Mexico's President AMLO and Brazil's President Jair Bolsonaro. Photos: Shutterstock

Economy

The three main measures taken (so far) by the two largest Latin American economies against Covid-19

Brazil and Mexico announced a string of measures to mitigate the pandemic impacts

12.Apr.2020 16:46 BRT
UPDATED 13.Aug.2020 15:54 BRT

A week ago, the Financial Times reported that 14 Latin American and Caribbean countries have already requested urgent help from the International Monetary Fund (IMF) to mitigate the impact of the coronavirus crisis.

The region is expected to be hit by its worst recession in 50 years, according to Alejandro Werner, head of the western hemisphere department in the institution. He did not say which countries have asked for assistance, but that the 14 mentioned seek access to a total of $4.48 billion using a credit line which allows disbursement with minimal conditions.

Werner told the FT that Latin America was particularly exposed to the impact of the new coronavirus because it was already struggling even before that, affected by weaker commodity values, oil price, and capital flight, with investors looking for safer assets and markets.

The latest United Nations Economic Commission for Latin America and the Caribbean (ECLAC) forecast is a decline of at least -1.8% in the region’s GDP, “although a contraction of between -3% and -4%, or even more, cannot be ruled out“. Unemployment in the region could increase by 10 percentage points. This could lead to the number of poor in the region rising from 185 million to 220 million people, out of 620 million inhabitants in total; and the quantity of people living in extreme poverty could increase from 67.4 million to 90 million.

It’s true that the region’s firepower when it comes to public spending to prevent the economy from collapsing is much smaller than that of the United States, the United Kingdom or the European Union. Even so, the largest economies in Latin America announced a string of measures to mitigate the impacts of COVID-19, ranging from the injection of liquidity in the financial market to emergency aid to citizens and companies.

Until this Sunday, together, Brazil and Mexico have 26,388 confirmed cases of infection by the new coronavirus, and already account for 1,496 deaths due to the disease.

Stay on top of the main economic measures taken (so far) by the two largest economies in Latin America:

Brazil

In the end of February, when the first case of coronavirus was confirmed in Brazil and also in Latin America, the Economy Minister Paulo Guedes said that the most important response during the crisis should be the approval of the reforms already planned. That changed drastically with the escalation of COVID-19 cases in the country. Since then, several measures have been announced by the Brazilian government:

One of the first measures of the Brazilian government was to zero the import tax rate on 50 medical and hospital products necessary to fight the pandemic and to determine that, via the Federal Revenue Service, items such as gel alcohol, masks, gloves and etc. would have simplified customs clearance.
In recent weeks, an emergency financial assistance of BRL 600 for informal workers, micro-entrepreneurs and the unemployed in the country has also been proposed and approved by Congress. For mothers responsible for their families’ income (single-parent families), the project allows the granting of two assistance quotas, that is, BRL 1,200 (almost $240). The aid will be given for the next three months. The emergency aid will cost BRL 98 billion, and it should reach 100 million Brazilians, including the 77 million low-income people who are already registered in the Cadastro Único, the federal government’s base register for social programs. Amid criticism for taking too long to approve this measure – three weeks passed between the first draft of the idea and the signature of President Jair Bolsonaro – the government also has the challenge of operationalizing this financial assistance. The application to register citizens was made available last Tuesday. Since then, more than 32 million Brazilians made their applications to the emergency aid, and the first payments should be made from this Monday. The lawyer specializing in innovation Ronaldo Lemos did warn that there were serious risks of fraud, and unforeseen inconsistencies in the process. On Thursday and Friday, thousands sought the IRS offices for having irregularities on its identification number, a condition that prevents the granting of financial aid. The IRS insists that people can regularize their identification number over the Internet, but the fact is that most people do not have access to the network or simply do not know how to do this.
The Central Bank also announced a credit line of BRL 40 billion to finance the payroll of small and medium-sized companies. The program will finance up to two minimum wages per employee. If the worker earns more than that, the credit will only contemplate the established limit, and the company may complete the payment. According to the Brazilian Central Bank‘s president Roberto Campos Neto, the program could reach around 12 million people and 1.4 million companies. The initiative was formulated by the country’s Ministry of Economy and BNDES (National Bank for Economic and Social Development). The loan will be offered by banks that process payrolls. In return, companies will not be allowed to fire anyone for the next two months. The practical access to these credit lines, however, is still unclear. As of Monday, only two of the five largest banks in the country had already released information on how to obtain financing: Itaú Unibanco and Bradesco. A survey carried out by the Brazilian Support Service for micro and small companies Sebrae shows that 30% of entrepreneurs had to seek loans to maintain their businesses. Still, 29.5% of them await a response from financial institutions, and 59.2% had their requests denied.

Mexico

Shortly after confirmation of the first Covid-19 case in Mexico, the President Andrés Manuel López Obrador was criticized for not taking more restrictive measures to encourage people to stay at home. While major cities in the country have gone into self-isolation or lockdown, cancelling flights and shutting down land borders, Lopez Obrador continued to argue that such measures were not needed, and that it would only hurt the Mexican economy.

The president’s biggest concern came from the fact that the Mexican gross domestic product shrank 0.1% in 2019, López Obrado’s first year in office. It was the first annual fall in the GDP since 2009.

About a week ago, however, AMLO changed his mind, and now asks those citizens who can, to stay at home.

In the beginning of March, Mexico’s central bank cut its interest rate to 6.5%, moving forward their monetary policy meeting by three days. According to Forbes, the rate cut matched the emergency cuts made by the Federal Reserve, which cut the overnight lending rate to between 0% and 0.25% recently. Mexico’s real rate (after inflation) is around 3%. This gives Banxico room to cut the country’s rate again in the following weeks. Also according to Forbes, at least 8% of Mexico’s economy is in trouble as Americans stay home. With a coronavirus escalation, the millions of Americans who usually spend their Summer Break in Mexico are canceling their reservations.
AMLO also announced that Mexico will offer MXN 25 billion ($1 billion) to fund 1 million loans for small businesses. Each small urban business is entitled to a MXN 25,000 loan. According to him, each entrepreneur will have 3 months to spend the amount without any type of charge. “In the fourth month, he (or she) will have to pay MXN 850 monthly, for 36 months, at an interest rate of 6.5% per year, which is the interest rate of Banxico,” said López Obrador.
He also said that social programmes aimed at almost half the population that lives in poverty would be increased. But no further measures to help private-sector companies survive the crisis, such as tax breaks, were announced. AMLO said that he would prioritise social spending, alongside with his flagship airport, train and refinery infrastructure projects. These measures, said Mexico’s President, would be enough to create 2 million new jobs. Business leaders, however, fear that by halting all but essential activities to stop the spread of the Covid-19 without major stimulus, as many as 1.2m jobs will be lost.