LatAm 2020 economic recovery “will not happen” – IMF

LatAm 2020 economic recovery “will not happen” – IMF

Bonds Capital Markets Corporate & Sovereign Strategy Economy & Policy Coronavirus

The rolling traumatic impact of the novel coronavirus, COVID-19, while not yet fully felt in Latin America in confirmed infection and mortality rates, is already being digested by economists as a significant hit to the regional economy, with the International Monetary Fund saying there is no economic recovery on the immediate horizon.

In fact, the multilateral lender’s top official for the Western Hemisphere, Alejandro Werner, said in a blog post on Thursday the disruptions to the global manufacturing supply chains, decline in commodity prices and the demand for them, plus a cratering tourism industry is “bringing activity to a halt in many Latin American countries – severely damaging economic prospects.”

“For the region, the recover we were expecting a few months ago will not happen and a 2020 with negative growth is not an unlikely scenario,” wrote Werner.

The aggressive monetary easing by the U.S. Federal Reserve and “whatever it takes” mantra among central bankers to help stabilize the global economy, will give some cover to emerging market counterparts to cut their benchmark rates and not increase the already significant downward pressure on their currencies which have wilted against the surge in safe haven asset buying that has lifted the U.S. dollar sharply higher.

Chile unveiled an $11.7 billion coronavirus economic stimulus package on Thursday aimed at trying to stem job losses and bolster the economy. The spending is equivalent to roughly 4.7% of GDP. 

In Brazil, the government said it would offer up BRL10 billion ($2 billion) in aid for 11 million low-wage workers. The plan is meant to cover their wages for at least the first 15 days after they may be sent home because of the coronavirus.

Source: Refinitiv

In January, the IMF/World Bank forecasted Latin American economic growth recovering from near zero in 2019 to 1.6% in 2020 and 2.3% in 2021. At the time, estimates were being trimmed because of lack of investment in Mexico and social unrest in Chile. Brazil was to prove the bright spot due to improved sentiment on the passage of long-awaited pension reforms and “fading supply disruptions in the mining sector.”

That has all been turned on its head by COVID-19.

Bank of America is now saying the US economy, the world’s largest, to have fallen into a recession, with the economy expected to contract by 12% in the second quarter after a measly 0.5% growth rate in the fast closing first quarter. They do expect the US to recover in the third quarter but overall 2020 is now looking like a 0.8 contraction in economic activity.

That will spill over into Mexico, where the bank now expects the open economy with more than 60 percent of its GDP tied to trade with the US, to contract 4.5% in 2020, down from the previous forecast of a 0.1% contraction. However, the bank said in a research note to clients on Thursday that the rebound in the economy in 2021 will be sharper, up 2.5 percent from the prior expectation of a gain of 1.75%.

Goldman Sachs is calling for Brazil, the region’s No. 1 economy, to contract by 0.9 percent in 2020. On Wednesday, Brazil’s central bank cut the benchmark Selic rate by 50 basis points to a record low 3.75%. Goldman is predicting that Mexico’s economy will contract by 1.6%, Argentina by -2.5%, Chile by -0.5%, and Ecuador by -2.7%. Peru slashed its benchmark lending rate by one full percentage point late on Thursday to a decade low 1.25% and said more liquidity measures could be employed if needed. Chile cut its benchmark interest rate by 75 basis points to 1% in a special meeting on Monday.

“We also expect zero growth in both Colombia and Peru. All in, given the recent domestic and external developments we downgraded the LatAm real GDP growth forecast by a sizeable 230bp, to -1.2%; we are now forecasting a recession. This assumes that the negative impact of viral outbreak peaks during 2Q20 and activity rebounds gradually in 2H2020, with a noticeable back-loaded profile," Goldman said in its note to clients on Thursday.

 

To track the latest infection rates around the world, refer below to the Johns Hopkins University COVID-19 interactive map. 

Source: Johns Hopkins University