According to Crédito y Caución's analysis, Latin America is the emerging region most affected by the pandemic, both in health and economic terms. The region, which accounts for 10% of the world's population, accounts for a third of the deaths from the pandemic. The informal economy and the high density of urban areas contributed to the spread of the disease, making it difficult to implement containment measures. In addition to the strong impact of the pandemic, the global decline in demand for goods and services, lower commodity prices or limited access to financing have had a devastating impact.
The outlook for Crédito y Caución in the region is highly uncertain and is hampered by growing fears of a new wave of infections. Deployment of the vaccine will be slow, so its effects on the economy will manifest themselves first and foremost through an improved external environment. The credit insurer expects a partial and uneven economic recovery in the region, which will be stronger in countries that have ample fiscal space to support their economies, such as Chile and Peru, as well as in those with greater institutional capacity for effective vaccine deployment. Recovery will be delayed, especially in countries dependent on tourism.
The estimated 7.7% contraction by 2020 is well above other emerging regions. The 2021 recovery will also be below average. This severe contraction reflects three characteristics of the region's labour market: informality, which reaches 50 per cent of the non-agricultural labour force; jobs in contact-intensive sectors such as hotels and restaurants and entertainment, which account for more than 40 per cent of the total; and the inability to telework in more than 80 per cent of jobs.
In the region's largest markets, Brazil and Mexico, there has been a divergent impact of the crisis. Both countries have a diversified economy, with modest oil exports, and adopted less stringent measures to contain the spread of the disease. However, Mexico's contraction will be close to 9 per cent, compared to 4.8 per cent for Brazil. This is partly because Mexico is a much more open economy, sensitive to external shocks. In addition, fiscal support in Brazil has reached 12 per cent of GDP, while that of Mexico has been only one per cent of GDP. Mexico has given priority to controlling the public deficit, even though its public debt closed 2019 at 47 percent compared to 76 percent in Brazil. Mexico's monetary policy has also been more cautious, with rates at 4.25% as opposed to 2% in Brazil. As a result, Mexico's economy is not expected to return to its pre-crisis level before 2024, a year after Brazil. Brazil's highly expansive fiscal policy has cushioned the economic consequences of the pandemic, but it has a cost: public debt will soar to nearly 100% of GDP.
Argentina and Peru, which have imposed some of the strictest restraints in the world, will experience double-digit economic contraction. Nevertheless, Peru maintains a sound framework of orthodox policies that give it access to international capital markets and anticipate a strong economic recovery. The region's other two major economies, Chile and Colombia, have put in place solid fiscal support packages of around 10% of GDP, aimed at boosting public and private investment. However, while Chile benefits from the recovery in copper prices, Colombia continues to be negatively affected by the incomplete recovery in oil prices.
The collapse of global tourism has dealt a blow to the small island economies of the Caribbean, which are experiencing the sharpest economic downturns in the region. In the case of Aruba, the country most dependent on tourism in the world, the figure is 37 percent. One of the exceptions is Jamaica, where increased remittances and the recovery of the mining industry cushioned the impact of the tourism shock.
The flow of foreign exchange sent by nationals abroad, which amounts to almost $100 billion for the region, has so far been surprisingly resilient. To a large extent, remittances come from the United States, where migrants often work in essential sectors. In addition, migrants have relied on their savings and have been able to access support offered by their host countries. However, the World Bank expects an 8 per cent fall in these flows by 2021 due to the extinction of savings, the gradual dismantling of support, and the evolution of the economies in host countries.
Commodity prices have already returned to pre-pandemic levels. This is particularly good news for the region, which is home to the world's largest producers of copper (Chile and Peru), soya (Brazil and Argentina), iron ore (Brazil as the second largest) and bananas (Ecuador). However, future commodity price developments are expected to be less favourable. Meanwhile, oil prices remain below pre-pandemic levels, weighing on dependent countries such as Bolivia, Colombia, Ecuador, Trinidad and Tobago and Venezuela.
The region has recorded large exchange rate depreciations in countries with more flexible exchange rates. This was contributed not only by the sharp fall in export earnings but also by the decline in foreign direct investment. The more financially integrated countries, such as Brazil, Chile, Colombia and Mexico, experienced an unprecedented outflow of capital after the declaration of the pandemic. In order to avoid an imminent balance of payments crisis, 21 of the 33 countries in the region have received emergency support from the IMF and other multilateral development agencies.