The novel coronavirus and the disease it causes, Covid-19, have imposed severe human and economic costs around the world. Cases are growing in Latin America and the Caribbean and if there is one lesson from other countries it is that early action to stop the spread of the virus is key. A recent analysis suggests that there would have been around 3.3 million deaths in the region if no measures to suppress the virus had been taken. But countries have imposed lockdowns, with temporary closures of non-essential businesses and stay-at-home directives to save lives.
The impact on the world economy has been dramatic; growth has tumbled, trade fallen, oil prices collapsed, and other commodity prices taken a dive. Moreover, global equity markets suffered steep falls, capital markets are disrupted, and emerging market borrowing costs have risen. Yields on Latin American and Caribbean bonds surged 150 points from the beginning of the year to April 1st, 2020.
Employing a pre-shock baseline of expected growth rates at the end of January 2020 and applying a set of shocks, a statistical model of the world economy yields potential macroeconomic outcomes considering external factors. One scenario puts the region into a recession of around the depth of that during the global financial crisis, but more pessimistic and probably more likely scenarios suggest a deeper fall. Further detail on these scenarios and the policy responses are detailed in the 2020 Latin American and Caribbean Macroeconomic Report.
Many countries in the region are implementing tough social distancing policies. The fall in external demand by itself would have created higher unemployment and greater under-utilization of capacity but the non-pharmaceutical interventions will have additional effects. The region will have negative growth this year, but this should not be thought of as a regular recession. There is virtually no relation to a standard analysis of “business cycles,” given that we are dealing with a partial and organized close-down of the economy.
It’s very difficult to make definitive projections given the dynamics of this crisis, hence the focus on a range. Countries will experience sharp drops in GDP, but most analysts expect a recovery towards the end of the current year and into 2021. China’s manufacturing sector appears to be recovering already, it is hoped that consumption and services follow. There will be setbacks, and some countries may suffer new outbreaks along the way that will need to be managed. The unprecedented fiscal and central bank support in advanced economies will surely help those economies, but there is much uncertainty about the depth of the losses and the speed of the recovery.
Typical countercyclical demand management, both fiscal and monetary, is likely inappropriate. If stimulating demand reduces social distance it will work against non-pharmaceutical interventions. Rather, the aim of policy should be to complement the partial shutdown, to allow those that lose their source of income to buy food and other essentials, to provide support and incentives for firms to maintain workers on their books and reduce liquidations, and to ensure the banking system remains sound and can assist firms with liquidity and credit. In short, policies should aim to provide relief (not stimulus), prevent an amplification of the economic costs, and keep the productive core of the economy intact for the recovery phase.
The pre-crisis total financing requirements for the region were between 4% and 5% of GDP, but with significant variation across countries. There will be many additional needs. Countries will need to find ways to finance the additional spending in the health system and support packages, through greater efficiency, by forsaking other non-essential expenditures, through greater borrowing, through public banks, and through the balance sheet of central banks where appropriate. Central banks also have an important role to play in terms of lowering policy interest rates, relaxing reserve and liquidity requirements, and providing extraordinary liquidity to markets, to banks, and, in some cases, even to other entities. Countries should design and calibrate such policies very carefully to provide the maximum relief for the resources used while maintaining monetary and financial stability and fiscal sustainability. The report considers a suite of appropriate policies and information on what countries are actually doing.
The IMF, the World Bank, and the IDB have all announced additional funding for borrowing countries. The IDB’s private sector arm, IDB Invest, has also made more resources available. Some larger economies, such as Brazil and Mexico, have swap lines with the Federal Reserve. Countries would be advised to seek additional financing as they require to finance health and extraordinary support measures given the partial economic closures. It’s possible that when cases decline and testing and contact-tracing resources can be built up, a transition to less aggressive policies can be effective.
The region has weathered many crises. Unfortunately, it is frequently the poorer and more vulnerable that suffer. The 2020 Latin American and Caribbean Macroeconomic Report had been conceived as a report on inequality with chapters on different dimensions. When the health crisis abates it’s likely that these topics will be even more pressing.
 Given the fall in US interest rates, yields are a better guide than spreads. Spreads rose by 350 basis points while yields rose by 150.