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Latin America And The Economic Consequences Of COVID-19

Governments around the region are taking measures to contain the outbreak. But they also need to face the economic fallout, IMF official Alejandro Werner warns.

A market in Havana, Cuba
A market in Havana, Cuba
*Alejandro Werner

-Analysis-

SANTIAGO — COVID-19 is spreading fast. It is no longer a regional question, but a challenge demanding an international response. The pandemic hit the countries of Latin America and the Caribbean (LAC) later than it did other regions, and we still have an opportunity to flatten the contagion curve.

Initiatives have been launched to that end in many areas. Besides reinforcing reactive sanitary policies, many LAC countries are enacting containment and social distancing measures such as closing borders and schools.

But these measures, in addition to the world economy slowing down and disruption of supply chains, along with falling prices for raw materials, shrinking tourist activity and notably harsher financial conditions worldwide, are paralyzing activity in many LAC countries and distinctly darkening their economic perspectives. The recovery we had foreseen for the region months back will not happen, and 2020, it must be said, may become a negative-growth year.

The resulting rise in debt costs will highlight the financial weaknesses that have accumulated in these years of low interest rates. While a sharp drop in oil prices should benefit countries that import crude, it will hamper investments and economic activity in countries highly dependent on oil exports. Services will suffer too — from containment and distancing measures, with tourism, hotels and transport particularly affected.

Additionally, countries with deficient sanitary infrastructures and limited spending margins for expanding healthcare services or to back affected sectors and households may face significant pressure. The economic impact of the pandemic will probably vary in keeping with the regional and particular conditions of each country.

South America will face a drop in revenues from exports, both because of a fall in commodities prices and reduced export volumes, especially to China, the United States and Europe, which are important trading partners. Falling oil prices will especially hit exporter countries hard, while harsher financing conditions will negatively affect the big economies and those closely integrated in the world financial system, or those suffering from underlying weaknesses. Containment measures being taken in various countries will reduce economic activity in services and manufacturing for the next three months at least. Expect a recovery only after the pandemic is contained.

In Central America and Mexico, slowed economic activity in the United States will curtail international trade, direct foreign investment, tourist flows and remittances. The main farming exports (coffee, sugar, bananas), as well as trade flows through the Panama canal, could also be negatively affected by a fall in global demand. Local outbreaks will pressure economic activity in the next three months and aggravate business conditions that were already uncertain (especially in Mexico).

Customer disinfecting her hands before entering a shop in Havana, Cuba — Photo: Zhu Wanjun/Xinhua/ZUMA

In the Caribbean, reduced tourist demand because of travel restrictions and the "fear factor" — even when contagion begins to recede — will gravely harm economic activity. Raw materials exports will also suffer significantly and fewer remittances are likely to worsen economic tensions.

Governments must resort to monetary transfers, wage subsidies and tax relief measures

The first priority is to ensure states can meet the immediate healthcare costs of protecting the population's health, attend to the infected and curb viral infections. In countries where healthcare facilities have limitations, the international community should intervene to help avoid a humanitarian crisis.

Thus it will be crucial to adopt measures focusing on fiscal, monetary and financial markets sectors with the intention of mitigating the economic impact of the virus. Governments must resort to monetary transfers, wage subsidies and tax relief measures to help homes and businesses affected by this sudden and temporary interruption in production.

Central banks should follow the course of events more closely, elaborate contingency plans and be prepared to supply abundant liquidity to financial institutions, and especially loans to small and mid-sized businesses that may be more or less prepared to meet prolonged interruptions. In some cases flexibility might be advisable in the short term application of norms.

As far as there is room for maneuver in its implementation, broader monetary and fiscal stimuli could boost confidence and aggregate demand, but these would be more useful once firms resume their normal operations. Given the extensive scale of cross-border economic ties, the need to respond to the epidemic in a coordinated manner and on a global scale seems clear.

Countries are starting to take economic policy measures to that end. In many countries, including Argentina, Brazil, Colombia and Peru, additional funds are being mobilized for medical costs. On March 17, Brazil announced an emergency economic plan oriented to giving support to vulnerable socio-economic sectors, safeguarding jobs and fighting the pandemic.

For its part, the IMF is prepared to help mitigate the economic consequences of coronavirus through a range of credit services and instruments. In conclusion, I would reiterate the importance of our acting together decisively, to limit the pandemic's economic effects and avoid a humanitarian crisis. The IMF is ready to work with member countries and assist them in difficult times.

*Werner is head of the IMF's Western Hemisphere Department.

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Future

7 Ways The Pandemic May Change The Airline Industry For Good

Will flying be greener? More comfortable? Less frequent? As the world eyes a post-COVID reality, we look at ways the airline industry has been changing through a pandemic that has devastated air travel.

Ready for (a different kind of) takeoff?

Carl-Johan Karlsson

It's hard to overstate the damage the pandemic has had on the airline industry, with global revenues dropping by 40% in 2020 and dozens of airlines around the world filing for bankruptcy. One moment last year when the gravity became particularly apparent was when Asian carriers (in countries with low COVID-19 rates) began offering "flights to nowhere" — starting and ending at the same airport as a way to earn some cash from would-be travelers who missed the in-flight experience.

More than a year later today, experts believe that air traffic won't return to normal levels until 2024.


But beyond the financial woes, the unprecedented slowdown in air travel may bring some silver linings as key aspects of the industry are bound to change once back in full spin, with some longer-term effects on aviation already emerging. Here are some major transformations to expect in the coming years:

Cleaner aviation fuel

The U.S. administration of President Joe Biden and the airline industry recently agreed to the ambitious goal of replacing all jet fuel with sustainable alternatives by 2050. Already in a decade, the U.S. aims to produce three billion gallons of sustainable fuel — about one-tenth of current total use — from waste, plants and other organic matter.

While greening the world's road transport has long been at the top of the climate agenda, aviation is not even included under the Paris Agreement. But with air travel responsible for roughly 12% of all CO2 emissions from transport, and stricter international regulation on the horizon, the industry is increasingly seeking sustainable alternatives to petroleum-based fuel.

Fees imposed on the airline industry should be funneled into a climate fund.

In Germany, state broadcaster Deutsche Welle reports that the world's first factory producing CO2-neutral kerosene recently started operations in the town of Wertle, in Lower Saxony. The plant, for which Lufthansa is set to become the pilot customer, will produce CO2-neutral kerosene through a circular production cycle incorporating sustainable and green energy sources and raw materials. Energy is supplied through wind turbines from the surrounding area, while the fuel's main ingredients are water and waste-generated CO2 coming from a nearby biogas plant.

Farther north, Norwegian Air Shuttle has recently submitted a recommendation to the government that fees imposed on the airline industry should be funneled into a climate fund aimed at developing cleaner aviation fuel, according to Norwegian news site E24. The airline also suggested that the government significantly reduce the tax burden on the industry over a longer period to allow airlines to recover from the pandemic.

Black-and-white photo of an ariplane shot from below flying across the sky and leaving condensation trails

High-flying ambitions for the sector

Joel & Jasmin Førestbird

Hydrogen and electrification

Some airline manufacturers are betting on hydrogen, with research suggesting that the abundant resource has the potential to match the flight distances and payload of a current fossil-fuel aircraft. If derived from renewable resources like sun and wind power, hydrogen — with an energy-density almost three times that of gasoline or diesel — could work as a fully sustainable aviation fuel that emits only water.

One example comes out of California, where fuel-cell specialist HyPoint has entered a partnership with Pennsylvania-based Piasecki Aircraft Corporation to manufacture 650-kilowatt hydrogen fuel cell systems for aircrafts. According to HyPoint, the system — scheduled for commercial availability product by 2025 — will have four times the energy density of existing lithium-ion batteries and double the specific power of existing hydrogen fuel-cell systems.

Meanwhile, Rolls-Royce is looking to smash the speed record of electrical flights with a newly designed 23-foot-long model. Christened the Spirit of Innovation, the small plane took off for the first time earlier this month and successfully managed a 15-minute long test flight. However, the company has announced plans to fly the machine faster than 300 mph (480 km/h) before the year is out, and also to sell similar propulsion systems to companies developing electrical air taxis or small commuter planes.

New aircraft designs

Airlines are also upgrading aircraft design to become more eco-friendly. Air France just received its first upgrade of a single-aisle, medium-haul aircraft in 33 years. Fleet director Nicolas Bertrand told French daily Les Echos that the new A220 — that will replace the old A320 model — will reduce operating costs by 10%, fuel consumption and CO2 emissions by 20% and noise footprint by 34%.

International first class will be very nearly a thing of the past.

The pandemic has also ushered in a new era of consumer demand where privacy and personal space is put above luxury. The retirement of older aircraft caused by COVID-19 means that international first class — already in steady decline over the last decades — will be very nearly a thing of the past. Instead, airplane manufacturers around the world (including Delta, China Eastern, JetBlue, British Airways and Shanghai Airlines) are betting on a new generation of super-business minisuites where passengers have a privacy door. The idea, which was introduced by Qatar Airways in 2017, is to offer more personal space than in regular business class but without the lavishness of first class.

Aerial view of Rome's Fiumicino airport

Aerial view of Rome's Fiumicino airport

commons.wikimedia.org

Hygiene rankings  

Rome's Fiumicino Airport has become the first in the world to earn "the COVID-19 5-Star Airport Rating" from Skytrax, an international airline and airport review and ranking site, Italian daily La Repubblica reports. Skytrax, which publishes a yearly annual ranking of the world's best airports and issues the World Airport Awards, this year created a second list to specifically call out airports with the best health and hygiene standards.

Smoother check-in

​The pandemic has also accelerated the shift towards contactless traveling, with more airports harnessing the power of biometrics — such as facial recognition or fever screening — to reduce touchpoints and human contact. Similar technology can also be used to more efficiently scan physical objects, such as explosive detection. Ultimately, passengers will be able to "check-in" and go through a security screening anywhere at the airports, removing queues and bottlenecks.

Data privacy issues

​However, as pointed out in Canadian publication The Lawyer's Daily, increased use of AI and biometrics also means increased privacy concerns. For example, health and hygiene measures like digital vaccine passports also mean that airports can collect data on who has been vaccinated and the type of vaccine used.

Photo of planes at Auckland airport, New Zealand

Auckland Airport, New Zealand

Douglas Bagg

The billion-dollar question: Will we fly less?

At the end of the day, even with all these (mostly positive) changes that we've seen take shape over the past 18 months, the industry faces major uncertainty about whether air travel will ever return to the pre-COVID levels. Not only are people wary about being in crowded and closed airplanes, but the worth of long-distance business travel in particular is being questioned as many have seen that meetings can function remotely, via Zoom and other online apps.

Trying to forecast the future, experts point to the years following the 9/11 terrorist attacks as at least a partial blueprint for what a recovery might look like in the years ahead. Twenty years ago, as passenger enthusiasm for flying waned amid security fears following the attacks, airlines were forced to cancel flights and put planes into storage.

40% of Swedes intend to travel less

According to McKinsey, leisure trips and visits to family and friends rebounded faster than business flights, which took four years to return to pre-crisis levels in the UK. This time too, business travel is expected to lag, with the consulting firm estimating only 80% recovery of pre-pandemic levels by 2024.

But the COVID-19 crisis also came at a time when passengers were already rethinking their travel habits due to climate concerns, while worldwide lockdowns have ushered in a new era of remote working. In Sweden, a survey by the country's largest research company shows that 40% of the population intend to travel less even after the pandemic ends. Similarly in the UK, nearly 60% of adults said during the spring they intended to fly less after being vaccinated against COVID-19 — with climate change cited as a top reason for people wanting to reduce their number of flights, according to research by the University of Bristol.

At the same time, major companies are increasingly forced to face the music of the environmental movement, with several corporations rolling out climate targets over the last few years. Today, five of the 10 biggest buyers of corporate air travel in the US are technology companies: Amazon, IBM, Google, Apple and Microsoft, according to Taipei Times, all of which have set individual targets for environmental stewardship. As such, the era of flying across the Atlantic for a two-hour executive meeting is likely in its dying days.

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