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How Prepared are LATAM Economies to Overcome COVID-19?

4 MIN READApril 30, 2020
The real estate sector is encountering a crisis that it has never seen before, making it twice as difficult to forecast the true impact it will have on the industry, and the economy. During our latest eMeeting, Alonso Cervera,Managing Director, Chief Economist for Latin America of Credit Suisse shared with members which Latin American countries could be the most impacted by the COVID-19 crisis. Unlike other crises, this one stems from a sanitary situation where we have very little information and do not have a clear solution. The solution for this crisis implies a serious cost on the economy, and has caused many companies and families to sacrifice many things. 

The response to this crisis has been to shut everything down and stay at home, and so far, it has pushed GDP growth forecasts back, all throughout LatAm. The end of this crisis is linked to how successfully we are able to contain the virus, with the economy to hit bottom in 2Q21. The key to resilience will be how each government reorients costs and stimulates the economy. It will be vital for the government to provide funds to local businesses and companies to avoid them from defaulting. 

The informal sector will require great support, especially in LatAm where informality represents a vast amount of the economy. The last thing any country wants is for the pandemic to generate insecurity and violence. Everybody wants this to be a temporal situation and we must keep people safe from harm. Before this crisis, it was already a well known fact that Latin American health infrastructure was precarious and this will have a deep impact on the region’s response to the pandemic. 

Local governments have to finance their debts and costs accordingly, especially as the entire globe will enter a fiscal expansion phase. If a government is able to finance itself correctly, it will generate certainty in the economy. 

Credit Suisse has categorized the pandemic in three phases: 
  • Phase 1: When countries start to hit their peak confirmed cases
  • Phase 2: From peak cases until the cure is found, which may be 4Q20 or 2021. Restrictions will be more relaxed. 
  • Phase 3: When there is a cure available and things will start to go back to normal.

COVID-19 Impact on Latin American Economies

Europe, Asia and the US are starting to see signs of recovery in the next week and most have announced stimulus packages to help boost the economy. Nevertheless, the story is different in Latin America. The same response from the government has not been seen in most latin american countries.

Mexico for instance, was an economy that was already suffering from low dynamism and no GDP growth. Yet it is one of the most vulnerable economies as 80 percent of its GDP is linked to international activities, and the government has yet to release a fiscal stimulus. The Mexican economy is expected to fall 4 percent due to this crisis, and with it many jobs. Brazil may also be in a difficult situation as the coronavirus spreads quickly. Although the central bank answered with a strong stimulus plan of 5 percent of the GDP, it will first need to control the spread of the virus. 

Chile may be one of the best prepared to face this crisis. It released a good stimulus package, and had vast savings in sovereign funds. The Central Bank has kept rates low to also keep the economy afloat and it will benefit from the rise in copper prices as oil prices drop. Chile is in a good position to recover, but it also has internal issues to attend to. 

Colombia has been impacted like other countries by the pandemic, oil prices and flow of capital. It is also particularly exposed to external shocks. Yet it has various good factors that will help it overcome obstacles. It was one of the fastest growing countries in LatAm and its forecasts were also good. Investor and consumer confidence was also doing very well and it has a good back up fund to face the crisis. It has had a good monetary policy and its exchange rate is also flexible. If the fiscal rule maintains its function, it will be able to keep the balance in Colombia even though it does not have reserves. 

Peru was one of the first LatAm countries to respond to COVID-19. Its bank has room to be flexible and its rates are also low. All countries will suffer, but there will be some that are less hurt. Argentina already had its issues before COVID-19 and may take longer to recover, while Ecuador will have to make a large adjustment to its economy to mitigate the risks. There is little room in its public policy to sustain activity and it may have to renegotiate its debt. Uruguay is very receptive of what happens in Argentina and Brazil.
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