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Latin America: Challenging Post-Covid Recovery
Latin America will see uneven recovery this year by country and sector.
BY JOHN PRICE
For many people based in other regions (North America, Europe, parts of Asia), despite the threat of variants, life is returning to normal. Businesses are hiring, people are traveling, and social distancing barriers are breaking down. By contrast, in Latin America, economic recovery is uneven, fear levels remain high, and societies are more divided than ever, foreshadowing a combative political cycle ahead.
The pain and fear resulting from more than one million COVID deaths in Latin America has devastated consumer confidence and delayed what many predicted would be a promising investment rebound in 2021. The longer term economic and political toll of the pandemic will be decided by the fate of the region’s 60 percent informally employed, of whom, more than forty million fell into poverty in 2020, with more likely to follow in 2021 as governments wean themselves off of costly public spending programs.
There is growing rancor among this vast underclass of informally employed Latin Americans, directed against their governments. Their list of grievances is long and palpable:
1). Governments were slow to procure testing equipment and vaccines and both spending programs were riddled with incompetence, nepotism and in some cases corruption.
2). The very government bureaucrats who made up the rules that determined when lockdowns begin and end, were able to do so while working comfortably from home, drawing a full salary – seemingly insensitive to the economic devastation that their rules imposed.
3). In some countries, privileged government officials jumped to the head of the age determined vaccination line, the last straw after more than a year of insensitive blunders by government officials.
The list could also include school closures, travel restrictions, and others that hurt the middle classes especially hard. With such a backdrop, it is little wonder that societal frustrations yielded protests in over a dozen countries, social chaos in Colombia and may have shifted politics towards a more populist bent in Chile, Peru and Colombia.
UNEVEN RECOVERY BY SECTOR
Like in the rest of the world, not all industries suffered equally from the pandemic recession and recovery will prove just as inequal. Just as SARs jumpstarted e-commerce in China in 2002, COVID did the same for Latin America. Many who had sat on the sidelines of the digital economy, operating solely in cash, were forced to adopt some kind of digital payment device (usually a pre-paid card – many of which were issued by governments) in order to buy groceries and other basics online. Almost everyone spent more online during the pandemic versus before, even if their incomes fell. The digital economy flourished, growing 60 percent on average across Latin America in 2020. With it, the low-profile logistics industry became a fast growth phenomena, employing tens of thousands of unemployed to delivery goods.
Other industries also fared well, as a result of the pandemic or the economic response to the crisis. Mining is a good example as loose central bank policy response ballooned the prices of precious metals, kickstarting mining operations across the region. The greening of policy and consumer sentiment accelerated the growth of the electric vehicle (EV) market, raising the prospects for the mining of copper, lithium and zinc.
Latin America’s economic recovery from COVID, like most historic recessions, will emerge from price-elastic exports: commodities, manufactured goods, outsourced services. The currency declines, though more moderate than in the past, give the region a pricing advantage over global competitors with the export of products and services and already we see strong growth in some of them. The domestic economy will take longer to recover but will flourish first in the job-economy, using new business models that employ individuals as contractors, bypassing the costly employment taxes that have challenged formal employers for years.
For those selling to governments, this is going to be a very difficult couple of years ahead because, with few exceptions, governments spent heavily during COVID while collecting far less tax revenue, creating massive fiscal deficits. After giving all governments a pass in 2020, international lenders and the ratings agencies are now pressuring governments to cut back COVID outlays, even while the delicate social dynamic in many LatAm countries demands continued deficits spending. As a result, any expenses that can be delayed, will be, including infrastructure, equipment, schoolbooks, medicine, et cetera.
Middle- and working-class consumption will remain soft, growing less gradually than the general economy. Professional and upper-class consumers, like their North American and European counterparts, will rapidly increase spending as they again rediscover the joys of travel, eating out, entertaining, etc. The corresponding retail and service providers who service these customers will similarly thrive or suffer over the next 6-12 months. Many specialized brick and mortar retailers will never recover from the pandemic, their customers having experienced the time saving advantages of buying online. This follows a similar trend seen in China, Europe and the US, all comparatively mature e-commerce markets.
Another area that has suffered is education. Latin America has been very slow to reopen its schools. This is important for two reasons. Firstly, education is a large industry unto itself, underfinanced more than ever. Suppliers will suffer accordingly. More significantly, public school education in Latin America is one of the great societal equalizers, providing a stepping-stone into the middle class. Losing up to two school years due to pandemic closures (without adequate online proxies) will further limit the hopes and opportunities of the underclass.
In the ranking model below, AMI took a number of factors into account to predict the viability of recovery (in 2021) by country, including: progress with vaccines, monetary and fiscal policy latitude, their export mix, central bank policies, and investor sentiment.
Some people will be surprised to see Peru so highly ranked given its sudden shift to the left with Castillo as the recently recognized Presidential election winner. History shows that political change tends to take time before it actually fosters changes in regulations and fosters real change in business outlook. The Castillo win did prompt considerable capital flight from Peru’s elites, and a softening of the currency, but exactly how key industries and tax policies are impacted by the new government remains to be seen, and will not materially impact the economy until 2022.
Politics is what crowds the headlines but it is only one factor and usually a slow moving driver of economic change. When it comes to short-term economic prospects in Latin America’s largest economies, the pricing of their leading exported commodities (Chile – copper, Colombia – oil and coal, Peru – copper and gold, Brazil – soy and iron) has an even greater impact on economic growth than political policies. Our ranking model takes this into account.
This article is based on an analysis originally published by AMI Perspectiva.
John Price is the Managing Director of Americas Market Intelligence. With 20 years of experience in Latin American market intelligence consulting, Price has supervised nearly 1,200 client engagements and advises clients in more than 20 countries across Latin America. He can be reached at jprice@americasmi.com
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