In wars, governments spend without constraints. The huge threat of the coronavirus pandemic is not limited to the health-care systems. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) is revising its GDP forecast for the region to a shrinkage of 1.8% in 2020 – down from a feeble growth of 1.3% in its latest official prediction, published three months ago. In this hostile scenario, countries must make use of vast resources to ensure that businesses don’t go bankrupt and people don’t fall into poverty. That is what many economists are saying, and Latin American governments are trying to heed their call.
Many countries in the region are announcing a barrage of countercyclical policies. Brazil’s government on Monday announced emergency measures to inject nearly $30 billion into the economy to soften the blow from the coronavirus pandemic. Besides increasing health expenditures, the administration will hand out a $40 monthly voucher to informal workers and anticipate salaries and bonuses to pensioners. Argentina pledges an additional $1.58 billion toward public works and a special work leave for those over 60 years old. Colombia estimates that the cost of its stimulus package may reach $14.8 billion. Chile unveiled a $11.7 billion package of emergency measures on Thursday aimed at saving jobs and protecting small business. And the list goes on.
And so it should be. Santiago Levy, senior fellow at the Brookings Institution and former vice president for sectors and knowledge at the Inter-American Development Bank, says money should not be a constraint at this moment. “Governments should pass national emergency laws that allow them to spend more freely end take further measures such as requiring private hospitals to take in patients without health insurance, for example”, he said during a discussion on COVID-19 and Latin America held by the Inter-American Dialogue, a U.S.-based think-tank.
That goes in line with what Martin Sandbu, an economics commentator for the Financial Times, wrote in a recent article about governments responses to the coronavirus crisis: “Governments should throw caution to the wind and spend massively. For him, the right fiscal response today, beyond spending as much on health care as needed, is “to sustain the income that people had expected to receive were it not for the virus.”
Where will the money come from?
A big question that arises from this is: where will the money come from? Latin American countries have much less financial room than during the global financial crisis of 2008-09, their debt rate related to GDP soared in the last decade and in general they didn’t build adequate economic buffers to downturns.
Alicia Bárcena, executive secretary of ECLAC, who also took part in the Dialogue discussion and anticipated the Latin American GDP revision, strongly emphasizes the role of multilateral financial institutions, such as the World Bank and the International Monetary Fund (IMF) who should step in and lend without much conditional terms to developing countries who will likely suffer more during this period.
“One of the main concerns is, at the end of the day, what is going to happen with multilateralism. Without a doubt, we must move towards greater coordination, and the policy priority must be how to address the current social and health crisis.”Alicia Bárcena, executive secretary of ECLAC.
Brazil’s and Mexico‘s central bank will be able to access an exchange swap line facility provided by the Federal Reserve that will be used to increase the provision of dollar liquidity where necessary. Each country will have a $60 billion line with the U.S. financial authority to tackle the high degree of market volatility, and ease their ability to implement other policies in the “real” economy.
Bárcena mentioned other economic, fiscal and monetary measures, such as the cuts in interest rates by central banks, as important tools. As lenders of last resort, central banks should ensure liquidity by keeping the cost of borrowing low and financing credit supply, both directly and indirectly. But monetary policy is not enough, in her opinion. “This crisis is quite different from 2008, so solutions should also be quite different.”
A 5-front impact
The executive secretary of ECLAC explains that the pandemic has already affected both supply and demand. On the supply side, with factories shutting down in China and Europe; on demand, the shock comes from restaurants closing doors, tourism sharply declining and people basically staying indoors. She describes the current crisis as an impact coming from five different fronts for Latin America:
- China shock: China is an important destination for exports from several Latin American economies, and it is the top trading partner of Chile, Peru and Brazil. ECLAC estimates that the value of region’s exports to China could drop by as much as 10.7%
- Lower demand: Commerce and huge tracts of services will suffer, such as tourism. Some Caribbean island nations could see the industry contract by 8% to 25% because of worldwide travel restrictions;
- Interruption in value chains: Disruption in supply chains are being felt in countries with strong manufacturing sectors, such as Mexico and Brazil;
- Commodity prices: Basically all big Latin American countries rely on commodities, from Chilean copper to Brazilian iron ore and soybean, from Mexican oil to Argentina’s wheat, and their prices are plummeting due to probable weaker global demand;
- Risk aversion: a fifth transmission channel stems from greater risk aversion on the part of investors and the worsening of global financial conditions.
Maintaining jobs and incomes and minimising the costs of collapsing businesses are essential. But Santiago Levy says it is important that governments signal clearly to capital markets that the increase in spending is due to an exceptional circumstance that will be reversed. “Governments should ask legislators ‘Give us the ability to increase spending and deficits’ and also indicate a tax increase in, say, January 2021”, he said, pointing out that the mentioned date is arbitrary. For him, this is essential so that markets don’t punish countries’ largesse, shutting them out of capital flows and adding a fourth layer to what is for him already an economic crisis with a 3-tier shock:
- An external shock, derived from trade, tourism and commodity prices slumping, as well as financial markets panicking;
- An internal shock that results from social isolation and quarantine;
- The uncertainty shock, which adds a heavy dose of complexity to all the others, because scientists still don’t understand thoroughly the virus and no one knows for sure how long the outbreak will last.
In 2008-09, only the first shock was felt. “Countries should be focused on protecting employment, so that demand does not collapse”, advises Levy, adding that transfers to the poor through existing instruments are also relevant, once there’s no time to start a program from scratch is needed.
Vulnerable groups and women
Alicia Bárcena also stressed the importance of protecting the most vulnerable groups from the crisis, particularly the elderly, lower income sectors and the poor. “The more unequal a country is, the more vulnerable groups will bear the burden of the economic impact of the pandemic and the fewer resources they will have to fight the pandemic. Special attention must be paid to women for their dual role as workers and caretakers,” she said.