The Economist USA - 28.03.2020

(Wang) #1

32 The Americas The EconomistMarch 28th 2020


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Bello The Latin American patient


I


n brazil, copacabanabeach is desert-
ed and football stadiums are being
turned into field hospitals. Colombia has
shut its border with Venezuela. Seabirds
have taken possession of Peruvian
beaches and a puma was spotted ambling
through the suburbs of Santiago, Chile’s
capital. Covid-19 has now arrived in
strength in Latin America. With it have
come lockdowns in many countries,
though some leaders remain in denial,
storing up trouble. Everywhere, it is
threatening and testing both public
health and livelihoods.
The virus has struck a patient that in
economic terms has a serious pre-exist-
ing condition. Since 2014 the region’s
economy has grown at an annual average
rate of less than 1% a year and income per
person has dropped. Now it faces a con-
traction even more severe than that
induced by the financial crisis in 2009,
when Latin America’s gdpfell by 1.7%.
Back then, thanks to prudent economic
management, many countries were able
to soften the blow by relaxing monetary
and fiscal policy. Now they have less
scope to do so. Many central banks had
already cut interest rates last year be-
cause of economic weakness. On aver-
age, public debt was 57% of gdpin 2019,
compared with below 40% in 2008,
according to the Inter-American Devel-
opment Bank (idb).
As in 2009, Latin American countries
face less demand for their exports and
lower prices for them. Unlike then, they
will also be hit by quarantines and the
concomitant temporary shutdown of
many service businesses. Mexico, Cen-
tral America and the Caribbean, with
close ties to the economy of the United
States, will be especially badly hit. Tour-
ism, which directly accounts for 15.5% of
gdpand 14% of total employment in the

Caribbean islands, has stopped dead.
Some South American economies have
been badly hit by the contraction in China,
their biggest export market.
Nobody knows how long quarantines
will last, so forecasts involve more guess-
work than usual. Early this year Ben Ram-
sey of J.P. Morgan Chase, a bank, had reck-
oned on growth of 1.2% in Latin America.
Now he thinks the region will contract by
2.2%, assuming a recovery in the second
half of the year. Santiago Levy, a former
chief economist of the idb, reckons that
the region will be lucky if the contraction
is no worse than 4% or 5%. The unEco-
nomic Commission for Latin America and
the Caribbean, which predicts a fall of
1.8%, thinks the number of poor people
will rise from 185m to 220m (in a total
population of 650m).
Policymakers are scrambling to react.
“They are using their tool-kits and throw-
ing caution to the winds,” says Mr Ramsey.
Central banks in Chile, Brazil, Mexico and
Peru have made emergency cuts in interest
rates. Several are readying credit lines for
firms (Brazil’s central bank has announced

that it will inject $230bn into the fi-
nancial system, about 11% of gdp) and
help for health services and workers.
But here they face a difficulty: most
Latin Americans work in small business-
es and are in the informal (unregistered)
economy. Emergency payments can
reach formal workers and, through con-
ditional cash-transfer programmes, the
poorest. That leaves out a large segment
of the lower-middle and working classes.
Peru’s government has ordered a
payment of 380 soles ($108) per family,
but is finding it hard to distribute. Gov-
ernments might consider resorting to
mototaxi (tuk-tuk) money, in which,
with suitable security and social dis-
tancing, they courier cash to households.
How will they pay for all this? Some
may face a “sudden stop” in private
capital inflows, similar to that suffered
by Argentina in 2001 and 2018. Ecuador,
an oil exporter which was all but bank-
rupted by Rafael Correa, its populist
president from 2007 to 2017, looks close
to default. Other countries have seen
investors demand higher premiums to
hold their bonds. Currencies have suf-
fered, too. Since February, against the
dollar the Mexican peso has depreciated
by a quarter and the Brazilian real by 16%.
Countries that can still tap financial
markets should make it clear that their
spending measures are temporary and
that they don’t imply losing control over
public finances, urges Mr Levy. Others
may turn to the imf, which is preparing
emergency finance. Some governments
may print money, something that has
been rightly frowned upon by serious
policymakers in Latin America since the
1980s, when it was associated with
hyperinflation. But today deflation looks
a bigger risk than inflation. Desperate
times call for desperate measures.

Governments scramble to mitigate the covid-19 shock to already weak economies

cases of covid-19. The neighbouring state of
Baja California had 16. That is surely an un-
der-count. By that date Mexico had tested
about 4,500 people, compared with
422,000 in the United States.
Mexico’s populist president, Andrés
Manuel López Obrador, is doing little to
prepare Mexicans for what is coming. He
continued to travel and hug supporters and
encouraged families to visit restaurants, as
“this strengthens the economy”. Other offi-
cials are taking the virus more seriously.
On March 22nd the mayor of Mexico City
shut bars and banned large gatherings.

Two days later the federal health ministry
ramped up testing and advocacy of social
distancing. That would have happened ear-
lier if the government had collected better
evidence by testing more, say experts. The
financial markets are predicting massive
economic harm, from an American reces-
sion, low oil prices and a domestic out-
break of covid-19. The Mexican peso has
dropped to its lowest-ever level against the
dollar (see Bello).
Openness on the border was tested be-
fore Mr Trump and covid-19 came along.
After the terrorist attacks of September 11th

2001, the United States enacted stringent
inspections. The delays they caused threat-
ened such economic damage that they
“would [have] deliver[ed] to al-Qaeda the
victory that it sought” had they been kept,
says Alan Bersin, a former boss of United
States Customs and Border Protection. The
two countries fixed that by waving through
“low-risk” workers with registered finger-
prints, which freed border agents to watch
for terrorists. That will not avert panic dur-
ing a pandemic. If the disease becomes
rampant in Mexico, Mr Trump could slam
shut today’s semi-open border. 7
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