Latin America and the Caribbean, Latam, has been the most affected emerging market in the Covid-19 pandemic, report economists from trade credit insurer Atradius.
The latest Atradius Regional Economic Outlook reports structural weaknesses across Latam have made the region economically vulnerable to the Covid-19 containment measures, including border controls, travel bans, lockdowns and social distancing. Atradius economists warn decreases in global demand for goods and services, lower commodity prices and limited access to finance have compounded the pressure on the region, creating a devastating impact.
As a result, Atradius reports Latam is forecast to have contracted 7.7% in 2020 after a period of sluggish or no growth; significantly higher than the forecast overall 2.3% contraction across the Emerging Market Economies (EME). Of all Latam economies, Guyana is the only one showing growth in the year, following the start of oil production from recently discovered fields. In 2021, Atradius forecasts a subsequent recovery of 4.6%, albeit this is still below the forecast 6.2% growth for the EME overall.
The Economic Outlook, entitled, Latin America: heavy dependence on informal labour and tourism exacerbates the Covid-19 shock was published by Atradius economists as part of a range of publications and tools to advise businesses of the risks and opportunities of trading overseas. It details how Latam’s dependence on contact-intensive sectors such as tourism, a low ability to work remotely and high population density in urban areas, particularly within the slums, contributed to the resurgence of the disease. In December, deaths in Latam accounted for nearly a third of total global deaths while the region accounts for less than 10% of the global population, highlighting the pervasiveness of Covid-19 in the region. Meanwhile, a large, informal economy – around half of the region’s non-agricultural labour force – means that measures such as tax relief or wage subsides were not as effective, pushing many people working in the informal sector deeper into poverty and heightening the economic impact.
According to the report, the global collapse in tourism dealt a severe blow to the small island economies of the Caribbean which are among the most dependent in the world on tourism. Atradius reports that economic contractions for these countries range from a forecast 14% in St Lucia in 2020 to a record 37% in Aruba. One exception is Jamaica, thanks to an increase in remittances and recovery of the mining industry, cushioning the blow and with a forecast contraction of 6.3% in 2020. However, until vaccines are more widely available, the tourism sector will remain depressed.
A recovery in commodity prices since the onset of the pandemic, including base metals and agricultural produce, is welcome news to Latam economies which follows a rebound in global trade in goods, led by China. This is of particular importance to South America as home to major producers of copper (Chile and Peru), soybeans (Brazil and Argentina), iron ore (Brazil) and bananas (Ecuador). However, Atradius warns that future developments in commodity prices are expected to be less supportive than in the past months.
Looking forward, Latam’s economic recovery will be partial and uneven.
Darren Power, Northern Regional Manager for Atradius UK, commented: “Recovery in the year ahead is set to be stronger in countries that have ample fiscal space to support their economies, such as Chile and Peru while it will continue to lag in tourist-dependent regions. Critically, the future outlook strongly depends on both global and national infection rates and the rollout of a vaccine. The economic benefit from vaccine deployment will most likely manifest first through an improving external environment as Latam’s vaccine orders have been small so far compared to advanced markets. Over the long term, glimmers of hope come from an expected improvement in US relations under a Biden presidency and the development of two free-trade agreements that Chile has secured with Brazil and Ecuador; demonstrating a continued effort by some of the region’s largest markets on delivering sustainable economic benefits despite the challenges brought by the pandemic.”