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Persistence of pandemic darkens recovery in Latin America and the Caribbean

Samuel Pienknagura, Jorge Roldós and Alejandro Werner

October 22, 2020

COVID-19 has hit countries in Latin America and the Caribbean harder than other parts of the world, both human and economic. The human toll is undoubtedly rather heavy: while the region represents just 8.2% of the world population, at the end of September it totaled 28% of contaminations and 34% of deaths.

Our Regional Economic Outlook for the Western Hemisphere forecast a contraction of real GDP of 8.1% in 2020. Contrary to what we have seen in previous recessions, employment fell more sharply than GDP in the second quarter of 2020, by 20% on average in five largest countries at 40% in Peru, the most pronounced drop.

The countries of Latin America and the Caribbean have two structural characteristics that have had relatively large economic consequences: a comparatively higher number of people than elsewhere are engaged in an activity requiring physical proximity and fewer people have jobs that can be done. teleworking. Almost 45% of jobs are in sectors with high contact intensity (restaurants, shops or transport), against just over 30% in emerging countries. Only one in five jobs can be done remotely, half of what is seen in advanced countries and less than the average for emerging countries (26%). These characteristics, together with a high level of informality and poverty, as well as a slowdown in trade and financial disruptions caused by the difficulties in the global economy, have contributed to the historic collapse of activity.

An uneven recovery …

Activity began to recover in May, thanks to the gradual lifting of containment measures, the adaptation of consumers and businesses to physical distancing, and the establishment of a vigorous support policy in certain countries. and improving external conditions. The still high levels of contamination and mortality, however, resulted in relatively slow reopening, with concern about the weak capacity of the public authorities and the resilience of the health systems remaining preponderant.

Some countries (Brazil, Costa Rica and Uruguay) suffered a less severe contraction and returned from July to a level close to that of January. Many, especially countries in Central America, have benefited from the robust recovery in remittances and exports, as well as from lower oil prices. In others, for example Ecuador and Peru, activity collapsed fairly widely and remained sluggish in July.

Dependent on tourism for 20 to 90% of GDP and employment, the Caribbean countries have been the hardest hit. While they have been relatively successful in stemming the spread of the virus, the abrupt halt in tourist arrivals and local lockdowns have dealt a fatal blow to their economy.

… with serious consequences

In the second quarter, Brazil, Chile, Colombia, Mexico and Peru lost 30 million jobs, with women, young people and poorly educated workers particularly affected. Although many jobs will reappear with the resumption of activity, current estimates point to lasting income losses, which could reverse some of the social progress made since 2015. Poverty is expected to rise sharply, exacerbating income inequalities , which were already among the highest in the world before the pandemic.

The recovery may take time. We forecast growth of 3.6% in 2021. Most countries will not recover their GDP and real per capita income before the pandemic before 2023 and 2025 respectively, which is later than all other regions of the world.

The outlook depends on the consequences of the pandemic on external and domestic demand and on how the aftermath of the crisis will affect the region’s production capacities. The long and uncertain recovery the global economy means that export forecasts are bleak. Nationally, consumption of contact-intensive goods and services is likely to remain sluggish until the pandemic is brought under control, and income levels may remain low even afterward. The resulting sluggish demand and uncertainties will constrain investment in the medium term. Some lost jobs may not reappear, lowering potential growth, especially in countries where budget support has remained modest.


Bold measures taken by many governments have proven essential to mitigate the economic and social consequences of the pandemic, but they are accompanied by growing public and private debt.

We need to continue to focus on containing the pandemic and strengthening the recovery. A premature withdrawal of budget support must be avoided. However, any additional support must be matched with explicit, legally defined and clearly announced commitments to consolidate and rebuild fiscal defenses over the medium term.

Once the pandemic is under control and the recovery is underway, these commitments will have to be implemented, which will mean stepping up the anchors in the medium term. In addition, fiscal structural reforms should aim to strengthen automatic stabilizers, social security systems and access to health and education, while preserving public investment.

Financial regulation will need to address the financial stability risks that could arise from the crisis. The share of corporate debt at risk (when profits are lower than interest) has doubled from 14% in December 2019 to 29% last June and could increase further in 2021 under an adverse scenario. Debt restructuring will be essential to restore the financial health of viable businesses. For non-viable businesses, efficient and equitable bankruptcy regimes should be defined, which distribute losses between investors, creditors, owners, workers and public authorities.

Despite deteriorating corporate balance sheets, Latin American banks remain resilient. They approached the pandemic on a relatively solid footing, with high capital and liquidity buffers and few NPLs. Most could meet capital requirements, even in a more adverse scenario. However, with the resumption of activity, banks will need to rebuild their capital to ensure their medium-term financial stability. Countries will need to monitor the most fragile institutions if a prolongation of the pandemic causes a longer and more severe recession.

A weaker-than-expected recovery and a longer pandemic will impose more difficult choices on governments. The consequences of the crisis and the decline in potential GDP growth add to the short-term difficulties. While some structural reforms can support confidence and recovery, especially if they succeed in laying the foundations for more sustainable and inclusive growth in the future, the aftermath of the pandemic is clouding the already uncertain outlook for the region.


Samuel Pienknagura is an economist in the regional studies division of the IMF’s Western Hemisphere department. Before joining the IMF, he was a senior economist at the World Bank. He holds a doctorate in economics from the Massachusetts Institute of Technology (MIT).

Jorge Roldos is Deputy Director of the Western Hemisphere Department of the International Monetary Fund. He has worked on a wide range of macroeconomic issues in Latin America and other regions over the past twenty years and has authored a number of articles on the macroeconomics of open economies, monetary policy, banking, and markets. financial.

Alejandro Werner took up his current role as Director of the Western Hemisphere Department of the International Monetary Fund in January 2013. A Mexican national, Mr. Werner has had a distinguished career in the public and private sectors as well as in academia. Before joining the IMF, he was Mexico’s Under-Secretary of Finance and Public Credit from December 2006 to August 2010, Professor of Economics at the Instituto de Empresa in Madrid (Spain) from August 2010 to July 2011, then head of corporate banking and investment services at BBVA-Bancomer from August 2011 to the end of 2012.

Previously, he was Director of Economic Studies at the Bank of Mexico and Professor at the ITAM Institute. He is also the author of numerous publications. Mr. Werner was named Young Global Leader by the World Economic Forum in 2007. He received his doctorate from the Massachusetts Institute of Technology in 1994.

EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.

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