Latin America Confronts the Coronavirus
The challenge posed by the COVID-19 pandemic has no parallel in recent history. The world and the Latin American and Caribbean region cannot afford delayed or inadequate responses. Mutual trust, transparency, and reason – not populism or demagoguery – remain the best guideposts in these uncertain times.
SÃO PAULO/SANTIAGO/BOGOTÁ/MEXICO CITY – The COVID-19 pandemic is a shock of unprecedented magnitude and uncertain duration. The consequences have been catastrophic. If not properly addressed, the crisis could cause one of the most tragic episodes in Latin America’s history.
So far, policy responses in our region have been uneven. Several governments reacted promptly, making the protection of public health their primary objective. Sadly, others minimized the risks of the pandemic, misinforming citizens and disregarding both scientific evidence and their own experts’ advice. Such leaders chose to pursue populist and divisive politics in the midst of tragedy.
Minimizing the pandemic’s death toll must be Latin America’s top priority. Policymakers should focus on upgrading health systems, channeling resources to hospitals, temporarily adapting idle infrastructure such as hotels and convention centers, and sharply increasing testing capacity.
Latin American leaders also ought to condemn export controls on medical supplies and other critical resources, and demand increased resources for the World Health Organization, contrary to US President Donald Trump’s reckless decision to freeze some $500 million in WHO funding. Stronger global coordination among health authorities is needed to improve the capacity to conduct tests, treat and isolate patients, and develop a cure and vaccine – the definitive solution to the pandemic.
The economic shock is massive. In addition to the disruption of domestic production, Latin American economies are suffering from falling export volumes and prices, lost income from tourism and remittances, and large capital outflows. The supply shock to much of the economy, coupled with cratering demand, could trigger a contractionary spiral.
To prevent that, bold policies to protect household incomes are essential. This implies cash transfers to those left vulnerable by the crisis, including informal and independent workers who cannot access employment subsidies or unemployment insurance.
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Relief to businesses is also indispensable. Subsidies to help firms pay their wage bill, contingent on the maintenance of employment, protect both companies and workers during the crisis and are crucial for a rapid economic recovery when conditions normalize.
If widespread bankruptcies are not prevented, then the pandemic’s next victim could be the banking system. At that point the payments system – indeed, entire economies – risk collapse.
Many businesses, particularly small and medium-size enterprises, will suffer significant income losses for the duration of the crisis. Without support, lack of liquidity will soon become a solvency problem. Tax deferrals, loan rollovers, and subsidized credit will not be enough.
This emergency demands unprecedented government credit guarantees to ensure that banks keep lending, as well as temporary regulatory changes to encourage credit expansion. Well-capitalized and well-managed state-owned banks can also play a leading role.
More broadly, while policies will differ across countries, extraordinary fiscal resources will likely be needed to boost recovery everywhere. Governments will need to stimulate employment and economic activity without exacerbating health-related risks.
The problem is that the policy space in Latin America today is even narrower now than it was following the 2008 global financial crisis. Fiscal costs should be offset by budgetary adjustments in low-priority areas. A commitment by governments to correct the larger resulting fiscal deficit within a reasonable period would mitigate the risk of a credit downgrade.
External support for both fiscal accounts and the balance of payments is crucial, especially for Latin America’s smaller and less developed countries. If both private firms and governments run bigger deficits, countries’ current-account gaps are likely to widen as well. The recent capital outflows from emerging economies – one of the largest capital-flow reversals in the modern history of financial markets – compound the problem.
The associated depreciation of emerging-market currencies can be a destabilizing force. For many economies in the region, far larger official external support will be the only way to cope with these compound shocks.
The International Monetary Fund has an essential role to play here. The IMF must address countries’ short-run foreign exchange and fiscal needs, and keep supporting economies through a crisis whose duration remains highly uncertain. The Fund needs more resources and the ability to disburse them rapidly. Latin American governments should unite in calling for a new issue of the IMF’s global reserve currency, Special Drawing Rights, totaling SDR1 trillion.
While SDRs are allocated to member countries according to their IMF quotas, a non-proportional allocation could be achieved by creating a common pool overseen by the Fund. In addition, the immediate doubling of the New Arrangements to Borrow would provide the IMF with the needed capacity to attend to the urgent upcoming demand for loans. Finally, because traditional IMF lending programs will not be approved in time, the Fund should increase significantly access to facilities with fast disbursement and low conditionality, such as its Rapid Financing Instrument, or create new pandemic credit facilities.
Major central banks that issue reserve currencies can help by broadening access to swap lines, either directly or indirectly through the IMF or the Bank for International Settlements as intermediaries of central bank liquidity. Domestically, central banks should use all instruments they can, innovating whenever necessary, to provide ample liquidity to financial markets and the economy.
Finally, multilateral development banks (MDBs), such as the World Bank, the Inter-American Development Bank, and the CAF – Development Bank of Latin America, should double the amount of net lending to the region and tap highly liquid global capital markets to provide further budgetary support. In exceptional circumstances and in countries without market access, a debt standstill could complement official lending.
MDBs should also provide countries with guidelines on the various policy areas involved in the crisis response, including their own estimates of COVID-19 morbidity and mortality rates – particularly in countries where governments are downplaying the health threat. Time is of the essence.
The challenge posed by this pandemic has no parallel in recent history. The world and the Latin American and Caribbean region cannot afford delayed or inadequate responses. Mutual trust, transparency, and reason – not populism or demagoguery – remain the best guideposts in these uncertain times. The crisis cannot be an excuse to weaken our hard-won rights. Instead, it should become an opportunity to strengthen democracy in Latin America, and to show it can deliver for citizens.