Latin America’s best markets are in the bargain bin
The Andean Three – Chile, Peru and Colombia – should have little trouble shrugging off the pandemic, says James McKeigue. And their long-term prospects remain excellent.
Emerging markets have been flattened by investors’ stampede for the exit. The Institute of International Finance estimates that overseas investors pulled $95bn from emerging markets in the first quarter of 2020 – a record quarterly outflow. Investors are right to be worried. Emerging markets tend to have poor health systems and cash-strapped governments, which make it harder to battle coronavirus. That’s especially true in Latin America, which seems the most vulnerable region. The International Monetary Fund (IMF) thinks Latin America’s economies will contract by 5.2% this year, worse than Africa or East Asia and as bad as eastern Europe.
But don’t be discouraged by those grim numbers. The sell-off has created an opportunity. Some Latin American countries – in particular the Andean Three of Colombia, Peru and Chile – look well placed to contain and recover from coronavirus. The pandemic won’t alter their strong medium-term growth prospects, but it has given us a chance to buy in at rock-bottom prices.
Lessons from Ecuador
The money managers and analysts were quick to react, but the virus took its time to travel west to Latin America and will wreak further havoc. I write this in the city of Guayaquil on Ecuador’s Pacific coast, the early epicentre of Covid-19 in the region. According to excess mortality data analysed by the Financial Times, during a fortnight spanning March and April the city had the world’s largest increase in extra deaths, with a 485% jump in fatalities from the historical average for that time of year. Unfortunately, the factors that exacerbated the crisis in Ecuador are commonplace across Latin America.
One problem is weak health systems. In most Latin American countries expensive private clinics – offering decent care by international standards – operate alongside underfunded public hospitals. The rapid collapse of Guayaquil’s health services, where there was a shortage of hospital beds, drugs and medical oxygen, will be repeated in other countries. Corruption and inefficiency in public health bodies hardly help.
Of course, these problems bedevil all emerging markets, but Latin America looks particularly susceptible. It has two of the world’s five largest cities, which will make social distancing difficult. Obesity, which early studies find a significant contributor to coronavirus cases needing critical care, is higher in Latin America than Africa, Asia or eastern Europe. And the IMF found more Latin Americans work in the informal sector than any other emerging market. That matters in a pandemic because it’s much harder to give informal workers the financial assistance they need to observe the quarantine.
The biggest lesson from Ecuador is that money matters. Ecuador’s economy was a mess before coronavirus arrived; it was struggling to maintain the terms of an IMF bailout. A lack of money hits countries in two ways. Firstly, it makes it harder to control the pandemic as there isn’t the cash to upgrade health systems, import equipment and give people the financial assistance needed to maintain lockdown. Secondly it exacerbates the economic impact, as in the absence of stimulus measures, more companies go bankrupt and more jobs are lost. That means that the eventual economic recovery will take longer.
Why the Andean Three will bounce back
So far, the article makes pretty grim reading, so congratulations if you got this far – your perseverance will be rewarded. Because although Latin America is in for a huge recession, there are some countries that will bounce back quickly. Chile, Peru and Colombia are long-term favourites of mine because they are well-managed, open economies, with positive demographics and great growth potential. They are also the best-placed major economies in Latin America to control and quickly recover from coronavirus.
The key factor with the Andean Three is that they entered the pandemic from a position of macroeconomic strength that allowed them to respond effectively. Peru’s combined fiscal and monetary package is worth 12% of GDP and is the region’s largest stimulus. The largesse is possible because its 2019 fiscal and current-account deficits were just 1.6% and 1.5% respectively, while its total debt-to-GDP ratio was only 26%. Its reserves comfortably cover external financing requirements, while it bolstered its position by securing an $18bn precautionary credit line with the IMF.
Chile also responded strongly, with a fiscal stimulus worth 6% of GDP, while its central bank launched the country’s first-ever quantitative easing (QE), or money printing programme, spending $4bn on bank bonds. Following political protests last year, Chile was already beefing up welfare payments and social services and the pandemic will merely accelerate that trend.
With a 2019 public debt-to-GDP ratio of just 28%, the country can afford to spend its way out of the crisis. Moreover, thanks to its strong institutions it is spending wisely. It has conducted more coronavirus tests than any other nation in the region, allowing it to implement a sophisticated partial-lockdown strategy.
Colombia’s situation is the most precarious of the three, but still positive compared with the rest of the region. Public debt-to-GDP stood at 51% in 2019, although growth reached 3.3% and the deficit just 2%. Moreover, the collapse in the oil price hit the country’s main export. These factors limited Colombia’s fiscal stimulus to 1.5%. However, the central bank was the first in Latin America to implement QE with a $3bn programme that covered private and public debt.
The three countries’ solid financial position entering the crisis allowed them to take strong measures to contain its economic impact and speed the future recovery. The IMF projects a fall in 2020 GDP of 2.4% for Colombia and 4.5% for both Chile and Peru in 2020, which is better than the regional average of -5.2%. (It has pencilled in a 6% contraction for the UK.) And crucially, all of the Andean Three will see a strong rebound in 2021. If the IMF is right in its estimate of 3.7% expansion in Colombia in 2021, 5.3% in Chile and 5.2% in Peru, then all three economies will be bigger at the end of next year than they are now.
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