Like much of the world, Latin America hopes that 2021 will bring a rapid recovery to the economic damage from the COVID-19 pandemic. The pandemic arrived in early 2020 as the region struggled to navigate ongoing social unrest, limited economic growth, and slow progress on social indicators. 2021 will begin with a series of challenges, as Latin America is expected to face the most pressing outcomes due to COVID-19 of any region in the world.
In December, the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) issued its Preliminary Overview of the Economies of the region. The ECLAC report projects that 2020 will mark the largest regional economic decline in 120 years with a contraction of -7.7%. It is anticipated to be the deepest recession among the world’s emerging economic regions.
On the bright side, ECLAC projected a rebound of 3.7% growth in 2021 and 2.8% growth in 2022. However, this rebound will struggle to bring regional economic activity back to pre-pandemic levels and is based on the tenuous assumptions that vaccine distribution will increase significantly in the second half of 2021 and that oil prices will hover around $44 per barrel. It is clear that Latin American and Caribbean governments will need to urgently find ways to mitigate external financial stressors while reducing debt and alleviating poverty.
The ECLAC report also revealed that more than one third of formal employment and one fourth of the Gross Domestic Product (GDP) of Latin America and the Caribbean are generated in sectors that are “severely affected” by the crisis, including tourism services, hotels and restaurants, transportation, automation, and traditional cultural industry and manufacturing. Less than one fifth of employment and GDP are generated in sectors identified as being only “moderately affected” by the pandemic. The vast majority of job losses will be from microenterprises (21.5%), followed by small enterprises (7.3%), medium-sized enterprises (2.7%), and large enterprises (0.6%).
Furthermore, an estimated 2.7 million formal companies are likely to close in the region, of which 2.6 million are microenterprises, due to an inability to pay employees and difficulty accessing working capital. This will result in a loss of 8.5 million jobs and total regional unemployment for 2020 is forecast at approximately 10.7%. The most affected sectors of the economy have been wholesale and retail commerce, social and personal community activities, hotels and restaurants, real estate (commercial and rental), and manufacturing.
To combat the destruction of production capacities, ECLAC has proposed four sets of measures that can mitigate economic losses. The first suggestion is to extend the timeframes and scope of intervention as it relates to liquidity and company financing. The second suggestion is to co-finance company payrolls for six months to avert the destruction of production and supply capacities. The estimated cost of this measure would be equivalent to 2.7% of regional GDP. In addition, governments should make direct cash contributions to independent workers. Direct cash deposits to 15 million workers would cost approximately 0.8% of regional GDP. Lastly, governments in the region can support big companies operating in strategic sectors which have been seriously harmed by the pandemic. Large companies provide roughly 39% of all formal employment and more than 90% of exports in the region.
Economic projections also highlight the profound transformation that production chains will undergo in the region. Big companies will seek to bolster their resilience in production chains by diversifying suppliers (both in terms of countries and companies) to reduce their vulnerability; prioritizing suppliers that are closer (nearshoring); and relocating strategic production and technological processes (reshoring). The disruption of international networks and supplies over the last year has created a crucial opportunity for governments to develop and enhance national and regional capacities.
Even as increased vaccine supply supports greater control of COVID-19, many of these countries will face a long road to full recovery both economically and socially. Government revenues will benefit from a cyclical boost as economic activity begins to rebound, but tax collections are projected to remain below pre-pandemic levels and GDP is not projected to recover to pre-pandemic levels until 2024.
The pandemic has increased poverty rates and income inequality, reversing the social progress achieved in recent years and potentially resulting in calls to expand social safety nets and government spending throughout the region. These rising economic and social pressures will challenge the ability of national governments to restore lost fiscal space and get back on track for the rest of the decade.