Latin America and the Caribbean: Quantifying the impact of COVID-19 with a view to reactivation

Latin America and the Caribbean: Quantifying the impact of COVID-19 with a view to reactivation 21 April 2020 Alicia Bรกrcena

Executive Secretary Economic Commission for Latin America and the Caribbean (ECLAC)

Eight key messages 1. Before COVID-19, Latin America and the Caribbean was growing slowly, with limited fiscal space and increasing social conflict.

2. COVID-19 is affecting the region through domestic and external impacts: a standstill in domestic economic activity coupled with a deep recession in the world economy.

3. The repercussions will cause the most severe recession in the region since 1914 and 1930.

4. The slump in international trade will exacerbate the recession.

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Eight key messages 5. Unemployment is expected to rise sharply, increasing poverty and inequality.

6. The countries of the region have announced significant measures, which must be strengthened and require greater funding.

7. There is an urgent need for access to low-cost financial resources, based on flexible support from multilateral financial bodies, debt service relief and, possibly, debt forgiveness.

8. The region’s model of participation in international markets and options for reactivation need to be reconsidered in light of the structural changes that will occur in globalization and in the world following COVID-19.

Alicia BĂĄrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

World GDP is set to contract more sharply in 2020 than it did during the global financial crisis WORLD (SELECTED COUNTRIES AND REGIONS): GDP GROWTH, 2013–2020 (Percentages)

2013

2014

2015

2016

2017

2018

2019

2020

2.6

2.8

2.8

2.6

3.2

3.1

2.4

-2.0

United States

1.8

2.5

2.9

1.6

2.4

2.9

2.3

-3.8

Japan

2.0

0.4

1.3

0.6

2.0

0.8

0.7

-4.2

Eurozone

-0.3

1.4

2.1

1.9

2.5

1.9

1.2

-5.7

China

7.8

7.3

6.9

6.7

6.9

6.6

6.1

1.8

India

6.4

7.4

8.0

8.2

7.2

6.8

5.8

3.4

World

Source: ECLAC, on the basis of Institute of International Finance and Bloomberg.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

World trade is plummeting: WTO estimates a fall of between 13% and 32% in 2020 VOLUME OF WORLD TRADE IN GOODS: YEAR-ON-YEAR CHANGE, 2005–2020a (On the basis of a seasonally-adjusted index, in percentages) 20% 13,9% 10%

7,0%

9,0%

6,0%

4,7%

0,9%

0%

1,4% 2,3% 2,8%

1,9%

2%

4,8% 3,4%

-10%

-0,4%

-13%

-12,8% -20% -30%

-32%

Source: ECLAC on the basis of CPB Netherlands Bureau for Economic Policy Analysis, World Trade Organization. a 2020 estimates from World Trade Organization

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

-40%

COVID-19 has exposed the vulnerabilities of interdependence § The globalization model based on highly fragmented production networks had been showing signs of depletion since the financial crisis: • World trade was already slowing: 2.7% annual growth (2012–18) compared to 6% previously (1990–2008) • Growing criticism of globalization, especially in advanced countries • Trade tensions, competition over technology and decoupling of production between China and the United States • Technological advances such as 3D printing may reduce the significance of low labour costs

§ COVID-19 originated at the heart of the international production networks, and its effects cascaded through them: • The stoppages in Chinese factories left the factories of the rest of the world without inputs, forcing them to stop operating and to dismiss workers, thus amplifying the initial impact Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

More than a third of world employment is under threat WORLD AND REGIONS OF THE WORLD: PERCENTAGE OF EMPLOYMENT IN AT-RISK SECTORS (Percentages)

Source: ILOSTAT, estimates modelled according to World Trade Organization, November 2019; World Social Protection Report 2017-2019 (International Labour Organization); Women and men in the informal economy: A statistical picture. Third edition (International Labour Organization); and European Centre for Disease Prevention and Control (ECDC).

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

More than 500 million people may fall into poverty WORLD: NUMBER OF PEOPLE LIKELY TO FALL INTO POVERTY BY PERCENTAGE DECLINE IN PER CAPITA INCOME OR CONSUMPTION, BASED ON A POVERTY LINE OF US$ 3.20 A DAY (Millions of people) 600 500 400 300 200 100 0

135,3

Decline in per capita income or consumption

278,4 5%

581,4 10%

Based on a poverty line of US$ 3.20 a day, declines in per capita GDP or consumption of: • 5% would result in 135 million more people in poverty • 10%: 278 million • 20%: 581 million

20%

Source: Sumner, A., Hoy, C. & Ortiz-Juarez, E. (2020) Estimates of the impact of COVID-19 on global poverty. WIDER Working Paper 2020/43. Helsinki: World Institute for Development Economics Research (UNU-WIDER).

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Latin America and the Caribbean: inadequate fiscal space

Before the pandemic, Latin America had already seen a seven-year run of low growth LATIN AMERICA: CHANGE IN GDP, AVERAGE BY SEVEN-YEAR PERIODS, 1901–2019 (Percentages) 10 8

6,3

4,5

4,3

4,2

6

5,5

5,3

5,8

6,2

3,2

3,1

2,6

4

3,2

3,5 2014–2019 0,4%

2,2

2 0 -2

1,4

1,9 Start of the COVID-19 crisis

-6

1901 1903 1905 1907 1909 1911 1913 1915 1917 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

-4

Source: ECLAC, based on data from Maddison Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

The region is facing the COVID-19 economic crisis with macroeconomic and fiscal vulnerabilities and weaknesses High levels of public debt and interest payments

Monetary policy space much reduced following the crisis of 2008

High levels of debt in the non-financial corporate sector

Vulnerability of public sector enterprises

Insufficient tax collection, high levels of tax evasion and avoidance

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

High debt and rising interest payments limit public expenditure LATIN AMERICA AND THE CARIBBEAN (31 COUNTRIES): GROSS PUBLIC DEBT OF CENTRAL GOVERNMENTS, 2000–2019 (Percentages of GDP)

LATIN AMERICA (16 COUNTRIES): INTEREST PAYMENTS, CAPITAL EXPENDITURES AND HEALTH SPENDING OF CENTRAL GOVERNMENTS, 2010–2019 (Percentages of GDP)

Latin America: 15 percentage point rise from 2011 to 2019

Source: ECLAC.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

The financial vulnerability of public-sector enterprises limits fiscal space § The income and profitability of public enterprises in the natural resources sector (which are highly indebted) are being hit by falls in commodity prices. § 42% of non-financial public sector enterprises are systematically reporting shortfalls (net of fiscal transfers). § The transfers needed to cover the shortfalls amount to around 0.3 to 1.0 percentage points of GDP. § Recapitalizing these enterprises will require a financial effort of a similar scale. § The liabilities of non-financial public sector enterprises total around 9% of GDP. Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Monetary space has also shrunk: reference rates are at historical lows, reducing the policy space LATIN AMERICA AND THE CARIBBEAN (SELECTED COUNTRIES): MONETARY POLICY RATE IN COUNTRIES WHERE IT IS THE MAIN POLICY INSTRUMENT, JANUARY 2016 – DECEMBER 2019 (Percentages)

Source: ECLAC.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Bu these policies have yet to bring down lending rates or reinvigorate lending LATIN AMERICA AND THE CARIBBEAN: REAL PRIVATE SECTOR LENDING, YEAR-ON-YEAR CHANGES IN QUARTERLY AVERAGES, FIRST QUARTER 2016–FIRST QUARTER 2019 (Percentages)

Source: ECLAC.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

0 01.12.2001 01.05.2002 01.10.2002 01.03.2003 01.08.2003 01.01.2004 01.06.2004 01.11.2004 01.04.2005 01.09.2005 01.02.2006 01.07.2006 01.12.2006 01.05.2007 01.10.2007 01.03.2008 01.08.2008 01.01.2009 01.06.2009 01.11.2009 01.04.2010 01.09.2010 01.02.2011 01.07.2011 01.12.2011 01.05.2012 01.10.2012 01.03.2013 01.08.2013 01.01.2014 01.06.2014 01.11.2014 01.04.2015 01.09.2015 01.02.2016 01.07.2016 01.12.2016 01.05.2017 01.10.2017 01.03.2018 01.08.2018 01.01.2019 01.06.2019

High private sector indebtedness has limited the effectiveness of monetary policy

LATIN AMERICA (SELECTED COUNTRIES): LENDING TO THE PRIVATE SECTOR (HOUSEHOLDS AND NON-FINANCIAL CORPORATIONS)

BY ALL SECTORS, DECEMBER – SEPTEMBER 2019

3.000

(Billions of dollars)

2.500

2.000

1.500

1.000

500

Source: ECLAC

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Fiscal space drastically narrowed by the low tax burden and tax evasion LATIN AMERICA AND THE CARIBBEAN: CENTRAL GOVERNMENT REVENUE

BY SUBCOMPONENT, 2017–2019 (Percentages of GDP)

Tax evasion and avoidance amount to 6.3% of regional GDP, which is: • Half of central government social spending • 4 times the spending on noncontributory social protection programmes (conditional cash transfers + non-contributory pensions + labour inclusion: 1.47% of GDP) • More than the average central government expenditure on education and health

Source ECLAC, on the basis of official figures.

Note: Simple averages. Does not include Dominica. Figures for 2019 are projections based on budget documents or official estimates at end-2019.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

The impact of the crisis

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Transmission channels of the COVID-19 crisis in Latin America and the Caribbean A drop in international trade

Falling commodity prices

Less demand for tourism services

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Heightened risk aversion and worse global financial conditions

Decline in remittances

Low commodity prices are worsening the terms of trade and reducing fiscal income, particularly in South America and Mexico INDICES OF INTERNATIONAL COMMODITY PRICES, JANUARY 2003–MARCH 2020

COMMODITY PRICES, VARIATION 31 DECEMBER 2019–17 APRIL 2020

(Index: January 2011 = 100)

20%

GOLD

10% 0%

$1686

-10% -20%

COPPER

-30%

$5140

-40% -50% -60% -70% -80%

Source: ECLAC on the basis of World Bank, “World Bank Commodities Price Data (The Pink Sheet)”.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

BRENT WTI

$18.09

$28.66

Deteriorating international financial conditions reduce available external financing for the region LATIN AMERICA: NON-RESIDENT CAPITAL INFLOWS TO THE REGION (Billions of dollars)

Down US$ 80 billion between 2019 and 2020

Source: ECLAC, on the basis of Institute of International Finance (IIF).

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

The Caribbean most affected by the collapse in tourism LATIN AMERICA AND THE CARIBBEAN: SHARE OF TOURISM IN GDP AND EMPLOYMENT, 2018 (Percentages)

Source: ECLAC.

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

The sharp contraction in remittances to the region is dealing a blow to the GDP of the smallest and most vulnerable economies • The economic downturn in the United States will lead to a fall in remittance flows • The service and construction sectors are the hardest hit and employ the largest number of migrants.

• Migrants employed in hotels and restaurants have lost their jobs and are not eligible for government subsidies.

35

LATIN AMERICA AND THE CARIBBEAN: REMITTANCES RECEIVED, 2018 (Percentages of GDP)

30 25 20 15 10 5

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

CR I TT O BR A CH L

EC U LC A CO L AT G

L

BO

Z BL

A DO M

DM

Source: ECLAC on the basis of World Development Indicators database, World Bank.

HT I HN D GT M

0

Economic structure determines the severity of the impact LATIN AMERICA: SHARE OF SECTORS IN GDP BY INTENSITY OF THE IMPACT OF COVID-19 (GDP in real terms at 2019 prices)

The contracting global economy, falling trade and containment measures are affecting production with varying severity, depending on the sector and country.

Source: ECLAC on the basis of official figures.

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

GDP of Latin America and the Caribbean to shrink by more than 5% in 2020 LATIN AMERICA: PROJECTED GDP GROWTH RATES, 2020a (Percentages)

THE CARIBBEAN: PROJECTED GDP GROWTH RATES, 2020 (Percentages) 56.4%

-18

// -18.0

Source: CEPAL a Central America includes Cuba, Haiti and the Dominican Republic

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

56.4 //

GDP of Latin America and the Caribbean to shrink by more than 5% in 2020 LATIN AMERICA AND THE CARIBBEAN: PROJECTED GDP GROWTH RATES, 2020 (Percentages)

Country Argentina Bolivia (Plurinational State of) Brazil Chile Colombia Ecuador Paraguay Peru Uruguay Venezuela (Bolivarian Republic of) South America Costa Rica Cuba El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Dominican Republic Central America and Mexico Central America Latin America

GDP growth 2020 -6.5% -3.0% -5.2% -4.0% -2.6% -6.5% -1.5% -4.0% -4.0% -18.0% -5.2% -3.6% -3.7% -3.0% -1.3% -3.1% -2.8% -6.5% -5.9% -2.0% 0.0% -5.5% -2.3% -5.3%

Country

GDP growth 2020

Antigua and Barbuda

-7.2%

Bahamas

-6.8%

Barbados

-5.8%

Belize

-3.9%

Dominica

-3.6%

Grenada

-7.3%

Guyana

56.4%

Jamaica

-5.3%

Saint Kitts and Nevis

-6.5%

Saint Vincent and the Grenadines

-3.6%

Saint Lucia

-8.1%

Suriname

-4.4%

Trinidad and Tobago

-5%

The Caribbean

-2.5%

Latin America and the Caribbean

-5.3%

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Source: ECLAC Note: Central America includes Cuba, Haiti and the Dominican Republic.

Such a large contraction has not been seen since the Great Depression of 1930 (-5.0%), or even since 1914 (-4.9%) LATIN AMERICA: GDP GROWTH RATES, 1901–2020 (Percentages)

10 8 6 4 2 0 -2 -4

1930 -5.0%

1914 -4.9%

-6 -8 1901

1908

1915

1922

1929

1936

2020 -5.3% 1943

1950

1957

1964

Source: ECLAC, on the basis of Maddison Project Database 2018.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

1971

1978

1985

1992

1999

2006

2013

2020

The value of Latin American and Caribbean exports is expected to decline by roughly 15% LATIN AMERICA AND THE CARIBBEAN: EFFECTS OF COVID-19 ON GOODS EXPORTS BY SUBREGION, FORECAST FOR 2020 (Percentage change)

-10.2 -11.7 -13.9

-14.8 -17.6 Source: Economic Commission for Latin America and the Caribbean (ECLAC).

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Unemployment in the region is expected to surge by more than during the financial crisis: adding some 12 million to the unemployed LATIN AMERICA: GDP GROWTH AND CHANGE IN UNEMPLOYMENT (Percentage points)

LATIN AMERICA: ECONOMICALLY ACTIVE POPULATION, UNEMPLOYED PEOPLE AND UNEMPLOYMENT RATE (Number of people)

2019

2020

Economically active population

322,421,908

326,849,019

Number of unemployed people

26,148,377

37,719,817

Change in number of unemployed Unemployment rate (%)

11,571,440 8.1

11.5

Increase of 3.4 percentage points in the unemployment rate Source: Economic Commission for Latin America and the Caribbean (ECLAC).

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

The GDP decline and higher unemployment will increase the number of poor by almost 30 million LATIN AMERICA: POVERTY AND EXTREME POVERTY IN THE SCENARIO OF A 5.3% DECLINE IN GDP AND A 3.7 PERCENTAGE POINT INCREASE IN UNEMPLOYMENT IN 2020 (Millions of people)

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

(Percentage of the population)

Policy measures and options

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

The region’s countries have taken immediate measures to contain the virus and protect the workforce and household income • Travel restrictions and monitoring measures for travellers from areas affected by COVID-19.

• Flight bans (to and from specific countries) and border closures.

•

Total or partial quarantine with working arrangements: legal measures for teleworking, reduced working hours, introduction of flexible hours, advance leave.

•

Protection of the workforce and income: wage support to offset loss of income through advance payments, wage subsidies, unemployment insurance and the suspension or reduction of payments for water, gas and electricity services.

•

Social protection to reduce the social impact on people with the lowest incomes through subsidies, cash transfers or advance payments through social programmes.

SMEs and other companies: special financial support for SMEs and the informal sector, in order for banks to renegotiate and improve conditions for loans to SMEs and the informal sector.

• Distance learning and homeschooling with asymmetries in connectivity.

• Social distancing, with the closure of restaurants, bars, cinemas, the encouragement of teleworking and reduced office hours.

• Strengthening of the capacity of the health sector: beds, mobile hospitals, medical supplies (2.5 beds / 1000 people).

•

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Monetary and fiscal measures to avoid the collapse of the economic system • Monetary and financial sector: assistance to financial institutions to avoid mismatches and liquidity squeezes; reductions in legal reserve requirements to encourage intermediation; restructuring of loan portfolios and deferral of payments; increase in interventions in the foreign exchange market to ease volatility.

• Fiscal: flexibility to redirect public budgets, delays or deferrals of taxes and search for additional financing to channel resources towards urgent short-term measures.

• Fiscal packages have been announced in the region, ranging from 0.6% of GDP to more than 10% of GDP. Additional efforts are being made, including State guarantees of loans.

• Preservation of productive capacity and creation of conditions for the revival of economic activity through liquidity mechanisms for companies, particularly SMEs.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Policymakers must broaden their toolkits and increase coordination • Between governments and central banks to finance stimulus packages through the purchase of public securities or the use of external assets to finance emergency spending increases.

• Between central banks and institutions responsible for bank supervision and regulation to ensure that the resources injected in these situations are channelled towards households and productive sectors in order to preserve income and employment.

• Adapt macroprudential instruments to ease exchange-rate volatility and excessive currency depreciation and to avoid destabilizing capital movements.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

All countries must increase their fiscal space and need more favourable financing conditions § Access to new financing sources and mechanisms. § Low-cost, flexible credit lines. § Forgiveness, restructuring and/or relief of debt and the related interest, including that of middle-income countries. § The leaders of the G20 countries must allow multilateral organizations to grant loans at favourable interest rates and provide debt relief for heavily indebted countries, postponing payment deadlines or forgiving the debt. § Otherwise, payments will be impossible and fiscal space will be compromised. § Exceptional measures to face an unprecedented crisis. There will be no progress without international cooperation and solidarity.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Implement measures to increase access to foreign exchange ยง The establishment of swaps between the United States Federal Reserve and the central banks of Brazil and Mexico is a positive step, but the rest of the region does not benefit from this type of support. ยง As was the case in 2008, Special Drawing Rights (SDR) must be approved on a large scale to provide liquidity and increase reserves. ยง Implement solid macroprudential policies, including regulations relating to international capital flows. ยง Countercyclical fiscal and monetary policies can only be implemented in developing economies if international financial institutions provide liquidity and prevent this liquidity from returning to the advanced economies.

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

Warning: the global economy will not return to ‘normal’

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

The production crisis will bring about changes that will outlast the pandemic 1. Need for greater resilience of production networks: ยง Diversification of suppliers for countries and businesses. ยง Nearshoring of end-consumer markets. ยง Reshoring of production processes and strategic technological processes.

2. Companies have adapted their internal functioning to social distancing measures, accelerating the automation and digitization of some sectors and industries.

3. Multilateralism is weakening (unilateral restrictions on exports of medical supplies in more than 60 countries).

4. Globalization will not be reversed, but the global economy will become more regionalized around three poles: Europe, North America and East Asia.

Alicia Bรกrcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation

More regional integration is required for the post-COVID-19 world § The region’s future should be shaped based on the new economic geography to reduce dependence on imported manufactures and develop regional value chains. § There is a need for industrial policies that allow the region to strengthen production capabilities and create new strategic sectors. § In order to have an impact on the new global economy, the region must advance towards greater integration in production, trade and technology. § An integrated market of 650 million people will serve as a buffer against shocks originating outside the region. § This market would provide the scale required to make new industries viable and promote production networks and joint technological research among countries and subregions. § Public certainty must be established on the basis of a new universal social protection system including basic income. § Inclusive and sustainable international governance based on the 2030 Agenda.

Alicia Bárcena Latin America and the Caribbean: Quantifying the effects of COVID-19 with a view to reactivation