IPDAL publishes CEPAL study on economic, fiscal and monetary conditions in the COVID-19 era.
In addition to the health crisis, the COVID-19 pandemic has produced the most serious economic contraction on a global scale in recent decades. Knowing that this recession reached all parts of the world, the Latin America and Caribbean region, in which many countries became epicenters of the pandemic, was no exception.
Firstly, in 2020 there was a 9.1% drop in the regional GDP growth rate and the poverty rate is expected to reach 37.3%. On the other hand, the forecasts from the United Nations Economic Commission for Latin America point to an unemployment rate of around 13.5%.
Source: CEPAL, based on the Home Survey Data Bank (BADEHOG). Notes: a/ Proyecciones. b/ Preliminary projections based on estimated impact on employment and labor income for the different productive sectors
If before the pandemic, countries in the Latin America and Caribbean region were already facing increasing social and macroeconomic vulnerabilities, as well as external and internal shocks in terms of supply and demand, a slow recovery from this crisis is now expected, with a drop in GDP similar to that which occurred in 2010.
It is true that many countries in the region have carried out – and continue to carry out – major economic and financial reforms to combat this crisis, but the report highlights that this commitment must be planned in a strategy with long-term fiscal and monetary policies, namely through measures such as increasing the tax burden, generating sustainable public debt trajectories and improving effectiveness and efficiency in expenditure.
Thus, despite the mitigation policies adopted, ECLAC predicts a GDP drop of 9.1% in the region. At a sub-regional level, the expectation is that the economy will contract by 9.4% in South America, 6.2% in Central America – 8.4% if we add Mexico – and 5.4% in the Caribbean.
LATIN AMERICA AND THE CARIBBEAN: GDP VARIATION PROYECTION, 2020 th
(In percentages)
Source: Economic Commission for Latin America and the Caribbean (CEPAL), based on official figures. Central America includes Cuba, Haiti and the Dominican Republic
Other effects have been felt, namely the decrease in aggregate demand (particularly consumption and investment) and the decrease in the volume of world trade, which could fall, according to the WTO, between 13% and 32% this year. However, the most affected sector is services: for example, the UNWTO expects that tourism could fall by 80% this year – a sector that suffers a greater shock in the Caribbean region and then in South America. Also The oil sector saw a 34% price drop compared to 2019, as well as basic products, due to global supply and demand dynamics.
With regard to exports and imports, the negative impact will be more concentrated in economies that export hydrocarbons, while the agricultural and food industries and metals and minerals industries have not suffered as much. The value of gold has even risen in recent months, reaching a growth of 28%.
Additionally, while the main governments and central banks (namely in the USA, Europe and Japan) were betting on improving international financial conditions, the sovereign risk of Latin American countries increased; However, from April onwards, with the general recovery of economic activities, this risk began to reverse, with some countries in the region managing to issue debt under conditions already considered favorable.
The pandemic reinforced the will of governments in Latin America and the Caribbean to reform their monetary and fiscal policies. However, this movement is proving to be one of the biggest fiscal challenges since the 1980 public debt crisis, as fiscal efforts will strongly boost public spending. The CEPAL document therefore launches the forecast that by the end of 2020 the region’s fiscal position will be quite weakened, potentially recording its highest deficit level since 1950, that is, -8.4% of GDP.
Therefore, to sustain this commitment, banks in the region adopted expansive monetary policies. This entire scenario, combined with inflation at historically low levels (4.4% in the first six months of 2020) and the need to avoid a serious crisis, meant that the monetary authorities had to act with much more pragmatism. As for the future, more specifically the post-COVID era, the report analyzes the main constraints that fiscal and monetary policies will face from now on.