The economic damage has been immense and represents the region’s worst economic contraction since records began in 1900. The International Monetary Fund (IMF) estimates that Latin America and the Caribbean’s economy nosedived by -7% in 2020 compared with -3% globally. Some countries were among the worst performers on the planet: it is estimated that Peru plummeted by -11.1%, Argentina by -10%, Mexico by -8.2%, Colombia by -6.8%, Chile by -5.8% and Brazil by -4.1%. Panama was one of the hardest hit countries globally, with its economy plunging by an estimated -17.9%.
The economic slump came in spite of many countries putting in place fiscal stimulus. Although not on the generous scale of many rich nations, it averaged about 4.5% of GDP across Latin American and Caribbean countries, according to the IMF.
Latin America and the Caribbean – with a population of 659 million people – had a total GDP of $5.19trn in 2019 but that plummeted to $4.3trn in 2020 and stands at about $4.65trn in 2021, according to the IMF. Latin America’s credit score has been hit harder than that of any other region in the world, with 13 downgrades and nine ‘negative’ outlooks administered since the pandemic began, according to Standard & Poor’s.
Latin America will recover more slowly than other regions
Furthermore, the IMF is forecasting Latin America and the Caribbean will make a slower economic recovery than other parts of the world because of its sluggish vaccination roll-out and continuing waves of the virus. Its overall economy is expected to expand by 4.6% in 2021 and by 3.1% in 2022, compared with emerging and developing Asia at 8.6% and 6% in the respective years and the world at 6% and 4.4%. The IMF is predicting that the region will get back to its pre-pandemic levels of output only in 2023 and on a GDP per capita basis in 2025, later than other parts of the world.
During the past decade or so, we saw the emergence of a bigger middle class in Latin America but all that progress has now been undone. Peter Hakim, Inter-American Dialogue
Latin America had some of the strictest lockdowns in the world in 2020. According to the Oxford Covid-19 Government Response Tracker, on 7 May 2020, Paraguay scored 94.4, Peru and Bolivia 96.3, Argentina 89 and Mexico 82 (on a composite measure based on nine response indicators including school closures and workplace closures, with a value of 100 the strictest). The UK stood at 79.6 in comparison.
“Latin America’s economy has collapsed during the past year,” says Peter Hakim, president emeritus and senior fellow of the Inter-American Dialogue, a Washington, DC-based think tank.
“The situation is much worse than the international financial crisis of 2008, when Latin America fared reasonably well because China purchased the region’s commodities. It is worth remembering that Latin America’s main economies were not performing that well before the pandemic struck. There was very little cushion. During the past decade or so, we saw the emergence of a bigger middle class in Latin America but all that progress has now been undone.”
Experts say that the continent has a number of structural features that explain why it has fared worse than other regions: weak healthcare and social security systems, a huge informal economy, overcrowded housing, a strong dependence on tourism, and a limited margin for fiscal support.
The informal labour market is certainly a key factor, accounting for more than 40% of the labour force even in wealthier countries such as Chile, and jumping to 70% in poorer countries including Honduras, Nicaragua and Bolivia. Most informal jobs are in hands-on sectors such as retail and construction, so working from home becomes virtually impossible.
As for co-morbidities, Latin America finds itself in the unenviable position of having Third-World incomes with First-World disease profiles. The region has some of the world’s highest rates of obesity: at 32.4% of the adult population Mexico was second in the world only to the US (at 38.2%), according to a 2015 report by the OECD. Latin America also has widespread problems with diabetes and hypertension. All these factors have been found to worsen the outcomes of Covid-19.
Latin America had weak growth before Covid-19 hit
Even before the pandemic struck, Latin America and the Caribbean had faced a period of stagnant economic growth: it expanded at only 0.48% a year between 2015 and 2019, according to the IMF. That weak momentum reflected structural and cyclical factors. On the structural side, growth was constrained by low investment, slow productivity improvements, a weak business climate, and the low quality of infrastructure and education. On the cyclical side, growth was held back by the weak global economy and low commodity prices, elevated economic policy uncertainty and social unrest.
One of the most worrying aspects is that many of the children from poor families, who have been out of schooling for the past year or so, may never return. Jens Arnold, OECD
One of the most concerning aspects about the pandemic and containment measures in the region is school closures, which could have a devastating impact in the longer term. Latin America has seen the most school days lost of any global region: by the end of May, it had lost an average of 300 school days, double that of the 38 member states of the OECD, for example. At the end of May, about 114 million students in the region were not attending classes in person.
“There is a real risk of the continent witnessing a ‘lost generation’,” says Jens Arnold, Latin America coordinator in the OECD’s economics department. “One of the most worrying aspects is that many of the children from poor families, who have been out of schooling for the past year or so, may never return. Children from upper-class families have access to laptops and may have been able to learn virtually. That is not the case for poorer children.”
While the precise learning losses are difficult to estimate, an IMF analysis suggests that students aged ten to 19 could expect a 4% lower income over their lifetime if the lost days of schooling in 2020 are not compensated for in the future.
"The income losses differ among countries, depending on how much the pandemic reduces the chance of completing secondary education and on the size of the skill premium for higher education," said Alejandro Werner, director of the IMF's Western Hemisphere department, in a report in April. "The losses will be greatest for students whose families are less able to support out-of-school learning, exacerbating already high income inequality and low levels of educational attainment."
The Economic Commission for Latin America and the Caribbean (Eclac) estimates that 2.7 million small and medium-sized enterprises in the region closed during the pandemic and the lockdowns, and that about 47 million jobs were lost (many millions of people left the labour force altogether). The region's average employment rate plunged to 51.7% at the end of 2020 from 57.4% the year before, according to the International Labour Organisation (ILO).
Furthermore, Latin America and the Caribbean witnessed the sharpest contraction in working hours of anywhere in the world: down by 16.2% in 2020 compared with an average global fall of 8.8%, according to the ILO.
Poverty numbers grow in pandemic
The number of people living in poverty in Latin America and the Caribbean jumped by some 22 million people in 2020 to a total of 209 million, according to Eclac. This raised the poverty rate from 30.5% in 2019 to 33.7% during the year. Inequality – as measured by the Gini coefficient – surged by 5.6% compared with the pre-crisis level.
The formal work deficit is likely to become more apparent to certain types of workers such as young people, women and adults with lower qualifications. Roxana Maurizio, University of Buenos Aires
Women felt the brunt of the losses in employment. Between the first and second quarters of 2020, the percentage of women’s job losses (-18%) exceeded that of men (-15%), according to the ILO. The more significant impact among women is associated with their high concentration in hard hit economic sectors such as hotels and restaurants, in other service activities and in the household sector.
A recovery in employment is incipient but led by the informal sector, threatening a persistent rise in the size of the informal economy. More than 60% of new jobs created in the region in the second half of 2020 were in the informal sector.
"The formal work deficit is likely to become more apparent to certain types of workers such as young people, women and adults with lower qualifications, groups that traditionally experience greater difficulties in accessing formal employment," said Roxana Maurizio, a professor at the University of Buenos Aires, in an ILO report published in April.
"The macroeconomic collapse has disproportionately impacted some segments of the population, amplifying labour and social gaps – especially gender gaps – that characterise the region."
FDI inflows dropped by between 45% and 55%
The region's volume of imports of goods and services nosedived by 13% in 2020 but is forecast to recover by 11.8% in 2021, according to the IMF. In 2019, Latin America and the Caribbean received $160.72bn in foreign direct investment – a 7.8% decline on 2018 – but Eclac estimates that inflows plunged by between 45% and 55% in 2020.
Tax collection came down by 25% (and bounced back only partially) and spending surged by about 3.5% of GDP in 2020, as governments sought to attend to health and preservation policies to save households, jobs and businesses, according to the Inter-American Development Bank (IDB). The average fiscal deficit jumped to about 9% of GDP in 2020, way above the pre-crisis level of 3%.
The IDB forecasts that average public debt in Latin America and the Caribbean could hit almost 80% of GDP by the end of 2022, a huge rise from its pre-crisis average of 58%. The region has become the most indebted part of the developing world and at 57% has the highest external debt service relative to exports of goods and services.
The economic landscape is complicated by new waves of contagion and the slow vaccination roll-out, which make the prospects for economic recovery this year and next year highly uncertain. According to the Americas Society/Council of the Americas, on 28 May, the proportion of the population fully vaccinated in Peru was 3.37%, in Argentina 5.74%, in Colombia 6.28%, in Mexico 9.56, and in Brazil 10.2%. On this front, Chile stands out with 41.55% of the population fully vaccinated.
Latin American countries are expected to receive 280 million vaccine doses from the Covax facility, a worldwide initiative aimed at equitable access to the vaccine, by the end of 2021.
Brazil and Mexico do better than expected in first quarter
The only good news coming out of Latin America during the past few months is that the region's major economies seem to be recovering at a faster pace than economists first predicted.
Companies recognised that there is a lot of pent-up demand; people were not able to go to shopping malls during the lockdowns, for example. That demand will be unleashed shortly. Gersan Zurita, Moody's
Brazil's economy grew by 1.2% in the first quarter of 2021, driven by services, industry and fixed business investment, according to the Brazilian Institute of Geography and Statistics. The markets had been factoring in a rise of only 0.6%. Agriculture grew by 5.7% in the quarter, its fastest pace in four years. The better-than-expected numbers prompted Citi and Goldman Sachs to increase their 2021 economic growth forecasts for Brazil to 5.1% and 5.5%, respectively. The 4.6% jump in fixed business investment during the quarter was particularly encouraging.
"Private investment carried the weight in the first quarter [of 2021 in Brazil]," says Gersan Zurita, senior vice-president at Moody's. "I think companies recognised that there is a lot of pent-up demand; people were not able to go to shopping malls during the lockdowns, for example. That demand will be unleashed shortly."
The improving US economy is also benefitting Mexico (about 76% of its exports are destined for the US). The country's GDP fell at a softer rate of 3.6% year-on-year in the first quarter of 2021 compared with a 4.5% decline in the fourth quarter of 2020, according to official figures. At the end of May, Citi revised its 2021 growth forecast for the country's economy to 5.1% from 4.8%, citing better domestic prospects and a better outlook for its US trade partner.
The OECD is forecasting that Chile will rebound by 6.7% in 2021, buoyed by higher global commodity prices. Copper makes up about 23% of the country's exports and, in early May, the benchmark copper price on the London Metal Exchange hit a ten-year high of $10,460 a ton.
"It looks like Brazil, Mexico and Chile will perform reasonably well economically this year," adds Zurita. "There is a lot of uncertainty around Colombia. Peru and Argentina have suffered a great deal and I think it will take longer for them to rebound."
No part of the world has suffered more because of Covid-19 and the subsequent lockdowns than Latin America. They have put back social progress by at least five years and may have permanently damaged the education and job prospects of tens of millions of people. Furthermore, as the developed world looks forward to coming out of the pandemic, the low vaccination roll-out on the continent means that Latin Americans are not in the same position. Economic growth has started to gather pace in some of the region's main economies but inequality has almost certainly got a lot worse during the past year.
Jason Mitchell is a senior editor at Investment Monitor, with a specialisation in emerging markets.