Latin America, while a region of immense economic potential seems to be in an exponentially worsening condition as a result of the pandemic. The economic crisis driven by the COVID-19 spread found this region in an already fragile economic and social condition. With frequent political unrest, recession, inflation and poverty, the economy of these nations has started teetering on the brink. Having said this, a significant number of surveys had predicted slow economic growth due to the pandemic in these potentially profitable nations in 2020. However, today there are unexpected barriers to overcome for Latin America. An insight into the said barriers is:
In Latin America, most countries are exporters of agricultural commodities. These commodities are less profitable than the export of manufactured goods; this will mean loss for these nations as they will have no ability to diversify their exports in the short term.
The travel and tourism industry has also been hit hard by the outbreak, the ban on the arrival of non- resident foreigners, suspension of domestic flights and shutdown of hotels has brought a slump in this industry. The tourism industry is a significant source of employment and income in most Latin American nations, thus the ban on travel contributes to a recession.
The oil reserves, contributing in major parts to the GDP’s of these nations, will also suffer the quakes of the outbreak. Larger economic problems are associated with the demand for oil, translating today into fluctuations in oil prices due to reduced economic activities. Expected excess supply but reduced consumption was also responsible for the significant price reduction.
The economic downturn will increase unemployment and reduce the incomes of self-employed people. For example, office workers are more likely to transition to flexible working arrangements during the restrictions, while many industrial, tourism, retail, and transport workers will suffer a significant reduction in work due to community restrictions and low demand for their goods and services.
The outbreak of the virus will create a disbalance in the supply and demand. There will be fluctuations in supply due to shutdown of retail stores and manufacturing plants and there will be demand shock as cases of unemployment rise and people reduce their consumption and become more cautious.
For example, in China, the production index in February declined by more than 54% from the preceding month's value Financial markets have been heavily impacted by the pandemics spread as well. Investments have also been hit hard due to financial volatility and an uncertain economic outlook.
While these consequences of the outbreak are seemingly general, they have a worse effect on the economies of Latin American nations than that on other countries.
These nations have borrowed heavily from banks and states in the North in the past. Most of the times, these borrowed funds were not spent wisely, did not materialize as anticipated or produced very little surplus. As a result, a third world debt crisis arose in Latin American nations, the weight of which remains to this day. These countries are largely, the exporters of raw materials than those of manufactured goods which brings about slower economic growth.
This combined with the political unrest, rampant corruption and high rates of poverty reduces the probability of these nations recuperating easily. A majority of Latin American nations export agricultural products to the United States of America.
The United States, now, embracing partial protectionism is another loss to these countries. Adding to these, today, Latin America is the epicentre of the COVID-19 outbreak. With meagre health facilities and wide-spread poverty, the loss of life occurring will also be an economic liability. All these factors combined with the effects of the COVID-19 pandemic indicate towards a bleak economic future of Latin America. While other countries will be thrown into an economic frenzy as well, Latin American nations will have to go an extra mile to bounce out of it.
As the spread of the virus is likely to continue disrupting economic activity and negatively impacting the service and manufacturing industries in Latin America, we expect that financial markets will be volatile. There is still the question of whether this unfolding crisis will have a lasting structural impact on the economy or a largely short term financial and economic consequences.
Written by: Tulika Gurnani