In Latin America, COVID-19-ravaged economies demand debt relief
As the coronavirus pandemic wreaks havoc in Latin America, with more than 3.5 million cases and nearly 150,000 dead, the region is increasingly facing a financial and humanitarian emergency. All over Latin America and the Caribbean, GDP is expected to contract 9.3% in 2020, according to the International Monetary Fund – the region’s biggest economic contraction on record, and far worse than the outlook for the African and Asian economies. The United Nations expects the value of South American exports to fall by almost a fifth this year due to falling international demand and falling commodity prices. Foreign investments have also declined massivelyand United Nations agencies predict 16 million more Latin Americans will fall into extreme poverty in 2020, bringing the total to more than 70 million people in the region.
Falling tax revenues, currency depreciation, emergency funding costs for hard-hit hospitals, and the need to fund income support and economic relief measures all drive up budget deficits and debt. Public debt in Latin America is skyrocketing, and can exceed 100% of GDP this year in some countries, such as Brazil.
Meanwhile, the existing economic and fiscal woes of countries like Ecuador, Venezuela and Argentina, which entered its ninth default since 1816 in May, will only worsen, raising fears in a few quarters of a mass debt crisis similar to “lost decade“From the 1980s.” With debt means fewer possibilities to increase spending in the future, “says Claudia Sanhueza, an economist at the Universidad Mayor in Chile. As such, she adds, this “poses problems of financing poverty reduction programs”.
In response, a group of seven former left-wing leaders – including Dilma Rousseff from Brazil, Evo Morales from Bolivia, Rafael Correa from Ecuador, Ernesto Samper from Colombia and Jose Luis Rodriguez Zapatero from Spain – signed a petition. demanding massive debt cancellation and relief from Latin America. The signatories call on the IMF and other multilateral organizations like the World Bank to cancel the external debt of Latin American countries and for foreign bondholders to agree to immediate private debt restructuring with a two-year suspension for the payment of interest. The petition argues that such actions are “both right and necessary” given the extraordinary challenge posed to the region by the pandemic, citing historical examples of debt cancellation.
Less radical but still important proposals are already advancing in certain quarters. Alicia Barcena, Secretary General of the United Nations Economic Commission for Latin America and the Caribbean, argued in June that creditors in Caribbean countries, whose tourism-dependent economies have been hit by an industry-wide shutdown amid the pandemic, is expected to cut interest rates and grant a moratorium on interest payments until at least the end of the year.
The indebted countries are also in desperate need of new sources of finance. The President of Costa Rica, Carlos Alvarado, starts a COVID-19 Economy Fund, which hopes to convince rich countries to offer “financial vaccines” to the poorest countries through 50-year interest-free loans. IMF stepped in to supply 17 Latin American and Caribbean countries, including Honduras, Jamaica, the Dominican Republic and Ecuador, with a total of $ 5.2 billion in emergency funding since March. Former Colombian Minister of Finance Mauricio Cardenas has called on the IMF to issue new bonds help Latin American countries more, but these measures will remain a drop in the ocean compared to the region’s total external debt of over $ 2 trillion.
Cancellation of wholesale debt, however, remains unlikely and even undesirable for most Latin American economies, analysts suggest. “Most countries will try to pull themselves out of this and hope that public finances will improve with the economic recovery in 2021,” said Robert Wood, senior economist for Latin America at The Economist Intelligence Unit. He points out that the “stigma” of debt restructuring or defaulting would affect these countries’ risk ratings in the eyes of international credit agencies, limiting their ability to raise funds in bond markets in the future to help fund. finance the recovery.
Falling tax revenues, currency depreciation, emergency funding of hard-hit hospitals and the need to fund economic relief measures are driving up deficits in Latin America.
Some economies in the region have ample sources of low-cost funding to support their emergency spending. Brazil, which spent more than $ 220 billion in measures to combat the coronavirus and its economic fallout, was able to fall back on deep domestic capital markets to borrow, thanks to policies favorable to savings, including a stable monetary regime, put in place in the 1990s. And small countries with strong economic bases have been able to tap international sovereign debt markets to help finance their pandemic-related spending. Since March, bond issues have raised $ 1.2 billion in Guatemala, $ 2.5 billion in Panama, $ 1 billion in Paraguay and $ 2 billion in Uruguay, all at relatively low yields.
“Countries like Uruguay and Chile have a fairly good debt management because creditors know that these are governments that could keep their promises,” said Nicolas Saldias, senior researcher in the Latin American program of the Wilson Center. It’s a different story for economies like Venezuela, Argentina and Ecuador, which were already facing severe economic crises before the pandemic broke, and for which debt cancellation could still hurt their ability to find enough funding to survive in the future. “That’s not to say that there isn’t room to find ways to ease the debt repayment schedule, but it depends a lot on your country’s credibility,” says Saldias.
In Argentina, COVID-19 has complicated the government’s ability to manage the $ 65 billion it owes to external bondholders, but the pandemic has also made some of them more sensitive to its plight. President Alberto Fernandez is closing in on a deal with Argentina’s creditors, likely granting a financial reprieve for South America’s second-largest economy this year and next. But unlike the likely V-shaped recoveries in Chile, Uruguay and Brazil, Argentina’s recovery “will take at least a decade,” warns Saldias. “With the economic policies of this government, it could take even longer.
Ecuador, with a total debt of $ 58.4 billion – more than half of its GDP –and an economy that is expected to contract up to 9.6% this year, reached a provisional agreement with some of its bondholders beginning of July. But he is still seeking more funding from China and the IMF to deal with the impact of the pandemic. Even before COVID-19 hit Ecuador, resulting in more than 4,000 deaths and 53,000 confirmed cases, a drop in global oil prices was hitting its commodity-driven economy.
Venezuela faces a similar dynamic. It has been in recession for more than six years, and its oil exports fell to 77 in June. 12-month inflation reached 3600% in May, and pervasive corruption and mismanagement means few lenders or institutions are likely to extend credit to the authoritarian administration of President Nicolas Maduro. At the beginning of July, the UK High Court blocked Maduro’s attempts to gain access to $ 1 billion in gold stored at the Bank of England, highlighting the UK government’s recognition of opposition leader Juan Guaido as the legitimate interim president of Venezuela.
China, struggling with its own economic slowdown, is unlikely to come to the rescue of Latin American countries in difficulty in the same way it did after the 2008 financial crisis. Given the dire humanitarian situation in Venezuela, human rights organizations like the Washington Office on Latin America have suggested that the United States and other countries should help prevent a humanitarian disaster by the lifting of economic and financial sanctions against the country, but with conditions.
Strains linked to the coronavirus are also being felt in Mexico. Administration of President Andres Manuel Lopez Obrador cuts government spending as part of a policy of “republican austerity” to supposedly fund health care, whereas so far avoid a $ 61 billion credit line made available by the IMF at the end of last year.
Ultimately, most Latin American countries are likely to survive the crisis by combining more debt and tax increases, provided that governments can give lenders the assurance that they spend and tax efficiently. But, as Wood warns, this cautiously optimistic outlook hinges on a moderate global recovery next year. For Sanhueza, the Chilean economist, the crisis offers countries the opportunity to “rethink their social policies”, in particular by using higher tax revenues to build better prepared health systems. “I hope that the wealthiest people and the wealth the continent has will be used for these purposes,” she said.
Laurence Blair is a freelance journalist who has reported throughout Latin America, particularly Bolivia, Chile and Paraguay.