Latin America and the Caribbean region to Contract by 8.1 Percent in 2020

The International Monetary Fund (IMF) projects a real GDP contraction of 8.1 percent in 2020 in Latin America and Caribbean region.

The new Regional Economic Outlook released by the IMF shows that employment contracted more strongly than GDP in the second quarter of 2020, 20 percent on average for the five largest countries, and up to 40 percent in Peru.

The IMF attributed the relatively larger economic impact of the pandemic in the sub-region to two structural characteristics of Latin American and the Caribbean economies:

“More people working in activities that require close physical proximity, and less teleworking have contributed to Latin America and Caribbean strong slowdown”.

The IMF pointed out that, almost 45 percent of jobs are in contact-intensive sectors (like restaurants, retail stores, or public transportation), compared to just over 30 percent for emerging markets. In reverse, only about one in five jobs can be done remotely, half the share of advanced economies and below the emerging world average (26%).

The Fund indicted that these two features, in addition to a high degree of informality and poverty, has interacted with lower trade and financial turbulence caused by the ailing global economy, to lower economic activity.

The IMF stated that economic activity started to rebound in May, aided by the gradual easing of lockdowns, consumers and firms adapting to social distancing, sizable policy support in some countries, and an improved external environment. Yet, the still high contagion and death rates have contributed to a relatively slow reopening process, due to persistent concerns over weak government capacity and resilience of health systems.

Some countries (Brazil, Costa Rica, Uruguay) experienced less pronounced contractions and by July were back close to their January trends. Many, especially in Central America, were helped by a strong rebound in remittances and exports, together with low oil prices. Others, for example Ecuador and Peru, experienced relatively large collapses and activity still remained subdued in July.

“Dependent on tourism for anywhere between 20 to 90 percent of GDP and employment, Caribbean countries were the hardest hit. Despite being relatively successful at containing the virus spread, the sudden stop in tourist arrivals and local lockdowns was equivalent to a cardiac arrest to their economies”, the IMF said.

The IMF further states that in the second quarter, Brazil, Chile, Colombia, Mexico, and Peru lost a combined 30 million jobs, with female, young and low-educated workers hit particularly hard. Although many jobs will be recovered as activity resumes, current estimates point to lasting income losses, potentially reversing some of the social progress achieved until 2015.

“Poverty is projected to increase significantly, exacerbating income inequality, already among the highest in the world before the pandemic.

“The recovery is expected to be protracted. Our forecast is for growth of 3.6 percent in 2021. Most countries will not go back to pre-pandemic GDP until 2023, and real income per capita until 2025, later than any other region”.

Policy priorities

The IMF recommended that policies should remain focused on containing the pandemic and cementing the recovery. Premature withdrawal of fiscal support should be avoided. However, further support should be accompanied by explicit, legislated and clearly communicated commitments to consolidate and rebuild fiscal defences over the medium term.

Furthermore, the IMF suggested that fiscal structural reforms should also aim at enhancing automatic stabilizers, social safety nets and access to health and education, while preserving public investment.

The Fund also expect financial regulation to address the potential financial stability risks emerging from the crisis. The IMF noted that debt restructuring will be critical to recover the financial health of viable firms. For unviable ones, efficient and equitable bankruptcy frameworks that distribute losses between investors, creditors, owners, workers, and the government were recommended.

“While some structural reforms may support confidence and the recovery, especially if they manage to lay the foundations for more sustainable and inclusive growth going forward, the legacies of the pandemic cloud an already uncertain outlook for the region”.