COVID-19 Pandemic Battering Latin American Economies As Some GDPs May Plunge 10% Or More

Latin America, now the epicenter of the global COVID-19 crisis, will see some of its economies suffer a “record-breaking contraction” this year warned Goldman Sachs.

Johns Hopkins University said that Brazil, Mexico, Peru, Colombia and Chile are now among the worst-affected nations in the world. In Brazil alone, more than 100,000 people have already been killed by the virus and an estimated 3 million have been infected.

Alberto Ramos, head of Latin America economic research at Goldman Sachs, expects Argentina, Peru and Mexico to endure double-digit contractions in their gross domestic product growth in 2020.

“The outlook is pretty uninspiring,” Ramos told CNBC on Wednesday. “We expect to climb [out] of a very deep hole during the second half of the year and throughout 2021.”

Ramos added that the GDP shrinkage in the region may be “the worst we’ve seen since the Second World War.”

In the second quarter, the largest economy in Latin America, Brazil, recorded an 11.2% plunge in GDP, compared to the first quarter.

Mexico, Latin America’s second largest economy, saw its GDP plunge by a record 17.3% in the second quarter from the first quarter. Mexico’s economy has been battered not only by the pandemic, but also by depressed crude oil prices.

However, Ramon noted that inflation in Latin America remains modest – which means central banks in the region will have room to enact accommodative monetary policies to support their economies.

Also, Argentina, the third largest economy in Latin America, had some good news after it secured a deal with its creditors to restructure $65 billion in sovereign debt.

Ramos also said that economic recovery in Latin America will be “a function of how competent the authorities are or have been in managing the [virus] outbreaks” in tandem with the fiscal and monetary stimulus from local governments.

“The continuation of the low growth environment can be socially and politically destabilizing and also undermine the credibility of the institutions,” Ramos warned.

GDP forecasts vary widely among individual nations in the region – but virtually all project economic contractions.

Last week Reuters reported that a central bank survey of economists in Brazil found they expect the economy to shrink by 5.7% this year, an improvement from projections of a 6.5% decline from the prior month. Nonetheless, the new estimate would still represent the sharpest fall in the country’s history.

Last month (before the debt restructuring deal), Argentine economists warned the economy could shrink by as much as 15% this year – its worst performance since 2002, when the country was ensnared in a depression and GDP crashed by 10.9%.

The Buenos Aires Times noted that as the Buenos Aires metropolitan area accounts for up to 60% of the country’s total GDP, tight quarantine rules in the metropolis will have an outsize negative impact on the national economy.

Late last month, Bloomberg reported that Mexico’s economy is expected to shrink by 10% this year (including that staggering 17.3% drop in the second quarter).

Mexico’s President Andres Manuel Lopez Obrador assured that “the worst [of the crisis] has passed, our strategy worked and we are already improving.”

But Jessica Roldan, an economist at Finamex, a Mexican brokerage house, warned: “If the [COVID-19] outbreak is not controlled, the hope for a robust recovery is totally off the table.”

Roldan further said that it may take Mexico seven years to return to GDP levels seen before the pandemic. She also criticized the government for failing to provide major stimulus measures.

Latin America’s fourth largest economy, Colombia, is expected to see its GDP slump by up to 10% this year, according to its central bank.

Reflecting this grim outlook, in late July the Central Bank of Colombia cut interest rates by 25 basis points to a record low of 2.25%.