COVID-19 has hit Latin America, both in terms of casualties and economically. GDP shrank about 7 per cent in 2020 despite interest rates being cut to record lows and government spending that resulted in budget deficits and heightened public debt. Yet, the region’s problems pre-date the pandemic.

The region was already on a low-growth trajectory because of stalled structural reforms, premature deindustrialisation and tepid investment. Annual growth averaged just 1.7 per cent during 2011-19 when other emerging markets averaged 4.8 per cent.

Latin America will bounce back in 2021 as lockdowns are lifted. However, the structural problems, slow inoculation rates and the limited room for additional monetary and fiscal support, mean we expect growth of just 3.8 per cent – one of the slowest emerging-market rebounds.

Peru is forecast to show the largest rebound, growing 8.5 per cent in 2021 after contracting 11.2 per cent last year, but the healthcare situation and April’s general election will delay the recovery.

Chile conducted one of the region’s most aggressive monetary and fiscal easing responses and is leader in rolling-out vaccines, allowing a swifter return to normalisation. We expect 4.5 per cent growth after GDP shrank 6.0 per cent last year.

Brazil’s economy contracted less than most others in the region, thanks to fiscal stimulus totalling around 12 per cent of GDP and cutting interest rates from 4.5 per cent to a 2 per cent all-time low. GDP could grow 3.2 per cent this year, supported by a vaccination push.

However, we expect just 3.0 per cent growth in Mexico, with exporters, especially those selling to the US, likely to experience the fastest improvement.

The region’s main countries all have relatively high coronavirus death rates and South America is likely to lag Europe and North America in vaccine roll-out. The region accounts for about 15 per cent of global reported COVID-19 cases but, as of February, less than 3 per cent of vaccine doses administered.

But two factors could boost Latin American growth: mainland China’s strong growth requires exports, and commodity prices are at multi-year highs, fuelled by Chinese demand and reflation expectations.

The region’s Chinese sales have nearly tripled since 2009 and now comprise 17 per cent of total exports. Mainland China is the major export destination for Chile, Brazil and Peru and important also to Colombia and Argentina.

But mainland China has also become a source of financing and capital. Brazil has received the most foreign direct investment – USD60 billion since 2005. But relative to GDP, Peru’s 13.7 per cent rate is highest, thanks to investments in metals and energy. Inflows are also sizeable for Argentina and Chile.

The pandemic sharply slowed Chinese investment into the region in 2020 but we expect it to accelerate this year. We reckon that a 1 percentage point rise in Chinese GDP growth increases emerging economies’ growth by an average of 0.4 to 0.6 points, with commodity-producing countries gaining most. The region remains a net commodity exporter and prices of all major commodities – metals, agricultural and energy – have recovered strongly from the slump in early 2020.

The improvement in Latin America’s terms of trade should help its currencies, which have lost about 6 per cent of their value each year since the 1990s, requiring high interest returns for foreign investors.

First published 24 February 2021.

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