OUTLOOK '21: LatAm eyes muted recovery from pandemic

Author: Al Greenwood

2020/12/30

HOUSTON (ICIS)--Latin America will likely have a muted recovery in 2021 following the recession caused by the coronavirus.

The GDP of Latin America and the Caribbean should grow by 3.6% in 2021, after contracting by 8.1% in 2020, according to the International Monetary Fund (IMF).

For comparison, Asia will grow by 6.9% in 2021, Europe by 4.7% and North America by 3.3%.

Among the largest countries in Latin America, Brazil's recovery will likely slow down because it cannot continue to fund the large stimulus packages that contributed so much to its economic rebound in 2020.

Brazil's GDP rose by 7.7% in the third quarter from the second.

For 2020, economists surveyed by the nation's central bank expect GDP to contract by 5.00%. In 2021, it should rise by the same amount.

If the forecast holds out, then the size of the Brazilian economy will be smaller than its pre-pandemic level.

Policy makers will have few tools to stimulate the economy. The nation's benchmark Selic interest rate cannot fall further without causing other problems to the economy.

Brazil's currency, the real, has weakened against the dollar, trading at more than reais (R) 5. At the start of 2020, it was close to R4 to the dollar.

The central bank has an inflation target of 2.50-5.50%. In November, actual inflation reached 4.31%, exceeding the mid-point of the central bank's target.

Fiscal stimulus is limited because of Brazil's growing deficit.

Brazil will likely lack the money to fund another ambitious stimulus.

MEXICO
Mexico's economy will likely shrink faster than Brazil's in 2020 and recover slower in 2021.

Economists surveyed by that country's central bank expect GDP to contract by 9% in 2020 before expanding by 3.34% in 2021.

Mexico's outlook is so poor because the government avoided large stimulus programmes. This kept spending under control but at the cost of speeding up the economic recovery.

Other factors slowing down growth date back before the pandemic.

Governance remains relatively weak. Policy interventions have damaged the country's investment climate.

Such arbitrary policy making has trickled down to the chemical industry.

Recently, Mexico has cut off supplies of natural gas to Braskem Idesa's Ethylene XXI complex, which is the country's main producer of polyethylene (PE). As a result of the shutdown, Braskem Idesa shut down operations and declared force majeure.

The cut-off is part of a larger dispute over the ethane supply contract to the complex. Mexico's president says it is too costly. Braskem Idesa says it was negotiated and signed in accordance to the law.

ARGENTINA
Argentina was already in a recession before the pandemic, with GDP shrinking for much of the past two years. The country's earlier recession was caused by a slowdown in demand combined with too much debt.

Argentina had to get a bailout from the International Monetary Fund (IMF). It later defaulted on its debt with private creditors before negotiating new terms.

Any boost the economy received from the successful talks with the creditors was wiped away by measures put in place by the government to get the coronavirus under control.

The government adopted an especially aggressive quarantine. The strict lockdowns deepened the recession.

The IMF expects Argentina's economy to contract by 11.8% in 2020 before expanding by 4.9% in 2021.

Because Argentina's finances were already in a precarious state, the coronavirus has proven to be especially damaging to the country's budget.

Argentina had few options other than to rely on the central bank to fund the government. The resulting expansion in the monetary supply kept inflation in double digits.

Given the challenges to the economy, the country's currency has weakened against the dollar. The official exchange rate is above peso (Ps) 80. In the country's informal exchange houses, the rate is much worse, standing at Ps150.

Because the gap is so large between the two exchange rates, the country will likely have to devalue the currency.

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Thumbnail image shows South America. Photo by Shutterstock