Latin America: Economic Contraction, Energy Issues, Politics & the Pandemic – September 3, 2020

Special Report

Latin America: Economic Contraction, Energy Issues, Politics & the Pandemic

The Economy & Covid-19

Latin America’s economy as a whole is set to contract by approximately 9.4% in 2020, according to the International Monetary Fund (IMF). This is down by four percentage points from its April projection and since the largest economies of the region – Brazil and Mexico – have suffered from the worst outbreaks of Covid-19. According to Goldman Sachs analysts, Mexico, Argentina, and Peru are likely to see double digit declines in growth this year, making it the worst economic downturn in the region since WWII. Still, the IMF projects that the region will see a recovery of 3.7% growth in 2021.

Latin America has been considered the global epicenter of the pandemic since early June, accounting for more than 40% of the world’s new Covid-19 deaths despite having only 8% of the population. Latin American governments, central banks, and international financial institutions have taken steps to mitigate the impacts of Covid-19, but the pandemic continues to rage through many parts of the region. Brazil, Mexico, Peru, and Chile have been hit hardest according to confirmed numbers of cases, but numbers out of Bolivia, Ecuador, and Venezuela are less clear. There is a widely held belief that Covid-19 cases are undercounted due to a lack of testing capacity as well as political will on the part of some governments, including in Venezuela, Mexico, and Brazil. Brazil’s confirmed death toll to Covid-19 currently stands at approximately 120,000, and Mexico’s is at about 64,000.

Both Mexican President Andrés Manuel López Obrador (popularly known as “AMLO”) and Brazilian President Jair Bolsonaro have underplayed the coronavirus since the beginning and were slow to implement shutdown orders in their countries – even when governors urged the federal governments to take specific measures. Many Brazilians and Mexicans live and work in the informal economy, so shutting down the country and asking people to work from home was just not a possibility in their view. Bolsonaro has also denied responsibility for the virus saying, “I’m sorry but what do you want me to do” and AMLO has told Mexicans to “lose weight and pray.”

But neither AMLO nor Bolsonaro seem to have suffered in approval ratings for their handling of the virus and the resulting economic downturn. In Mexico, an August poll by Parametria found AMLO’s approval rating to be 65%, while the Mexican newspaper Reforma’s August poll found his approval rating to be 56%. In Brazil, an August poll by Datafolha found 37% gave Bolsonaro a positive approval rating, which is up from 32% in June and the highest his ratings have been since he took office.

Popular outreach could be buoying their approval ratings and blunting the economic impacts in the short term. But Latin America is suffering from multiple related economic factors from the pandemic including: 1) the negative impacts of lockdowns and travel restrictions inside the region; 2) the reduction of trade within and outside the region; 3) the reduction of foreign investment; and 4) lower remittances from the United States and Europe. Many countries are also suffering from a decline in global demand for commodities, a significant drop in tourism, and low oil prices.

Energy Issues

Energy is a key sector of the economy in Latin America and will be important for the recovery of the region. The oil market is currently in trouble worldwide – oil prices have come back from recent lows but remain depressed by the pandemic’s impact on global demand. This augurs poorly in the near term for oil-producing countries in Latin America. The continuing spread of Covid-19 through the region means there is little visibility on when consumption and growth will start to pick up again, but consensus is against any real optimism about a recovery before 2021.

If oil stays as cheap as it is, that could undermine the value proposition for costly sub-salt exploration and development offshore Brazil. Venezuela’s economy was already in ruins heading into the pandemic, and low oil prices have only added to the pressure. According to the Organization of the Petroleum Exporting Countries (OPEC), Venezuela produced 339,000 barrels per day in July, which was up from 336,000 barrels per day in June. These are production levels not seen in Venezuela since the 1930s.

There will probably be some big deals in oil, but they may be of the consolidation/distressed assets variety, whereas the big infrastructure spending is more likely to be in natural gas and renewables. The United States is pushing to export more of its LNG to Latin America, but that is going to require new import capacity, pipelines, and capex spending.

Climate considerations are also playing a role in government decision-making throughout Latin America, particularly as countries in the region seek to expand energy access. This bodes well for renewables, but also potentially for natural gas. Natural gas burns cleaner than oil, is growing easier to deliver by ship and truck, is available for export in large quantities from the United States (with low shipping costs) and is also increasingly available from South American sources thanks to technological advances. Although economics in Argentina’s Vaca Muerta shale are currently challenged by low oil prices, in recent years, natural gas production growth from shale was sufficient to spur a resumption of exports to neighboring Chile and Brazil and to trigger Argentina’s first-ever exports of liquified natural gas (LNG) last year.

Social & Political Consequences

Coming out of the pandemic, the region will likely have to deal with growing crime, insecurity, and social and political unrest – and the possibility of increased migration to the United States from Mexico and Central America. Political stability will be necessary for the economic recovery in the region, but it is far from certain as many people in Latin America have begun to feel disillusioned with democracy. Economic prosperity has not been a natural correlation to democracy, and neither has security. Rapid urbanization, poor social services (like healthcare and education), weak democratic institutions, and persistent inequality, which were already chronic in the region, have been exacerbated by the pandemic and the economic contraction.

Political protests and violence, which were seen in 2019 in places like Bolivia and Chile, could return as the region shifts gears to elections. Bolivia and Chile are both scheduled to hold elections in October, after a presidential contest in Bolivia and a national vote on the need for a new constitution in Chile were postponed due to the pandemic. Brazil is scheduled to have municipal elections in November. Venezuela will have legislative elections in December, but the opposition parties have decided to boycott saying that the election will be rigged. Peru, Chile, Nicaragua, and Ecuador are scheduled to have general elections in 2021, and Mexico will hold midterm elections in June 2021.

Corruption is also a chronic issue. Latin Americans want to weed out corrupt officials, ruling elites, and private sector corporate interests which benefit from corrupt dealings and seem out of touch with the people. At the same time, political parties are increasingly using corruption allegations to undermine their political opponents. For example, AMLO recently floated the idea of a referendum on five former Mexican presidents and whether they should be charged with corruption. This came after a former PEMEX head implicated two former presidents in corrupt dealings involving millions of dollars. If AMLO moves forward with the referendum, it could have profound political consequences.

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