Latin America Was Already Steeped in Economic Problems. Now Come the External & Internal Shocks of COVID-19

Not even Brazil and Mexico have the fiscal and monetary leeway to offset those shocks.

Covid-19 is beginning to gain a foothold in Latin America. Even in some of the region’s tropical areas, the case numbers are rising at a startling rate. Ecuador, which appears to have caught the bug a month ago as a result of its close connections with Spain, now has over 1,300 cases — more than any other country in the region except for Brazil, which has over 12 times Ecuador’s population.

If the virus spreads across Latin America with the same virulence as as it has in Europe, the U.S. and large parts of Asia, the results could be disastrous. The region’s cash-strapped governments simply cannot afford to provide the sort of financial support programs being rolled out in more advanced economies. Even if they could, the measures would not apply to the untold millions of workers eking out a living in the informal economy, most of whom could not afford to miss a day or two of work.

Brazil’s administrative capital Brasilia, which went into lockdown a few days ago, is a case in point. Most of the city’s middle- and upper-class residents, including thousands of politicians and civil servants, are now safely ensconced at home. For the moment, they’re being paid, either to work remotely or just not to go to work. Like many places in Europe, the U.S. and East Asia, the streets in the downtown area are more or less deserted.

But once you venture out into the city’s poorer suburbs, the reality changes. Thelma, a friend who lives in Brasilia, just visited nearby Valparaíso de Goias, which is roughly an hour’s drive from the capital. “It was just like any other day in the city,” she said. “The streets were teeming with people. The buses were rammed, as were the bars, restaurants and shops. These people can’t afford to take a day off, let alone two or three weeks.”

The same is true of countless towns and cities across Latin America. Locking down entire cities or countries and paying millions of non-essential workers not to work while healthcare workers battle to contain the virus is a luxury only afforded to countries with first-world economies, huge public debt capacities, relatively stable currencies and big central banks.

Even before Covid made its first official appearance in Latin America, just over a month ago, big cracks were already showing in the region’s economy. Both Chile and Colombia had been rocked by massive social protests over economic inequality. Venezuela is in the midst of a huge humanitarian crisis, while Argentina is waiting for yet another restructuring of its unpayable debt mountain. The largest economy, Brazil, has barely recovered from its longest recession in history (2014-2017). Mexico, the second largest economy, experienced three quarters in a row of declining annual GDP.

In the last two months, Brazil has suffered $12 billion dollars of capital outflows, mostly the result of foreign investors offloading shares on the country’s benchmark index, reports the Institute of International Finance (IIF). Mexico has an other problem on its hands: the sliding value of its peso against the dollar. In the last couple of days, the currency has rallied somewhat as the dollar has sold off slightly but it is still trading just above historic lows.

The Chilean peso is more or less in the same boat, having hit unprecedented lows to the dollar a week ago before firming slightly over the last few days. Chile’s export-heavy economy is particularly dependent on China, which buys (or at least used to buy) one-third of Chile’s exports, accounting for 9% of Chile’s GDP. The recent Covid-triggered slowdown of economic activity in China means not just lower commodity prices but also lower export volumes for Chile.

Continue reading the article on Wolf Street

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