In the descendant economic chaos of 2020, all but a handful of the world’s economies declined thanks to COVID and, more specifically, the lockdowns that the pandemic provoked. By contrast, economic recovery varies substantially by region and by country. Latin America stood out for taking the most devasting blows from COVID. Its recovery will be even more remarkable and distinct from the rest of the world. Below are documented six reasons that together will help explain why Latin America will experience a rebound unique from other parts of the world.
#1 Infection is the Best Protection
A groundbreaking Israeli study, published August 24th, 2021, showed that people who were previously infected with COVID-19 were six times more likely to NOT be infected by the Delta variant versus those who were never infected but did receive two Pfizer vaccinations. This is unwelcome news to nations, like Israel, who worked effectively to minimize infection and rapidly vaccinated their population. Conversely, the study, which echoes humanity’s checkered past at fighting viruses (not diseases) with vaccines, provides some level of silver lining optimism to most of Latin America, which suffered global leading levels of COVID-19 infection.
In most of the world’s nations, including all but a few countries in Latin America, infection levels have been woefully under-reported. The more accurate data point is death by COVID, albeit with its own set of caveats. When we compare the COVID mortality rate trend over the last three months across a series of countries in the region, we see a clear pattern. Those with high accumulated COVID mortality rates on June 1st, 2021 realized strong declines in deaths (and presumably infections) over the next 90 days (through August 29th), regardless of the level of vaccinations, versus those countries that started the summer with low accumulated morbidity rates, even if their vaccination programs were quite advanced.
It is universally believed, and proven multiple times in separate studies, that vaccinations help reduce the impact of COVID infection, even if they do not prevent infection. But what the Israeli study shows, and three months of trend data bear out, is that highly infected countries like Peru, Chile, Brazil, Argentina, Colombia, Ecuador and Peru should continue to experience a steady decline of infection levels in spite of the arrival and spread of new variants. Time will tell if such a prediction is valid but if it is, then those highly infected societies will move on from COVID more quickly than the less infected countries. Latin America may well put COVID behind it before Asia, Canada, the Caribbean, the affluent Middle East and parts of northern Europe where infection levels were better controlled.
#2 Start of a Commodity Boom Cycle
The global monetary policy response to COVID, led by central banks in the US, China, Europe, Japan, Canada, Australia, and South Korea flooded the global economy with close to $12 trillion USD of additional cash, more than 10% of pre-COVID money supply. Couple that with aggressive fiscal spending on new infrastructure by the Americans and Chinese and select other countries and you have an unprecedented demand and supply boost to the world’s economy. Cash is still being hoarded by many corporations, wealthy individuals and even some governments so the supply side growth explosion we feel now should continue for at least another three years, lifting prices of just about every commodity the world produces.
At the same time, the logistical obstacles created by lockdowns, travel restrictions and nativist politics have stifled investment in new commodity supply. It could take years for supply to catch up with demand.
The world’s leading central banks today offer negative real-interest rates (interest rate minus inflation). Even if tapering begins and rates are lifted, inflation will remain well ahead of interest rates for the foreseeable future, further underpinning commodity prices.
The last time the world faced high commodity prices and low interest rates (2003-2013), Latin America grew at record levels in what was considered the greatest decade of growth in the past half-century. If reactionary politics don’t get in the way, Latin America may be on the precipice of a new super-cycle that creates impressive wealth for the region.
#3 Disruption of Retail
In 2003, SARS forced millions of Chinese into quarantine. Locked in their homes, many turned to e-commerce to buy staples. Those disruptive six months created a momentous change in Chinese retail that today positions China as the largest e-commerce market in the world, capturing over 30% of all formal retail. The shift was also the death nell for niche retailers. The convenience of online shopping outweighed the time waste of searching for hard-to-find items on foot. Similarly, niche retail has vastly declined in the US, Canada, and Europe where e-commerce share of retail is over 20%.
In Latin America, COVID produced the same impact on retail as SARS did in China, lifting digital commerce to remarkable growth levels and driving out of business non-essential niche retail. While consumers will return to brick-and-mortar retailers for much of their essential purchases (food, medicine, clothing), niche retail must either radically reinvent itself (by selling services, not just products) or it will not bounce back.
In the meantime, pandemic quarantines created an estimated 50+ million new digital commerce customers in Latin America. Today, slightly more than half adult Latin Americans have transacted digitally. Like those before them, these new customers will purchase an increasing share of all they consume online.
Digital commerce in Latin America is now mainstream and every merchant is racing to embrace them. The early years of retail e-commerce in Latin America have been dominated by e-marketplaces like MercadoLibre, Amazon, Alibaba and Linio, and, to a lesser degree, leading consumer brands who run their own e-commerce fulfillment sites (Apple, Adidas, etc.) The next wave of growth will come from smaller retailers and consumer brands playing catch-up who don’t want to be beholden to the e-marketplaces.
#4 Worsening Distribution of Wealth
People will debate for a long time to come which outcome was worse in Latin America: the more than 1 million dead from COVID or the over 30 million driven into poverty by COVID lockdowns. What cannot be disputed is how COVID worsened the already troubling distribution of wealth in Latin America.
With 60% of Latin America’s workforce working informally, lockdowns were a devastating blow to the working poor and struggling middle class. From one day to the next, the incomes of people working in street markets, restaurants, home services, etc. was decimated. Not only did an estimated 30 million fall below the poverty line since 2019 but an estimated 300 million lived in households that suffered income decline.
As mass-market consumers pick up their spending, they will do so slowly, careful to first replenish their meager colchon of savings. What is more, the first stages of higher inflation are notably impacting food and transportation prices, where the poor and middle class spend the bulk of their discretionary monies. As a result, marketers are struggling to pass on their own inflated costs to consumers who have grown more price sensitive. The impressive financial support systems constructed in Brazil, Chile, and Peru during 2020 and continued in 2021 helped soften the income blows of the poor and small business owners. But those subsidies will disappear in 2022, exacerbating the price sensitivity of consumer spending.
Latin America’s affluent keep over $6 trillion USD of savings outside of the region, in bank accounts, global stock markets, US real estate and other safe assets. Loose monetary policy boosted the value of international assets held by Latin America’s wealthy. They are richer than ever, but they are also more disliked and isolated than ever. Class warfare has entered the political discourse in every country in Latin America and the wealthy bear the brunt of that populist wrath.
The affluent, around the world, have been the most cautious about preventing themselves and their families from COVID infection, going to costly and elaborate lengths to isolate themselves. In Latin America, the wealthy have always lived behind high walls and lived in bubble-like environments of country clubs, private planes, 2nd and 3rd homes, private schools, private hospitals and private toll roads. COVID only reinforced this tendency. There is an unspoken sense among the wealthy in the region that the poor are more likely to be infected (and may well be because they cannot afford the high cost of isolation). This engenders even greater distrust and dislike between classes than existed pre-COVID.
For marketers looking to service the needs of an even wealthier affluent consumer, COVID presents enormous challenges. Luxury brands have been slow to pivot to online selling, even while their target market eschews in-store shopping. The business of selling to the rich has always been conducted face-to-face via trusted intermediaries. COVID has shattered that business model and upended high end retail and other services.
#5 Political Populism
Latin American leaders had little choice but to pursue strict lockdowns as a policy response to COVID infections back in March 2020. But after three months, the working poor and middle class, the majority of which worked informally and could not pivot their work online, were calling for an end to lockdowns. Their fear of COVID had turned to fear of unemployment, even starvation. Those fears largely fell on deaf ears of government technocrats and bureaucrats who continued to be paid in full while working from home, while dictating policies that decimated the incomes of most voters. The GINI co-efficient, which measures income disparity, jumped in 2020 to levels not seen in a decade (see the chart below).
Starting late summer, 2020, the majority of voters turned against their governments, but especially those governments that lack a populist sensitivity. As a result, some of the most politically stable countries in Latin America are on course for very disruptive change ahead that has investors in countries like Colombia, Peru, and Chile gravely concerned.
This contrasts with the political reactions found in parts of central and Eastern Europe and the USA. In those countries, the more disruptive political elements (usually on the right) tended to lose credibility in the face of COVID’s devastation. Trumpism lost favor among centrist Republicans and Germany’s AFD (far right-wing party) lost credibility as its members adopted an anti-vaxxer stance. For many democracies, a science-based technocrat driven policy stance worked, so long as it was coupled with a reasonable degree of economic and social freedoms, as was the case in northern Europe and (some) US states. By contrast, governments who took a more extreme approach to lockdowns are now suffering political blowback, even more so if they could not afford expensive subsidies for the poor.
#6 Massive Fiscal Fallout
Few countries in the world have spent a larger share of their GDP on fighting COVID and subsidizing the poor and small business as Brazil. In 2020, Brazil’s COVID counter-cyclical spending cost close to 9% of GDP. Across Latin America, COVID hurt the fiscal bottom line because so much sales tax revenue was never collected during lockdowns. But while most OECD countries can expand their fiscal debt with little to no impact on their sovereign debt rating, the ratings agencies have already punished Latin America harshly and will bring the hammer down even harder in 2022 unless governments drastically reduce annual deficit levels. Since the start of COVID, the majority of LatAm countries have been downgraded at least once.
With rare exception (perhaps Chile and Peru whose foreign debt levels remain admirably low), there will be no more Keynesian fiscal response to COVID in Latin America come 2022. Instead, governments will have to choose between higher taxes or less spending or a bit of both. Those decisions will come down to ideology and political lobbying. In Ecuador, pro-business President Lasso has chosen to cut spending, deregulate and judiciously re-calibrate taxation, lowering some, raising others. The formula seems to be working. Ecuadorian bonds are among the world’s best performing in 2021. By contrast, the Peronists in Argentina continue to target the nation’s most successful sectors (e.g., farmers) with price controls, and stiffen currency controls which stifles investment in export industries like mining, energy and business services.
Fiscal pressure does tend to have a silver lining in Latin America, however. It helps keep populist governments from becoming profligate spenders and it also cuts down on corruption, simply because there is less in the coffer to steal. It can also lead to the opening of sectors, privatization, and deregulation, all of which has the power to spur private sector investment, augmenting national competitiveness. Fiscal pressure helped build political support for privatizations in Brazil and open new concessions in renewable energy. Ecuador’s President Lasso is demonstrating that a pro-investment stance can usher in much needed foreign portfolio investment that drives down the cost of capital.
A positive global economic environment, led by Latin America’s two largest customers, China and the US, will bring much needed growth and capital to the region. But before the days of fat cows arrive, Latin America faces a challenging year ahead in 2022.
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