After several years of slow growth, the Latin American and the Caribbean economy is facing a new setback as the COVID-19 pandemic slams the global economy.
Social turmoil affected growth in parts of the region in 2019. This year, the entire region is suffering from low oil prices and the impact of the deadly novel coronavirus. Although most countries in the region have enforced measures to avoid contagion, the outbreaks have recently spread rapidly, and the economic impacts of nationwide business closures and mobility restrictions have been sudden and severe.
Added to this are external shocks, which vary in impact from country to country. Demand from China and developed countries, curtailed by the pandemic, will fall dramatically, affecting commodities exporters in South America as well as exporters of manufactured goods and services in Central America and the Caribbean. Flight restrictions are already hitting the Caribbean’s tourism sector, a main source of income for many small island states.
The multiple domestic and external shocks deriving from the pandemic will cause regional economic activity to contract by 7.2% in 2020. This will be a far deeper recession than the ones that occurred during the global financial crisis in 2008-2009 and the 1980s Latin America debt crisis. The outlook assumes economic activity will fall to its lowest ebb in the second quarter of the year, when mitigation measures are at their highest levels. Under this scenario, a normalization of domestic and global conditions would enable regional growth to recover to 2.8% in 2021.
There are other challenges. The region’s countries do not have the fiscal space of developed countries. Indeed, some were facing financial crises before the COVID-19 outbreak. What’s more, high levels of informality make it hard to provide relief through tax deferrals and wage subsidies to many firms and households. This informality combined with the low levels of funds makes designing an adequate policy response all that much more crucial.
The hardship from the crisis will be enormous for large segments of the population. Many households live hand to mouth. They do not have the resources to cope with the economic lockdowns and quarantines needed to contain the spread of the virus. Many workers are self-employed, and a raft of wage earners are paid under the table. Reaching these workers through financial transfers is more challenging than in formalized economies. Many households also depend on remittances, which are collapsing as shutdowns in host countries affect the incomes of migrants.
Given the unprecedented nature of the COVID-19 pandemic, forecasts of economic performance in 2020 could change, dramatically even. This poses a challenge. The types of policy responses needed to rekindle economic activity are vastly different in a sharp, temporary downturn than in a major, long-lasting recession. Assessing the situation correctly is crucial for countries to operate under common assumptions about the breadth and depth of the crisis, make policy decisions, and build consensus for them from the public and key stakeholders. Unfortunately, the severity of the global decline in output remains highly uncertain, and as such the impact on the region’s economies.
The World Bank Group is taking broad, fast action to help developing countries strengthen their pandemic response such as by increasing disease surveillance, improving public health interventions, and supporting the private sector to sustain operations and jobs. It is deploying up to $160 billion in financial support over the next 15 months to help countries protect poor and vulnerable people, support businesses, and bolster economic recovery.
Latin America has an additional challenge: the worst immigration crisis in its history. Almost 5 million Venezuelans have left their homeland, fleeing an economic and social crisis now extending for more than five years.
Latin America and the Caribbean are also exposed and vulnerable to natural disasters, from earthquakes to floods that can ravage entire regions, and hurricanes that devastate Caribbean states. The region is among the most vulnerable in the world because of the high population density in the areas where these disasters strike and the need for better risk management practices. Fortunately, we are getting better at understanding and managing these risks. Examples supported by the World Bank include the Pacific Alliance catastrophe bonds for earthquakes. Risk sharing across countries through mechanisms such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF) can also provide readily available funds for recovery after a member country is hit by a hurricane.
Last Updated: Jun 26, 2020