World Bank sees muted recovery in LatAm, Caribbean

World Bank sees muted recovery in LatAm, Caribbean

Economy & Policy Regions Coronavirus

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Economic growth the Latin America and Caribbean (LAC) region in 2021 is forecast to rise 3.7% on expectations that the COVID-19 pandemic mitigation measures will ease while prices for commodities, a main source of revenue for many nations, will see increases, according to a  World Bank report issued on Tuesday.

According to the bank's Global Economic Prospects report, the recovery is expected to be muted as it follows "a decade of already sluggish growth," with significant downside risks to growth forecasts coming from any disruption to the rollout and administration of the COVID-19 vaccine regimen. If that were to occur, the expectation is for consumer and business confidence to drop, dragging expected growth to a paltry 1.9% in 2021 and 2.3% in 2022. The current projection for 2022 is a 2.8% growth rate across LAC.

Overall global economic growth is expected to rise 4% this year, assuming the "vaccine rollout becomes widespread throughout the year," the World Bank said in a statement. In 2020, the region's economy contracted by 6.9%.

“To overcome the impacts of the pandemic and counter the investment headwind, there needs to be a major push to improve business environments, increase labor and product market flexibility, and strengthen transparency and governance," said World Bank Group President David Malpass.

The region is home to 10% of the world's population, the report said, however it accounts for 20% of confirmed casts. The high level of informal employment hit the region harder while there was limited capacity to enforce mitigation measures in some areas. Rising food insecurity was the result of the lost income.

While incomes fell, remittances to the region slowed broadly but showed resilience in the Dominican Republic, Jamaica, Mexico and Nicaragua. The drop in energy prices impacted oil and gas producers, and hit the region's newest entrant into that sector, Guyana particularly hard.

"In Guyana, offshore oil field development was impeded by the impacts of the pandemic, logistics challenges, and delays in government approvals, leading to substantially weaker growth in 2020 than projected mid-year," the bank said.

On the positive side, domestic banks were well capitalized before the pandemic hit and do not show signs of systemic stress. Currencies in the region are under pressure, with significant weakness in Brazil's real and Argentina's peso.

LAC nations took on more debt to bolster public spending and underpin their economies, a potential future drag on economic dynamism going forward. "Government debt in the median LAC economy has risen sharply, from 53% of GDP in 2019 to 69% in 2020," the bank said, adding that creditworthiness has dropped, with credit rating downgrades as a result.

"A sudden tightening of bond yields, sharp currency depreciation, or further credit downgrades could interrupt capital inflows and make debt servicing significantly more challenging, with possible knock-on stress for domestic banking systems," the bank said. A deepening of the local debt markets does provide a counterweight to the external credit shocks, however.

Another risk is the reabsorption of workers into the economies being weak, potentially leading to a renewed round of social unrest.

“The global community needs to act rapidly and forcefully to make sure the recent debt accumulation does not end with a string of debt crises. The developing world cannot afford another lost decade," World Bank Acting Vice President for Equitable Growth and Financial Institutions Ayhan Kose said.