Last year 2.7 million businesses disappeared in Latin America, 44 million people – a number similar to Argentina’s population – were unemployed, and extreme poverty reached levels similar to 1990.
According to estimates by the Economic Commission for Latin America and the Caribbean (ECLAC), the region’s GDP per capita has fallen back to levels similar to 2010. There is no doubt that the Covid-19 pandemic has caused a deep crisis in the Latin American economy. And after the pandemic ends, the region risks facing another debt crisis.
This situation can however be extrapolated to the global context. Faced with the disaster resulting from the health crisis, the various economies were forced to act with determination. Several countries, mainly developed countries, have developed unprecedented fiscal and monetary programs. According to data from the International Monetary Fund (IMF), budget packages total US $ 12 trillion, while monetary initiatives reach US $ 7.5 trillion.
Although these measures aim to reduce the negative economic consequences of the health crisis, the other side of the coin is sometimes overlooked: they aggravate the debt.
Before the pandemic, the level of global debt had reached its all-time high. In 2019, it represented 320% of global GDP, in the first quarter of 2020 it had exceeded 331% and today it exceeds 360%.
In the case of Latin America, the debt trajectory had accelerated due to fiscal expansion policies, implemented mainly by progressive governments in the region, and the end of the peak in commodity prices in 2014.
According to IMF information, in South America, the government’s net deficit to GDP fell from an average of 0.77% from 2000 to 2009 to 3.8% from 2010 to 2019. In Central America and in the Caribbean, the government net deficit averaged 2.58% from 2010 to 2019. The persistence and, in some cases, widening of the budget deficit in recent years has led to an increase in debt in the region.
In South America, the average gross debt to GDP increased from 30.9% in 2011 to 72.3% in 2019. The South American countries that increased their debt the most from 2010 to 2019 are: Argentina with 47 points, Ecuador with 34 points and Brazil with 26 points. It should be noted that the countries with the highest share of debt in South America in 2019 were: Venezuela, with 232.8%, Argentina, with 90.4%, and Brazil, with 89.5% .
In contrast, in Central America and the Caribbean, the average gross debt to GDP rose from 55.8% in 2008 to 65.8% in 2019. The countries that increased their debt the most during the same period period are: Costa Rica with 34 points, Aruba with 39 points and El Salvador with 23 points; while in 2019, the most indebted countries on GDP were: Barbados, with 122.2%, Belize, with 105.1%, Jamaica, with 93.9%, and Dominica, with 85, 7%.
However, in the context of the current Covid-19 crisis, the acceleration in debt has been extraordinary. According to IMF estimates, from 2019 to 2021, average debt in Central America and the Caribbean will drop from 65 percent of the debt-to-GDP ratio to 80.8 percent. In other words, a 15 point increase in the debt-to-GDP ratio. In South America, the debt-to-GDP ratio is expected to increase by an average of 12 points over this period.
The debt spiral
Under these conditions, there is a good chance that the region will go into debt. Fiscal imbalances in Latin American economies, together with the recent increase in debt and a sharp slowdown in economic activity, will most likely lead to increased financing needs.
This scenario may raise doubts about the solvency of governments to honor their financial commitments, generating increased sovereign risk and higher borrowing costs.
Recent losses in the value of some currencies are also a potential problem. Faced with a sharp devaluation against the creditor’s currency, an economy that borrows in a currency over which it has no control cannot guarantee debtors that the money will still be available when the bonds expire. This phenomenon is known in economic jargon as original sin.
Ranking of the largest economies Position 2019 2020 1st United States United States 2nd China China 3rd Japan Japan 4th Germany Germany 5th India United Kingdom 6th United Kingdom India 7th France France 8th Italy Italy 9th Brazil Canada 10th Canada South Korea 11th Russia Russia 12th South Korea Brazil
Source: Austin Assessment
Although the economic crisis cannot be avoided by any economy, certain decisions and characteristics have helped to maximize the effects of the pandemic.
The political instability of several nations, the problems of economic management before the health crisis, the inaction of several governments, the structural problems which have not been overcome in recent decades, the evident inequality in the distribution of vaccines Covid-19, the decline in trade and falling commodity prices bode well for a disheartening future for the region.
Therefore, in addition to the loss of life, the deterioration of social conditions and the decline in production activity, Latin America will also have to face a probable debt crisis in the medium term, similar to that of the years 80 and 90.
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