2021 becomes the year of destiny for Latin America

Latin America will recover economically only slowly from the severe recession, and political crises could further destabilize the region. An overview of the consequences of Corona for politics and the economy

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

“Latin America: Could be much worse, but will be hard to get much better” – this is how the investment bank JP Morgan succinctly describes the situation in Latin America in its latest analysis. The situation and prospects for the further course of the pandemic and for politics and the economy are indeed mixed.

 

Corona

Almost exactly half a year after corona infections were officially registered for the first time in Latin America, the number of infections is slowly beginning to decrease. Nevertheless, a preliminary conclusion can be drawn: During the pandemic, governments in Latin America found it difficult to find the right mix of social isolation and economic openness. This is probably true of most countries worldwide, because there is no silver bullet against the pandemic.

However, statistics show that Latin America is doing particularly badly in the fight against Covid-19: Both in terms of those infected and the victims, the Latin American countries are among the worst affected countries in the world – both in absolute terms, i.e. per country, and in relative terms in relation to the number of inhabitants. In addition, the COVID statistics only partially reflect the dramatic situation: On average, the number of tests is far below that of Europe or the USA.

Prognoses about a second wave of infections are difficult to make: On the one hand, the coming summer could slow down the number of new infections. On the other hand, high immunity already seems to exist in some previously severely affected regions. On the other hand, agglomerations are also increasing in summer.

 

Some forecasts for politics and economy at a glance

The social protests, which had been halted for almost half a year because of Corona, have flared up again in recent weeks. Riots have already occurred in Colombia, Chile and Bolivia. It is likely that the overall number will increase further as soon as the Corona social aid and isolation in these countries is reduced. The reasons for the dissatisfaction of the population last year have increased due to the severe economic crisis.

Contrary to expectations, the popularity of governments in Mexico or Brazil has not suffered as a result of their obviously failed crisis management. President Bolsonaro in Brazil is more popular than ever before, despite high casualty figures. President López Obrador in Mexico is also enjoying stable approval, although he has hardly used government measures to mitigate the consequences of the pandemic for companies or the population.

The trend toward more authoritarian forms of government, the undermining of the separation of powers and the growing influence of the state in the economy are likely to continue. 2021 will also be a year of important political elections (Bolivia, Peru, Chile) and midterm elections (Argentina, Mexico, Colombia) in the region.

Currently, nationalism is on the rise throughout the region. Instead of working together regionally, which was quite successful in Latin America in the decades following the democratizations, governments are once again trying more to find solutions on their own. The lack of coordination in the region during the election of the new president of the Inter-American Development Bank (IDB) has clearly demonstrated this: For the first time in almost 60 years, the United States was able to put an American at its helm. There was no protest in the region; most states either agreed or abstained. Latin American free trade agreements are also stagnating.

The consequences for the economy have now become more manageable. In fact, Latin America’s economy was hit hardest by the pandemic worldwide. No economy will return to its pre-crisis level before 2022.

The massive government compensation measures in Chile, Colombia and Brazil are having a positive effect on the economy. The central banks will not raise interest rates any time soon either, due to the low inflationary pressure. This favors local investments and public financing. China’s rapid recovery is also providing an export boost for raw materials from the agricultural industry, energy and mining.

Thus, the outlook for the economy has improved slightly. JP Morgan expects the gross domestic product in Latin America to shrink by 8.2 percent this year. For 2021, the bank expects growth of 4.2 percent. The recession will be most severe Peru (-13.5 percent), Argentina (-12.5 percent) and Mexico (-10.5 percent). In Chile (-5.6 percent), Colombia (-7.7 percent) and above all Brazil (-5.2 percent) the losses will be lower.

However, new problems are added to this: Budget deficits have increased rapidly due to higher (social) expenditures and lower (tax) revenues. The states must now find ways and means to save money or increase revenues in the stagnating economy. Otherwise the rating agencies threaten to raise the risk assessment for the states, which will make their financing more difficult. Especially since foreign direct investment will also shrink.

Conclusion: 2021 is likely to be the key year for Latin America. After that it should be clearer whether the region is threatened with another lost decade like the one that has passed.

COVID-19 in Latin America

Development of case numbers in the region


Currently reported cases in the countries

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