their fiscal policies to help implement the support needed – not only now during the crisis, but in the months and years to come after it.

The breakdown of the region’s demographics is also an issue that will add to the struggle its economies will face in future. Much of the region has a younger population. This has positive ramifications on how badly affected individuals will be by the health issues surrounding the coronavirus, given that the disease seems to trouble the over 65s. That being said, Latin America in general has a weaker healthcare system than other regions so it may not be able to provide for all those that do get sick. However, in terms of economic impact, younger people tend to be in lower paid jobs which are the ones that are affected most in the pandemic, with job losses to be likely for many. Retail, manufacturing and wholesale trade sectors are all expected to be some of the hardest hit industries, which is a huge source of employment for the population of Latin America.

The region will also have to deal with a decline in its exports, which then has further repercussions on the economy’s ability to grow. There has already been a breakdown and collapse in some of the global supply chains due to the pandemic, but within the region supply chains have also been disrupted. A large decrease in exports from Latin America is therefore anticipated, acting as a drag on its GDP.

Additionally, currency depreciation is also one of the impacts the virus will inadvertently wreak on Latin America. This is down to the high financial volatility of the markets that limit the ability of governments within Latin America to be effective. Investors have fled to safety during the crisis which has ultimately meant large capital outflows from the region and, coupled with a currency depreciation, has meant that financial assets are much reduced.

Finally, it cannot be underplayed the amount of trouble social discontent can play on an economy. The region was already suffering from large swathes of the population feeling marginalized and forgotten about in terms of how much support the state gave them. With a high public debt burden, and a recession on their hands, governments have little in their arsenal left to help stimulate the economy and improve living standards for the already discontented.

With the projected GDP growth for the region in 2020 being anywhere between -1.8% and -5.5% as calculated by institutes like the IMF, the impact of the virus cannot be underestimated. Plus, it is important to remember that the region did not come into the crisis with strong economic numbers like many parts of Europe or the US. Instead, according to the OECD, the region will have to grapple with negative growth on the back of the weakest period of growth seen since the 1950s. Plus the social discontent that the region was already experiencing could well be exacerbated by the inequalities that the crisis will only continue to aggravate.