The Economist USA 03.28.2020

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