LatAm faces setbacks in COVID-19 response
June 26, 2020 |
High borrowing rates and structural problems are making it hard to finance stimulus programs, finance ministers say
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Mexico, one of the countries hardest hit by the coronavirus around the world, has fallen short in providing as much stimulus funding as it would have liked — and far less than in developed countries — largely because of the structural challenges that have held it and the rest of Latin America back for decades.
"We wish we could have done much more" to support the economy, Mexican Finance Minister Arturo Herrera said Thursday during a webcast hosted by Bloomberg. "But it is a matter not only of willingness, but a matter of fiscal and economic space," he added.
In comparison, developed economies like Canada, Germany, Japan, the United Kingdom and the United States have been able to spend more on economic stimulus because of their low borrowing costs, Herrera said.
"Germany and Japan, for practical purposes, have negative interest rates at which the governments are raising the money," he said.
Mexico's central bank cut the overnight interbank lending rate by 50 basis points to 5% on Thursday. But the US Federal Reserves cut its benchmark rate to 0.25% in March from 1.75% the previous month, while the Bank of England slashed its rate to 0.1% from 0.75% in the same period.
"It costs us 55 times more than in the UK to raise money," Herrera said.
At the same time, Mexico keeps 30% of its debt in foreign currencies, which means that as the peso has depreciated this year, its debt has increased in peso terms "by 15% to 18% even without raising an additional peso," he added.
Herrera's views on the constraints that emerging markets face in response to the COVID-19 pandemic were shared at the forum, called "Emerging Market Debt: A Roadmap Beyond COVID-19," where the finance ministers of Argentina, Peru and the Philippines also talked about how their countries are coping.
ARGENTINA'S DEBT SETBACK
Martín Guzmán, Argentina's economy minister, said his government has reacted by locking down the economy from March 20, when the first cases were still being reported, and will likely be extended beyond the latest proposed end date of June 28.
"It was very important to act fast" and put protecting people's health as the number one priority, he said.
At the same time, Argentina is seeking to limit the social impact of the crisis with stimulus programs, making it easier to pull out of the crisis.
When asked whether Argentina's economy was hit harder than it could have been because of its debt crisis — the government defaulted on $500 million in payments on three bonds in May and has faced delays in trying to restructure $66 billion in foreign-currency debts — Guzmán said yes.
The economy was already in a "sick state" when the country was hit by COVID-19, so the effects of the pandemic "are more damaging than for economies that had public finances that were a healthy state," he said.
Argentina's response has been to try to keep the fiscal deficit "under control" while rebuilding the peso-denominated debt market and yield curve as a source of liquidity during the crisis and to reduce a reliance on borrowing from the central bank, Guzmán said.
Like Argentina, Peru took aggressive measures early on to try to contain the virus, but has faced setbacks because of decades-old structural problems, including nearly 70% informal workers, poor public services, low financial inclusion and a weak healthcare system, Finance Minister María Antonieta Alva said during the webcast.
Only 40% of Peruvians have bank accounts, she said, which is less than the 55% in Latin America, 63% in developing countries and 94% in high-income countries, according to data from the World Bank.
"These issues have made us very vulnerable during the crisis," she said.
Indeed, Peru has the sixth highest number of confirmed cases in the world at nearly 265,000, the second worst in Latin America after Brazil's almost 1.2 million, according to data compiled by the Johns Hopkins Coronavirus Resource Center.
The result has been a strict quarantine that has pushed Peru into one of the deepest recessions in the region. According to the World Bank's forecast in early June, the Peruvian economy will decline 12% this year, while Argentina's will shrink 7.3% and Mexico's 7.5%. The International Monetary Fund (IMF), however, has since released estimates showing that Argentina could contract by 9.9% this year and Mexico by 10.5%, a sign of the worsening impact of the health crisis. The IMF did not put out a forecast for Peru.
Despite the setbacks, Peru is rolling out a stimulus program for 7 million of the country's 9 million households at the equivalent of $220 per household and is creating short-term jobs in infrastructure for low-income people, Alva said.
A SECOND WAVE? A THIRD?
Another concern expressed by the finance ministers was when the crisis could end.
"We don't know how long this crisis is going to last, so you have to have enough reserves for a second wave or a third wave," said Carlos Domínguez, the secretary of finance of the Philippines.
In Mexico, Herrera shares that concern. "This is not, as the world thought a few months ago, a small lockdown of two or three months, and then go will go back," he said.
Instead of V-shaped rapid recovery, he warned that it could be "a much longer game" that will require a steady flow of economic stimulus. "You have to have some dry powder," he said.
In a Twitter post later in the day on Thursday, Herrera said he had tested positive for coronavirus, but was experiencing "very minor symptoms." He added that he would continue to work from home.
(Photo: Mexican Finance Minister Arturo Herrera - file)