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

2020-10-06T14:09:00.806Z


ECLAC points to a fall in GDP of 9.1% and almost 10% of per capita income, to unprecedented levels A woman collects food in the community dining room of a village in Buenos Aires (Argentina). Juan Ignacio Roncoroni / EFE The pandemic will have devastating effects on the Latin American economy. The bloc's GDP will plummet this year by 9.1% (the worst figure since there are data: 120 years ago), unemployment will rise to 13.5%, poverty will reach 37.7% of the population ( seven points more) and


A woman collects food in the community dining room of a village in Buenos Aires (Argentina). Juan Ignacio Roncoroni / EFE

The pandemic will have devastating effects on the Latin American economy.

The bloc's GDP will plummet this year by 9.1% (the worst figure since there are data: 120 years ago), unemployment will rise to 13.5%, poverty will reach 37.7% of the population ( seven points more) and inequality will continue to spike upward in what is, in itself, the most unequal region on the planet.

The setback will be so hard that, at the end of the year, GDP per capita will return to levels of a decade ago and the poverty rate will go back to 2006 levels. The balance presented this Tuesday by the United Nations arm for the development of Lastly, Latin America and the Caribbean (ECLAC) suggests that the continent is on the way to losing in just one year "a decade in economic terms, and almost a decade and a half in social terms."

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Per capita GDP, the best measure of the population's material well-being, will fall further: to 9.9%, levels not seen since 2010. By subregions, the largest drop in per capita income will occur in South America ( 9.4%), followed by Central America and Mexico (8.4%).

And the depth of the decline in April and May, the hardest months of the various quarantines, "suggests that the reactivation of growth will be slower than expected."

The dynamics of investment is not exactly a good omen: it is suffering, states the body led by Alicia Bárcena, a "significant decline" after a dismal second quarter.

Latin America is "without a doubt" facing "the strongest economic and social crisis that the region has experienced in several decades, and highlights the structural weaknesses of the economies," warn the technicians of the Santiago-based organization .

Weaknesses that have limited the possibilities of responding to the health crisis in countries that are burdened by poor and unfair health systems, high labor informality - which amplifies a blow such as the coronavirus - and poor social protection systems.

In this situation, ECLAC economists call to forget about the adjustment strategies that guided official policies in previous years and ask to bet on expansive fiscal and monetary plans, even more than those already approved in recent months.

In this way, says the UN agency, 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 recipes - purchases of public and private debt, the so-called QE, unpublished until now in the instruction manual of the central banks of the area - and fiscal ones - Brazil is the emerging country that most is pulling the deficit, largely financed by the issuing institute, according to the latest data from the Institute of International Finance—, the room for maneuver in Latin America is notably lower than in rich countries.

Economies in recession

Whether or not one step further in policy is taken, the future looks bleak.

The Latin American economies reached the pandemic, except for a few cases, touched.

After a five-year period of minimal growth, in the first quarter of the year GDP was already negative in nine of the 20 countries that make it up and eight more showed a clear downward trend.

The reason: a mix between the downturn in domestic and foreign demand, with China, at that time, in the midst of a crisis.

The restrictions of the pandemic, with the consequent partial or total paralysis of the production of goods and services, only aggravated - and in what way - this situation.

Private consumption was, by far, the component of demand hardest hit.

"There has been an accelerated deterioration in household spending as a result of the context of compulsory confinement imposed by the authorities in many countries, the voluntary social isolation of people and the arrest of many non-priority activities", outline the ECLAC technicians .

Added to this is the drop in family money inflows as a result of the loss of their sources of employment.

Although partially offset by state income support programs - yet more timid than in other parts of the emerging and advanced world - this collapse threatens a slower recovery than might be expected from a recession at the outset. use: in an economy so dependent on consumption, less willingness (and capacity) to spend today always means less growth tomorrow.

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

At the same time, the region has suffered a significant deterioration in its prospects abroad, both due to the fall in the prices of primary products - which remains its main source of foreign exchange: the promises of diversification remained just that, mere promises - As for the crisis in its main clients.

“In the context of the worsening of the region's average terms of trade, which will fall by 4.7% in 2020, the negative shock will be concentrated in the hydrocarbon exporting economies, while the food and metal exporters will be less affected ”, Warns ECLAC.

Exports will fall 23%, while imports will collapse 25% due to the collapse of activity and income.

And the sub-region most affected will be, once again, 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 crash is not producing - so far - a domino effect on banks: the financial crisis seems, for now, out of the question.

And that is not a minor element of hope in a region in which the solvency of the financial sector has been, and continues to be, a matter of prime concern.

Inflation, another historic workhorse for Latin American countries, is also under control except in Venezuela or Argentina, which have been dragging their own dynamics long before the term covid-19 even began to sound in the media.

Sharp drop in collection

The blow to the public deficit, which will go up to 8.4% in 2020, will come from both sides: public spending will grow just at the same time as cash inflows falter: with the formal economy paralyzed or, at least, Weighed down for weeks, tax revenues have clearly been depleted.

The debt of the countries of the region, which at the end of 2019 was 46%, will close 2020 above 55%.

An enormous effort that will have to be purged in the future, but that will have served to avoid a total collapse of the economy.

If it has not been possible to do more, it is precisely due to the absence of muscle derived from the everlasting fragility in tax collection of a region that already received much less in taxes than other comparable blocks: having closed that gap when it could, in the In recent years, now the room for maneuver today - when it faces the “greatest fiscal challenge since the public debt crisis of the early 1980s” - would be much greater.

“The total income of Latin America and the Caribbean has historically been insufficient to cover public expenditures, which leads to a deficit bias in the management of fiscal accounts, with all the risks that this implies.

And the last decade has not been an exception to this trend: the income of the countries has not been able to keep up with the growth of public spending ”, he highlights.

"The challenge is not only to increase tax pressure, but to do it progressively, so that the tax system also contributes to reducing inequalities."

In 2018, the latest year for which data is available, tax collection in Latin America and the Caribbean amounted to 23% of GDP compared to more than 34% of the OECD average.

One more challenge on a horizon full of challenges.


Source: elparis

All business articles on 2020-10-06

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