As COVID-19 Ravages Latin America, Demands for Debt Relief Resurface
As the coronavirus pandemic takes a terrible toll across Latin America, with over 3.5 million cases and nearly 150,000 deaths, the region is increasingly facing a financial and humanitarian emergency. Across Latin America and the Caribbean, GDP is forecast to contract by 9.3 percent in 2020, according to the International Monetary Fund—the region’s largest economic contraction on record, and far worse than the outlook for African and Asian economies. The United Nations expects the value of South America’s exports to fall by nearly a fifth this year due to shrinking international demand and weaker commodity prices. Foreign investment has also declined massively, and U.N. agencies predict that a further 16 million Latin Americans will sink into extreme poverty in 2020, pushing the total to more than 70 million people in the region.
Lower tax receipts, currency depreciation, the costs of emergency funding for hard-hit hospitals, and the need to fund income-support and economic relief measures are all driving up fiscal deficits and indebtedness. Government debt across Latin America is skyrocketing, and may breach 100 percent of GDP this year in some countries, like Brazil.
Meanwhile, the existing economic and fiscal woes of countries like Ecuador, Venezuela and Argentina, which entered its ninth default since 1816 in May, will only worsen, raising fears in some quarters of a mass debt crisis akin to the “lost decade” of the 1980s. “Indebtedness implies fewer possibilities to increase spending in the future,” says Claudia Sanhueza, an economist at the Universidad Mayor in Chile. As such, she adds, it “causes problems in funding anti-poverty programs.”
In response, a group of seven left-leaning former leaders—including Dilma Rousseff of Brazil, Bolivia’s Evo Morales, Rafael Correa of Ecuador, Ernesto Samper of Colombia and Jose Luis Rodriguez Zapatero of Spain—have signed a petition demanding mass debt cancellation and relief for Latin America. The signatories call on the IMF and other multilateral organizations like the World Bank to cancel the external debt of Latin American countries, and for overseas bondholders to accept an immediate restructuring of privately held debt with a two-year interest payment holiday. The petition argues that such actions are “both fair and necessary” given the extraordinary challenge posed to the region by the pandemic, citing historical examples of debt forgiveness.
There are less radical but still significant proposals already advancing in some quarters. Alicia Barcena, the secretary-general of the U.N. Economic Commission for Latin America and the Caribbean, argued in June that creditors of Caribbean countries, whose tourism-dependent economies have been hammered by an industry-wide shutdown amid the pandemic, should reduce interest rates and grant a moratorium on interest payments until at least the end of the year.
Debt-ridden countries also desperately need new sources of funding. Costa Rica’s president, Carlos Alvarado, is launching a Fund Against COVID-19 Economics, which hopes to convince rich countries to offer “financial vaccines” to poorer nations by way of 50-year, interest-free loans. The IMF has stepped in to provide 17 Latin American and Caribbean countries, including Honduras, Jamaica, the Dominican Republic and Ecuador, with a total of $5.2 billion in emergency financing since March. Former Colombian Finance Minister Mauricio Cardenas has called on the IMF to issue new bonds to further assist Latin American countries, but such measures will remain a drop in the ocean compared to the region’s total external debt of over $2 trillion.
Wholesale debt forgiveness nevertheless remains unlikely and even undesirable for most Latin American economies, analysts suggest. “Most countries are going to try to ride it out and hope that the public finances will improve with the economic recovery in 2021,” says Robert Wood, the principal economist for Latin America at The Economist Intelligence Unit. He points out that the “stigma” of debt restructuring or default would affect these countries’ risk ratings in the eyes of international credit agencies, limiting their ability to raise money in bond markets in the future to help fund the recovery.
Lower tax receipts, currency depreciation, emergency funding for hard-hit hospitals, and the need to fund economic relief measures are driving up deficits across Latin America.
Some of the region’s economies have ample sources of low-cost financing to fuel their emergency spending. Brazil, which has spent more than $220 billion on measures to combat the coronavirus and its economic fallout, has been able to fall back on deep domestic capital markets for borrowing, thanks to saving-friendly policies, including a stable monetary regime, that were laid down in the 1990s. And small countries with strong economic fundamentals have been able to tap international sovereign debt markets to help fund their pandemic-related expenditures. Since March, bond issues have raised $1.2 billion in Guatemala, $2.5 billion in Panama, $1 billion in Paraguay and $2 billion in Uruguay, all at relatively low yields.
“Countries like Uruguay or Chile have pretty good debt management because creditors know that these are governments that could fulfill their promises,” explains Nicolas Saldias, senior researcher at the Wilson Center’s Latin American Program. It’s a different story for economies like Venezuela, Argentina and Ecuador, which were already facing severe economic crises before the pandemic struck, and for which debt cancellation could further damage their ability to find enough financing to survive in the future. “That isn’t to say that there’s no room for finding ways to make the debt repayment schedule easier, but that depends a lot on your country’s credibility,” says Saldias.
In Argentina, COVID-19 has complicated the government’s ability to manage the $65 billion it owes to external bondholders, but the pandemic has also made some of them more sympathetic to its plight. President Alberto Fernandez is inching closer to a deal with Argentina’s creditors, probably granting South America’s second-largest economy a financial reprieve this year and next. But in contrast to probable V-shaped recoveries in Chile, Uruguay and Brazil, Argentina’s recovery “will take a decade, at least,” Saldias warns. “With this government’s economic policies, it could take even longer.”
Ecuador, with $58.4 billion in total debt—equivalent to over half of its GDP—and an economy due to shrink by up to 9.6 percent this year, reached a provisional agreement with some of its bondholders in early July. But it is still seeking more financing from China and the IMF to deal with the impact of the pandemic. Even before COVID-19 hit Ecuador, leading to more than 4,000 deaths and 53,000 confirmed cases, a slump in global oil prices was battering its commodity-oriented economy.
Venezuela is facing a similar dynamic. It has been in recession for over six years, and its oil exports sank to a 77-year low in June. Twelve-month inflation reached a staggering 3,600 percent in May, and pervasive corruption and mismanagement mean that few lenders or institutions are likely to extend credit to President Nicolas Maduro’s authoritarian administration. In early July, the United Kingdom’s High Court blocked Maduro’s attempts to gain access to $1 billion worth of gold stored in the Bank of England, pointing to the British government’s recognition of opposition leader Juan Guaido as Venezuela’s legitimate interim president.
China, struggling with its own economic slowdown, is unlikely to come to the rescue of struggling Latin American countries in the same way it did after the 2008 financial crisis. Given the dire humanitarian situation in Venezuela, human rights organizations like the Washington Office on Latin America have suggested the U.S. and other countries should help prevent a humanitarian disaster by lifting economic and financial sanctions on the country, albeit with conditions.
Coronavirus-related strains are also being felt in Mexico. The administration of President Andres Manuel Lopez Obrador is slashing government spending as part of a policy of “republican austerity” to supposedly fund health care, while so far eschewing a $61 billion credit line made available by the IMF late last year.
Ultimately, most Latin American countries are likely to weather the crisis with some combination of more debt and tax increases, provided governments can give lenders confidence they are spending and taxing effectively. But, as Wood warns, this cautiously optimistic outlook depends on a moderate global recovery next year. For Sanhueza, the Chilean economist, the crisis offers an opportunity for countries to “rethink their social policies,” including using higher tax revenues to build better-prepared health systems. “I hope that both the richest people, and the wealth that the continent possesses, are used to these ends,” she says.
Laurence Blair is a freelance journalist who has reported from across Latin America, especially Bolivia, Chile, and Paraguay.
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