Information and analysis to understand the political and business reality of Latin America
SPECIAL REPORT: COVID-19 IN LATIN AMERICA
Executive summary: general situation
In Latin America, the coronavirus pandemic that paralyzed China between December and March and that has been hitting Europe since February is beginning. However, seeing how the disease has developed, everything points to the crisis in a few weeks, when China has overcome the crisis and the EU sees the pandemic decline, Latin America will go through or approach the maximum expansion of the virus in a region that, in its southern part, is heading towards the southern winter.
The expansion of coronavirus in the world and its arrival and advancement in Latin America must be looked at from four different areas, but which interrelate and influence each other: health, economic, political and social.
The effects of Covid19 on Latin America imply an increase in economic uncertainty that, in turn, will have a political and social derivative, as more pressure is placed on the administrations in general and particularly on health systems of countries facing this crisis with little scope to increase spending and borrowing in order to meet the financial needs to combat the disease.
The evolution of the Latin American economy is therefore, linked to how the economies of China, the European Union and the US behave and how long it takes to reduce the pandemic’s expansion. Forecasts for 2020 indicated an expansion of 1.8%, but the coronavirus crisis will sink that prospect: The Economist’s Intelligence Unit has lowered forecasts to a range of -0.4% to ‘+0.2% from its previous forecast of 0.9%.
The impact will be comprehensive for all of Latin America: the countries most linked to China (not only by the paralysis that the Asian country has undergone, but also due to the time it will take for the Asian giant to return to normal)and, those nations linked either to the EU or to the US will also feel the effects that, at least, until the middle of the year will see their economies paralyzed.
Should the Covid19 outbreak in Latin America and the Caribbean grow, the impact could be significant with the potential for health services to be overburdened by a high demand for specialized hospital care and intensive care. The Global Health Security Index suggests that the protection power of such systems is “medium””, with four countries ranked “worst prepared” (Guatemala, El Salvador,, Honduras and Venezuela). Health infrastructure problems affect the entire region, as no country stands out for its preparation and some are in an extremely fragile situation.
The expansion of the pandemic in Latin America is going to have a political derivative first, in addition to economic, social and health. This crisis comes at a time of deep weakness in most governments in the region, which have failed to adequately address the social demands of the emerging middle classes in recent years. And they haven’t done so in the area that’s going to be most tested in this crisis that comes from the expansion of coronavirus: public services.
In light of the potential crisis ahead, Latin America has to assert its comparative advantage to compensate for its structural weaknesses. Latin American countries have neither the means, nor the resources, nor the technology, nor the capacity to act to follow South Korea’s example.
Its main comparative advantage is time. The fact that Covid19 has arrived in the region late and the public administrations know what the successes (of China and South Korea) have been and the mistakes (in the EU and the US) that have been made in meeting the health challenge.
1-. The economic effects
First, the coronavirus pandemic, which has sunk European and US stock markets, toppled commodity prices, especially oil, and paralyzed China’s economic and European Union economic expansion, will cause renewed and deep downward pressures on the growth of Latin American economies.
The magnitude of the impact will depend on how long it takes for China to return to normal (once controlled, as the epidemic seems to be in this country) and how the disease evolves in the US and the EU which is now, according to WHO, “the epicenter of the pandemic”. At the moment, the estimated impact in Latin America is moderate, especially compared to Asia. But, with a declining European area and a US considerably moderating its expansion, Latin America will not be able to escape a fall in its economy, dragged by the slow recovery in Chinese demand, by the strong European crisis and a low US demand, which will result in weak commodity prices.
Latin American countries are already suffering from the current 2% contraction in China’s production, which will be joined by the more than likely European recession (the Commission has already warned that “growth for the eurozone and the EU as a whole is likely to fall well below zero this year”) and a halt in US expansion.
The evolution of the Latin American economy is therefore, linked to how the economies of China, the EU and the US behave and how long it takes to reduce the pandemic’s expansion. The main risk is that this disease will not only reach higher levels of spread (something inevitable), but its duration will extend longer than expected.
This new situation caused by the pandemic only deepens the uncertainty that economies have already been suffering, which have accumulated a period of slowdown, stagnation or crisis since 2013.
Forecasts for 2020 indicate an expansion of 1.8%, but the coronavirus crisis will sink that prospect:
– The Intelligence Unit of ‘The Economist’’ has lowered the forecasts to a range of between -0.4% and only +0.2% since its previous forecast (0.9%).
– Barclays Investment bank believes that the Mexican economy will record a new contraction in 2020, of 2%, due to the accumulation of three simultaneous shocks: the impact on value chains on manufacturing due to the situation in China; the decline in tourism and the impact of coronavirus on Mexican territory.
2-. Different levels of impact
The impact will be comprehensive for all of Latin America: the countries most linked to China (not only by the paralysis that the Asian country has undergone but due to the time it will take for the giant to return to normal) and likewise, those nations more closely linked to the EU or to the US will feel the effects, with their economies paralyzed at least until the middle of the year.
The economies of the region most directly exposed to the economic impact of the situation in China are Brazil, Peru and Chile, for their high trade with the Asian country. The fall in demand in China, as well as the demand effects of other countries whose growth has also slowed, and the decline in US and European demand leads to falls in commodity prices (e.g. copper, iron ore or oil).
In addition to the export of raw materials, the consequences of the current crisis reach Latin American countries by other means. For example, through capital flight. Emerging countries, since the first contagions were known outside China in mid-January, have suffered a capital outflow of $29.3 billion (25.6 billion euros)– the highest number since records are available.
Attached to capital outflows is the monetary front. As the dollar is the main refuge of the world economy, Latin American currencies have lost value as the economic outlook worsens. The most affected are currencies in Latin America, whose value has plummeted against the dollar.
Among the largest economies in the region, the countries most affected by the depreciation of their currency since the spread of Covid19 began are Brazil, Chile, Mexico, Argentina, Peru and Colombia. Falls accelerate from capital flight to safer destinations due to the financial uncertainty of the disease.
The coronavirus crisis also has another derivative: it paralyzes, even more, the possibility of implementing the structural reforms that the region needs to make its economies more productive and competitive and not be left out of the current digital revolution.
Until now, the implementation of these transformations had slowed due to the intense electoral period experienced in the region (2017-19), the weakness of governments arising in these elections (most, except Mexico, without sufficient parliamentary support) and by the strong social response that resulted in the social outbursts of late last year.
Now the crisis in China, the US and the EU, plus the effects of all this on the region create an added obstacle to implementing structural reform programs.
3-. Healthcare situation in Latin America to coronavirus
In the event that the outbreak of Covid19 in Latin America grows, the impact could be significant, with the possibility that health services will be overburdened by a high demand for specialized hospital care and intensive care.
The point is not to focus on preventing the arrival of coronavirus, but on preparing to deal with it properly when it arrives and when it begins to expand. The key is to provide a multisectoral response to ensure the strengthening of surveillance, the preparation of health services, the prevention of the spread and the maintenance of essential services to slow transmission and save lives. However, the Latin American health situation is very disparate and heterogeneous.
The most serious problem is that many of the region’s health systems lack the infrastructure and resources to deal with a new virus. Because of the characteristics of the disease, low lethality but highly contagious, suitable places are required, not only for the care of patients, but for their isolation. In the countries of the region there is a lack of isolation room spaces for airborne infections and hospital infrastructure does not cover massive demands.
The Global Health Security Index suggests that the protection power of such systems is “medium””, with four countries ranked “worst prepared” (Guatemala, El Salvador, Honduras and Venezuela).
The health infrastructure problems facing the region are serious, as no country stands out for its preparation and some are in an extremely fragile situation: Guatemala, Haiti, Honduras, Guyana and, above all, Venezuela. All of them present a high vulnerability to new emergencies. Venezuela is among the 20 nations worst prepared to deal with the crisis that means the spread of an epidemic, as the 2019 Global Health Security Index points out.
An article from ‘The Lancet’ shows that mortality is higher in those places with the highest incidence of cases and where the system sees its capacity saturated. One indicator that serves as a first approximation, included in the Global Index itself, is the number of hospital beds per capita. The best-placed countries (Cuba and Argentina) are five times better than the worst-placed (Guatemala, which is below 1), although only five of the best-placed in terms of beds show high global health security. Countries with above-average safety and equipment are concentrated in North America (USA and Canada) and the Southern Cone (Argentina, Uruguay, Brazil and Chile). At the other end the most worrying situation is that of Central America, with the exception of Panama.
4-. Politics to the test
The expansion of the pandemic in Latin America is going to have a political derivative first, in addition to economic, social and health. This crisis comes at a time of deep weakness in most governments in the region, which have failed to adequately address the social demands of the emerging middle classes in recent years. And they haven’t done so in the area that’s going to be most tested in this crisis that comes from the expansion of coronavirus in the region: public services.
Along with economic stagnation, the malfunction of these public services (education, transport, citizen security and health) and the existence of inefficient, corrupt administrations explains the growing public disaffection that led to the series of social outbursts at the end of 2019 which changed the course of many governments in the region.
The two major regional powers (Mexico and Brazil) will be the countries most affected by coronavirus. In the case of the American country, because of its proximity to the United States, where the disease progresses at a very high rate. Mexico has gone from the calm which was announced a few days ago to recognizing that phase 2 of the epidemic is imminent and that there are signs that call for a stronger response. And, in the Brazilian case, because it is the country with the highest incidence from the first moment and yet the most drastic measures are not being taken.
These governments are going to have to deal with the coronavirus crisis when they find themselves hampered, first and foremost, by state appliances with serious functioning problems (poorly funded and, in some cases, understaffed, without means and untrained).
Moreover, from a political point of view many of these governments have little social leadership (Chile); they face a new economic crisis of enormous magnitude (Argentina); are in the final leg of their mandates (Peru and Ecuador); they are going through a highly polarized election campaign (Bolivia) or are countries with very weak public administrations (most of Central America and the Caribbean) or are nations plunged into a strong institutional and economic deterioration (Nicaragua, Venezuela).
Conclusions
Comparative advantage vs structural problems
In light of the potential crisis ahead, Latin America has to assert its comparative advantage to compensate for its structural weaknesses.
Its main comparative advantage is time. The fact that Covid19 has arrived in the region late and the public administrations know what the successes (of China and South Korea) have been and the mistakes (in the EU and the US) that have been made in meeting the health challenge.
Latin American countries have no means or resources, no technology, no ability to act to follow South Korea’s example: to undertake a massive campaign to examine the population, regardless of whether there were symptoms or not, and, within a framework of absolute transparency, to do massive tests to detect the virus without even having to consult or leave their offices. The effort must rely on taking more drastic measures, sticking to the scientific evidence and experience of other countries, which have proved successful in managing outbreaks.
Therefore, they must take advantage of their greater scope of action, it is vital to compensate for the region’s weaknesses in human and technical means, as well as the financial inadequacies. All indications are that, with exceptions, most countries have made decisions that are more drastic and more expeditious than what was done in the EU. This is key to slowing the coronavirus expansion and thus buying time to prevent the collapse of health services that present serious inefficiencies. It doesn’t guarantee success, though.
The lesson left by what has happened in Italy and Spain is that it is reckless to underestimate the impact of coronavirus. In the face of doubt, we must act quickly and with drastic measures, as well as alert about the threat without inducing panic. That’s the path to success.
The countries that best managed to contain the virus’s advance (Taiwan, Japan and South Korea) took drastic measures early on. And that, although not in a generalized way and with the same parameters, has begun to happen in the region. The remoteness and geographical isolation have so far played in favor of Latin America, whose governments have been able to benefit from the experience of what happened in Asia and Europe. This has made it easier for the authorities to react earlier by taking drastic measures in advance. Peru, with seventy cases, is the country that has taken the most drastic measures: Vizcarra’s government quickly decreed a general quarantine in the country, as well as the closure of its borders for a period of 15 days to combat the pandemic. And the exercise of constitutional rights relating to personal freedom and security, the inviolability of domicile and freedom of assembly and transit in the national territory have been restricted.
Uruguay stands out for its speed in taking restrictive measures: with only 6 cases it called for the suspension of classes. In this regard, there are also two Central American countries that, aware of the fragility of their health system, have activated protection measures with a single case (Guatemala) or zero (El Salvador). Guatemalan President Alejandro Giammattei, suspended meetings of more than a hundred people, as well as classes at all levels. And Salvadoran Nayib Bukele ordered the Civil Protection authorities and the Ministry of Health to ban the crowds of more than 75 people and managed to get the Legislative Assembly, mostly opponents, to approve the state of national emergency for 30 days.
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