Virus and oil shocks risk tipping Latin America into recession
Latin America was the world’s slowest-growing region even before the coronavirus and the oil price crash created a perfect storm which risks plunging it into recession.
Already struggling to recover from the end of the commodities boom and buffeted by street protests last year against inequality, the region now faces the prospect of sliding further backwards.
“The combination of the quickly spreading coronavirus with a crash in the oil price and a sell-off in LatAm assets could bring the region’s economy to a complete halt,” said Marcos Casarin of Oxford Economics in a report.
“Our first estimates for a scenario in which financial volatility lasts for another few months and oil prices stay close to $30 a barrel until the end of the year point to a 0.7 per cent loss in Latin America’s GDP this year.”
Initially, the region appeared to have dodged the worst of the coronavirus epidemic, prompting some governments to conclude that warm weather and relative isolation meant there was little to worry about.
That changed dramatically last week when Brazil’s president Jair Bolsonaro took to Facebook wearing a mask to announce the cancellation of a big political rally and news that one of his aides had tested positive for the virus. The same day, Argentina banned all flights from Europe, the US and three Asian countries for the next 30 days.
Banks and research houses have now been slashing forecasts, with Capital Economics predicting that Latin America excluding Venezuela will grow just 0.2 per cent in 2020, down from an earlier forecast of 1.2 per cent.
“The region is wholly unprepared for this, with a few exceptions,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics in Washington, adding that “it is really vulnerable because of the dependence on commodities exports, China and foreign investment” — some of the factors most affected by the disease’s spread.
Copper prices have fallen by 11.6 per cent so far this year and soyabean prices by 10.8 per cent, while oil prices plunged nearly 30 per cent at the start of this week.
In Brazil, Latin America’s largest economy, expectations for a pick-up in growth this year to around 2 per cent have been jettisoned. Bank of America is now forecasting growth of 1.5 per cent in 2020. Finance minister Paulo Guedes said he would put together a special package of economic measures to fight the impact of the coronavirus, hinting that fiscal targets may be relaxed.
Analysts are divided over the likelihood of Brazil cutting interest rates, given the difficult choice between protecting the country’s vulnerable currency and providing a domestic stimulus to offset the virus shock in a highly unpredictable environment. “Guedes said a week ago that if the real fell to five to the dollar, he would have got things very wrong,” said Zeina Latif, a leading Brazilian economist. “Well, [last Thursday] it went to five. And Bolsonaro had said he was not at all concerned about the coronavirus, that the media was spreading fear. Brazil is a joke country on this issue.”
The virus comes as Argentina’s new Peronist government tries to renegotiate more than $100bn of debt — a challenging task, even before virus-related travel bans made face-to-face meetings almost impossible.
Heavily dependent on oil exports and using the US dollar as its currency, Ecuador was already struggling to pay its foreign debt and keep on track with a $4.2bn IMF bailout. The difference in yield between the country’s bonds and those of equivalent US Treasuries has increased sharply in recent days, signalling a greater likelihood of default.
Among Latin America’s other big oil producers, Mexico stands out because of the shaky finances of the state oil company Pemex. Analysts believe that a downgrade of Pemex’s ratings, and those of the associated sovereign, are increasingly likely.
“Clearly, less money for Pemex [because of lower oil prices] means less for the sovereign or more sovereign support to Pemex,” said Joydeep Mukherji, head of Latin American sovereign ratings at S&P Global. “[The oil price shock ] just makes things even more challenging for the Mexican government.”
Mexico’s large manufacturing sector is particularly exposed to supply chain vulnerabilities and to its dependence on a rapidly slowing US market.
Sound economic policies mean Colombia, another large oil producer, has more room to manage the fall in crude prices and most economists believe it will remain the region’s fastest-growing big economy. But the Colombian peso has been Latin America’s weakest big currency this year, falling 19 per cent on the dollar.
Venezuela also depends heavily on oil exports, though US sanctions had already reduced the effective price at which its crude could be sold and President Nicolás Maduro’s government had diversified its income via illegal gold mining, drug trafficking and remittances, according to US officials.
The country’s authoritarian government saw one silver lining in the crisis: just before the first two cases were officially confirmed, Mr Maduro introduced a ban on all public gatherings and suspended flights from Europe.