In Latin America, the economic and financial scars left in the disease’s wake may never fully heal. Public debt levels across the region skyrocketed as governments scrambled to stave off economic collapse with stimulus payments, credit relief and other support. Some even resorted to quantitative easing-like measures, a tactic rarely used before in emerging markets. As result, several governments now have elevated debt levels that experts said will take years to normalize. Latin America came into the pandemic already in a precarious position. According to the Inter-American Development Bank, the region’s debt likely will end 2020 at 74% of GDP, compared to 57% in 2019. Such a high debt-to-GDP ratio undermines the prospects of an economic recovery, economists said. After suffering an expected 9.2% contraction this year, GDP in the region is only expected to rebound by about 4% in 2021. Most major Latin American economies will not return to their pre-pandemic GDP output levels until 2022 or 2023 at the earliest. In the meantime, banks likely will continue to face a challenging operating environment.
Brazil, the region’s largest economy, likely will face one of the most demanding cases. To temper the economic impact, the government resorted to an unusually large stimulus for an emerging market. Fiscal aid there grew to 11.8% of GDP, a percentage more similar to those of advanced economies. The average COVID-19 stimulus package in emerging economies equated to just 6.6% of GDP. Chile, Argentina, Brazil and Mexico need the largest fiscal consolidations after 2021 in order to stabilize debt, with cuts equivalent to between 3.5% and 4.5% of GDP. Although its 2020 GDP downturn is expected to be modest, Brazil also will have one of the sharpest increases in debt. Public debt-to-GDP is expected to hit 96.5% this year, up from 75.8% in 2019, making it one of the most indebted countries in the region, alongside Argentina. Other nations, such as Chile and Peru, have lower levels of debt. And while they face their own problems, largely stemming from political uncertainty, economists are not as worried over their eventual recovery. Lack of resources could become a major issue in the months to come as some believe that the full economic brunt of the pandemic is still to play out. Credit deterioration is not expected to peak until the first half of 2021, and most economist believe that labor markets still do not fully reflect the lasting impact of the crisis.