Latin America is still fully in the pandemic, but an election cycle begins
The global economy could grow more strongly this year than it has for a long time. Whether Latin America will benefit depends on how long it takes to contain the pandemic in the region.
by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung
It is still difficult to assess how the current vacation season in South America will affect infection figures. With the exception of Argentina, the number of new infections appears to be falling. And vaccinations are also starting now in most countries. However, they are not likely to be used across the board until the middle of the year. So the further course of the pandemic in Latin America is still unclear. It seems difficult to imagine a normalization of everyday life in the next few months.
This could mean that Latin America will be late to benefit from the new momentum in the global economy. The forecasts of investment banks for 2021 show this: Latin America will only grow by between 3 and 4 percent this year, following a decline of 7 to 9 percent in 2020. This means that the region will once again bring up the rear in the global economy this year, according to JP Morgan’s forecast. The economic power of the region between Patagonia and Mexico is therefore only expected to grow by around half as much as the emerging markets worldwide in 2021.
The pandemic has exposed and in some cases exacerbated Latin America’s weaknesses: Weak growth is now compounded by high budget deficits due to stimulus measures during the first Corona wave. Public debt has skyrocketed. The Inter-American Development Bank expects the region’s debt to GDP ratio to currently be 74 percent, up from 57 percent in 2019. Such a high debt-to-GDP ratio undermines prospects for economic recovery. Most major Latin American economies will not return to pre-pandemic output levels until 2022 or 2023 at the earliest, according to ratings agency Moody’s.
Good governance and reforms would be necessary now – but between passivism (Brazil, Mexico) and activism (Peru and Argentina), “no country currently has convincing leadership,” Oxford Economics judges.
In addition, elections will be held again in 2021: Peru will elect a new president in April, Chile in November. Argentina (October) and Mexico (June) will hold important elections for their legislatures. The concern is that populists will come to the helm in the hitherto comparatively well-governed states on the Pacific, as in Brazil or Argentina. This would weaken the pressure for market-economy reforms throughout South America.
Colombia and Mexico are currently considered to be in the most stable position from an economic macro perspective. Brazil, on the other hand, is increasingly dependent on investor sentiment: How long will they want to continue financing the highest debt among emerging markets? The Bolsonaro government can hardly be expected to implement any more reforms in the last two years of its term in office.
Even after a possible agreement with the IMF, Argentina is unlikely to receive any loans for a long time to come. The government of Alberto Fernández, who is increasingly coming under the influence of his vice president, ex-president Cristina Kirchner, appears too erratic and haphazard.
Nevertheless, there is also some positive news from Latin America. Inflation and current account balances are under control. Rising commodity and energy prices will also provide growing export revenues in the region and at least partially replace the overall decline in foreign investment.
COVID-19 in Latin America
Development of case numbers in the region
Currently reported cases in the countries