Fiscal recovery at peril in LatAm amid rising political and social anger
Unrest across Latin America in the wake of the devastating impact of Covid-19 will make it harder from governments to push through spending cuts and tax rises needed to restore their public finances especially in the face of double-digit employment.
Increased social tensions and unpredictable politics in Latin America, the region worst-affected by Covid-19, could jeopardise the return to fiscal stability after the pandemic.
More than 45m additional people in Latin America and the Caribbean will fall into poverty as a result of the crisis, according to estimates from the UN. Petar Atanasov, co-head of sovereign research at Gramercy, told GlobalMarkets it was impossible to know the full impact of the pandemic on the region, and that governments would have to learn to deal with the poverty increase.
“Latin America was already seeing major social unrest, and it would appear very difficult to avoid political and social upheaval in some countries as we emerge from Covid-19,” he said. “Most of the region is susceptible.”
Chile, Ecuador and Bolivia — among others — saw mass protests and violence in the final months of 2019 before Covid-19 lockdowns mostly halted them. Yet unrest returned in recent weeks across the continent and could complicate efforts for fiscal consolidation post-crisis.
“[Prospects for] fiscal consolidation are very much on my mind,” said Sarah Glendon, senior Latin America analyst at Columbia Threadneedle Investments. “We will be emerging from a huge crisis, some countries face double-digit unemployment rates and the informal sector is large.
“In these circumstances, it’s hard to imagine fiscal belt-tightening — especially in election years.”
Moody’s said on Monday that EM sovereigns would suffer “long-lasting revenue losses” from coronavirus, with governments’ ability to implement revenue-raising measures set to be a “key credit driver”.
“Countries are going to have to start talking about things like tax reform, and when they do finally get to fiscal consolidation, there is a risk it sparks further unrest,” Glendon told GlobalMarkets.
Most of Latin America entered the crisis in a weak fiscal position, and Fitch said this week that the median debt-to-GDP ratio in the region would rise by 13.5% this year and 4.6% in 2021. But with a wave of elections in the next two years, governments may not be willing to tackle the problem.
Brazil has implemented one of the world’s largest stimulus programmes — at around 12% of GDP — despite limited fiscal space and debt fast approaching 100% of GDP.
“Brazil has arguably the most ambitious reform programme of any EM country,” Joydeep Mukherji, head of Latin America sovereign ratings at Standard & Poor’s, told GlobalMarkets. “But pulling back fiscal stimulus will be difficult and my main concern is that the political economy is not going to be conducive to the fiscal framework that they need.”