A historic recession in Latin America will likely drag on before Brazil, the region’s No. 1 economy, starts fixing a dire budget shortfall that tops the list of threats along with the persistent coronavirus pandemic, a NYK Daily poll showed.
Expectations of a moderate recovery next year reflect high caution about a potential return to fiscal discipline, a prerequisite for any improvement in business confidence, as the health crisis deepens long-standing economic problems.
The number of deaths from the coronavirus in Latin America has exceeded the figure for North America for the first time since the start of the pandemic, our count showed this week.
Brazil’s gross domestic product is forecast to shrink 6.4% in 2020, almost the same as the last survey taken in May, according to the median estimate of 45 economists polled July 6-13. But views for Mexico and Argentina were revised sharply downward, obscuring the regional outlook.
“Should the pandemic take longer to be effectively controlled, the risk is that expenditures will continue to rise,” said Roberto Secemski, Brazil economist at Barclays, in New York.
Promising the drift from austerity will be temporary, President Jair Bolsonaro’s government now sees a record primary deficit of 11.5% of GDP this year. The sheer size of the imbalance is giving analysts pause.
“Although political tensions subsided in recent weeks, we are not convinced that the conditions to move forward with bold reforms to address mandatory spending are in place yet,” said Secemski.
Prospects for Mexico have worsened significantly, with economic activity now expected to slump 9.0% compared with an estimated GDP loss of 5.1% in April. Latin America’s No. 2 economy is besieged on many fronts, domestic and external.
To avoid further mistrust from investors already upset by some of his decisions, President Andrés Manuel López Obrador is resisting the kind of big fiscal stimulus that would send the budget down the same road as Brazil’s.
The effort may not be enough. In a report, Oxford Economics analysts forecast Mexico’s primary fiscal deficit would reach 0.8% of GDP in 2020, double the official projection, following a surprisingly steep revenue drop in May.
Moreover, the country’s exposure to the world economy could bring additional challenges for the economy and policymakers. “Depressed global trade (conditions) and a battered auto sector could limit Mexico’s recovery in the second half,” the report, published on Friday, added.
Argentina is an example of what its neighbors are fretting about. The mix of the pandemic’s impact with heavy state intervention has already resulted in a massive currency depreciation, unruly consumer prices and increasing poverty.
The government so far has been unable to reach a much hoped-for deal with debtors, mainly foreign funds, that would help stabilize an economy going through its third year of recession amid inflation rates of 40%-50%.
“A successful debt restructuring could reduce one source of uncertainty among economic agents and should allow authorities to focus on other pressing matters, including the designing of a macro plan,” Morgan Stanley analysts wrote earlier this month.
Argentina’s GDP is seen falling 10% this year, the worst contraction in the region, which nevertheless is an optimistic outlook for the country, assuming a smooth reopening and progress in talks with bondholders over the coming months.
Peru’s activity is expected to suffer a similar drop of 9% in 2020. However, it is due to pick up much faster next year and make up for most of the loss, getting back on its recent track as one of Latin America’s top-performing economies.
Chile and Colombia should also recover almost fully in 2021, provided they are capable of rekindling growth in a socially inclusive way, the lack of which in Chile led last year to disrupting protests beyond economists’ risk considerations.