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. 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. Containing the spread of the virus and addressing the health crisis remain the key policy priorities. In countries where lockdowns still hamper activity, policies should focus on ensuring that firms have sufficient liquidity, and on protecting employment and income, while developing medium-term fiscal consolidation plans to safeguard debt sustainability. In countries that are easing lockdowns, efforts should focus on supporting the recovery, including through structural reforms. Once the pandemic is under control, and the recovery is on a strong footing, fiscal policy will need to focus on rebuilding buffers. Monetary policy should remain accommodative as long as inflation stays within the target range and inflation expectations are well anchored.
Latin America and the Caribbean (LAC) has been hard hit by the COVID-19 crisis both in terms of lives and of livelihoods. An early and prolonged lockdown in some countries helped prevent the rapid explosion of deaths that Western Europe and the eastern US experienced. However, the lockdowns only slowed the epidemic but did not stop it, and over time their effectiveness declined. Combined with initial vulnerabilities associated with high informality, low access to health services, low government effectiveness, high poverty and densely populated urban areas, the outcome has been a high toll on lives and livelihoods in many countries.
Latin American labor markets have been severely disrupted by the economic fallout from the coronavirus disease (COVID-19) pandemic. Employment fell sharply across the region, more so than in other emerging markets (EMs) and advanced economies, and, in contrast to previous recessions, the contraction in employment was larger than that of GDP. These patterns are linked to key structural features in the region’s labor markets. A relatively large share of workers in Latin America were employed in occupations that are not amenable to remote work and the share of workers employed in contact-intensive occupations was larger than in other regions. These attributes were more common in sectors subject to lockdowns and social distancing. As a result, a large share of the region’s labor force was vulnerable to the COVID-19 shock ex-ante. Moreover, 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. This partly explains the disproportionate impact of the COVID-19 crisis among these groups.
Fiscal policy in Latin America and the Caribbean (LAC) is being put to test at different stages of the COVID-19 pandemic—from the initial response through the expected recovery. This chapter first describes fiscal positions in LAC at the onset of the pandemic and summarizes emergency lifelines that were announced to cushion the economic fallout of lockdowns on households and firms. These lifelines amount to 8 percent of the region’s GDP. Although deep recessions are expected, the chapter shows next that these exceptional measures are playing a key role in mitigating the effects of the pandemic. If fully implemented, the fiscal measures would increase the region’s level of real GDP by about 6½ -7 percent within a year. As economies gradually reopen, but under uncertainty about the pandemic’s course and its effects, fiscal policy actions could focus on gradually scaling down lifelines. At this stage, fiscal stimulus should support the recovery where fiscal space is available, but with clear commitments to medium-term consolidation. Credibility of these 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) to ensure sustainability. Over the medium term, when the pandemic is under control, policy should focus on rebuilding fiscal space and facilitating the transformation of the economy through growth-friendly and inclusive adjustments, given the pandemic’s potentially lasting scaring effects on the economy. Enhancements to automatic stabilizers, including safety nets, would foster a more inclusive recovery.
Nonfinancial corporate performance in Latin America was already worsening prior to the COVID-19 pandemic, with falling profitability and rising leverage. Performance deteriorated further the second quarter of 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. Despite these trends, banks in the region have been resilient so far, but the near-term outlook remains highly uncertain. Strong capital buffers combined with a multi-pronged policy response to support economic activity, ease financial conditions, and sustain credit intermediation have enabled banks in LA to cope with the immediate effects of the shock. However, the sheer size of the economic contraction this year and the expected slow recovery ahead could trigger firm and household bankruptcies and loan defaults. This would put pressure on banks’ profitability and capital positions, 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. 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.
