5 economic risks that Latin America will face in 2021
(and a chance)
With the start of vaccine distribution, many people are regaining hope that 2021 will be better than 2020.
A lifelong bus driver, Marco Alarcón lost his job in March, as soon as the pandemic arrived in Santiago, Chile. Within two months he came up with the idea of making furniture out of wood that he found lying on the ground or discarded at construction sites. He had never done it before, but the need for income prompted him to try something different. "My passion has always been to transport passengers, but now I have seen that I can create things with my hands and that fills me with happiness," he says.
Better known as Tata Marco, his daughter publishes photographs of his products on Instagram and thus, little by little, he has managed to open an improvised work path, as thousands of people have done from Mexico to Patagonia.
Although the economic outlook is more encouraging for 2021, there is still a high level of uncertainty about how and when employment will be reactivated, one of the deepest traces that the recession has left after the lockdowns and the rapid spread of COVID-19. And despite the fact that official unemployment reached more than 10% in the region, the people most affected were informal workers who live from day to day and who are not counted in the statistics.
The problem is that even if the economy grows again in the region (around 3.7%, according to different estimates), indicators such as employment or poverty will take much longer to recover. And according to the International Labor Organization, in 2021 unemployment could rise to 11.2%.
"We have gone back ten years in ten months," said ILO regional director Vinicius Pinheiro in late December.
Therefore, he adds, the great challenge is to achieve economic growth with employment, an opinion shared by Daniel Titelman, director of the Economic Development Division of the Economic Commission for Latin America and the Caribbean, ECLAC.
"The social costs that the pandemic has produced are going to be with us for a long time and that is why it is important that fiscal policy helps mitigate and offset those effects," says Titelman
To reactivate the economy, he adds, ECLAC projects that Latin America will face 5 major risks in 2021:
1 - The evolution of the pandemic and the availability of the vaccine are uncertain
The scenario that ECLAC considers for its economic projections is that the negative effects of the pandemic would improve in the first half of 2021, as there is a higher level of mobility than that registered in mid-2020. It also means that during 2021 the vaccination process will advance in the region. If that is the case, the economic impact of vaccines on growth could occur from the second half of 2021. But if the expected conditions are not met, without a doubt the economic growth projection for the region of 3.7% in 2021 could decrease.
2 - Premature withdrawal of monetary and fiscal stimulus policy measures
The elimination of fiscal stimulus and the measures that the central banks have taken to boost recovery could stunt economic growth with a negative impact on the region. For this reason, the organization recommends that fiscal aid be maintained and that monetary policy continues to guarantee the availability of liquidity worldwide.
3 - Worsening of global financial conditions
The growth estimated for Latin America also depends to a great extent on the fact that international financial conditions are similar to those of the second half of 2020. For the poorest countries, access to financing is essential. But a worsening financial outlook could create a big problem for those countries that have increased their debt levels in the context of the pandemic.
Another issue refers to the possible depreciation of currencies, given a lower "risk appetite" on the part of investors, who in crisis situations seek refuge in more stable currencies. If there is a downward trend, this would put severe pressure on those countries with higher levels of debt in foreign currency.
4 - Potential drop in commodity prices
Estimates suggest that there will be an increase in the prices of basic products in 2021. If this projection is not met, the countries of South America, a net exporter of these products, will suffer a severe blow that would affect their income level and its growth prospects.
5 - Increase in social and geopolitical tensions
The increase in unemployment, poverty and inequality could intensify latent social tensions in Latin American countries and affect their economic activity. These internal tensions are compounded by geopolitical conflicts, including technological and trade frictions between countries.
"The brutal fall in income generates social tensions and challenges to fiscal policy", argues Titelman.
For this reason, he adds, "governments must make an important effort to continue supporting and thus mitigate the social effects of the pandemic."
"With this crisis there is an opportunity to move towards a more sustainable and inclusive development," says the economist.
A positive point of view, he explains, is that what we have experienced in 2020 is a lesson to overcome the great structural challenges of the region such as poverty, inequality, unemployment, labor informality and low social protection. What the pandemic did was put on the table those great challenges that have affected Latin America for decades, he says.
From their perspective, the ideal would be that countries not only take measures to reactivate the economy in the short term, but also look to the future and include environmental and industrial policies to transform the development model.