Inter-American Development Bank President Luis Alberto Moreno has declared that Latin America will come away from the COVID-19 health crisis with even higher poverty rates as the campaign to keep the virus in check has led to massive unemployment and debt.
Latin America has seen its economic growth slow down to a crawl in the past few years. Moreno said that they are expecting to see an economic contraction of 8-10% in 2020 because of the coronavirus and the quarantine measures that were put in place.
The pandemic “will impoverish not only Latin Americans, (but also) the world in general, but clearly, Latin America is going to be hit much harder because we are an emerging market region,” Moreno said.
IADB, which is Latin America’s largest regional lender, will green light almost $20 billion in loans this year. Around $15 billion of those is headed to governments to bolster their healthcare systems, Moreno explained.
Latin America has become the most impacted region by the pandemic in the entire world, with 26.83% of worldwide cases. The region has 4,327,160 total cases of the novel coronavirus compared to 4,308,495 infections in the United States and Canada, the first time it has gone over the combined infections in North American nations.
Brazil, Mexico, Peru, and Chile are among the top 10 nations in COVID-19 cases, and all these countries have over 300,000 coronavirus cases. Venezuela, with its relatively small caseload in the region, is suffering the sharpest contraction, explained Moreno, saying that the IADB cannot provide any funding to the government of President Nicolas Maduro any longer.
Venezuela has been in recession for six years, and annualized inflation exceeds 3,500% according to the opposition-run National Assembly.
Mexico’s economy remains weak, “so further easing is expected despite the uptick in inflation to 3.59 percent year over year in mid-July,” said Win Thin, Global Head of Currency Strategy with Brown Brothers Harriman, in a note to clients last July 26.
The next policy meeting is slated for August 13 and another 50 basis point cut to 4.5 percent is expected. “The relatively firm peso should give the bank confidence to maintain its pace of easing,” Thin added.
Brazil will report its June current account and FDI data next week. The current account gap has been narrowing “due to the sharp economic slowdown, with FDI easily covering the deficit,” according to Thin, however, the fiscal deficit is more troubling as the 12-month nominal consolidated deficit increased to -8.8 percent of GDP in May.
June central government budget data will be reported soon, followed by consolidated budget data. The next COPOM meeting has been scheduled for August 5 and the CDI market is pricing in good odds of another 25 bp cut to 2.0 percent.
Chile is set to report June retail sales and IP also very soon. Chile has maintained its rates for three straight meetings after the last 50 bp cut to 0.5 percent in March.
“At the last meeting, the bank said it would keep rates at the technical lower bound for the forecast period and will continue with its current asset purchase program,” Thin exclaimed. “The proposal to allow citizens to withdraw funds from their pension savings could lead to some volatility in local asset markets, though the peso has the potential to strengthen as off-shore investments are sold and repatriated.”