Publish in Perspectives - Wednesday, May 6, 2020
The Peruvian government provided a US$26.4 billion stimulus package, the largest incentive package in all of Latin America, in response to COVID-19. Here capital Lima. (Photo: Peru's Ministry of the Environment)
Randy Bullard, Alex Miranda and Robert Rodriguez, Morrison & Foerster. (Latinvex collage)
The impact of COVID-19 in Argentina, Peru and Ecuador.
BY RANDY BULLARD,
AXEL MIRANDA AND
The COVID-19 pandemic arrived in Latin America during the midst of broad-ranging political and economic crises involving mounting debt burdens, social unrest, falling oil and commodity prices and currency devaluations. On February 26, 2020, Brazil was the first country in the region to report the presence of the disease within its population. Within weeks, countries across the continent had closed their borders and enforced lockdowns, implementing a series of macro-economic actions to try to preserve and stabilize the local economies and protect local businesses and employment for their citizens.
In our first piece, “The Impact of COVID-19 in Latin America”, we explored the responses of four of the larger economies in Latin America (i.e., Brazil, Chile, Colombia and Mexico). In this article, we evaluate the responses of three other Latin American economies, all of which have developed fairly varied approaches in responding" to the COVID-19 pandemic, while facing their own unique challenges at home: (i) Argentina, (ii) Peru and (iii) Ecuador. Argentina’s center-left government, for example, has prioritized the health and safety of Argentinean citizens over the country’s economic growth by providing US$12.9 billion in economic aid for its citizens while remaining on the brink of yet another sovereign debt default. Similarly, the Peruvian government also announced a US$26.4 billion stimulus package, the largest incentive package in all of Latin America, for health spending, cash transfers, loan guarantees, and future infrastructure investment. The Ecuadorian government, in comparison, was much slower in its response to the pandemic. Although the Ecuadorian government has now enacted a series of regulations aimed at strengthening the country’s healthcare systems and protecting small businesses, the government’s initial laissez-faire approach to the pandemic together with prior reductions in healthcare funding has left Ecuadorian citizens in a much direr situation. A more complete description of the government programs and economic policies addressing the COVID-19 pandemic for each of Argentina, Peru and Ecuador is set forth below.
Argentina has over 4,000 confirmed cases and 197 mortalities as of April 28, 2020. Similar to other governments around the region, the Argentinean government has adopted measures to prevent a rapid growth in infections, involving a full closure of borders and a nation-wide quarantine that began on March 20. Even though capital flow management measures that were already in place since August 2019 have largely protected Argentina so far from the impact of capital outflows, the government has still been forced to find other means to quickly counter the effects of the COVID-19 pandemic. As further described below, the Argentinian government has provided a significant stimulus package while simultaneously undertaking efforts to renegotiate its sovereign debt payments as well, to avoid triggering a sovereign default and furthering deepening the effects of the pandemic.
US$12.9 Billion Stimulus Package
Unlike Mexico’s and Brazil’s response to the COVID-19 pandemic, Argentina’s government provided a stimulus package of US$11.1 billion (later raised to US$12.9 billion) to sustain economic activity, avert shortages of food and medical supplies, help companies and protect workers and vulnerable groups affected by the crisis. Over US$5 billion of the total amount is being used by the government to make direct payments to unemployed works, pensioners and individuals on welfare. A smaller amount is being used for public works projects, including building homes and fixing schools. Additionally, another significant portion of the package is coming from state banks whom are providing companies with loans and credit lines at preferential rates.
Despite the country’s constant struggle with creditors over its foreign debts as well as its current recession, Argentina seems determined to assist its citizens through the economic downturn of this pandemic. Its center-left Peronist President Alberto Fernández has prioritized the health and safety of Argentinean citizens over the country’s economic growth, and, as opposed to Mexico’s President Lopez Obrador, President Fernández has emphasized that the economic fall-out of the COVID-19 pandemic is the government’s burden to carry rather than the private sector’s. By granting the US $12.9 billion stimulus package, the Argentinian government has made it easier for citizens to access monetary aid with the aim of ensuring that “after this pandemic, the engine of production is as strong as possible.”
Similarly to other countries in the region, but perhaps with a tougher stance, Argentina has banned all international commercial flight ticket sales to and from Argentina until September in an attempt to halt the spread of COVID-19 within the country. This policy may operate to further bolster the ability of state-owned and state-subsidized enterprises such as Aerolineas Argentinas to survive such downturns, while privately owned airlines such as LATAM Airlines Group, a Chilean-Brazilian airline with significant operations in Argentina, for example, would face an immense strain due to this ban.
Sovereign Debt Restructuring
Argentina’s multiple rounds of sovereign debt default are well-known. In 2001, the Argentinian government defaulted on US$100 billion of debt, triggering the worst economic crisis in the country’s history. From his inauguration, President Fernández and his administration have been keen not to subject the country to yet another default. However, today, as disruption in the global financial markets takes its toll on countries around the world, Argentina will likely undergo an impending default of about US$500 million in debt services on three of its foreign bonds. The government may consider pushing for a postponement of debt services until after the crisis, perhaps the only workable option to avoid falling into default during a recession that is expected to deepen as a consequence of the pandemic.
Nevertheless, the Argentinean government’s initial approach was to present a bond restructuring proposal on April 17, 2020 to divide its bonds into two general groups: (i) the Eurobonds issued by the Macri Administration and (ii) the bonds exchanged in the previous restructurings. The restructuring proposal also provides for a grace period for the government to adjust to current economic realities as well as regain access to the international capital markets. Analysts, however, expect international creditors to reject the plan since President Fernández will have about the same debt servicing obligations in all of the remaining years of his administration as the country currently has in one year. On April 22, 2020, Argentina announced that it did not make the US$500 million in debt payment that was due, thereby starting a 30-day countdown to a possible default on May 8th unless the government and creditors can reach an agreement before then.
Similar to the national efforts at restructuring its debt, the province of Buenos Aires offered its own bondholders a restructuring offer. However, bondholders stated that “the offer proposed by Buenos Aires was ‘not based on credible policy efforts or forecasts that bondholders can support’ since ‘the terms of the offer do not reflect the province’s reasonable payment capacity and the offer will not lead to a consensual resolution but rather, it will lead to a failed debt restructuring, likely default and a protracted period of uncertainty that will inhibit investment and economic recovery in the province’.” The province of Buenos Aires must pay around US$200 million on May 1st or be in default.
According to the Financial Times, “[s]ettling Argentina’s debt issue was widely seen as essential to solving its economic woes, including a recession now in its third year and inflation of about 50 percent. But any sense of urgency in government for doing so has diminished since the spread of COVID-19.” As mentioned above, President Fernández has made it clear that economic growth will take a back seat to the well-being of Argentinean citizens. However, “the damage to [Argentina’s] national accounts from the response to the [COVID-19] outbreak and global recession will hurt for years, maybe decades. In the same way, it isn’t clear where the limit between a quarantine to contain the virus and its negative economic effects lies—the point at which the future impact of saving the economy today will come back to haunt [Argentina] in the form of excessively high deficits is impossible to ascertain.” This begs the question of whether the cure is far worse than the disease.
Higher Local Oil Price
The COVID-19 pandemic has also affected the global oil market. While countries that form part of the Organization of the Petroleum Exporting Countries (OPEC) are trying to figure out how to share the production cuts from low oil prices and sales, Argentina decided to set a “higher local oil barrel price to protect the domestic industry from being further decimated” by the COVID-19 pandemic. In a move to reduce its reliance on imports, Argentina began to produce around 500,000 barrels of “criollo barrel” per day with the goal of continuing to increase that number to target an energy surplus for this year. Time will tell whether this move by the government will prove fruitful for the country and its citizens.
Peru Announced the Largest COVID-19 Stimulus Package in Latin America
In late March 2020, just within a month from the first confirmed coronavirus case in the country, as a necessary response to the COVID-19 pandemic, the Peruvian government announced a US$26.4 billion (90 billion Peruvian soles) stimulus package, which includes provisions for health spending, cash transfers, loan guarantees, and future infrastructure investment. Peru’s stimulus package, representing 12 percent of the country’s GDP, is the largest incentive package in Latin America in response to the dramatic effects of the pandemic.
On April 16, 2020, Peru placed a US$3 billion bond issuance to finance part of its stimulus package, and, as a result, the country received more than US$25 billion in orders from more than 400 investors. Approximately 50 percent of the orders originated from investors in the United States, 30 percent from Europe and 20 percent from Asia and Latin America.
For access to additional funds, the country has also begun talks with the International Monetary Fund for a contingency line that could reach US$18 billion. Moreover, the Finance Ministry also plans to draw down on an existing US$2.1 billion contingency line from the World Bank.
The stimulus package will have three phases of approximately US$7 billion each and its main objective is to protect employment. During the first phase, US$7 billion has been allocated to strengthen the health system against the pandemic and to provide cleaning supplies for schools, subsidies for the poor, and subsidies for the payroll of small businesses (including micro enterprises). In addition, the head of the central bank of Peru, Julio Velarde, announced that, as part of the strategy to protect employment, the central bank plans to implement the “Reactivate Peru Program” (Programa Reactiva Perú, the “Program”). The Program seeks to inject US$8 billion into banks for loans intended mainly for smaller companies to help cover their working capital needs. The interest rate for these loans is supposed to drop by 1 percent from the current 1.25 percent, and the loans are intended to cover a maximum amount equal to either three times the contributions made by a company to EsSalud (the country’s social security institution) in 2019 or a month of the monthly average sales achieved in 2019. However, to determine the loan limits for smaller businesses (micro enterprises), the average monthly sales will be the only amounts considered.
In order to access and obtain a loan under the Program, a company must meet certain requirements. One of them is to have “Normal” or “With Potential Problems” ratings at the SBS Risk Center for at least 90 percent of a company’s loans. Companies that do not have a specific rating will be rated and treated as “Normal”. In addition, the subject company must not have an active tax collection proceeding (deuda tributaria coactiva) for debt exceeding one (1) tax unit (unidad impostiva tributaria, “UIT”) as of February 29, 2020.
The loan may only be used for employee payroll and for the payment of suppliers with whom the company has debts and contractual obligations. Specifically, the funds received under the Program may not be used (i) to acquire fixed assets and shares or participations in other companies, (ii) to pay debts to companies in debt to the Financial System Companies (ESF) or (iii) to prepay financial debts. Lastly, the term of the loans cannot exceed 36 months including a 12-month maximum grace period. The loans may be requested from banks and financial institutions until June 30, 2020, which is the term established by the Operating Regulations of the Program.
On February 29, 2020, Ecuador became the third country in Latin America to report a case of COVID-19, after Brazil and Mexico. It has now one of the highest rates of COVID-19 in all of Latin America, with 24,258 reported cases and 871 reported deaths in a country of just 17 million people and has been facing serious issues with testing and reporting, as even President Lenín Moreno recognized. The country has the highest per capita COVID-19 death toll in the region, with Guayaquil as the epicenter of the pandemic with 70 percent of the cases reported. On March 18, 2020, Ecuador closed all its borders. Since March 22, the army has been present at the Guayas province to enforce confinement measures.
The pandemic arrived in Ecuador during a time of economic hardship as a result of falling oil prices and foreign exchange appreciation in a fully dollarized economy heavily dependent on oil revenue. Ecuador, which left OPEC on January 1, in order to increase its output, produces roughly 540,000 barrels of oil per day. The oil sector in Ecuador accounts for approximately 50 percent of the country’s exports and 15 percent of its GDP and the recent decrease in oil prices adversely affected the country’s ability to meet its financial obligations. On April 20, Fitch Ratings downgraded Ecuador’s sovereign long-term foreign currency credit rating to “restricted default” after creditors accepted the government’s request to defer bond payments.
Ecuador also recently had significantly reduced its investments in health care from US$306 million in 2017 to US$130 million in 2019. This allied to the government’s denial and late response to COVID-19 resulted in a very dramatic situation in the country, where international media outlets continue to report the unforgettable images of the deceased being left unclaimed in the streets of Guayaquil.
In response to the pandemic, Ecuador enacted Decree No. 1017 on March 16, 2020, declaring a state of exception response to the pandemic. This Decree suspended certain individual rights under the Ecuadorian constitution (association, assembly, among others) and establishing that authorities may use certain digital tools for surveillance of the Ecuadorian population during the mandatory quarantine. A mandatory quarantine and a curfew followed the state of emergency decree.
Similarly to other countries, Ecuadorian banks granted a 60-day standstill for microcredit loans and loans granted to small companies and entrepreneurs, and deferring payment of principal and interest to the end of the original loan term. The import of medical supplies was exempted from any tariffs and collections were suspended by the government (administrative, coercive, tax and prescription processes included). Statutes of limitation for collection actions were interrupted.
A 6-month deferral was granted to small businesses, airlines, tourism companies and those companies acting in the agribusiness, among others, for the payment of 2019 corporate income tax and VAT related to the months of April, May and June 2020. Otherwise, deadlines for filing annual corporate income tax and monthly VAT returns were maintained. Additional income taxes were imposed for financial entities and companies providing mobile phone services at a rate of 1.75 percent over monthly taxable income and 1.5 percent for other entities such as those engaged in the exploration of non-renewable energy sources and entities that transport crude oil.
Specific regulation was enacted in order to allow the reduction of the work week to 30 hours for a period of six months, as agreed between the parties, and such agreements are required to be registered online with the Ministry of Labor. Employers may reduce salaries proportionally, but are required to continue contributions to social security. Payments to employees shall have priority over distribution of dividends to shareholders during this period. Employees will have to work extra days after the pandemic ends to compensate any working day missed due to the suspension in accordance with a schedule to be determined by the employer. Alternatively, the employee may reimburse the employer for the remuneration received during the suspension.
Exceptional contributions starting in the amount of US$60 to be paid to low income families in April and May were later increased to US$120 and other urgent economic laws are being considered by the National Assembly, including: the “Organic Law of Humanitarian Support to Combat the Health Crisis of COVID-19”, which aims to collect taxes from companies that have earned more than US$1 million in 2019, and a progressive income tax from workers with a salary exceeding US$500 per month, the “Organic Law for the Regulation of Public Finances” which is intended to improve the use, control and assessment of public resources.
On April 2, 2020, the World Bank approved a US$20 million loan for Ecuador to assist with the crisis management in the country and to support the national plan to provide adequate medical care and strengthen the national public health system.
On April 13, 2020, the Inter-American Development Bank disbursed US$25.3 million to Ecuador to support its healthcare system as the first tranche of more than US$700 million that the Inter-American Development Bank has committed to provide Ecuador. Ecuador is also seeking emergency funds from the International Monetary Fund in an amount of approximately US$500 million.
While the impact of the COVID-19 pandemic on the populations and economies of Argentina, Peru and Ecuador remains uncertain, there are significant differences in the macro-economic approaches that the governments of each of these countries have been taking. The timing of the responses, the targets and directions of the stimulus packages, and the external crises pre-dating the arrival of COVID-19 in these countries will significantly impact how quickly such countries, their populations and economies can recover. The Peruvian government, on the one hand, was quick to respond, by providing a US$26.4 billion stimulus package, the largest incentive package in all of Latin America, for health spending, cash transfers, loan guarantees and future infrastructure investment, partially funded by a new sovereign debt issuance. While in the verge of another sovereign debt default, Argentinean President Fernández responded in a similar manner by announcing a $12.9 billion stimulus package to sustain economic activity, avert shortages of food and medical supplies, help companies and protect workers and vulnerable groups affected by the crisis. President Fernández has continuously emphasized that his priority during this crisis is the health and well-being of Argentinean citizens over the country’s economic growth. In contrast, the Ecuadorian government was much slower to respond. Although the Ecuadorian government has now enacted a series of regulations aimed at strengthening the country’s healthcare systems and protecting small businesses, the government’s initial laissez-faire approach to the pandemic together with prior reductions in healthcare funding and pre-existing economic crises have put the country in a much more difficult situation. The ultimate effect of these initiatives on Latin American economies and the large vulnerable populations within each country nevertheless is uncertain, and the political legacy of these disparate reactions to an unprecedented crisis remains to be seen.
Randy Bullard is co-chair of the Latin America Desk at Morrison & Foerster and partner in the firm’s Corporate Department, based in New York and Miami.
Axel Miranda and Roberto Rodriguez are associates in the firm’s Corporate Practice.
Associate Ludovica Gardani and International Associate Rafael Breves de Toledo contributed to the writing of this overview.
This article is based on a client alert by Morrison & Foerster. Republished with permission.