Latin America begins its long road back to normality

In Latin America, the economic recovery from the pandemic is taking place more slowly than elsewhere in the world – but it is much more stable. So far, no second wave of infections has occurred in the region

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

 

This is the conclusion reached by the economists from Oxford Economics, who use various indicators to measure the return to normality. According to them, with 11 percent less activity than in February of this year, i.e. before the outbreak of the epidemic, Brazil is already the most advanced on the road to a pre-crisis state. Colombia (-23 percent) follows at a clear distance, just ahead of Mexico (-25 percent). Peru (-34 percent) and Argentina (-37 percent) are still furthest from pre-pandemic normality after the radical quarantines.

For 2021, the Institute of International Finance (IIF) expects a muted recovery in capital flows to the region, moderate growth prospects and continued pressure on local currencies. The global banking association has just published forecasts for Latin America with regard to the current account balances of the states. Because of their flexible exchange rates, the economies are usually quite successful in protecting their foreign exchange reserves – even though foreign capital inflows have declined and exports have collapsed.

During the severe recession, imports to Latin America shrank by 15 percent overall. This quickly reduced the current account deficits. But exports have also declined, especially for energy exporters like Mexico and Colombia. Commodity exporters such as Chile or Brazil have experienced less of a slump in exports. On the other hand, countries that depend more on tourism, such as Mexico and the Caribbean, have seen their foreign exchange earnings fall sharply.

Individual states in the region were able to compensate for this with remittances from Latin Americans in Europe and especially the USA to their home countries. Contrary to expectations, they have remained stable or in some countries have even grown. In contrast, the chronic flight of capital from the region stagnated this year. Investors are putting their capital into local stock exchanges and investments. That is positive. What is bad, however, is that Latin American companies are withdrawing from their global investments during the crisis. Foreign direct investment will also decline. This will slow down the transfer of tech to the region.

Some currencies in the region will remain under pressure due to political uncertainty and the resulting impact on capital flows, the IIF concludes. This could particularly affect the real in Brazil and the peso in Argentina.

In Brazil, foreign investors have so far mainly withdrawn from portfolio investments in bonds and shares. How far direct investments in companies will actually decline this year is still open: According to forecasts by the IIF, direct investment in Brazil this year will fall from 73 (2019) to 50 billion dollars.

COVID-19 in Latin America

Development of case numbers in the region


Currently reported cases in the countries

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