| World Bank IMF and Dev Agencies |    896 VIEWS  |
| World Bank IMF and Dev Agencies | |
| 896 VIEWS | |
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Thursday,
March 19, 2020 /06:55 PM / by Alejandro Werner, IMFBlog / Header Image Credit:
COVID-19 is spreading very
quickly. This is no longer a regional issue-it is a challenge calling for a
global response. Countries in Latin America and the
Caribbean have been hit later than other regions from the pandemic and
therefore have a chance to flatten the curve of contagion.
Efforts on multiple fronts to achieve this goal are underway. In
addition to strengthening health policy responses, many countries in the region
are taking measures of containment, including border closures, school closings,
and other social distancing measures.
These measures, together with the world economic slowdown and disruption
in supply chains, the decline in commodity prices, the contraction in tourism,
and the sharp tightening of global financial conditions are bringing activity
to a halt in many Latin American countries-severely damaging economic
prospects. For the region, the recovery we were expecting a few months ago will
not happen and a 2020 with negative growth is not an unlikely scenario.
Deep Impact
The resulting increase in borrowing costs will expose financial
vulnerabilities that have accumulated over years of low interest rates. While
the sharp fall in the oil price is expected to benefit the oil importing
countries in the region, it will dampen investment and economic activity in
countries that are heavily dependent on oil exports.
In the event of a local outbreak, service sector activity will likely be
hit the hardest as a result of containment efforts and social distancing, with
sectors such as tourism and hospitality, and transportation particularly
affected.
Moreover, countries with weak public health infrastructures and limited
fiscal space to ramp up public health services and support affected sectors and
households would come under significant pressure.
The economic impact of the pandemic is likely to vary due to regional
and country-specific characteristics.
South America will face lower export revenues, both from the
drop in commodity prices and reduction in export volumes, especially to China,
Europe and the United States which are important trade partners. The sharp
decline in oil prices will hit the oil exporters especially. The tightening of
financial conditions will affect negatively the large and financially
integrated economies and those with underlying vulnerabilities. Containment
measures in several countries will reduce economic activity in service and
manufacturing sectors for at least the next quarter, with a rebound once the
epidemic is contained.
In Central America and Mexico, a slowdown in the United
States will lead to a reduction in trade, foreign direct investment, tourism
flows, and remittances. Key agricultural exports (coffee, sugar, banana) as
well as trade flows through the Panama Canal could also be adversely affected
by lower global demand. Local outbreaks will strain economic activity in the
next quarter and aggravate already uncertain business conditions (especially in
Mexico).
In the Caribbean, lower tourism demand due to travel
restrictions and "the fear factor"-even after the outbreak recedes-will weigh
heavily on economic activity. Commodity exporters will also be strongly
impacted and a reduction in remittances is likely to add to the economic
strain.
Policy Priorities
The top priority is ensuring that front-line health-related spending
is available to protect people's wellbeing, take care of the sick, and slow the
spread of the virus. In countries where there are limitations in health care
systems, the international community must step in to help them avert a
humanitarian crisis.
In addition, targeted fiscal, monetary, and financial market measures will be key to
mitigate the economic impact of the virus. Governments should use cash
transfers, wage subsidies and tax relief to help affected households and
businesses to confront this temporary and sudden stop in production.
Central banks should increase monitoring, develop contingency plans, and
be ready to provide ample liquidity to financial institutions, particularly
those lending to small and medium sized enterprises, which may be less prepared
to withstand prolonged disruptions. Temporary regulatory forbearance may
also be appropriate in some cases.
Where policy space exists, broader monetary and fiscal stimulus can lift
confidence and aggregate demand but would most likely be more effective when
business operations begin to normalize. Given the extensive cross-border
economic linkages, the argument for a coordinated, global response to the
epidemic is clear.
Countries are starting to take policy initiatives in this direction. For
example, additional funds are being secured for health spending in many
countries including Argentina, Brazil, Colombia, and Peru. Moreover, Brazil
announced an emergency economic package on March 17 that is targeted for
supporting the socially vulnerable, maintenance of employment, and combatting
the pandemic.
For our part, the IMF stands ready to help mitigate the economic fallout from the coronavirus and
we have several facilities and instruments at our disposal.
In closing, I would like to iterate the importance of decisive actions
by all of us to limit the economic fallout from the coronavirus and avert a
humanitarian crisis. The Fund stands ready to assist and work with member
countries in these difficult times.
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