Regional Economic Outlook for Western Hemisphere
Western Hemisphere, October 22, 2020
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- Published: October 22, 2020
- Series: Western Hemisphere
Pandemic and Economic Activity
- The pandemic continues to spread in Latin America and the Caribbean (LAC), but economic activity is picking up.
- After a deep contraction in April, activity started recovering in May as lockdowns were gradually eased, consumers and firms adapted to social distancing, some countries introduced sizable policy support, and global activity strengthened.
- Containing the spread of the virus and addressing the health crisis remain the key policy priorities.
Outlook and Key Projections
- Real GDP is projected to contract by 8.1 percent in 2020, followed by a mild recovery in 2021 reflecting persistent spread of the virus and associated social distancing and scarring.
- Risks to the outlook remain tilted to the downside, and uncertainty about the pandemic’s evolution is a key source of risk.
- Fiscal lifelines announced to cushion the economic fallout amount to 8 percent of the region’s GDP.
- If fully implemented, the fiscal measures would increase the region’s level of real GDP by about 6½ -7 percent within a year.
Labor Markets
- Employment fell sharply across the region, more so than in other emerging markets (EMs) and advanced economies.
- In contrast to previous recessions, the contraction in employment was larger than that of GDP.
- Structural features increasing vulnerability:
- A relatively large share of workers employed in occupations not amenable to remote work.
- A larger share employed in contact-intensive occupations than in other regions.
- These attributes were more common in sectors subject to lockdowns and social distancing.
- Disproportionate impacts:
- Women, informal workers, and workers with low educational attainment were more likely to be employed in contact-intensive occupations and, except for women, less likely to be employed in occupations where remote work is feasible.
Fiscal Policy Findings and Recommendations
- Chapter documents fiscal positions at the onset of the pandemic and summarizes emergency lifelines (8 percent of GDP).
- Exceptional measures are playing a key role in mitigating pandemic effects; they could raise real GDP by about 6½ -7 percent within a year if fully implemented.
- Near-term fiscal guidance:
- In countries where lockdowns still hamper activity: focus on ensuring firms have sufficient liquidity, and on protecting employment and income, while developing medium-term fiscal consolidation plans to safeguard debt sustainability.
- In countries easing lockdowns: focus on supporting the recovery, including through structural reforms.
- Medium-term fiscal guidance:
- Once the pandemic is under control and the recovery is on a strong footing, fiscal policy should focus on rebuilding buffers.
- Fiscal stimulus should support the recovery where fiscal space is available, but with clear commitments to medium-term consolidation.
- Credibility of consolidation strategies should be ensured through commitment devices, such as fiscal rules and the passing of legislation (for example, the “pre-approval” of future tax reforms).
- Over the medium term, policy should focus on rebuilding fiscal space and facilitating transformation through growth-friendly and inclusive adjustments.
- Enhancements to automatic stabilizers, including safety nets, would foster a more inclusive recovery.
Corporate and Banking Sectors
- Nonfinancial corporate performance was worsening prior to the pandemic, with falling profitability and rising leverage; performance deteriorated further in Q2 2020 and is expected to remain weak the rest of the year.
- Corporate debt at risk has increased sharply in the first half of 2020 and could increase further in a downside scenario.
- Banks have been resilient so far due to strong capital buffers and a multi-pronged policy response to support activity, ease financial conditions, and sustain credit intermediation.
- Risks to banking sector:
- The size of the economic contraction and expected slow recovery could trigger firm and household bankruptcies and loan defaults, pressuring banks’ profitability and capital positions and impairing their ability to lend.
- A solvency stress test of a sample of 61 major banks in Brazil, Chile, Colombia, Mexico, Peru, Uruguay accounting for no less than 75 percent of banking assets in each jurisdiction shows that under the World Economic Outlook baseline scenario, bank capital ratios would decline but remain above regulatory minima.
- In an adverse scenario, banks’ capital positions would deteriorate significantly, and some banks could experience capital shortfalls without a policy response.
- Policy measures if downside risks materialize:
- Mitigating policies, including extending restrictions on the distribution of dividends, would be needed to ensure that average capital levels remain adequate.
Monetary Policy Guidance
- Monetary policy should remain accommodative as long as inflation stays within the target range and inflation expectations are well anchored.
Regional Economic Outlook for Western Hemisphere, October 2020
Content in this bundle
- Background
- Assessing the Impact of the Covid-19 Pandemic on the Corporate and Banking Sectors in Latin America
- Covid-19
- Dataset overview
- Appendix Table 1. Western Hemisphere: Main Economic Indicators
- fiscal
- Appendix Table 2. Western Hemisphere: Main Fiscal Indicators
- labor
- Outlook for Latin America and the Caribbean - October 2020
- Full Report