COVID-19 and the Road to Economic Recovery for South American Emerging Economies
As the world marks the one-year anniversary of the COVID-19 pandemic, the global economy is still trying to recover from the shock. While economic powerhouses such as the United States, the United Kingdom, and France struggled to battle the pandemic-induced economic recession, as of early 2021, South American members of the Pacific Alliance have been able to achieve initial steps of what appears to be a strong revitalization of economic activity. Considered as one of the least-equipped regions to handle the pandemic, Colombia, Peru, and Chiles’ series of responsive healthcare measures and policy actions have surpassed expectations and challenged the responses of their wealthier counterparts.
In the earliest months of the pandemic, the headlines covering Latin America's struggle with COVID-19 were frightening. Striking examples include the funerary industry crisis in Guayaquil, Ecuador’s largest city, due to the overwhelming number of deaths, Peru’s skyrocketing mortality rates, and Chile’s absolute number of active cases nearly doubling daily during April. South American countries held some of the world’s highest COVID-related death rates and the supply of ICU beds and ventilators proportional to their population was worrisome.
With turmoil from a healthcare crisis and soaring unemployment levels resulting from uncertainty and a shaky adaptation to a virtual world, Latin America experienced an economic downfall because of the virus. Like many other emerging markets, Latin America faced enormous capital outflow as investors relocated their assets to safer and more stable markets. As one of the hardest-struck countries, Peru faced a GDP decline of 17.4% in the first half of 2020 due to extensive lockdown restrictions. Colombia’s historic struggle with labour productivity worsened with the pandemic, facing a deepening recession. Similarly, after abandoning a plan of “cautious” reopening of the economy, Chile’s central bank predicted a staggering 10.4% decline in domestic demand.
Nevertheless, by the fourth quarter of 2020, three of the emerging economies of South America managed to catalyze remarkable improvements in economic activity, with certain industries even returning to pre-pandemic levels of productivity and performance.
Colombia, Peru, and Chile continue to impose strict rules for compliance with the health department to battle COVID-19, including lockdowns that lasted several months, early curfews, and stringent mobility restrictions in major cities. As of the beginning of February 2021, Chile maintained a multiphase quarantine system, constantly monitoring the trajectory of the virus to revise capacity limits in public spaces. Meanwhile, Colombia placed regulations for automobile circulation in Bogota and a system of entrance to grocery stores and other public-services locations based on the last digit of citizen IDs. Likewise, Lima limited the number of persons per family allowed to leave their homes and imposed 24-hour curfews on Sundays in several Peruvian provinces. The continuous revision of COVID-related policies has not only facilitated the control of the virus but also aided the transition into a post-pandemic world seemingly less bumpy than in many countries in the Northern hemisphere.
The adequate use of the exchange rates as a buffer to stimulate exports and international trade may also have positively affected the course of Latin American economic recovery. Colombia and Peru have continued with their floating exchange rate regimes that allow for their respective currencies to absorb the shock of the pandemic through forces of supply and demand. The depreciation of the Colombian Peso and the Peruvian Sol against the U.S. dollar signal less expensive goods from these Latin American countries, thus propelling economic recovery by stimulating local industries.
Many South American governments have committed to significant stimulus packages to protect individuals and businesses from the recession resulting from the pandemic. Colombia introduced multiple programs to increase liquidity, some of which are worth over 72 trillion pesos. Comparably, Chile has awarded increased lines of credit for SMEs’ and supported economic packages that amount to $12 billion throughout 2021 and 2022. As these measures continue to mitigate the economic impact of the pandemic, the light at the end of the tunnel is already visible on numerous fronts for the emerging markets in South America. In fact, Latin America’s unpredicted economic performance in 2020 led the World Economic Forum to revise the region’s expected growth for 2021 to 4.1% from an initial 3.6% prediction in October.
Following the end of the initial lockdown, the Chilean economy started experiencing significant improvements, marking the beginning of an optimistic road to recovery. While the tourism and hospitality sectors remain weak, business confidence has increased and retail sales have gone up. Rising exports in the mining industry will further benefit the Chilean economy as global demand reaches an improved steady-state.
By October, investments in Peruvian real estate improved significantly. Along with recoveries in capital inflow, financial institutions in Peru responded to the crisis by issuing bonds with maturities of 100 years. As predictions indicate, the pent-up demand will continue to drive the economy forward, as public sentiment becomes more comfortable with a future in the presence of COVID-19. The higher-than-expected recovery faced during the first three months of 2021 will also alleviate fiscal deficit plans.
Similarly, by December 2020, unemployment in Colombia faced a moderate decline, and analysts expect that economic recovery will consolidate by the second quarter of 2021, achieving an impressive 4.8% growth. Resuming major infrastructure projects such as the 4G road construction program and the construction of the Bogota metro will also benefit economic revival. Furthermore, the remittances that many Colombian workers abroad have sent their families in response to the pandemic have helped soften the crisis.
Although economic activity is improving, multiple Latin American countries are facing a resurgence in contagion. This wave has forced Chile into lockdown despite having one of the most successful vaccination plans in the world. In the same way, Colombia and Peru’s cases continue to climb to troublesome values. Moreover, inequality, corruption, and lack of leadership have caused a struggle with the procurement of vaccines in most South American states. The region’s ability to secure vaccines is fundamental for the livelihoods of its people and the path for economic recovery. While levels of economic activity are an indication of the presence of fairly successful and timely economic measures, the future remains uncertain and fragile.