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To get back on track, Latin America needs to find a never-before-achieved balance between structural reforms and monetary stimulus

The region will grow more than 3% next year, according to ECLAC, IMF and S&P Global. Recovery in services, commerce sectors depends on vaccine race

It will take some time, but Latin America will get back on the economic growth track. For this, it will need to find a never-before-achieved balance between structural reforms and monetary stimulus as of 2021, pointed out the experts from the United NationsEconomic Commission for Latin America and the Caribbean (ECLAC).

According to them, the region will present a positive GDP growth rate (3.7%) that will fundamentally reflect a statistical rebound, but the process of recovering pre-crisis levels will be slow and will not be achieved until 2024. In its latest World Economic Outlook report, the International Monetary Fund (IMF) also pointed out a 3.6% growth for the entire region in 2021. Simultaneously, the global lender estimated a 4.4% shrunken for the global economy in 2020 (a much deeper contraction than that of 0.1% in 2009, when the world last faced a worldwide financial crisis).

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Credit rating agency S&P Global is a bit more optimistic. It forecasts a 4.1% rebound in 2021 for the region’s six largest economies (Brazil, Mexico, Argentina, Colombia, Chile, and Peru). “This implies that the level of GDP in the region by the end of 2021 will still be roughly 3% below its pre-pandemic level (fourth-quarter 2019). We expect most Latin American economies will return to their pre-pandemic GDP level in the second half of 2022, with Mexico toward the end of our forecasting horizon in 2023 and Argentina beyond that,” says the agency report.

To keep the region from skidding off the road to growth, ECLAC’s report poses the need to prioritize spending on the economic and social reactivation and transformation by fostering employment-intensive and environmentally sustainable investment in strategic sectors, including a credit push for Micro, Small, and Medium-sized Enterprises (MSMEs). In this sense, the UN’s body also stresses the need to extend basic income transfer programs for people living in poverty situations. Doing all that while pushing structural reforms to reduce fiscal risks is the region’s major challenge for the next years.

The IMF also stressed that governments need to stay focused on their sanitary responses to the coronavirus and not withdraw all their stimulus measures prematurely. This is crucial for limiting the COVID-19’s damage.

How the COVID-19 pandemic shook Latin America

Back to the beginning of this year, 2020 was supposed to be a year pulled by emerging countries, in a sense that, according to the IMF, the United States and China would probably slow down, and the global economy would grow by around 3%. This means that the world’s largest powerhouses wouldn’t be enough to truly move the needle after ten years of uninterrupted global growth. In this scenario, Brazil and Colombia were seen as Latin America’s main driving forces, the region’s way out from a lost decade.

But then the COVID-19 pandemic came. 

In Latin America, the coronavirus officially arrived on February 26th, with a 61-year-old man who traveled from Italy to São Paulo. As the only way to prevent the spread of the disease, local administrations began to apply isolation measures in March. Amid more restrictive measures in some countries and a great deal of denialism in others, Latin America became the disease’s epicenter in May.

The extent of the human tragedy is overwhelming: with only 8.2% of the world population, the region accounted for nearly a fourth of the cases and over a third of the deaths so far.

The prospect scenario of reductions in GDP, employment, and consumption, as well as warnings about an imminent social collapse, prompted countries such as Brazil, Argentina, Peru, and Chile to announce emergency measures to mitigate the economic impacts of the COVID-19 pandemic, which also included minimal income transfer programs.

In Brazil, as soon as states and cities implemented social distancing, a crucial measure to save time for better preparation of the public health system, there was a need to help vulnerable people. Informality in the labor market exceeds 40% of the country’s employed population, according to the Brazilian Institute of Geography and Statistics (IBGE). Almost 68 million Brazilians received a total of BRL$ 273 billion in financial aid between April and December 2020.

The emergency aid alongside the forced digitization was the upside of the crisis in the region’s largest economy.

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Latin America effectively entered a recession after the first quarter, with an overall 1.53% setback. If, in the beginning, experts and organizations struggle to identify and measure the economic impacts of the disease in the region, two quarters later, the damage is far more clear.

After the second quarter’s drop in economic activity, the initial GDP rebound in the third quarter was even stronger than expected. “The main reason for the outperformance was robust goods exports (mainly manufactured goods to the U.S. and commodities to China). However, the services sector, which is the largest in most Latin American economies, remains very weak. This means that in the absence of a recovery in services, the region will remain highly vulnerable to swings in external demand,” wrote the credit rating agency S&P Global in early December.

Recovery in services, commerce sectors depends on vaccine race

Unemployment rates shooting up are also a big challenge for Latin America. Some of the region’s largest countries have introduced measures to support labor markets, such as financial subsidies for companies that kept employees on their payroll. But in 2021, these measures will no longer exist. Given the relaxation of the containment measures, people started to go out more to look for jobs in this fourth quarter, which is making the unemployment rates soar (from 3.7% in the third quarter of 2019 to 5.1% in Mexico; from 9.7% to 11.7%, in Argentina; and from 9.8% to 14.7%, in Colombia).

In Brazil, the latest data from IBGE, from the quarter ended in October, shows that the country has just over 14 million unemployed (or around 14.3% of people who are old enough to work, 14 years or older, and who are looking for work). In the quarter ended in March, at the beginning of the COVID-19 pandemic, this rate was 12.2%, and in the third semester of 2019, at 11.6%.

Latin America’s largest economy also registered an increase of 2.8% in the number of occupied workers (employed people or people working informally, without a formal job contract), which reached 84.3 million people. Despite the increase in this number compared to the previous quarter, it is still below (-10.4%) the one registered in the same period last year.

After good health, certainly, Latin Americans’ main desire for 2021 is to have a job, a source of income. To meet this important demand, governments will have to invest heavily in vaccination strategies against COVID-19 so that the services (mainly and commerce sectors, which employ the most in the region, can hire again. In Brazil, 22.7 million people worked in these segments before the pandemic, with the total contingent being reduced by 3.5 million people throughout the pandemic.

Mexico was the first Latin American country to start vaccination against COVID-19, followed by Argentina, Costa Rica, and Chile.

As for Brazil, there is still no start date for the national vaccination campaign against coronavirus. The Fiocruz foundation, a Brazilian partner for the testing and production of the Oxford / AstraZeneca vaccine in the country, said it would file an application for emergency use of the immunizer at the Brazilian National Health Surveillance Agency, Anvisa, until January 15, and then start producing the vaccine on Brazilian soil in the same month.

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In parallel, the State of São Paulo’s government announced that it would start vaccination against the COVID-19 virus on January 25. For this, the state hopes to count on the CoronaVac vaccine, developed by the Chinese pharmaceutical company Sinovac, which has the Butantan Institute as its local research and production partner. However, there is still no immunizer approved by Anvisa.

In general, access to any vaccine will not be wide and unrestricted in the region. The Pan American Health Organization (PAHO) hopes to distribute vaccines in the region between March and May 2021 through Covax, a WHO mechanism to ensure equal access in a race where emerging nations have more to lose. All countries in Latin America and the Caribbean expressed their interest in participating in Covax, although some cannot buy vaccines. But this mechanism should take the coronavirus vaccine to only 10% to 20% of the populations of the poorest countries.