## reo-launch-presentation ## Source details **Canonical URL:** [reo-launch-presentation](https://www.imf.org/-/media/files/publications/reo/whd/2020/oct/english/reo-launch-presentation.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/whd/2020/oct/english/reo-launch-presentation.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/whd/2020/oct/english/reo-launch-presentation.pdf.json) --- ### Outlook for Latin America and the Caribbean — “A Crisis Like No Other” - COVID-19 pandemic hit LAC hard, together with strong external shock. Latest data are as of October 9, 2020. - Mobility and external links disrupted: international flight arrivals and trading-partner real GDP growth showed large declines in 2020. - Policy response was “like no other”: large fiscal loosening and cuts in policy rates across the region (policy rates series shown from Jul-19 to Sep-20). ### Recovery and Projections - Regional projections (PPP GDP-weighted averages; year series and averages shown): - Latin America and the Caribbean: 1.4, 1.1, 0.0, –8.1, 3.6, 2.6 - LAC excl. Venezuela: 2.0, 1.7, 0.8, –7.8, 3.8, 2.7 - South America: 0.8, 0.3, –0.2, –8.1, 3.6, 2.6 - Argentina: 2.8, –2.6, –2.1, –11.8, 4.9, 2.5 - Brazil: 1.3, 1.3, 1.1, –5.8, 2.8, 2.2 - Chile: 1.2, 4.0, 1.1, –6.0, 4.5, 2.8 - Colombia: 1.4, 2.5, 3.3, –8.2, 4.0, 3.8 - Peru: 2.5, 4.0, 2.2, –13.9, 7.3, 4.4 - Mexico: 2.1, 2.2, –0.3, –9.0, 3.5, 2.2 - CAPDR: 4.2, 3.8, 3.2, –5.9, 3.6, 4.0 - Caribbean tourism dependent: 1.4, 2.0, 0.5, –9.9, 4.0, 2.7 - Commodity exporters (Caribbean): –0.6, 1.1, 1.0, 0.6, 3.8, 5.8 - GDP not expected to reach pre-crisis levels until 2023 due to withdrawal of support and scarring (index: 2019 = 100; January 2020 vs October 2020 vintages shown). ### Risks and Policy Challenges - Main risks highlighted: - “Pandemic persistence clouds the recovery”, high uncertainty (testing and tracing; pandemic fatigue). - Higher public debt: space to extend support? Sustainability? Financing pressures? - Higher corporate leverage: who’s viable/solvent? Scarring and financial stability concerns. ### COVID-19 in LAC — Lives and Livelihoods - Despite early and stringent lockdowns (Oxford Stringency Index comparisons through Sep 28, 2020), LAC countries have some of the highest case and death counts to date. - COVID-19 confirmed cases and deaths per million (data as of September 28, 2020) show countries like PER, CHL, BRA, MEX among high values. - Early lockdowns prevented explosive daily peaks but resulted in a “slow burn” with high cumulative deaths (new deaths per million series by subregion shown through Sep 28, 2020). - Reopening remains risky given low preparedness: - Tests and hospital beds: Latin America lags advanced economies across tests per 100,000 people and hospital beds (tests over 100,000 people series: May 1, 2020 vs September 1, 2020). - Containment stringency weakened over time; expanding testing capacity has proven challenging (data as of September 28, 2020). ### Drivers of Ineffective Lockdowns - Structural factors contributing to high death toll and partial ineffectiveness of lockdowns: - High degree of informality reduces effectiveness of containment (growth-in-cases response to stringency shocks differs by informality). - Low government effectiveness reduces impact of stringency measures. - “Confinement fatigue” and other behavioral responses. ### Macroeconomic Impact - Both lockdowns (stringency) and fear of contagion (new deaths) contributed to significant economic contraction in early 2020; coefficients from regional regressions (17 countries) show: - Stringency coefficient: –0.264 ***, –0.231 ***, –0.348 ***, –0.336 *** - New Deaths coefficient: –18.881 ***, –16.586 ***, –16.884 *** - Interaction terms and model fit statistics reported (Observations: 615/757/757/757; R2: 0.701/0.779/0.809/0.809; Adjusted R2: 0.592/0.674/0.710/0.704). ### Labor Markets: Depth and Distributional Effects - Employment in LA5 (Brazil, Chile, Colombia, Mexico, Peru) declined sharply in April 2020 and began recovering in June 2020; LAC employment fall was larger than in advanced economies and other emerging markets. - Effective hours worked for those employed contracted substantially (percent reductions Feb to Jun 2020: Brazil, Colombia, Chile, Mexico, Peru shown). - Disproportionate impacts: - Informal workers suffered larger employment losses than formal workers. - Workers with low educational attainment (primary/secondary) experienced larger declines than tertiary-educated. - Women experienced larger employment declines than men in Brazil, Chile, Colombia, Mexico, Peru (Feb to Jun 2020 percent changes). - Structural vulnerabilities: - Higher share of employment in contact-intensive sectors in LAC compared to ROW and higher than many peers. - Lower share of teleworkable jobs in LAC relative to advanced economies and other EMs. - Teleworkability is lower among informal workers in Chile, Colombia, Mexico, Peru. ### Employment-at-Risk Accounting Framework and Estimates - Framework adapts Alfaro et al. 2020, combining sectoral, occupational, and firm characteristics to compute probability that worker i loses her job: - Probability equations include supply shock, demand shock, aggregate demand shock components and min/max operators (mathematical expressions shown verbatim). - Employment at risk in LA5 during the lockdown was close to 75 million, mostly informal workers. - By firm size: - Small firms most vulnerable; medium-sized firms take longer to recover. - Input-output intersectoral links amplify effects, especially during lockdown phase (contributions of supply, demand, and IO linkages shown). - Employment at risk is larger than value added at risk, particularly in early phases; employment fell more steeply than GDP in Q2 2020 (indices and percent-at-risk series displayed for scenarios: 2020:Q2, Selective reopening, Advanced reopening). ### Fiscal Policy Response and Implications - Announced fiscal support varied in size and composition across countries: - Above-the-line discretionary fiscal measures and below-the-line/off-budget measures reported as percent of GDP by country (detailed country bars shown). - Composition: direct support for households, direct support for businesses, support for the health system, and other measures; below-the-line and off-budget measures include loans, equity injections, asset purchases, guarantees, and contingent liabilities. - Model simulations (WHDMOD) estimate announced above-the-line measures mitigated the downturn: - Real GDP level percent deviations from baseline over 2019–2025 and government debt percent-of-GDP deviations shown. - Effects of below-the-line and off-budget measures on real GDP reported (Total / Off-budget / Below the line with min-max ranges). - Legacies: high debt levels from large deficits and growth collapse: - General government debt (percent of GDP) and general government fiscal balance (percent of GDP) series shown for 2019–2022 for LA5 and other countries. - LA5 interest rate-growth differentials series shown; average r–g and r–g adjusted for depreciation reported. ### Fiscal Strategy Considerations - Fiscal policy after the “Great Lockdown” will hinge on available fiscal space; staged policy approaches by pandemic phase are outlined (reference to October 2020 Fiscal Monitor and IMF staff calculations). ### Corporate and Financial Risks - Corporate performance weakened, especially in 2020 Q2, and could worsen further in 2021 under an adverse scenario: - Profitability continued to decline. - Corporate leverage increased. - The share of debt at risk doubled in 2020 and could increase further in 2021. - Bank capital position implications under the WEO baseline and adverse scenarios are referenced (corporate debt-at-risk and bank capital impacts illustrated for Argentina, Brazil, Chile, Colombia, Mexico, and Peru). ### Corporate sector performance in Latin America (Section 2) - Median of the nonfinancial corporations of Argentina, Brazil, Chile, Colombia, Mexico, and Peru. - Note: 2021 refers to the adverse scenario. ICR = interest coverage ratio. - Corporate Profitability in Latin America (Return on assets; percent) — chart axis labels shown from –4 to 12 and years 2006–2020. - Corporate Leverage in Latin America (Debt to assets; percent) — chart axis labels shown from 0 to 50 and years 2006–2020. - Share of Corporate Debt at Risk in LA (Percent; share of corporate debt with an ICR < 1) — years 2019, 2020, 2021 presented. ### Banks: resilience entering the pandemic and 2020:H1 developments - Despite these trends, banks remain resilient as they entered the pandemic in a relatively strong footing. - Banks’ capital levels were adequate at end-2019. - Sources: IMF, Financial Soundness Indicators database; national authorities; and IMF staff calculations. - ... and have remained adequate in 2020:H1, but provisioning has increased, while profitability has declined. - Capital Adequacy Ratio (Percent) — chart includes Brazil, Chile, Colombia, Mexico, Peru, Uruguay; axis labels from 0 to 25 and markers "2008", "December 2019", "EM median, 2019". - Financial Soundness Indicators (Percent) — table headings shown: Latest; Percentage point change since December 2019 (decrease = red). - Table metrics and country rows as presented in source: - Brazil16.3-0.8205.126.314.7-3.3 - Chile13.40.69.4-6.8 - Colombia16.6-1.0152.910.515.3-2.0 - Mexico16.50.5164.717.712.8-7.8 - Peru15.50.9184.535.410.8-7.0 - Uruguay18.61.564.74.6263.1 ### Banks under the WEO baseline and an adverse scenario - Banks’ capital positions would deteriorate under adverse scenario, with heterogeneous effects. - Under the WEO baseline scenario, bank capital ratios would decline but remain above regulatory minima. - In an adverse scenario, banks’ capital positions deteriorate significantly... - ... but about 75 percent of banks (by assets) would be able to maintain the CET1 ratio above 4.5 percent. - Note: Excludes outliers. CET1 = common equity tier one; ROA = return on assets. - Distribution of Bank Assets by CET1 Ratio under the Adverse Scenario (Percentage share of sample banks in each jurisdiction) — categories and counts shown: - < 4.5 percent< 8 percent> 8 percent - 56 banks - 5 banks - 18 banks - 21 banks - 22 banks - CET1 Capital Ratio (ROA Model, Baseline Scenario) and CET1 Capital Ratio (ROA Model, Adverse Scenario) charts shown for years 2019, 2020, 2021 with a 4.5% reference line. *International Monetary Fund — Outlook for Latin America and the Caribbean (Section 1, October 2020).* ### Section 1 ### Outlook for Latin America and the Caribbean ### “A Crisis Like No Other” - COVID-19 pandemic hit LAC hard, together with strong external shock. Latest data are as of October 9, 2020. - Mobility and external links disrupted: international flight arrivals and trading-partner real GDP growth showed large declines in 2020. - Policy response was “like no other”: large fiscal loosening and cuts in policy rates across the region (policy rates series shown from Jul-19 to Sep-20). ### Recovery and Projections - Regional projections (PPP GDP-weighted averages; year series and averages shown): - Latin America and the Caribbean: 1.4, 1.1, 0.0, –8.1, 3.6, 2.6 - LAC excl. Venezuela: 2.0, 1.7, 0.8, –7.8, 3.8, 2.7 - South America: 0.8, 0.3, –0.2, –8.1, 3.6, 2.6 - Argentina: 2.8, –2.6, –2.1, –11.8, 4.9, 2.5 - Brazil: 1.3, 1.3, 1.1, –5.8, 2.8, 2.2 - Chile: 1.2, 4.0, 1.1, –6.0, 4.5, 2.8 - Colombia: 1.4, 2.5, 3.3, –8.2, 4.0, 3.8 - Peru: 2.5, 4.0, 2.2, –13.9, 7.3, 4.4 - Mexico: 2.1, 2.2, –0.3, –9.0, 3.5, 2.2 - CAPDR: 4.2, 3.8, 3.2, –5.9, 3.6, 4.0 - Caribbean tourism dependent: 1.4, 2.0, 0.5, –9.9, 4.0, 2.7 - Commodity exporters (Caribbean): –0.6, 1.1, 1.0, 0.6, 3.8, 5.8 - GDP not expected to reach pre-crisis levels until 2023 due to withdrawal of support and scarring (index: 2019 = 100; January 2020 vs October 2020 vintages shown). ### Risks and Policy Challenges - Main risks highlighted: - “Pandemic persistence clouds the recovery”, high uncertainty (testing and tracing; pandemic fatigue). - Higher public debt: space to extend support? Sustainability? Financing pressures? - Higher corporate leverage: who’s viable/solvent? Scarring and financial stability concerns. ### COVID-19 in LAC — Lives and Livelihoods - Despite early and stringent lockdowns (Oxford Stringency Index comparisons through Sep 28, 2020), LAC countries have some of the highest case and death counts to date. - COVID-19 confirmed cases and deaths per million (data as of September 28, 2020) show countries like PER, CHL, BRA, MEX among high values. - Early lockdowns prevented explosive daily peaks but resulted in a “slow burn” with high cumulative deaths (new deaths per million series by subregion shown through Sep 28, 2020). - Reopening remains risky given low preparedness: - Tests and hospital beds: Latin America lags advanced economies across tests per 100,000 people and hospital beds (tests over 100,000 people series: May 1, 2020 vs September 1, 2020). - Containment stringency weakened over time; expanding testing capacity has proven challenging (data as of September 28, 2020). ### Drivers of Ineffective Lockdowns - Structural factors contributing to high death toll and partial ineffectiveness of lockdowns: - High degree of informality reduces effectiveness of containment (growth-in-cases response to stringency shocks differs by informality). - Low government effectiveness reduces impact of stringency measures. - “Confinement fatigue” and other behavioral responses. ### Macroeconomic Impact - Both lockdowns (stringency) and fear of contagion (new deaths) contributed to significant economic contraction in early 2020; coefficients from regional regressions (17 countries) show: - Stringency coefficient: –0.264 ***, –0.231 ***, –0.348 ***, –0.336 *** - New Deaths coefficient: –18.881 ***, –16.586 ***, –16.884 *** - Interaction terms and model fit statistics reported (Observations: 615/757/757/757; R2: 0.701/0.779/0.809/0.809; Adjusted R2: 0.592/0.674/0.710/0.704). ### Labor Markets: Depth and Distributional Effects - Employment in LA5 (Brazil, Chile, Colombia, Mexico, Peru) declined sharply in April 2020 and began recovering in June 2020; LAC employment fall was larger than in advanced economies and other emerging markets. - Effective hours worked for those employed contracted substantially (percent reductions Feb to Jun 2020: Brazil, Colombia, Chile, Mexico, Peru shown). - Disproportionate impacts: - Informal workers suffered larger employment losses than formal workers. - Workers with low educational attainment (primary/secondary) experienced larger declines than tertiary-educated. - Women experienced larger employment declines than men in Brazil, Chile, Colombia, Mexico, Peru (Feb to Jun 2020 percent changes). - Structural vulnerabilities: - Higher share of employment in contact-intensive sectors in LAC compared to ROW and higher than many peers. - Lower share of teleworkable jobs in LAC relative to advanced economies and other EMs. - Teleworkability is lower among informal workers in Chile, Colombia, Mexico, Peru. ### Employment-at-Risk Accounting Framework - Framework adapts Alfaro et al. 2020, combining sectoral, occupational, and firm characteristics to compute probability that worker i loses her job: - Probability equations include supply shock, demand shock, aggregate demand shock components and min/max operators (mathematical expressions shown verbatim). ### Employment-at-Risk Estimates - Employment at risk in LA5 during the lockdown was close to 75 million, mostly informal workers. - By firm size: - Small firms most vulnerable; medium-sized firms take longer to recover. - Input-output intersectoral links amplify effects, especially during lockdown phase (contributions of supply, demand, and IO linkages shown). - Employment at risk is larger than value added at risk, particularly in early phases; employment fell more steeply than GDP in Q2 2020 (indices and percent-at-risk series displayed for scenarios: 2020:Q2, Selective reopening, Advanced reopening). ### Fiscal Policy Response and Implications - Announced fiscal support varied in size and composition across countries: - Above-the-line discretionary fiscal measures and below-the-line/off-budget measures reported as percent of GDP by country (detailed country bars shown). - Composition: direct support for households, direct support for businesses, support for the health system, and other measures; below-the-line and off-budget measures include loans, equity injections, asset purchases, guarantees, and contingent liabilities. - Model simulations (WHDMOD) estimate announced above-the-line measures mitigated the downturn: - Real GDP level percent deviations from baseline over 2019–2025 and government debt percent-of-GDP deviations shown. - Effects of below-the-line and off-budget measures on real GDP reported (Total / Off-budget / Below the line with min-max ranges). - Legacies: high debt levels from large deficits and growth collapse: - General government debt (percent of GDP) and general government fiscal balance (percent of GDP) series shown for 2019–2022 for LA5 and other countries. - LA5 interest rate-growth differentials series shown; average r–g and r–g adjusted for depreciation reported. ### Fiscal Strategy Considerations - Fiscal policy after the “Great Lockdown” will hinge on available fiscal space; staged policy approaches by pandemic phase are outlined (reference to October 2020 Fiscal Monitor and IMF staff calculations). ### Corporate and Financial Risks - Corporate performance weakened, especially in 2020 Q2, and could worsen further in 2021 under an adverse scenario: - Profitability continued to decline. - Corporate leverage increased. - The share of debt at risk doubled in 2020 and could increase further in 2021. - Bank capital position implications under the WEO baseline and adverse scenarios are referenced (corporate debt-at-risk and bank capital impacts illustrated for Argentina, Brazil, Chile, Colombia, Mexico, and Peru). *International Monetary Fund — Outlook for Latin America and the Caribbean (Section 1, October 2020).* ### Section 2 ### reo-launch-presentation - Section 2 ### Corporate sector performance in Latin America - Median of the nonfinancial corporations of Argentina, Brazil, Chile, Colombia, Mexico, and Peru. - Note: 2021 refers to the adverse scenario. ICR = interest coverage ratio. - Corporate Profitability in Latin America (Return on assets; percent) — chart axis labels shown from –4 to 12 and years 2006–2020. - Corporate Leverage in Latin America (Debt to assets; percent) — chart axis labels shown from 0 to 50 and years 2006–2020. - Share of Corporate Debt at Risk in LA (Percent; share of corporate debt with an ICR < 1) — years 2019, 2020, 2021 presented. ### Banks: resilience entering the pandemic and 2020:H1 developments - Despite these trends, banks remain resilient as they entered the pandemic in a relatively strong footing. - Banks’ capital levels were adequate at end-2019. - Sources: IMF, Financial Soundness Indicators database; national authorities; and IMF staff calculations. - ... and have remained adequate in 2020:H1, but provisioning has increased, while profitability has declined. - Capital Adequacy Ratio (Percent) — chart includes Brazil, Chile, Colombia, Mexico, Peru, Uruguay; axis labels from 0 to 25 and markers "2008", "December 2019", "EM median, 2019". - Financial Soundness Indicators (Percent) — table headings shown: Latest; Percentage point change since December 2019 (decrease = red). - Table headings/metrics shown in source: Profitability; Regulatory capital to risk-weighted assets; Return on equity; Capitalization; Loan Loss; Loan loss provision to non-performing loan ratio. - Country rows as presented in source: - Brazil16.3-0.8205.126.314.7-3.3 - Chile13.40.69.4-6.8 - Colombia16.6-1.0152.910.515.3-2.0 - Mexico16.50.5164.717.712.8-7.8 - Peru15.50.9184.535.410.8-7.0 - Uruguay18.61.564.74.6263.1 ### Banks under the WEO baseline and an adverse scenario - Banks’ capital positions would deteriorate under adverse scenario, with heterogeneous effects. - Under the WEO baseline scenario, bank capital ratios would decline but remain above regulatory minima. - In an adverse scenario, banks’ capital positions deteriorate significantly... - ... but about 75 percent of banks (by assets) would be able to maintain the CET1 ratio above 4.5 percent. - Source: IMF staff calculations. Note: Excludes outliers. CET1 = common equity tier one; ROA = return on assets. - Distribution of Bank Assets by CET1 Ratio under the Adverse Scenario (Percentage share of sample banks in each jurisdiction) — categories and counts shown in source: - < 4.5 percent< 8 percent> 8 percent - 56 banks - 5 banks - 18 banks - 21 banks - 22 banks - CET1 Capital Ratio (ROA Model, Baseline Scenario) and CET1 Capital Ratio (ROA Model, Adverse Scenario) charts shown for years 2019, 2020, 2021 with a 4.5% reference line. *INTERNATIONAL MONETARY FUND* --- _Source: https://www.imf.org/-/media/files/publications/reo/whd/2020/oct/english/reo-launch-presentation.pdf_