Latin America Advisor

A Daily Publication of The Dialogue

How Quickly Can Latin America’s Economies Recover?

An image of a graph. File Photo: City University of New York.

In the July update to its World Economic Outlook report, the International Monetary Fund maintained its forecast of 6 percent for global economic growth this year but said the gap between rich and poor nations was widening amid low Covid-19 vaccination rates in developing countries and the emergence of highly contagious variants of the novel coronavirus. For Latin America and the Caribbean, the report forecasts 5.8 percent growth this year, just below the global average. This year and next, which countries in Latin America and the Caribbean will see their economies bounce back the fastest, and which will lag? How much does limited access to Covid-19 vaccines and people’s hesitancy over receiving the vaccines threaten to derail the region’s economic recovery? Which industries in the region will recover more quickly, and which will continue to struggle?

Alicia Bárcena, executive secretary of the Economic Commission for Latin America and the Caribbean: “ECLAC forecasts that Latin America and the Caribbean will grow 5.2 percent this year. Although the 2021 growth dynamics respond in part to improvements in external conditions and the gradual opening of economies, it is mainly explained by a strong statistical carry effect and by a very low base of comparison. The 2021 growth rate will not be enough for the region to recover the level of GDP before the pandemic; only six of the 33 countries in the region will have achieved their 2019 GDP level by the end of this year. For 2022, ECLAC forecasts a GDP growth rate of 2.9 percent for the region, with only 14 of the 33 countries achieving their 2019 GDP level by the end of that year. One of the main challenges for Latin America and the Caribbean is maintaining sustainable and inclusive growth rates beyond in a context where the structural problems that have historically limited growth in the region not only remain but have been made worse by the crisis. To sustain inclusive growth, it is essential to gain wide access to vaccines that allow the normalization of economic activity in the region. Also, from a macroeconomic policy perspective, there is the need to sustain expansive fiscal policies that link the actions taken to face the emergency with other medium- and long-term strategic actions. In the short term, it is necessary to maintain emergency social-transfer programs and support for productive sectors. From a medium-term perspective, it is essential to boost productivity and to foster investment. The large resources needed to face these challenges require not only strengthening domestic resources but also the support of financing for development and international cooperation. The latter should play a key role in increasing the capacity of countries to maintain expansionary fiscal policies and in providing access to vaccines that allow the normalization of economic activity in Latin American and Caribbean countries.”

Claudio Loser, visiting senior fellow at the Inter-American Dialogue, president of Centennial Group Latin America and former head of the Western Hemisphere Department of the International Monetary Fund: “Latin America remains a laggard in terms of its recovery from the pandemic. As the updated World Economic Outlook indicates, parts of Latin America continue to see high levels of new deaths and relatively low vaccination rates, although countries such as Chile and Uruguay see higher rates. The new estimates show an upward correction in the expected rate of growth for the region in 2021, from 4.6 percent estimated earlier to 5.8 percent now. There is also a slight correction for 2022, when GDP is expected to grow by 3.3 percent, more in line with the historical trajectory, and declining to less than 3 percent subsequently. Actually, prior to the pandemic, Latin America showed the poorest performance of all emerging regions, dragged down by Argentina, Colombia, Ecuador, Peru, Uruguay and Venezuela, among others, and only offset by more solid improvements in Brazil and Chile, among the larger economies of the region. In general, the expectations are that for the 2020-2022 period, per-capita income will have declined, while other regions, including the advanced countries, will have seen an increase. Most likely, export activities will pick up, although climate will not cooperate, as seen with the drought that is hitting Brazil and with limited rain and snow in the southern part of the continent. Tourism will recover slowly, while services will remain affected by the remaining high incidence of contagion and mediocre vaccination. In summary, the evidence suggests downbeat prospects for Latin America and the Caribbean.”

Alfredo Coutiño, director for Latin America at Moody’s Analytics: “Latin America is on track to report an economic rebound this year, with annual growth amplified due to last year’s low base for comparison. Growth for next year will still benefit from the post-recession recovery. Chile, Colombia and Peru will lead the rebound in 2021 because of the recovery response that these economies have shown and because of the dynamics of their exporting sectors, stimulated by strong external demand and commodity prices. Meanwhile, Argentina, Brazil and Mexico will report more moderate growth due to the reduced fiscal support to their economies’ recovery. Access to vaccines and the lack of sufficient health infrastructure have limited vaccination rates, particularly in Mexico, Central America and the Caribbean, which have restricted mobility and delayed the economic reopening. However, as the vaccine supply increases and more people are willing to get inoculated, the recovery will gain some momentum. Certainly, the lethality and high transmission rate of the new virus strains, together with the low response from governments, could introduce delays in the recovery process. The recovery has definitely been heterogeneous, not only in terms of countries but also among industries and sectors. On the one hand, developed countries with more access to vaccines and resources are advancing faster. On the other hand, export-oriented sectors have benefited greatly from the recovery of external demand, particularly from the fast and solid recovery of China and the United States, the world’s two main locomotives. Sectors and activities considered nonessential have continued to face delays in their reopening and also in the access to vaccines. The region is facing the risks of the proliferation of the new virus strains and a galloping inflation fueled by domestic and external factors.”

Pablo Heidrich, associate professor in the Global and International Studies Program at Carleton University: “Generally speaking, commodity exporters will likely recover quicker than countries that depend on tourism and light manufactures (maquilas). Peru and Argentina are examples of that. In terms of domestic markets, those nations that had shorter or lighter lockdowns will see faster domestic market recoveries than those that had harder or longer ones, as fewer bankruptcies happened in the former, and unemployment there grew less dramatically. Brazil, Chile and Mexico are in that category. Those with worse pre-Covid problems, such as Venezuela and Cuba, will naturally lag. Most Caribbean countries, which overly depend on tourism, will also tend to perform worse than Central or South America. Access to vaccines is a big disruptor for economic recovery in parts of Central America and more underdeveloped parts of South America. Almost half of Latin Americans have received a first dose, but only 20 percent are fully vaccinated, and there is huge variation across countries. Much remains to be done, crucially as the Delta variant is spreading there rather quickly. On the positive side, vaccine hesitancy has been much lower in the region than in the United States or several European countries. Exporters of commodities, such as minerals, oil, agricultural products and lumber, will recover quickest, and some have not been that disrupted by Covid. Manufacturing value chains for the U.S. market are already picking up significantly and will return to normal by early 2022. However, tourism and all its related industries, such as restaurants, entertainment and luxury retail, will take much longer to return to 2019 levels, if they ever do. The sum of these general trends augurs a slow recovery of employment, income and reductions in poverty.”

Edgardo Sternberg, vice president and emerging markets portfolio manager at Loomis, Sayles & Company in Boston: “The IMF’s most recent growth projections for Latin America and the Caribbean are an improvement over those it had in April. It is interesting that despite the high incidence of Covid cases and low levels of vaccination (except for very few exceptions), growth forecasts for 2021 have increased. The countries that have benefitted from this improved outlook are those that produce commodities or are tied to the U.S. manufacturing industry. Countries that depend on tourism will see much slower growth this year. Although Mexico has done very little to counterbalance the effects of the pandemic by enacting large fiscal stimulus or implementing effective measures to protect and vaccinate the population, it will see stellar growth this year and even next year as it has tied its fortunes to those of the United States. We can see that in Mexican companies increasing their production of cement, even beyond capacity. Other countries, such as Argentina and Brazil, will see relatively healthy growth this year but meager growth next year as they will have to lower their fiscal spending in order to bring it to more reasonable levels. Very healthy growth in Peru and Chile this year, thanks to commodity prices and last year’s sharp declines, may see large slowdowns in 2022 as political uncertainties affect investments in those countries. Lastly, the surge in Covid cases because of the Delta variant may cause more lockdowns that affect growth in tourism-dependent countries. Thankfully, remittances to these countries have grown and have been steady.”

[Editor's note: See the Advisor's video interview with Ernesto Revilla, head of Latin America economics at Citigroup, about the region's economic outlook.]

Latin America Advisor logo.The Latin America Advisor features Q&A from leaders in politics, economics, and finance every business day. It is available to members of the Dialogue’s Corporate Program and others by subscription.


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