Latin America was already on the way to another lost decade when the COVID-19 pandemic broke out. After nearly two years of health crisis, economists are trying to extract from the indicators and between the lines of the political situation the projections for the following year. The first conclusions touch on a historical problem that has become incredibly visible in recent times: the world as a whole will come out much more unequally than it entered the pandemic. And this is directly reflected in the projections for the 2022 GDP.
In March 2021, the region that concentrates 8.2% of the world’s population took the lead in the health crisis and began to account for more than a quarter of all deaths by COVID-19 in the world – that month, Latin America was the place on the globe with the highest number of deaths from COVID-19 per one million inhabitants. Today, there are more than 1.5 million deaths recorded, about a third of the total. And that number is just the saddest in this scenario.
Isolation measures, necessary to contain the brutal spread of the disease, knocked the region’s already weakened economic activity down. Brazil, Chile, and Colombia were some of the countries that rushed to take macro measures to guarantee liquidity in the financial market, credit in the real economy, and emergency income for the millions of people who were out of work during this entire period. Still, the UN‘s Economic Commission for Latin America and the Caribbean (ECLAC) estimates that 22 million people have fallen to the poverty line by 2020, bringing the total to 209 million.
This means that if in 2019, 30.5% of the Latin American population was poor, in 2020, this proportion rose to 33.7%. With activities being resumed despite the uneven progress of vaccination, these people are now suffering the most from the biggest side effect of the picture painted above: inflation.
Brazil will close the year, according to the latest projections, with official inflation around 10% – for next year, with the monetary tightening, this should drop to 5%. Argentina will likely end this year with a surreal 38% price hike (and reach 45% next year). Mexico, Colombia, Chile, and Peru will close the year with rates around 7%, 5%, 6.6%, and 5.7%.
While developed countries have fiscal plumpness to delay as much as possible the withdrawal of stimulus measures and put the demand-supply relationship on the axis, emerging countries are forced to increase interest rates as the fastest way to stop the soaring prices. On the face of it, the actual recovery, economists say, will slowly start only in 2022 and (as always in Latin America) quite unevenly.
“Inflation has revved in all countries in the region and is above the target in all of them. This is leading to an adjustment in monetary policy.[Public] debt has increased a lot, and these countries do not print anchor currencies [such as the United States and the European Union do]. This fiscal issue explains why the world economy will emerge even more unequal than it entered [the pandemic]. Mature countries with greater fiscal capacity will maintain expansionism longer, seeing their GDP recover more consistently than that of emerging ones. (…) Developed nations can expect that growth alone will reduce their debt. That’s also why we see activity dropping again among emergent economies [not only because of the virus but because of the inflation and the consequent rising in interest rates]; the whole world will move towards that,” analyzes Mário Mesquita, chief economist at Itaú-BBA, the analysis and consulting arm of the largest public listed bank in Latin America.
He believes that any political upheaval is always an essential factor for analyzing Latin America and necessary for anyone who wants to understand what is happening in the region. But that the biggest issue is, in fact, fiscal. According to ECLAC, Latin America faces its biggest fiscal challenge since the public debt crisis in the early 1980s, when the GDP fell by -6.1%.
“Argentina has a difficult agreement with the IMF ahead [which will test the coalition that governs the country, defeated in the 2021’s primary], Chile is coming out of an election [and drafting a new constitution], and next year there will be general elections in Colombia and Brazil [which will make fiscal adjustments likely to be postponed.] Peru has elected an anti-establishment government and has a fragmented parliament that could lead to a new impeachment and a dissolution of Congress. Mexico is a different story because, despite his typical populist trait, president [Andrés Manuel López Obrador] is very conservative from a fiscal point of view; he doesn’t spend. There is, however, a lot of regulatory uncertainty,” says Mesquita.
He explains that, in general, political risks always hit the exchange rates first, then result in inflation, affecting activity, but that Itaú-BBA did not consider any specific interpretation in this regard in its projections – not enough to change them.
In the analysis of Itaú-BBA, Chile is one of the countries with the best conditions to drive the region’s recovery next year. “The country benefits from decades of prudent macro-management and a build-up in the private savings sector (…) which is now being used. The country’s economy has entered the pandemic healthier and is, therefore, is recovering better,” says Mesquita, recalling that the need for fiscal tightening will come stronger in 2022, which also explains the expectation of lower growth in the country next year. Itaú-BBA sees the country ending 2021 with a 12% GDP and decelerating to 1.8% in 2022.
But while Chile tends to raise interest rates to contain an overheated economy, the scenario is not one of high demand in Brazil. Latin America’s biggest economy has been stagnant since March. Even so, as a way of trying to tame inflation, the Central Bank is likely to raise the country’s benchmark interest rates beyond 11% per year (11.25% in the first quarter in Itaú-BBA’s projection, and 11.50% or more in Oxford Economics’ forecast). “With the real rate set to rise by 8% in 2022, Brazil will see the biggest monetary tightening in Latin America,” wrote Oxford Economics experts Marcos Casarin, Felipe Camargo, Joan Domene, and Debora Reyna in their last report.
To Oxford Economics, the fiscal and monetary tightening that will come in 2022 already makes Latin America look at a recovery easily coming from the economy’s reopening in the rearview mirror. And even with this tightening, convergence to inflation targets will come slowly due to persistent imported inflation.
In its report, the consultancy recalls that Brazil, which cut primary spending by 7% of GDP this year, got back to a technical recession and that President Jair Bolsonaro has decided to burn his market-friendly credentials by modifying the constitutional spending cap to increase social transfers ahead of his re-election bid next October. As the pandemic wasn’t enough, the need for a fiscal adjustment and the (almost certain) dispute between Bolsonaro and the former president and leftist icon Luiz Inácio Lula da Silva are two more ingredients that will make 2022 a disrupting year for the Brazilian economy.