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Writer's pictureUnited Peruvian Youth

Management of the economic crisis generated by COVID-19 in Latin America

Authors: Manuel Torres Lajo, Kevin Serpa, Valery Díaz, Paola Vasquez, Leandro Ramos


The pandemic in Latin America has been unequal in levels of contagion in some countries. After seven months of crisis, the situation in countries such as Chile, Peru and Ecuador have managed to stabilize their cases, while in Brazil, Colombia and Argentina, they maintain a high number of cases (John Hopkins University, 2020). This is mainly explained by the different measures taken by Latin American governments. For example, severe confinements were carried out in Argentina (Lejtman, 2020), more focused measures in Chile (Toro, 2020) and in Brazil no further measures were taken.


Clearly, this is not an easy context for the region. The coronavirus situation challenged the health system as well as the economy: in an effort to slow down the contagion curve and buy time to strengthen health systems that were not prepared to face a pandemic, drastic measures had to be applied, such as the paralysis of a major part of the productive activity in Latin America.


Although these economies have gradually reactivated the productive sectors, the impact of more or less prolonged restrictions has taken a toll on them. The October report of the International Monetary Fund (IMF, 2020) projects a fall of the Latin American economy of 8.1%. The Peruvian economy being one of the most affected, with a forecast of a loss of 13.9%.


Unlike developed economies, emerging economies do not have strong mechanisms that act as a social shield. Social inequality, informality, and the weak productive and business structure in Latin American countries have not contributed to curbing the economic impact. That is why, once the initial shock of the pandemic passed in mid-April, the countries of the region started taking measures to reactivate their economies, while maintaining the fight against the pandemic, as can be seen in table 1.

Given the above, the interest of the article in describing some of the measures taken by Latin American countries to face the economic crisis and mitigate its consequences. Variables such as liquidity and credit, employment, exports and public debt have been considered, which have been more important in some countries than others in the short term.


Liquidity and credit

In relation to liquidity and credit measures, the financial system has been playing a leading role as it is the intermediary between the government, companies and families. Thus, the main measures for companies have been economic reactivation programs through credits guaranteed by the state. In the case of Peru, the Reactiva Peru program was launched to guarantee payment chains, in Chile there are Fogape-COVID Credits, and in Colombia, the MiPyME Credits - National Guarantee Fund (FNG), among others.


Regarding the measures for families, the regulatory bodies of the Financial System have established a series of palliative measures for consumer and mortgage loans. For example, in the case of Peru the postponement of installments for up to 6 months has been facilitated without this affecting the debtor's risk classification, as well as new alternatives for debt restructuring. In the case of Chile, the granting of “Recoloca” credits was promoted, which allows postponing the payment of three installments of a consumer or mortgage loan.

Employment

In line with the protection of income and household welfare, it was estimated that the region could lose up to 17 million formal jobs due to the closure of non-essential companies and the cancellation of massive events, and at the same time eliminating informal jobs which represent 37% of the total population of Latin America (OECD, 2020). Thus, multiple countries in the region deployed employment preservation policies along with social support to serve both the formal and informal sectors (ECLAC, 2020), with immediate, short and medium-term impact periods.


Regarding immediate-term policies, which refers to those applied during the period of social isolation, the policies revolved around modification of working hours, temporary licenses, suspension and / or advancement of vacations in the formal sector (Bank Inter-American Development Program, 2020). In this way, countries such as Ecuador, Argentina and Panama opted to replace the time not worked during isolation for up to 3 additional hours to work days once activities were resumed, providing exceptional licenses for those workers who will return from areas with coronavirus cases.


Additionally, countries such as Peru, Colombia and Costa Rica gave authorization to the public and private sectors for the execution of telework, without the formality / requirements according to the norms of remote work, to allow the prompt deployment of business activities in those sectors. economic that could work under that scheme.


One of the strictest proposals was the prohibition of dismissals in Costa Rica and El Salvador, in which it was determined that those companies that declared bankruptcy could not fire or reduce the salaries of their collaborators during the closing of operations. On the side of the informal sector and for the unemployed, Chile promoted subsidies under the figure of vouchers, serving 2 million people without formal work.


As for short-term policies, these focused on addressing the fall in labor demand during the trance of an economic recession due to the pandemic. In this way, Brazil opted for policies to anticipate benefits for formal workers, while on the business side it offered a package of economic measures focused on granting more credit lines for SMEs, reducing the rate of interest, and the reduction of contributions to 50% for 3 months.


Finally, regarding actions with a medium-term impact, Argentina has prioritized economic assistance vouchers for retirees and pensioners, increasing the Supplementary Social Salary and reinforcing school and community canteens for the care of the highly vulnerable population. Regarding the Panama measures its package has focused on refinancing loans for all economic sectors until the end of 2020 (without affecting its bank rating), reducing tariffs for sanitary goods, and reducing the monetary policy interest rate. to 3.25% (Inter-American Development Bank, 2020).

Exports


Although the downward trend of foreign trade in Latin America dates back to 2019, the impact of the pandemic accentuated it. In this sense, the IDB indicates in its report "Estimates of trade trends, Latin America and the Caribbean" (2020) that exports contracted by 3.2% during the first quarter of 2020 compared to the same period of 2019. This is due to the lowest export flows among Latin American countries (-8.6%), towards the EU (-7.1%) and the US (-1.0%). In addition, the report indicates that the retraction is explained by the fall in prices of basic products and a lower volume of exports. For this reason, the IDB pointed out that the contraction of Latin American exports deepened from April by -30% and this trend would not change until June 2020.


Faced with this crisis, Economic Commission for Latin America and the Caribbean (ECLAC) issued a recommendation for the countries of the region, which consists of having an action plan to reduce internal logistics costs and generate value-added services to maintain competitiveness. ECLAC points to regional integration as an exit strategy from the crisis, that is, SMEs exports to reactivate interregional trade. In its report "From confinement to reopening: Strategic considerations for the restart of activities in Latin America and the Caribbean in the framework of Covid-19" (2020), the IDB presents five public policy recommendations on international trade:

  • · Strengthen and deepen regional integration initiatives.

  • · Eliminate tariff and non-tariff barriers.

  • · Eliminate export restrictions.

  • · Implement trade facilitation measures.

  • · Stimulate local production.


These recommendations can be viewed in the measures taken by some countries in the region. In Peru, the reduction of tariff rates, the permissibility of transit for personnel related to export activities, discretionary power not to sanction certain customs infractions are some examples of measures to promote exports (Agencia Andina, 2020).


In Chile, the representative of the Undersecretariat for International Economic Relations (SUREI, 2020), Rodrigo Yañez, highlighted that an action plan has been implemented with the following measures: maintain the levels of trade flow in the logistics and production chains, constant coordination with public and private actors related to foreign trade and facilitation in the issuance of export certificates.


In Brazil, the Ministry of Economy has evaluated the possibility of extending a tax incentive for one year given to Brazilian export companies. China represents 28% of Brazil's exports, but with the pandemic, there was a reduction both in Chinese demand and in the price of exported goods (Santander Trade, 2020).


In Argentina, some measures taken by the government are: prior authorization for the export of supplies and medical equipment to face the pandemic, as well as the acceleration of the payment of export refunds for industrial companies (Government of Argentina, 2020).


In Colombia, the government has had a restrictive trade policy by prohibiting the export of 24 goods necessary to prevent and contain the spread of the virus. (Government of Colombia, 2020).

Public debt

As mentioned at the beginning, most of the measures taken were of immediate application, thinking in the short term. But the health crisis has now lasted for more than seven months, and in view of the current levels of contagion worldwide, there is no end in sight in the short term. "It's more of a marathon," said Martín Rama, chief economist for Latin America at the World Bank (Olmo, 2020). Faced with this situation, many analysts are looking for indicators that somehow predict how quickly the countries of the region will recover from this pandemic, one of them being public debt. The higher the debt, the lower the probability of recovering in the short term, since the lower the margin that will be to continue taking credit and liquidity measures, such as those mentioned above.


Consequently, in terms of public debt, according to IMF data, the countries in the worst conditions to face the health crisis are Argentina, with a public debt as a percentage of GDP of 93.3%, followed by Brazil with 91.5% and Uruguay with 64%. On the other hand, the best prepared countries in the region are Paraguay, Peru and Chile with public debts of 23.6%, 26.8% and 27.7% respectively. Thus, these last three have a greater margin of maneuver to apply the measures mentioned above for a longer period, allowing a faster recovery. In fact, the growth outlook for the Peruvian economy in 2021 is 7.3% (IMF, 2020).

Conclusions

Clearly, the return of the Latin American economy to pre-pandemic levels will not be so immediate despite all these measures taken. In fact, it will not happen in 2021 according to the IMF (2020), as it will only grow by 3.6%. Nonetheless, it is a good sign for the region that the current forecast is for a partial recovery in 2021, taking advantage of different strategies such as slowly increasing foreign trade and supporting national production at the same time.

Latin American countries should be aware that falling into a second wave of contagions could have serious consequences, in both social and economic aspects. The firsts forecasts after the new series of lockdowns in Europe show that the economic recovery of that continent will be slower than expected, and its return to pre-pandemic levels will be delayed until 2022 (Meyer, 2020). That being said, it is key that Latin America keeps taking appropriate sanitary measures that allow, at the same time, the protection of the population against the virus and retake the majority of their economic activities. A second wave similar to those of other latitudes has the potential to worsen the forecasts of economic (and sanitary) recovery in the region, which could lead to higher poverty levels in Latin America, and a reduction on their life expectancy.

 

References

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