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COVID-19 Economic Impact: Latin America and the Caribbean Year in Review 2020

Latin America has been particularly vulnerable to the effects of COVID-19 and the pandemic has spurred the development of digital ecosystems
Atalayar_Envio remesas de dinero

AP/GREGORY BULL  -   Shop offering services to send remittances to Mexico and Central America, Friday September 11, 2020, in San Diego

After registering relatively few cases during the early stages of the coronavirus pandemic, Latin America quickly became a global COVID-19 hotspot – a status it has maintained throughout the year.

Despite accounting for 8.2% of the world’s population, the region has seen a disproportionately high percentage of cases and deaths, with Brazil and Mexico featuring among the five worst-affected countries globally.

This has given rise to significant economic headwinds. The IMF’s most recent forecast suggests that Latin America’s GDP will fall by 8.1% this year, followed by muted growth of 3.6% in 2021 – well below pre-pandemic projections.

One particular challenge in the region is that a large proportion of jobs are in contact-intensive sectors – 45% compared to an emerging world average of 30% – and only around 20% can be carried out remotely, compared to 26% globally.

With a high level of informal labour, lockdowns in the region have left a considerable dent in employment: in the second quarter of the year Brazil, Chile, Colombia, Mexico and Peru lost a combined 30m jobs.

Caribbean countries were also badly affected. Heavily dependent on tourism, the combination of lockdowns and travel bans resulted in what the IMF called an economic “cardiac arrest”.

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AP/FERNANDO LLANO - Shop advertising discounts in downtown Mexico City. Before the coronavirus pandemic, Mexico's economy was in recession, and that only deepened with the economic shutdown caused by measures to stop the spread of COVID-19

In spite of this distressing panorama, the region has seen numerous successes in terms of both resilience to the economic and social fallout of the virus, and effective and innovative approaches to its management.

Using OBG Advisory’s “4R” matrix for analysing COVID-19 responses – encompassing Resilience, Response, Recovery and Reinvention – we highlight success stories and lessons that have come out of the region this year, and look ahead to 2021.

While some aspects of Latin American economies were particularly vulnerable to the pandemic, others were better placed to withstand its worst effects.

The region’s banks, for example, generally remained resilient, thanks to ample capital and liquidity buffers, and low non-performing loan ratios. In addition, with the exception of Argentina, the region’s major economies had low inflation, enabling central banks to keep interest rates under control

Another positive was the relatively high level of cooperation between countries in the region.

An example of this was a declaration signed by 26 Latin American and Caribbean countries in the early stages of the pandemic, expressing their commitment to safeguarding the agriculture sector – which accounts for 6% of the region’s GDP and employs 14% of its workforce.

Released on April 3, this declaration included guarantees that governments would provide technical and financial assistance to small and medium-sized producers; ensure the regular functioning of wholesale markets; monitor logistics chains; promote the use of e-commerce platforms and applications; and guarantee that fiscal policies did not impede the normal functioning of regional food trade.

Partly thanks to such coordinated efforts, the region’s agricultural exports proved relatively robust – with some areas even experiencing growth. For example, during the previous agricultural season – which ran from July 2019 to June 2020 – Mexico’s avocado exports increased by 11% year-on-year (y-o-y).

Remittances also play an important role in some of the region’s economies and, despite predictions of a significant fall as a result of COVID-19, inbound remittances in some countries actually increased following the outbreak. 

In the first six months of the year remittances to Mexico totalled $19.1bn, a y-o-y increase of 10.4%, according to Banco de México, the central bank. This included a record monthly total of $4bn in March, the month the virus was first detected in the country. Positive trends were also seen in the Central American countries of Guatemala, El Salvador and Honduras.

One explanation for this is that a large proportion of migrant workers are based in the US, where documented workers were eligible to receive benefits from the US government’s federal unemployment programmes. Furthermore, as currencies like the Mexican peso lost value against the US dollar, the value of transfers was inflated.

Resilience case study: Peru

The first case of COVID-19 in Peru was confirmed on March 6. Over the course of that month the virus spread to the rest of the country. Most of the initial cases were imported from Europe, and the capital was the epicentre – a common pattern in the region.

Although Peru’s GDP growth slowed to 2.2% in 2019, it has been one of Latin America’s best-performing economies this century, posting over two decades of continuous growth. In addition, a combination of strong fiscal and monetary policy meant the country could remain fiscally prudent without cutting back on spending.

Before the onset of Covid-19 Peru planned to run a debt limit of 30% of GDP for 2020/21. This provided the government with ample space to enact fiscal and monetary stimulus packages.

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AFP/CESAR VON BANCELS - People queue up in front of a bank to collect government aid bonds, in the Amazonian city of Iquitos, in the Peruvian region of Loreto, on June 15, 2020, in the midst of the COVID-19 coronavirus pandemic

On March 29 it announced a stimulus package to offset the secondary effects of the pandemic. Equivalent to 12% of GDP, it was the largest in Latin America at the time.

This was followed by the Reactiva Perú programme in April, which provided credit guarantees to companies and was subsequently expanded in May.

Peru was not alone in launching a major stimulus, with Brazil, Argentina and Paraguay all dedicating substantial funds to fight the economic fallout of the virus. Mexico, meanwhile, was more cautious in its spending, particularly in the first half of the year.

Governments across the region also introduced targeted measures to address specific areas of concern during the crisis.

Food security

Disruption to supply chains, in combination with lockdowns, limited access to essential supplies for millions of people; those living in remote areas with inadequate infrastructure were among the worst affected.

The situation was particularly acute in Haiti, where 1.6m of the 11.4m-strong population faced severe food shortages, and along Central America’s so-called dry corridor, consisting primarily of Guatemala, Honduras and El Salvador.

To combat these shortages governments placed an increased emphasis on improving logistics connections to areas in need.

Despite being responsible for the bulk of the region’s agricultural output, rural areas were at greater risk of food insecurity, with COVID-19-related disruptions to employment exacerbating existing levels of poverty and leading to food shortages. At-risk groups, such as indigenous communities and the 3m Venezuelan migrants in Colombia, Ecuador and Peru, also faced significant threats to food supplies.

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AFP/CLAUDIO REYES - A farmer harvests avocados in an orchard in Valle Hermoso, La Ligua, province of Petorca, Valparaiso Region, Chile

In light of these concerns, in Colombia the UN’s World Food Programme assisted nearly 400,000 people every month with cash transfers or food rations during the pandemic.

In Ecuador the organisation provided monthly food vouchers to 96,000 people, while offering logistical support to the government in Peru to deliver 240,000 food kits to vulnerable households in Lima and Callao.

In Trinidad and Tobago (T&T), meanwhile, food shortages intensified calls for agricultural self-sufficiency.

Response case study: Mexico

After being slow to respond to the initial outbreak, on April 5 Mexico’s President Andrés Manuel López Obrador unveiled a plan to combat its economic effects, including higher health spending and support for vulnerable groups. This was followed on April 22 by the announcement of a $25.6bn stimulus package to fund job creation and social protection programmes, alongside spending cuts in non-essential areas.

In May 740,709 loans totalling $1.9bn were dispersed to homeowners, individuals and small and medium-sized enterprises to help reinvigorate the economy.

Most recently, in October the government unveiled a $14bn infrastructure investment plan aimed at improving the business environment. These funds will go towards some 39 projects, seven of which are already under way; the remaining 32 will kick off early next year.

Responses to the pandemic have taken many forms, with businesses across the region obliged to make often seismic shifts in their operations, production and distribution.

In particular, strict social distancing measures forced governments and businesses to adopt digital practices to ensure the ongoing delivery of essential goods and services. Looking ahead, increased digitalisation will be key to the region’s recovery.

Digitalisation

The health care industry was swift to adopt new technologies for the delivery of essential services. Mexican IT firm Seguritech developed a new mobile application that allows staff at the country's emergency services call centre to conduct video calls with people displaying COVID-19 symptoms and connect them with trained medical professionals.

In Peru, meanwhile, technology was used to ensure the uninterrupted flow of goods through airports, ports and land borders without unnecessarily exposing key workers to the virus. This digital shift is backed by Legislative Decree 1492, which aims to “adopt provisions to promote the digitisation of processes by public and private entities which form part of this logistics chain”.

The move, announced on May 10, called for coordination among all public entities active in the logistics chain, as well as all private sector actors involved in the import and export of goods.

The banking system is also undergoing rapid digitalisation. In T&T, for example, financial technology (fintech) is expanding. Prior to the pandemic, T&T was a relatively underdeveloped market in terms of fintech and mobile payments, with most legacy banks preferring to use established interfaces. However, given the country’s established reputation as a regional leader for financial services, there is significant potential for growth in this area.

“The onset of COVID-19 has caused an irreversible acceleration in the use of digital banking services by customers. Banks are actively engaged in assisting customers stay protected and migrate to online channels,” Reshard Mohammed, chief financial and administrative officer at Scotiabank T&T, told OBG in July.

The successful and sustained implementation of digital technologies will be key both to managing the virus and to ensuring that Latin America can recover from its worst effects

The most recent OBG Latin America COVID-19 CEO Survey suggests that a large majority of CEOs in the region have integrated digital practices into their operations.

Vaccine research

With cases increasing across the region from Brazil to Uruguay, no consensus exists on how quickly Latin America will be able to bring the virus under control and concentrate on reconstruction.

While national governments – primarily those of Argentina, Brazil and Mexico – have been working with international laboratories on the testing of major vaccine candidates, as well as negotiating to ensure they receive sufficient and timely doses once they are approved, various entities in the region have also been working to develop their own vaccine.

For instance, the Universidad Peruana Cayetano Heredia, Peru’s leading medical university, is collaborating with Farvet, a local biopharmaceuticals firm, to develop a vaccine against the virus. The drug is currently undergoing testing, and it is hoped it will be ready by next year.

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AFP/ JUAN MABROMATA - Laboratory plant for biosimilar monoclonal antibodies to mAbxience in Garín, Buenos Aires province, on 14 August 2020, where an experimental coronavirus vaccine for Latin America will be produced

In Mexico, meanwhile, four separate vaccines are being developed at four different universities – among them Mexico City’s Universidad Nacional Autónoma de México – with each one employing a different approach. The initiative is being coordinated by the Centre for Research and Advanced Studies of the National Polytechnic Institute. As in Peru, the emphasis is on meeting national demand.

The pandemic has shaken Latin American economies to the core. However, it has also created scope for meaningful changes in the way they operate, with many actors increasingly calling for greater sustainability in the wake of the crisis – particularly with regard to agriculture.

In parallel to this, many countries in the region stand to benefit from medium-term changes precipitated by the pandemic’s disruption of global supply chains.

Agriculture

Accelerated digitalisation is driving innovation in the agriculture sector, with governments and businesses looking to boost domestic production through new agricultural inputs and investment in agri-tech and logistics networks.

Although the pandemic has created significant challenges for the sector, it has also given rise to opportunities for innovation and the evolution of homegrown digital solutions. A key aspect of this has been the widespread expansion of e-commerce in many countries.

To take a representative example, in Costa Rica the Cooper Borbón cooperative, founded in 2015, expanded its e-commerce pilot project to fill supply chain gaps created by the pandemic.

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PHOTO/AP - Agricultural workers in Avircato, Bolivia

Similarly, the Colombian government set up an online mercado campesino (farmers’ market) – or a centralised website that connects family farmers directly with consumers.

Some stakeholders are similarly looking to leverage the pandemic to accelerate the shift towards more sustainable practices.

For example, in August Costa Rica launched its National Bioeconomy Strategy, which aims to address some of the issues highlighted by COVID-19 by making its economy greener, more resilient and more sustainable. In parallel to government efforts, broad-based grassroots movements are emerging to promote a green recovery from Covid-19, among them the Eco-Social Alliance of the South.

Existing sustainability projects are also expanding their footprint. AgroUrbana opened Latin America’s first vertical farm in a suburb of Chile’s capital Santiago in 2019. The pilot phase will conclude at the end of this year, and the company is set to launch a second farm in 2021, which will use 100% renewable energy. AgroUrbana is also developing Carmelo, a digital platform that monitors and controls growing operations.

A recent report released by the International Labour Organisation and the Inter-American Development Bank argues that a broad-based adoption of sustainably produced, plant-based foods could provide a major boost to the Latin American economy

Considering that plant-based food requires less land and water and fewer inputs than animal-based food, such a dietary shift should reduce biodiversity loss and land degradation, as well as improve food security.

While it will be hard to change mainstream consumer patterns in the region, a proliferation of sustainable alternatives could spark some immediate and wide-reaching benefits for the environment and public health, as well as help to offset some of the effects of COVID-19.

Nearshoring

One global trend that will potentially have significant ramifications for Latin America is nearshoring.

Disruption to supply chains has given rise to a shake-up in the way many multinational companies conduct business, leading to a shift away from an over-reliance on China for production. 

Some companies have adopted a China +1 strategy, which consists of setting up factory lines or identifying suppliers in other countries – while still maintaining interests in China.

A related solution is nearshoring, whereby companies shift their offshore production capacities closer to home. Thanks to its proximity to the US, Latin America has seen the benefits of this trend, with two Latin American countries in particular standing out as affordable nearshoring options: Mexico and Colombia.

Mexico has several characteristics that make it a strong nearshoring location, including a wide range of cities, a developed labour pool and proximity to the US. The signing of the US-Mexico-Canada Agreement in July further cemented this potential.

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REUTERS/HENRY ROMERO - Audi production line at the German car manufacturer's plant in San José Chiapa, Mexico

Additionally, the country has a highly diversified economy and increasing levels of specialisation. Its well-developed industrial capabilities are perhaps most evident in the automotive and aviation segments, while its strong production capabilities in pharmaceuticals and medical devices place it in a favourable position to become the primary exporter to the US of such supplies.

Colombia is also poised to benefit. “Thanks to the country's favourable time zone, there are substantial prospects for enhancing nearshoring activities over the medium term", Pedro Fernández, vice-president of innovation and sector intelligence at ProColombia, a government agency, told OBG in June.

Other countries in the region, including Caribbean nations such as T&T, are also working on enhancing their appeal to nearshoring firms. If existing hurdles can be overcome, the rise in nearshoring could prove to be a significant boost to the post-COVID-19 Latin American economy.