December 2020

Latin America: heavy dependence
on informal labour and tourism
exacerbates the Covid-19 shock
Atradius Regional Economic Outlook

Atradius Economic Research
Greetje Frankena

greetje.frankena@atradius.com+31 (0)20 553 2406

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Executive summary
Of all emerging market regions, Latin America and the Caribbean (Latam) has been most affected by the Covid-19
pandemic, both in terms of infection and death rates, and regarding the impact on its economy. The outlook is highly
uncertain and weighted down by growing fears of a new wave of infections. Rising prospects of multiple Covid-19
vaccines are definitively hopeful. However, the vaccine rollout is expected to move more slowly in the Latam region
compared to advanced markets due to smaller vaccine orders so far relative to population and more logisticalchallenges. Therefore the economic benefits from the vaccine are expected to manifest first through the improving
external environment as rollout across advanced markets boosts trade, commodity prices and external financing
flows.

Key points
 The pandemic has revealed structural weaknesses, which has made the region particularly vulnerable to the measures tocontain the spread of Covid-19: border closures, travel bans, lockdowns and social distancing.
 Hardest hit have been countries with a large informal economy, a high dependence on contact-intensive sectors such as
tourism, and a low ability of working remotely.
 More developed and diversified economies, particularly those that quickly restored access to international capital markets
and had room for government stimulus packages, are more resilient.
 Still, most countries in the region, including the more developed ones, needed emergency liquidity support and credit lines
from multilateral agencies to deal with higher financing needs resulting from rising expenditures and falling fiscal andexternal revenues due to the Covid-19 crisis. One of the region’s long-term problem children, Brazil, stands out positively inthis respect.
 Latam’s economic recovery from the Covid-19 pandemic will be partial and uneven. It will be stronger in countries thathave ample fiscal space to support their economies, as well as in those that have good institutional quality to help aneffective rollout of vaccines. Meanwhile, recovery will be lagging in the tourist-dependent countries.

Latin America: heavy dependence on informal labour
market and tourism exacerbates the Covid-19 shock

A severe health crisis
Of all emerging market regions, Latin America and the
Caribbean (Latam) has been most affected by the Covid-19
pandemic. When Covid-19 reached Latam’s shore end of
February 2020, starting in Brazil, countries closed theirborders, implemented lockdowns, and employed social
distancing measures to limit its spreading and prevent
overloading their relatively weak healthcare systems. The
strength of these containment measures varied
substantially across countries, from very strict inArgentina and Peru, to less stringent on the national levelin Brazil and Mexico, and mainly voluntary in Uruguay.
Whereas these lockdowns initially reduced the spreadingof the disease, they became less effective once mobility
increased and social distancing measures appeared to bedifficult to maintain, causing the virus to spread like a petfire in many Latam countries since June. Weak social
safety nets, high informality – on average roughly half ofthe region’s non-agricultural labour force, according to the
IMF – and high population density in urban areas,
particularly in the slums, were important factors behind
the resurgence of the spreading of the disease.

million inhabitants between some 29,000 and 47,000 by
early-December. Meanwhile, for the most part the virus isstill not well controlled, and recent developments showthat the general trend of a decline in daily-confirmed cases
since August has ended. The number of daily-confirmed
cases is rising again at an alarming rate since mid-in a
number of countries, including in some which so far had
succeeded in containing the spreading of the virus. The
most notable of these are Uruguay and some Caribbean
islands. This raises concerns about the development of
infection rates going forward, particularly ahead of the
December festivities. This uncertainty will cloud theregion’s economic outlook.

By early-December, the Latam region recorded 13.7 million
confirmed cases and over 460,000 deaths (note that theactual numbers could be higher, as testing for Covid-19 has
not been systematic). This represents a fifth of the total
global cases and nearly a third of the total global deaths,
while the region accounts for less than 10% of the global
population. Five Latam countries belong to the top 15 ofcountries worldwide with regard to the number ofconfirmed cases: Brazil, Argentina, Colombia, Mexico andPeru. That said, in terms of the size of its population,
confirmed cases in Mexico were at some 9,300 per one
million inhabitants by early-December – still much below
those of the other four countries (between some 27,000
and 33,000 per one million inhabitants).

4

Structural features explain thecrisis’ severity and cloud theregion’s outlook

In terms of infection rates, Aruba, Chile, Costa Rica andPanama can be added to the list of the world’s hardest hit
countries by Covid-19, with confirmed cases per one

The Covid-19 crisis and its associated lockdown and social
distancing measures, decreases in global demand forgoods and services, as well as lower commodity prices and

1.1 Total Covid-19 confirmed cases in Latin America and the
Caribbean, early-December 2020

14
12
10
8
6

2
0

BrazilArgentina

Colombia

MexicoPeru

Rest of LatAm

Source: WHO, Macrobond

Atradius Regional Report Latam – December 2020 | 1

limited access to finance, all have had a devastating
impact on Latam economies. The estimated economic
contraction of 7.7% in 2020 is much above the Emerging
Market Economies’ (EME) average of 2.3% and the deepest
among all regions, and follows a period of sluggish or no
growth. The subsequent recovery in 2021 is estimated at
4.6% – relatively mild and below the 6.2% EME average.
This is partly due to generally stricter lockdowns andother restrictive measures compared to most otherregions. It is also the result of a more gradual approach
towards easing in the wake of generally weaker
healthcare systems.
1.2 Latin America’s economy underperforms and is hit hard by
the Covid-19 crisis
8

Real GDP growth, % year-on-year-6

Emerging Markets

Bahamas, The
Barbados
Curacao
Anguilla
Antigua and Barbuda
Belize-42020

St. Kitts and Nevis

St. Vincent / Grenadines-2

Developed Markets

Aruba
Venezuela, RB

4

0

2019

1.3 LaTam countries with above-average GDP contractions in
2020

6

2

World

At the same time, a recently developed indicator by the
IMF shows that Latam’s share of occupations that can bedone remotely is at some 20% – markedly below the EME
average of some 26%. Many Central American countries, aswell as for Peru, Bolivia and Ecuador, stand out in thisrespect.

GrenadaDominica
St. Lucia
Suriname
Peru
Argentina
Dominican Republic

-8

Haiti

-10

MexicoLatam
2021

Source: Oxford Economics, Macrobond

Bolivia
PanamaTrinidad and Tobago-40

But the severe economic contraction and modest reboundparticularly reflects structural characteristics of Latam’s
labour market, which make the economies highly
vulnerable to a pandemic and its associated measures tocontain the spreading of a virus: border closures, travel
restrictions, lockdowns and social distancing. High
informality of the economy, for instance, makes it morechallenging to provide financial support to firms andhouseholds. This informality reduces the effectiveness ofmeasures, such as tax relief or wage subsidies, pushing
many people working in the informal sector deeper intopoverty. Rather than starving, many people take the riskof getting infected by Covid-19 in their daily search forsome income, thereby amplifying the health crisis as
noted above. High informality is particularly prevalent in
Bolivia, Ecuador, El Salvador, Guatemala, Honduras,
Paraguay and Peru, ranging from 60%-80% of their nonagricultural labour force.
Next to the high share of informality, two othercharacteristics of Latam’s labour market stand out: arelatively large share of workers in contact-intensive
sectors (such as hospitality and entertainment), and a
relatively low share of workers able to work remotely.
According to a recent IMF report, the region’s average
share of workers in contact-intensive sectors is above 40%– notably higher than the EME average of some 31%.
Unsurprisingly, this is particularly true for the tourismintensive Caribbean, but also for some Central Americancountries, such as Costa Rica and El Salvador, andArgentina.

-35

-30

-25

-20

-15

-10

-5

0

Source: Oxford Economics, Macrobond

Meanwhile, the more diversified economies whose shareof remotely workable occupations is close to the EME
average. This is true for countries such as Panama, Brazil,
Chile and Uruguay, which show higher resilience to the
Covid-19 shock. That said, their economies are alsoshrinking as never before seen in recent history. Of all
Latam economies, Guyana is the only one showing growth
this year. The economy of this small country will expand
by a third following the start of oil production fromrecently discovered fields, making it the fastest growing in
the world.

Caribbean hit hard by collapse intourism
The Covid-19 pandemic, the strict measures to contain the
spreading of the virus, and the strong increase in online
events and conferences caused a collapse in global
tourism. This has dealt a blow to the small island
economies of the Caribbean, which are among the mostdependent in the world on tourism. Nearly a dozen ofthem feature in the top 20 on a recently developed
Tourism Dependency Index of the Inter-American
development Bank (out of 166 countries for which data are
available). This index provides a broad picture of acountry’s dependence on the tourism sector by measuring
its contribution to export receipts, GDP (directly andindirectly) and employment. The most tourism-dependent
in the world based on this measure is Aruba, whose

Atradius Regional Report Latam – December 2020 | 2

average annual tourism receipts accounted for 77% of totalexports in 2014-18, and almost 90% of its GDP and
employment (see chart 1.4). The members of the Eastern
Caribbean Currency Union, Antigua & Barbuda, St. Lucia,
Dominica, Grenada, St. Vincent & Grenadines, and St. Kitts& Nevis, are all ranked in the top 20. Included on the list
are also the Bahamas, Barbados, Jamaica and Belize. Not
ranked in the Tourism Dependency Index, but vulnerable
as well, are Curaçao and St. Maarten. It is therefore no
surprise that all those countries are experiencing thesteepest economic contractions in the Latam region,
ranging between 14% for St. Lucia and a record 37% for
Aruba.

flow of this group of countries, being larger than foreign
direct investment flows (USD 534 billion) and overseas
development assistance (about USD 166 billion). For theLatam region, remittances amounted USD 99 billion in
2019, serving as an important source of income andfinancing of the current account. This is particularly true
for Central-American countries and some Caribbean
islands, ranging from almost 40% of GDP in Haiti, to 5% of
GDP in Belize.
1.5 Remittances as a percentage of GDP
45
40
35
30

1.4 Dependency on tourism receipts of LaTam, average 20142018

25
20

100

Tourism: contribution to GDP 2014-18

Antigua and Barbuda

Barbados
Jamaica

Costa Rica

Dominican Rep.
PanamaEl Salvador
Haiti

5

70

0

50
40

St Lucia

Dominica

St Kitts

30

St Vincent

20

Grenada20

40
60
Tourism: share in total exports 2014-18

2019

2020e

Source: World Bank

10
0

0

10

80

60

Bahamas

Belize

15

90

Aruba

80

100

Source: Inter-American Development Bank, Tourism Dependency Index

One of the exceptions is Jamaica, where an increase inremittances and a recovery in the countries’ mining
industry (which generates some 50% of export revenues
and 7% of GDP), cushioned the impact of the shock in its
tourism industry (real GDP expected to contract 6.3% in2020). As such, it performs even better than the economyof the Dominican Republic (real GDP expected to contract
9.2% in 2020), which is more diversified than the other
Caribbean islands. This higher diversification is due tomembership of DR-CAFTA, the free trade agreement
between the US, the Dominican Republic, Costa Rica, El
Salvador, Guatemala, Honduras and Nicaragua.
Meanwhile, the gradual reopening of the Caribbean
economies since last summer has proven to bechallenging. Despite strict health and safety measures,
including the requirement of proof of a negative Covid-19
test by most countries on entry, some have experienced asurge in imported Covid-19 cases, while in most cases
tourist arrivals remain low. This clouds the outlook for thehigh season, which has just started and will run throughFebruary. Until a vaccine or treatment for the disease is
widely available, the tourism sector will remain
depressed.

Remittances quite resilient so far,but not for most of the Caribbean
Remittances to low and middle-income countries (LMICs)
worldwide reached a record high of USD 548 billion in
2019. They became the main non-debt creating financing

Right after the start of the Covid-19 pandemic, the WorldBank projected that remittances to LMICs would fall
dramatically, by some 20% in 2020. Migrant workers,
particularly those who are undocumented or on temporary
working permits, often lack access to social safety nets
and are more susceptible to infection by Covid-19. This isdue to the fact that they generally work in poor conditions,
live in more crowded places and have limited access tohealthcare.
However, although remittances did initially drop in thefirst few months after the Covid-19 outbreak, the flow ofmoney sent home by foreign overseas workers has so far
been surprisingly resilient. The World Bank now estimates
remittances to LMICs to decrease by 7.2% this year, still
more than the 5% recorded during the global financial
crisis in 2009, but less than initially feared.
The Latam region stands out positively compared to other
LMICs on this particular aspect, as remittances are
expected to remain on balance unchanged compared tolast year. An explanation could be the proximity to the US,
which performed relatively better than many othermigrant worker destinations, and where migrants often
work in essential sectors.
In some Latam countries, remittances flows evenincreased compared to last year. In absolute amounts themost for Mexico, which is by far the largest recipient in
Latam, accounting for over 40% of total remittances to theregion (but which represents only 3%-4% of Mexico’s GDP).
Some of the countries which are more dependent on
remittances saw migrant flows increasing in USD terms,
most notably in the Dominican Republic (up 7%), Jamaica(up 5%) and Guatemala (up 1%). In some other highly
dependent countries remittances rose relative to GDP, but
this is due to a shrinking economic output this year.

Atradius Regional Report Latam – December 2020 | 3

Unfortunately, in USD terms, remittances actually fell thisyear for the already hard hit Caribbean economies
Dominica (down 4%), St. Vincent (down 6%) and Belize(down 4%), dealing a further blow to their economies andbalance of payments. The exception was Aruba, whose
foreign overseas workers raised the money sent home by
71% (representing 2% of GDP).

Underperformance of Latam
remittances next year will impact
the recovery
The reasons for this year’s surprisingly better than
expected performance of remittances are not reassuring
for future flows. This is because these reasons include that
migrants drew on their savings, shifted from informal(unrecorded) to formal (recorded) money transfer
channels and were unexpectedly better able to accessincome support offered by their host countries. As
drawing down on savings cannot last forever, and income
support programs will be gradually unwound, the WorldBank is meanwhile more pessimistic on the outlook forremittances. Rather than expecting a recovery of migrantflows in 2021, the agency now forecasts a further declineof 7.5% for LMICs. This is also due to a more gradual thanpreviously expected economic recovery in the hostcountries.
For the Latam region the World Bank expects remittances
to decrease by 8%. A weak employment situation in the US
will weigh negatively on migrant flows to Mexico, while
concerns about the economies of Spain and Italy areclouding the outlook for remittances to Argentina, Bolivia,
Ecuador, Colombia, Paraguay, Peru and Uruguay.

Recovery in commodity prices
helpful for South-America, but will
not last
After deteriorating last spring due to the Covid-19
pandemic, commodity prices have generally recovered topre-Covid-19 levels. This happened on the back of arebound in global trade in goods in the course of the year,
led by China. In November base metal prices, led bycopper, were 14% higher than their pre-Covid peak, while
agricultural commodity prices were up 7%. This isparticularly good news for South-America, which is hometo the world’s largest producers of copper (Chile and Peru),
soybeans (Brazil and Argentina) and iron ore (Brazil as thesecond largest) and the world’s largest banana exporter(Ecuador). However, looking ahead developments incommodity prices are expected to be less supportive thanin the past months. In its latest Commodity Markets
outlook, the World Bank projects only modest gains formetal and agricultural prices of 2% and 1% in 2021.
Meanwhile, oil prices are still one-third below prepandemic levels, despite a doubling from their April lows
following supply cuts by OPEC. They are projected torecover very gradually and to stay low in 2021, averaging
some USD 44 per barrel in 2021, as an easing in supply
restrictions will counterbalance the impact of a slow
recovery in demand.
The only partial recovery in oil prices continues to weighnegatively on oil dependent Bolivia, Colombia, Ecuador,
Trinidad & Tobago and Venezuela. On the other hand, it isa welcome helping factor for oil-importing countries inCentral America and the Caribbean.
1.6 Commodity prices, index 2010=100

160
140
120
100
80
60
40
20
0

2014

2015
Oil

2016
Copper2017
Iron ore

2018

2019

2020

Soybeans

Banana's

Source: World Bank

Multilaterals to the rescue
Despite the fall in exports of goods and services,
particularly tourism, the current account deficit for thewhole of the Latam region will improve significantly thisyear, from USD 87 billion (1.7 percent of GDP) in 2019 to
USD 15 billion (some 0.5 percent of GDP), on the back ofimport compression due to falling domestic demand.
Flexible exchange rates in some countries have facilitatedthis improvement as well, proving their role as a shock
absorber. However, this masks huge differences within
the region. Almost all countries in South America andsome in Central America see their current accounts
improving in USD terms, except of the relative tourism
dependent countries Belize, Costa Rica, El Salvador and
Uruguay. It is therefore no surprise that all Caribbean
islands will see a deterioration in their current accounts in
USD terms this year. Many of the most vulnerable show
deficits of more than 20% of their GDP.
Meanwhile, the drop in foreign currency receipts resulted
in pressure on the currency and reserves in countries with
fixed exchange rate regimes (mostly in the Caribbean) andlarge exchange rate depreciations in countries with more
flexible exchange rates. Not only a sharp fall in export
receipts contributed to this, but also declining foreign
direct investment flows. These are expected to remain
subdued for the Latam region as a whole, as the pandemicinduced global recession has resulted in lower profits andproject reassessments by multinational companies. On topof that, more financially integrated countries such as
Brazil, Chile, Colombia and Mexico experienced recordhigh portfolio outflows of about USD 30 billion in March

Atradius Regional Report Latam – December 2020 | 4

by non-residents, following a flight to safety by investors
in response to the outbreak of the Covid-19 pandemic.
1.7 Exchange rate, largest depreciations vis-à-vis the USD andQoQ as of November 19th
Argentina
BrazilUruguay
Colombia
Jamaica
Dominican Republic
Paraguay
Peru
MexicoCosta Rica
-30

-25

Year to date

-20

-15

-10

-5

0

5

10

15

QoQ, Nov 19, 2020

Source: Macrobond (Venezuela (-93 percent YTD) and Suriname (-47percent YTD) excluded)

In order to avoid an imminent balance of payments crisis
and a deeper economic shock stemming from the sharp
fall in export receipts and capital outflows, 21 of the 33
Latam countries that are members of the IMF havereceived emergency liquidity support from the Fund. This
support amounts to some USD 5.4 billion. The lower
income countries in the region received support throughthe unconditional Rapid Credit Facility (Dominica,
Grenada, Haiti, St. Lucia and St. Vincent), and most of theothers through the unconditional Rapid Financing
Instrument (the Bahamas, Bolivia, Costa Rica, theDominican Republic, Ecuador, El Salvador, Guatemala,Jamaica, Nicaragua [also RCF], Panama and Paraguay).
Furthermore, existing IMF programmes for Barbados andHonduras were augmented.
Chile and Peru qualified for an IMF Flexible Credit Line
(FCL), which is an unconditional renewable credit line
only provided to countries with sound policy frameworks.
Colombia and Mexico already had an FCL, which in thecase of Colombia was augmented.
Next to the IMF, also the World Bank and the region’s
multilateral development banks – Inter American
Development Bank, Central American Bank for Economic
Integration, Caribbean Development Bank and theDevelopment Bank of Latin America – provided credit
lines to most of the region’s governments. The lower
income countries Dominica, Grenada and St Lucia also
benefitted from the G20 Debt Service Suspension
Initiative. This comprises of a suspension of debt service
payments to official bilateral creditors and provides room
to increase health spending.

Remarkably solid access tointernational bond markets
supports the recovery
After a record-high portfolio outflow by non-residents in
March, portfolio flows to EMEs recovered, and the Latam
region was no exception. This was driven by the search foryield that followed massive monetary stimulus
programmes in the advanced economies to address theCovid-19 shock. International bond markets took the lead,with equity markets lagging. These flows rebounded in
November upon positive vaccine news and Joe Biden’s
win in the US presidential election. However, the recovery
of non-resident portfolio flows in the secondary market isstill uneven, incomplete and highly susceptible to shifts inmarket sentiment.
1.8 Non-resident portfolio flows to main LaTam countries on
the secondary market, USD billions
30
20
10
0
-10
-20
-30
-40

EquityBonds

Sources: IIF, data refer to Brazil, Chile, Colombia and Mexico

Quite remarkably, considering the severity of the healthand economic crisis, Latam countries regained solid accessto primary international bond markets during 2020.
According to Fitch Ratings, by the end of September
Latam’s sovereigns had issued USD 42.5 billion ininternational bonds, significantly above the USD 34.5
billion issued during the entire year of 2019 and also
exceeding the 2015-2019 annual average of about USD 30
billion (excluding Argentina).
Nearly three-quarters was accounted for by investment
grade sovereigns, with Mexico being the largest issuer,followed by Chile, Panama, Peru and Uruguay. In
November Peru even joined a select group of countries
that have issued century bonds. Sub-investment grade
sovereigns were able to tap international bond markets,
most notably Brazil, the Dominican Republic, El Salvador,
Guatemala, Honduras, Paraguay and Trinidad & Tobago.
Additionally, corporate issuance on the international bondmarket was strong as well. External issuance was
generally at longer maturities and lower costs, withsovereign bond yields in some of Latam’s largest
economies close to historic lows. This indicates that many
Latam countries also benefit from the benign international
financing conditions, which will be supportive for growth
going forward. That said, for some sovereigns, the cost of

Atradius Regional Report Latam – December 2020 | 5

funding remained quite high. For instance, El Salvador
paid a 9.5% coupon on its 32-year international bond.
1.9 10-Year sovereign bond yields in some of LaTam’s larger
markets close to record lows
12
10
8
6
4
2
0

BrazilChile

Colombia

MexicoSource: Macrobond

Finally, international debt markets remained closed forsome Latam countries, due to problems originating before
the Covid-19 crisis. The sovereigns of two smaller markets,
Belize and Suriname, had to defer payments on theirinternational bond obligations to create some fiscal space,
while Suriname is aiming for a debt restructuring. The
sovereigns of Argentina and Ecuador have both finalised
the restructuring of their external debt with international
private creditors. They did so in a relatively short amountof time of some five months, very different from earlier
restructurings, despite the complexity of particularly
Argentina’s debt restructuring (35 foreign-law bonds in
multiple currencies and with different conditions). Socalled collective action clauses facilitated the process,which bodes well for other countries that have such
clauses and are in debt-distress. These clauses allow a
qualified majority of bondholders to agree to a debt
restructuring that is legally binding on all holders of thebond, including those who vote against the restructuring.
As such, they prevent free riding and litigation. Althoughthese clauses help the process of debt restructuring, moreis needed for rebuilding trust and restoring healthy
economic growth. A full-fledged IMF programme withconditions would help. Ecuador received this lastSeptember, while Argentina is still negotiating.

External financing enabledgovernments to support theireconomies despite limited
fiscal space
Support from the IMF and the regional multilateraldevelopment banks, as well as sound access tointernational bond markets, enabled Latam countries tosupport their economies and healthcare systems withstimulus packages, despite limited fiscal space in mostcountries in the region. Chile and Peru are the main
exceptions in this respect, with government debt ratios at
28% respectively 27% of GDP in 2019, substantially below

the region’s average of 69% in 2019, fiscal buffers and astrong revenue base (Guatemala and Paraguay also have
low government debt ratios, but a much narrower taxbase).
These fiscal stimulus packages typically consisted of tax
reductions and increased spending, mostly to support
poorer households. They have ranged between less than
1% of GDP in debt-distressed Ecuador, to over 14% in St.
Lucia. However, they were for most of the region at 4% or
below. Additionally, central banks of the region’s moreadvanced economies cut interest rates, but unfortunately,
those in the hard hit Caribbean islands were less capableof doing so, given their fixed exchange rate regimes.

Larger markets in the spotlight: sound policies
make a difference
1.10 Real GDP developments in the main LaTam countries
15
10
5
0
-5
-10
-15
Argentina

Brazil2019

Chile

Colombia

2020f

Mexico
2021f

Peru

LatAm
2022f

Source: Oxford Economics, Atradius

In Latam’s largest markets, Brazil and Mexico, thediverging economic impact of the Covid-19 crisis stands
out. Both countries have a well-diversified, service-based
economy and are modest oil exporters. They both have
populist presidents who took less stringent measures on anational level to contain the spread of the disease,
compared to most other countries in the region. However,Mexico’s GDP contraction in 2020 is estimated 8.9%,
significantly deeper than 4.8% forecast for Brazil. Asidefrom Mexico’s economy being much more open than thatof Brazil (and as such more susceptible to external
shocks), the difference in policy response is an important
explanatory factor.
In Brazil the size of fiscal support has been at 12% of GDP,
while that of Mexico has amounted just 1% of GDP.
Mexico’s president gives priority to adhering to the fiscal
rules, even though government debt was at 47% of GDP in
2019, much below that of Brazil (76%). Mexico’s monetary
policy has also been more cautious than that of Brazil,
where interest rates have been cut to 2%, compared to
4.25% in Mexico. Meanwhile, both had similar inflation
rates at 4% last October (within the target range for bothcountries, although at the upper end for Mexico).
As a result, business confidence and retail sales in Brazil
have strongly rebounded, with both the manufacturing
and services sector PMI moving into expansionary
territory. In contrast, business confidence and retail sales

Atradius Regional Report Latam – December 2020 | 6

in Mexico have remained sluggish, and its manufacturing
PMI is still moving in contractionary territory. The latteralso reflects the negative impact on business confidence
and investments of policy uncertainty and concerns about
contract enforcement and rule of law under the current
government. As a result, Mexico’s economy is currently
expected to return to its pre-Covid-19 level only in 2024, a
year later than Brazil.
While the highly expansionary fiscal policy in Brazil has
cushioned the economic fall-out of the pandemic, it comesat a cost: government debt will jump close to 100% of GDP
this year and is forecast to trend around this level for theforeseeable future. Positively, debt affordability has
improved, with the average costs of borrowing having
decreased to 6.1% from almost 8% at the start of the year.
Most of the debt is financed domestically (88%) in local
currency (95%), and the government is a net-external
creditor. Although the shortening of maturities to an
average of 5 years (from over 6 years pre-Covid-19) has
raised some concerns, these positive factors mitigate
currency, refinancing and sovereign default risks, andenabled Brazil to pursue a very expansionary fiscal policy.
Moreover, high official reserves meant that Brazil did notneed emergency liquidity support from the IMF.
Argentina’s and Peru’s double-digit economic contractionsof respectively 11.1% and 12.5% in 2020 are even steeper
than Mexico’s. Both countries imposed amongst theworlds’ most stringent lockdowns, with negative impact
on the economy. In the case of Peru this is amplified by alarge informal sector (60% of total non-agricultural
employment) and limited abilities for working remotely(at 17% below the region’s average).
Even here, economic policies differ strongly. While
Argentina returned to heterodox business unfriendly
policies under the current administration, Peru has for along time a strong, business friendly orthodox policy
framework, allowing it to qualify for an IMF Flexible
Credit Line and to access international capital markets tofinance its government stimulus measures. This will
support economic growth going forward and enable astrong economic recovery. Peru’s recent political crises is
not expected to impact its sound economic policy. The
recent issue of a USD 1 billion century bond at decent rates(coupon 3.23%) supports this view.
Argentina, on the other hand, had lost access tointernational capital markets, following several
confidence crises starting in 2018. Although it successfully
restructured its debt to commercial creditors, restoring
access to international capital markets will take a longtime, and is conditional on a credible economic plan
supported by the IMF. Corresponding negotiations havestarted, but are not expected to be completed any timesoon. In the meantime, the Argentinian government has
turned to money printing to finance its fiscal stimulus
package, equivalent to some 3.5% of GDP. The country is
running down on already tight foreign currency reserves,
despite stringent currency controls. This policy weighs
down on Argentina’s economic outlook, as it lifts
inflationary pressures, reduces spending power, increases

the gap between the official and parallel exchange rate
and worsens the business environment. Argentina’s
economy will therefore be the last country in the entire
region to return to its pre-Covid-19 levels (in 2025), except
for debt-distressed Venezuela and Antigua and Barbuda.
Of the region’s two other large economies, Chile andColombia, Chile is best positioned to return to pre-Covid
levels, which is expected to happen in 2022, one year
before most other countries in the region. Both Chile andColombia have launched robust fiscal support packages ofabout 10% of GDP, aimed at boosting public and private
investment. Additionally both have cut interest rates tovery low levels (0.5% in Chile and 1.75% in Colombia).
However, whereas Chile’s economy benefits from therecovery in copper prices, Colombia’s economy is still
being negatively impacted by the incomplete recovery ofoil prices. Meanwhile, the passing of legislation allowing
for pension withdrawals is positive for household demandin Chile. Underlining the countries’ robust fundamentals
despite the Covid-19 shock, foreign direct investments
have remained a key financing flow for these countries.

Living between hope for a
vaccine and fear of a new wave
Latam’s economic recovery will be partial and uneven,and it will be stronger in countries that have ample fiscal
space to support it, such as Chile and Peru, while lagging
in tourist dependent countries. The outlook strongly
depends on global and national developments of theCovid-19 infection rates, as well as on the rollout of a
vaccine and its effectiveness. Increasing Covid-19 cases in
the larger markets of Brazil, Colombia and Mexico fuelfears of a new wave. Rising prospects of multiple Covid-19
vaccines are definitively hopeful, but the economic
benefits for Latam’s economies will most likely manifest
first through an improving external environment. Vaccine
rollout will start in the advanced markets, with the
Pfizer/BionTech and Moderna vaccines, which are
currently being authorized. The rollout will move more
slowly in the Latam region, which is waiting for othervaccines, such as that of AstraZeneca/Oxford, which ischeaper and easier to transport and store, and therefore
pre-ordered by them. Moreover, vaccine orders are smaller
so far relative to population compared to advanced
markets. Additionally, the success of a vaccine rollout inthe Latam region much depends on the quality of acountry’s institutions and its organisational strength.
Higher income countries with sound institutions (Chile,
Uruguay and Costa Rica) are better positioned in thisrespect than most of their Latam peers, which have rather
weak institutions, with the poorer countries (Nicaragua, El
Salvador, Bolivia and Haiti) being on the opposite end of
the spectrum.
To end on a more positive note, relations with the US will
most likely improve under a Biden presidency. He is
expected to restore financial aid to and supply chains withthe region, which would benefit Mexico, Colombia andAtradius Regional Report Latam – December 2020 | 7

Central America the most. It is generally expected that Mr
Biden will follow up on the ‘Alliance of Prosperity’ plan set
up under the Obama presidency to address Central
America´s violence and high poverty rates, which aremajor causes for emigration to the US. Under the plan, thecountries receive financial support in exchange forstrengthening their institutional quality. Also beneficial

are the two free-trade agreements that Chile has secured
with Brazil (its largest regional trade partner) and Ecuador
last August. This is encouraging, as it shows that despite
the challenges created by the Covid-19 pandemic, some of
the region’s largest markets have managed to focus on
matters that would benefit their economies in the longer
term.

Atradius Regional Report Latam – December 2020 | 8

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Atradius Regional Report Latam – December 2020 | 9