IMF: Latin America Will Suffer Worst Economic Crisis in Its History

ECLAC has indicated that the pandemic in 2020 will cause the greatest economic crisis that Latin America and the Caribbean have ever experienced

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The decline in the working population in the region has been widespread. Colombia, Mexico, and Peru have been particularly hard hit (EFE).

Spanish – The International Monetary Fund (IMF) has lowered its growth prospects for Latin America and the Caribbean by predicting that economic activity will fall by 9.4% this year due to the impact of the coronavirus pandemic. To help these governments, the IMF approved an additional 5.5 billion USD loan to 17 countries in Latin America and the Caribbean, plus flexible credit lines for Chile and Peru, and renewed access for Colombia, expanding precautionary lending in the region to 107 billion USD.

The World Bank forecasts for the region show a 9% drop in Gross Domestic Product (GDP). ECLAC has indicated that the pandemic in 2020 will cause the greatest economic crisis that Latin America and the Caribbean has experienced in its history for as long as statistical records are available. During the so-called “debt crisis,” the region’s GDP contracted by 2.5% in 1983, and during the international financial crisis in 2009, the contraction was 1.8%.

Historical growth of Latin America and the Caribbean (IMF and World Bank).

There has been a significant drop in the working population in the region. The impact has been particularly strong in Colombia, Mexico, and Peru, although the National Audit Institutions of the other countries in the region are still waiting to update these figures.

Employment index for Brazil, Mexico, Chile, Colombia, y Peru (IMF).

Perú

Peru has been the country that has seen its economy most-affected by the pandemic. This year, it is estimated that the drop in the economy will be about 14%, well above the average for the region.

The reasons for the sharp drop include the decline in exports of raw materials – especially copper; the strict lockdown has considerably affected consumption and led to a series of mass layoffs; and informal work is extremely prevalent in the Peruvian labor market, reaching 70% of the employed population, a huge figure even at the regional level.

México

In Mexico, the IMF forecasts a 10.5% drop in economic activity. The impacts of COVID-19 have been aggravated by the fall in oil prices, volatility in international financial markets, disruptions in global value chains, and the deterioration of trust among businesses, as evidenced by the drop in investment before the COVID-19 pandemic.

The Mexican central bank is expected to further cut interest rates to absorb the demand shock caused by the crisis and preserve the functioning of financial markets.

Argentina

Argentina’s GDP is expected to contract by about 10% in 2020 as the risks become more acute. The country’s growth was overturned by the extension of the quarantine in Buenos Aires and its metropolitan area. The country has experienced a fall in external demand and the deterioration in commodity prices, which will more than offset the support provided by the fiscal program, which remains constrained by the scarcity of financing options. Uncertainties related to the debt restructuring process continue to undermine confidence in Argentina.

Brazil

The IMF expects Brazil’s real GDP to decline by 9% and rebound by 3.6% in 2021. The authorities have responded to the pandemic with decisive interest rate cuts and significant fiscal and monetary stimulus programs that include direct cash transfers to the most vulnerable population. The IMF believes that the withdrawal of this stimulus would affect growth in 2021, as the Brazilian economy had not yet recovered from the aftermath of the 2015-16 recession when the COVID-19 crisis emerged.

Consequently, an accommodative monetary policy will be essential to support the cyclical recovery, and a resumption of the government’s fiscal and structural reform program is crucial to preserve fiscal sustainability and foster potential growth and investor confidence.

Chile

For Chile, the multilateral organization projects that economic activity will contract by 7.5% this year, and rebound by 5% next year. After the good results of the first quarter, economic activity is expected to contract sharply in the second quarter, due to strict social distancing measures, and, to a lesser extent, the weakening of external demand. A rebound in activity is expected for the beginning of the third quarter and should continue in 2021, thanks to the unprecedented measures taken in the fiscal, monetary, and financial areas.

The unemployment rate in Chile reaches 11%, and this would rise to 26% in the population between 15 and 26 years old. Female employment also fell to 38.

Colombia

Colombia acted early to limit the spread of the virus, but economic disruptions related to the global quarantine – such as falling oil prices – are expected to trigger the Andean country’s first recession in two decades.

The IMF anticipates that Colombia’s GDP will contract by 7.8% in 2020, but should grow by 4% by 2021. The Banco de la República has cut monetary policy rates and supported market liquidity, and the fiscal rule has been suspended for two years to provide sufficient flexibility to deal with the health and economic crises. Colombia faces a sharp drop in employment, reaching unemployment rates of 24% in the country’s principal cities.

Central America and the Caribbean

Central America and the Caribbean will experience a deep recession in 2020 with gradual recovery starting in 2021. The strongest impacts of the trade contraction will be felt in Panama, El Salvador, and Nicaragua. The collapse of tourism will particularly affect Costa Rica. Countries of the Northern Triangle and Nicaragua will be affected by the decline in remittance inflows. A mitigating factor is that the fall in oil prices has improved the terms of trade in Central America.

The Caribbean economies have succeeded in flattening the contagion curve of the COVID-19 pandemic, but tourism has come to a standstill, and key markets where tourists come from are falling into a deeper recession. So the region is likely to experience a very dramatic and prolonged contraction in economic activity.

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