World Economy

Latin America will see 'record-breaking contraction' as the coronavirus shatters their economies, Goldman says

Key Points
  • Latin America and the Caribbean have become a new global epicenter of the pandemic, and the United Nations warned several countries in the region are "now among those with the highest per capita infection rates worldwide."
  • "The outlook is pretty uninspiring," Alberto Ramos, head of Latin America economic research at Goldman Sachs, told CNBC's "Street Signs Asia."
  • "We expect to climb out of a very deep hole during the second-half of the year and throughout 2021," he added.
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Latin America saw record decline in real GDP from virus impact: Goldman Sachs

As Latin America continues to battle the coronavirus outbreak, some economies in the region could see a "record-breaking contraction" not seen since World War II, according to investment bank Goldman Sachs. 

Latin America and the Caribbean have become a new global epicenter of the pandemic, and the United Nations warned several countries in the region are "now among those with the highest per capita infection rates worldwide."

Countries like Brazil, Mexico, Peru, Colombia and Chile are among the ten worst-affected, according to data from Johns Hopkins University. More than 100,000 people have died from Covid-19 in Brazil alone. 

"The outlook is pretty uninspiring," Alberto Ramos, head of Latin America economic research at Goldman Sachs, told CNBC's "Street Signs Asia" on Wednesday. 

"We expect to climb (out) of a very deep hole during the second-half of the year and throughout 2021," Ramos said, adding that some countries such as Argentina, Peru and Mexico are likely to see double-digit contractions in growth. He said others may experience less severe declines that are "still a record-breaking contraction — at least the worst we've seen since the Second World War." 

The only silver lining is that inflation remains low in the region, which would allow most central banks in the region to maintain a relatively accommodative monetary policy stance for an extended period of time to support the economies, Ramos explained. 

Mexico's gross domestic product fell 17.3% in the second quarter from the previous three months, Reuters reported in late July citing preliminary data.

Emergency Rescue Service (SAMU) nurse Belisa Marcelino checks the lungs of Maria Geralda da Silva, 84, who is experiencing breathing difficulty and others symptoms of the coronavirus disease (COVID-19), as preparation is made to transfer the patient to a hospital amid the outbreak, in Sao Paulo, Brazil.
Amanda Perobelli | Reuters

Meanwhile, Argentina, the third-largest economy in region, managed to reach a deal with creditors to restructure $65 billion in sovereign debt in early August. For months, Argentina left billions of dollars worth of bonds in default as its economy was hammered by the pandemic. 

Brazil, the worst-affected country in the region, has reported more than 3 million cases of Covid-19. It continues to struggle with lack of tests, ventilators, and intensive care unit beds in many regions, and insufficient data has made it difficult to understand how rapidly the virus is spreading. But economists appear to be growing relatively more optimistic about the outlook for Brazil, according to a central bank survey, Reuters reported

The International Monetary Fund downgraded its forecast for Latin America and the Caribbean in June. In a blog post, the IMF said the region as a whole could shrink by 9.4% in 2020, four percentage points lower than its April projection. The IMF projected that the region will see a recovery of 3.7% growth in 2021.

Goldman Sachs' Ramos said that while every country has been hit badly by the virus, recovery will be "a function of how competent the authorities are or have been in managing the outbreaks." The quality and intensity of the fiscal and monetary stimulus delivered by each country will also determine the strength of the recovery, he added.

The last time Latin America grew more than 2% was seven years ago, he added. 

"The continuation of the low growth environment can be socially and politically destabilizing and also undermine the credibility of the institutions," Ramos said. That means countries may emerge out of the pandemic poorer and more in debt, with higher inequality and potentially more social and political polarization.