RIO DE JANEIRO, BRAZIL – Over these months of pandemic, Héctor Bárcena has spent all his savings. The 28-year-old Mexican hairdresser still owes rent for the months when his salon was closed. His second daughter was born in April, which added to his expenses. Bárcena, like many Latin Americans, also rents his home. His only asset is a car he has put up for sale to cover the essential expenses for the coming months. “Here we say that the assets are intended to repair the damage, so that’s the option to be able to move on,” he says over the phone from the Province of Mexico, which surrounds the capital city. Bárcena sighs and continues: “It will be difficult for my family, but we don’t have another option.”
Millions of people throughout Latin America are looking for a way to survive the economic crisis caused by Covid-19. Some have migrated their businesses or jobs to the Internet, others have left them to sell masks or antibacterial gel. Many rely entirely on remittances sent by their families abroad, while others have fallen into poverty. In a place where informality reigns, it is difficult to know exactly how many jobs have been lost, but the International Labor Organization (ILO) estimates that there have been 47 million lost this year. Latin America is the world region that lost the most paid work hours.
Heading for a record recession
The projections are very difficult to stomach. The International Monetary Fund (IMF) estimates that Gross Domestic Product (GDP), the most important measure of an economy, will contract by 9.3 percent this year – the worst recession ever recorded in Latin America. This is unlikely to be the final projection. They worsen every month that goes by without effective treatment or a vaccine against the severe acute respiratory syndrome caused by this novel coronavirus. In May, the region became the epicenter of infection, and its mortality rate reached the top of the ranking.
Nevertheless, the countries in the region are experimenting a gradual or partial reopening of economic activity, but there are sectors, such as industry and entertainment, that require human closeness in closed areas, meaning that they will not be able to fully restart until the virus is under control. Worldwide, the most affected sectors are automotive, commercial services (such as beauty salons and restaurants), and professional services (such as call centers), hotels, energy, and retail sales. On the other hand, some sectors have maintained a relatively good performance, such as gas, electricity, banking, insurance, and online services.
Industrial production declined to such a degree in the region’s nations that it threatens to lengthen the economic upturn. Argentina, Brazil, and Mexico, the economies with the most competitive industries in the region, are sustaining losses. United Nations Industrial Development Organization (UNIDO) figures show a 30.8 percent decline in Mexico’s industrial production between March and May; in Brazil, production in May dropped 12 percent over the same period. In Argentina, the sector suffered a 19.2 percent contraction between February and March – and has not recovered to date.
Remittances resist
The region’s economies have certain common features, including dependence on exports and the remittances that Latin Americans living abroad send to their families. Exports will decline by at least 15 percent in the region, according to the Economic Commission for Latin America and the Caribbean (ECLAC). The hardest blow will be dealt to the southernmost countries, which are raw material exporters, as prices have plummeted due to a lack of demand.
Remittances have also declined, albeit not in all countries. Most of these funds come from people living in the United States, where unemployment reached 13.3 percent in June (in March it was only 4.4 percent). In April remittances fell by 20 percent for Guatemala and 40 percent for El Salvador. Central American countries benefit most from these inflows.
However, in Mexico remittances showed surprising immunity from the pandemic crisis. The Central Bank reported that in May, the last month with available data, US$2.4 billion (around R$13 billion) in family remittances flowed into the country, an increase of three percent compared to the same month last year. In addition, the Mexican currency has depreciated against the dollar in recent months, which benefits families receiving dollars from abroad. According to economist Juan José Li Ng of BBVA bank, remittances have increased 24 percent in real terms. This is equivalent to an additional 14.5 billion Mexican pesos (R$3.46 billion) in May for Mexican households.
“Despite difficult economic conditions in the US, where 95 percent of remittances to Mexico originate, the increase observed during May is explained by the effect of Mother’s Day,” wrote Li Ng. “This additional money is typically sent to a mother of the family or an acquaintance: often it is the mother of the person sending the money, but grandparents, aunts, sisters, and in-laws, among others, also receive the funds. This money is often a gift to cover the expenses of some special event linked to the celebration.”
Capital flees… and returns
The Mexican peso has depreciated 20 percent against the dollar since February 20th, the day markets began to react aggressively to the pandemic. In the same period, the Brazilian real declined 23 percent and the Colombian peso by ten percent. This is not so much due to investors’ distrust of specific countries, but to the uncertainty of the pandemic itself. An initial reaction was to take investments from these countries to place them in assets considered safer, such as US government bonds. This is the so-called “capital flight”, feared by all governments of emerging countries around the world.
The International Monetary Fund (IMF) states that investors have already withdrawn approximately US$100 billion (R$540 billion) from emerging countries, a larger amount than the 2008 financial crisis outflows. But there are indications that this may change. According to analysts at JP Morgan investment bank, the outflow of financial capital has slowed down. There have been foreign capital inflows into emerging countries in May. Several Latin American countries were able to issue bonds on international markets under relatively good conditions. Chile, Guatemala, Mexico, Colombia, Paraguay, Peru, and Panama raised funds by selling sovereign bonds. For governments, these funds are a breath of life in times of great need.
While governments implement aid programs for the most vulnerable, Latin Americans have been forced to conform as best they can to the new reality. And those most affected are in the Caribbean, since tourism, one of the most severely impacted sectors in the world, accounts for between 50 and 90 percent of their GDP. These countries are used to welcoming between 12,000 and 20,000 tourists a day to their islands as part of the cruise liners’ stopovers departing from Cancún, Mexico. Since February, the islands have not hosted a single cruise. According to the IMF, Aruba and Belize will be most affected, with an economic contraction of 14 percent and 12 percent this year, respectively.
The aftermath of the crisis
“The long-term social impact is what concerns me the most,” says Germán Ríos, professor of economics and director of the Latin American Observatory at IE University in Madrid. Ríos proposes an exercise in economics. “Suppose that in 15 days the vaccine for Covid is found. We all get vaccinated and that’s it. Let’s assume that it will allow economies to recover quickly. However, what do you do about the scars? With all those people who have lost their jobs, who have shifted from middle class to poverty, who have suddenly become obsolete because now the survivors are those with a certain knowledge of digital and online issues? For me, this is the most important issue in Latin America,” he says.
The IMF projects that the region’s rebound will be moderate, at 3.7 percent in 2021. Ríos says Latin America is recognized for its innovation in social assistance programs, which is why, compared to other emerging countries, it has managed to reduce poverty in recent decades. These advances are currently in danger, and governments must capitalize on this acquired knowledge in their efforts to reduce income inequality so as not to allow a large part of their population to fall into poverty during the pandemic. “Rebound may be swift and vigorous. The issue is the aftermath. And I believe that the most important consequences will be unemployment and poverty – and how we will address these issues in terms of public policy,” Ríos says.
Source: El País
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