Home » COVID-19 » Chronicle of a Crisis Foretold? Latin America in the time of Coronavirus: Revenues, Growth and Policy Responses.

Chronicle of a Crisis Foretold? Latin America in the time of Coronavirus: Revenues, Growth and Policy Responses.

By Matteo Pazzona, Brunel University London

According to the World Health Organization, Latin America is the current epicentre of the Covid-19 pandemic. While many countries have been able to control the spread of the virus, in Latin America the peak has yet to be reached. Some numbers might help signify the extent of the looming crisis. Brazil is the second country in the world in terms of deaths and confirmed cases. Peru, an early adopter of lockdown measures together with Chile, sits 8th in the inauspicious global ranking of contagions, with more than 240,000 confirmed cases. In Chile, the situation seems to be  out of control and it is the 5th country in the world in terms of cases per capita, although testing six times more than Brazil. Mexico adopted a late response and has now more than 22,000 deaths, a number which (as with all these numbers) is probably underestimated.  The virus could spread in the region thanks to the high number of informal sector workers, the high level of urbanization and weak health systems, which make the lockdowns measures difficult to enforce. There are success stories too: countries like Uruguay, Paraguay, Argentina, and Nicaragua show low levels of cases and deaths, for now at least. Argentina has around a tenth of confirmed cases and deaths compared to Peru, a country of similar population. In Colombia, the city of Medellin acted fast and with the help of technology was able to limit the spread of the virus.

The challenges ahead for governments, and particularly tax authoritiesin these countries, are considerable. The crisis will negatively impact tax revenues directly – through lower taxable income and consumption- but also a decrease in tax compliance, especially from the struggling segments of the population. Fiscal authorities will need to need to adapt their tax strategies to accomplish fiscal sustainability and promote economic recovery.  According to a recent report, in 2020 the region GDP will decrease by 7.4 %, the largest slump in the world. The two biggest economies, Brazil and Mexico, will have a negative growth of 7.6 % and 8.5 % respectively. The current crisis is happening after a period of low growth which started in 2014, caused mainly by the drop in commodity and oil prices. The current crisis leads to further drops: countries such as Brazil, Chile, Venezuela, or Peru are already experiencing a drastic reduction in exports which is likely to extend for many more quarters. The tourism industry, which represents a significant share of employment and revenues, has also been severely hit.

Besides, the economic structure of many Latin American countries is dominated by small companies (99% according to the OECD) which being less likely to have a financial buffer to survive the crisis, might go bankrupt rapidly. There has been also a significant decrease in remittances flow from migrants working abroad. According to the World Bank, the region will experience a 20% decline in the flow, the highest ever recorded. Financial volatility has also been a constant in the last months, with many currencies devaluating and significant capital flight. The pandemic will also lead to a surge in inequality and poverty, as reported by the World Bank. That is very unfortunate, especially because many countries had managed to decrease their levels in the last two decades. The current crisis will also be costly in terms of human capital accumulation, which will affect the most fragile sectors of the population. All this inevitably will have a significant impact on tax revenues, and the growth trajectory of the economies.

Latin American governments have implemented a wide range of welfare programs to sustain individuals and firms. They have helped vulnerable households through direct transfers or employment subsidies, among others. For example, Brazil extended the well-known and successful Bolsa Familia program and created a new transfer scheme for informal workers. Several countries, for example El Salvador, have helped directly or indirectly the firms through tax breaks, loan instalments, and public credit guarantees. However, the fiscal power of many countries is limited compared to richer ones and the fiscal space is further restricted by six consecutive years of soaring debt/GDP ratio, due mainly to the effects of low commodity prices on government revenues. The large share of the informal economy, 40% according to the OECD, further constrain the fiscal power of the region. Despite this, the countries that managed to create a fiscal buffer in the last years and have better access to the financial markets were able to implement more aggressive policies. For example, the fiscal COVID-19 related spending in Peru accounts for 12 % of the GDP, 10 % in Brazil, and 7 % in Chile according to IMF data. On the other hand, Mexico will spend between 0.6 % and 1% of the GDP in such measures (depending on the source used). These figures need to be taken cautiously because it is difficult to identify COVID-related expenditures from normal ones. Moreover, tax breaks or credit guarantees are not visible in fiscal accounts.

Fortunately, countries in Latin America will receive international financial help. The Inter-American Development Bank increased the loans to countries by $3,300 million, plus $5,000 to sustain the private sector. The World Bank Group committed to providing $160 billion to alleviate the health, economic, and social impacts of COVID-19 around the world and a big part of these funds will go to the region. The IMF has also secured a significant amount of money to help many countries in the region.

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