While most countries are facing recessions in 2020, Latin America’s economy has taken an especially hard hit from the pandemic. In a roundtable organized by the YPO Global Diplomacy Network, four business leaders shared future outlooks on some of the affected countries, explaining why next year’s recovery across the region will be relatively weak — further exacerbating existing social and political instability and widening income inequality.
Prior to the pandemic, Latin America’s gross domestic product (GDP) was expected to grow at a modest 1.8% in 2020, reflecting years of economic underperformance compared to other emerging markets. According to the International Monetary Fund’s (IMF) latest forecast, the region’s economy will instead contract by an estimated 8.1% this year.
Four business leaders from Mexico, Brazil, Argentina and Venezuela share their views on why Latin America’s GDP contraction is the worst among the major regions of the world, highlighting the issues that must be addressed for the respective countries:
- Ildefonso Guajardo Villarreal, Mexican economist and politician who previously served as the Secretary of Economy of Mexico during the presidency of Enrique Peña Nieto
- YPO member Sidney Levy, Chairman of the Board at Valid SA and CEO of 2016 Rio Olympic Organizing Committee
- Alejandro Catterberg, President and Co-founder of Poliarquia Consultores
- YPO member Esteban Torbar, President at Turismo Maso Internacional C.A.
A very slow recovery expected in Mexico
Mexico’s economy was already stagnating in 2019, and the pandemic accelerated the reduction in Mexico’s real GDP. The IMF expects a sharp contraction in 2020 (by 9.0%) with a mild recovery in 2021 (by 3.5%).
For Guajardo, the pandemic has been particularly severe due to a reduction in demand from the United States, Mexico’s largest trade market, for its manufacturing production and exports. In addition, he cites the fiscal intervention implemented by Mexico’s federal government was weak, even “non-existent.”
He explains, “Most of the government money went to social programs that help the poor families, which is very good. But there was no help whatsoever to the economically active population that lost jobs, both in the formal and informal sectors.” (Formal sectors represent jobs with specific working hours and regular wages. Informal sectors represent no regular working hours or wages, and are exempt from taxes.)
Another contributing factor was the lack of an “action plan” to manage the pandemic. While regions applied different lockdowns and social distancing measures, Guajardo says in the Latin American and North American model, leaders showed little concern for the pandemic’s impact. “And they don’t have an action plan in place to really take control of what is going on,” he adds. “The result of this is a very, very slow recovery.”
With continuing uncertainty amid a second wave of the pandemic, he believes the only positive element is exports and the new activation of the North American Free Trade Agreement. Guajardo is hopeful that things will get better with the incoming administration, although he expects a lot of measures in the U.S. will focus on containing the virus.
One thing remains clear for Guajardo, and that is the crisis has exposed how Mexico, along with most of Latin American countries, were unprepared for the pandemic. “It did not do its homework at all in the last couple of decades. COVID-19 has shown the weakness in our social infrastructure. The poor in Latin America are paying the highest toll of debt in our countries,” he says “We have to do a re-engineering of what kind of public policies we need, to rescue our social systems in order to be in a much better standing for years to come.”
As a case in point, he explains how the public sector in Mexico was not ready to launch virtual education. “Kids are really having a very difficult time because nobody has led an effort to call in telecom companies to offer affordable packages for connectivity. We are going to pay a high cost in the years to come … a full generation have lost a year or two in the educational system,” says Guajardo. “You have the richest man in the world owning telecom companies but showing no effort to provide a package of connectivity to poor kids in public schooling. This shows a lack of sensitivity, social commitment and leadership.”
Mixed signals from Brazil
Compared to the rest of the region, Brazil’s second quarter contraction was relatively mild. Looser quarantine measures, increased exports to China, and an increase in fiscal stimulus helped. Brazil’s GDP is expected to contract by 5.8% this year and expand by 2.8% next year.
“We’re having mixed signs in Brazil. During COVID-19, generous emergency aid was provided for the lower classes, injecting a huge amount of money into society, and, as a consequence, the country survived,” says Levy. “Meanwhile, the debt is as high as it’s ever been. And we have to roll 40% of that until next year.”
Another area of concern is worsening distribution of income “We’ve been failing to diminish that over time. We have tried different formulas from the left-to-right ideology spectrum, and none of them work so far. But overall, I think the image of the country’s (economic state) is worse than it actually is.”
Like Villareal, Levy believes there is a leadership crisis that became apparent with COVID-19. “We have 13 million people out of job in Brazil. But there are 300,000 information technology (IT) positions open and nobody to fill them. Old jobs are disappearing, and there’s no people for the new jobs. There’s an urgent need for leadership to help educate and create change across the region,” he says.
Argentina trapped in stagnation
Against the backdrop of a deep recession with high inflation, the IMF predicts Argentina’s GDP will shrink by an additional 11.8% this year and expand by 4.9% in 2021, accumulating a permanent loss of 8.0%.
“The region is not going through a very good moment. I don’t want to speculate about which country is worse, but Argentina is still governed by a populist regime from the left that returned last year to power,” says Catterberg. “And if we look at GDP trend, Argentina right now has the same GDP per capita than 30 years ago. So basically, we are stuck; the political system is stuck.”
He adds that Argentina has been losing its leadership role not only politically and economically, but also in cultural terms. “It is losing its influence across the region. Argentina is trapped in this circle of long stagnation. And sending very negative signals to the market.”
In 2020, Argentina completed its ninth sovereign debt restructuring with private creditors, and its government is now preparing to re-negotiate with IMF on a new program. But Catterberg does not expect the IMF to able to press the government to change the agenda and to start making strong reforms.
Asked if Argentina is heading toward a Venezuela-scenario, Catterberg says, “I don’t see it. Yes, Argentina will keep losing its dynamic big middle class that characterized it in comparison with the rest of Latin America. It will become a much more divided society; the distribution of wealth will get worse and more economic problems and violence will follow. Unless we see a big game changer, it we will keep going down that track.”
But Catterberg highlights ways the country can still change its course, including strengthening its institutions and judicial system, and reinforcing the role of the private sector. “We still need some help toward economic growth and reforms in order to consolidate democracy. Because if not, neither of those things happen. Then we are opening the door in Latin America for having more Venezuelas.”
Venezuela: The biggest economic collapse in history
“When we start talking about Venezuela, the first thing we have to be clear about is that Venezuela is unique in the world. It’s the biggest economic collapse in history,” says Torbar. “In the past seven years, the country lost 80% of its GDP. We have gone back 90 years in terms of what we’ve lost and of how much we’re producing in oil. We used to produce 3.2 million barrels a day. Now, we are down to only 300,000 barrels a day.”
Still Venezuela matters to the world, says Torbar, and these are the six reasons why:
- Venezuela sits on the largest proven oil reserves in the world.
- It has created one of the biggest migration crises is in the world with implications for the region.
- Venezuela sits in the middle of organized crime, terrorism organizations, and repressive apparatus, with a narcotic route into the U.S.
- The country’s allies include China, Russia, Iran and Turkey, countries that can influence the geopolitics of the region.
- Venezuela continues to have close ties to Cuba on various fronts.
- The country’s negative impact on the environment is huge, including rivers contaminated by illegal mining with implications for the world and for the Amazon.
While Venezuela has beaten all the records in terms of “economic destruction,” Torbar says “at least we are not topping the world in terms of COVID-19.” However, he adds that the negative impact of the pandemic is being felt. “Before COVID-19, Venezuela was a problem that people were willing to address. With COVID-19, Venezuela has come to second place in many ways. So now, there’s this perception that it might take longer for things to change.”
But Torbar remains hopeful. “A country that has the level of destruction that Venezuela has had will definitely need help. I will probably not see the country that I saw when I grew up.It will take generations to recover Venezuela, but it is going to have to happen. Venezuela has to recover to send the right signals for the rest of the region.”
YPO members can view the full conversation Latin America Today – Challenges And Prospects here.