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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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Chepa Beltran/LongVisual via ZUMA
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