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Covid Derails Latin America's Bid for Middle-Class Prosperity

08/06/2020 | 11:52am EDT

By Ryan Dube and Juan Forero

LIMA, Peru -- The pandemic has devastated hundreds of thousands of businesses across Latin America, setting back the clock on the social and economic gains made over the past two decades when a global commodities boom powered breakneck growth.

From 2003 to 2019, poverty fell from 45% to 30% regionwide, and poor Latin Americans by the millions, poised on the threshold of middle-class life, took their first airline flight, bought their own homes and paid university tuitions for their children.

Now Latin America's economy is expected to contract 9.4% this year, according to the International Monetary Fund, the worst downfall on record for a region that was already wrestling with political turmoil and social unrest before it became a hot spot for Covid-19.

Economists predict it will take until around 2023 for Latin America to return to pre-pandemic levels, the slowest rebound among the emerging-market regions. The International Monetary Fund forecasts developing economies will contract 3% this year, with a 4.7% fall in the Middle East and a 3.2% decline in sub-Saharan Africa. The U.S. economy is projected to contract 8%.

The virus has dealt a hammer blow to businesses ranging from department stores and construction companies to small, family-owned restaurants and the neighborhood shops that are the backbone of so many Latin American economies.

As a child 20 years ago, Jhon Castañeda filled potholes for spare change in an impoverished Lima neighborhood populated by war refugees. Earlier this year, he employed 10 people in his furniture-making business in the same neighborhood, a manufacturing hub that has helped thousands escape poverty.

With the coronavirus pandemic whipping across Latin America, Mr. Castañeda has laid off workers and the business he named after daughters Fernanda and Kamila, Ferkam Furniture, is on the verge of closing. Myriad other entrepreneurs have already gone broke in Villa El Salvador, home to an industrial quarter on the outskirts of Lima that employed about 100,000 people.

"We've had absolutely no income," said Mr. Castañeda, 29. "We've had to survive on our savings, and now that money is gone."

About 2.7 million businesses, or nearly 20% of the region's companies, are expected to close for good, said Alicia Bárcena, executive secretary of the United Nations' Economic Commission on Latin America and the Caribbean. The demise of the mainly small firms will destroy 8.5 million jobs.

Large corporations are also being battered despite having more capital and the ability to take on debt. Argentina's Techint engineering conglomerate laid off about 1,500 workers after construction projects were halted. Chile's Cencosud, one of Latin America's biggest retailers, is shutting its 11 Paris department stores in Peru.

The crisis has so far led six corporations to default this year, the same for all of 2019, according to Fitch Ratings. It says another 40 corporations in telecommunications, oil and gas, and construction are at risk of defaulting on more than $36 billion in debt due to the pandemic, imperiling any economic recovery.

"If they go belly up, if they don't survive the crossing of the desert, you are actually destroying the capital stock of the economy," said Alberto Ramos, an economist at Goldman Sachs. "When the doors do reopen, the recovery is going to be weaker."

Major regional airlines from Colombia, Mexico and Chile have already filed for bankruptcy. In Argentina, emblematic theaters and steak houses are struggling to stay afloat. Picturesque Caribbean towns that once attracted throngs of tourists to sandy beaches are all but abandoned. The newly unemployed, many with no safety net after working in the vast informal labor force, are increasingly destitute. The U.N.'s World Food Program warns there could be a hunger crisis.

"This is the worst crisis in our history," Peruvian President Martin Vizcarra said recently.

Luis Alberto Moreno, president of the Inter-American Development Bank, said the challenges for governments up and down the region are steep: Debt-to-GDP levels, which stood at 57% last year, are expected to hit 70% or higher, he said, as trade volume and tax income fall precipitously. Coupled with a 30% drop in the money relatives in the U.S. and Europe send to support families, the blow amounts to a financial storm unlike any in modern times.

"This is to me the Great Depression with the Spanish Flu at the same time," Mr. Moreno said from Washington. "Latin America probably will be hit as a region the hardest of any place in the world."

Latin America's three biggest economies -- Brazil, Mexico and Argentina, with their 380 million inhabitants -- are on track for about a 10% decline in their gross domestic product this year, the IMF said.

Mexico has been powering up its formidable manufacturing sector but the country can't avoid the economic and social cost. The government estimates the number of poor Mexicans could rise this year to 70 million, 57% of the population, from 61 million in 2018. Those in extreme poverty could expand to as many as 32 million, up from 21 million in 2018. Mexico lost 12.5 million jobs in April alone.

In Brazil, 13 million people were already in extreme poverty in 2019, partly the consequence of a 2014-2016 recession and years of sluggish growth since. Then came the pandemic, which has led to more deaths and Covid-19 cases than anywhere save the U.S.

People like Junio de Jesus Oliveira, who migrated to São Paulo eight years ago and started a locksmith shop and a bar in the working class Brasilândia district, worry what the future holds. He has already spent nearly all his savings, about $18,000, to keep his businesses afloat. He had to close his locksmith business -- temporarily, he hopes -- and dismiss three employees. The bar may be next.

"If things don't improve soon, I will need to close down everything and go back" to his home state in southeast Brazil, he said. "I came to São Paulo to improve my life. This pandemic was a curse."

Far to the north, in the Colombian capital of Bogotá, José Manuel Díaz, 62, has looked back with pride at decades of work at some of the city's best-known restaurants. He rose from a poverty-stricken childhood in the countryside to a professional waiter who has bought his own home, car and put two children through university.

"It's been very hard because not even one peso is coming in," he said, noting that the country's quarantine has closed off much of the service sector, leaving him at home. "We can't work. We can't do anything. You have to abide by government measures, but it is very hard, very hard."

At the dawn of the new millennium, things looked quite different as the price of oil, soybeans, copper and iron ore -- among the commodities produced in Latin America, all coveted by China -- began an inexorable rise.

Flush with cash, governments created social programs and funded generous cash handout programs for the poor, which coupled with fast-growing economies cut into poverty. Brazil lifted 30 million from poverty amid a wave of optimism about the nation's future as it prepared to host soccer's World Cup and the Summer Olympics. Peru, emerging from a brutal guerrilla war and quasi-dictatorship, saw poverty reduced from 58% in 2004 to 20% last year, according to World Bank figures. Argentina's economy, in one nine-year stretch, grew an average of 6.5% annually, slowing only briefly for the 2009 world-wide economic crisis. A 10-year expansion in Chile saw the economy grow nearly 5% a year.

The robust growth slowed in recent years with the end of the commodities boom. Brazil and Argentina, having failed to save enough money during the good times, slipped into recessions. Others, including Chile, Peru and Colombia, continued to grow at a slower pace.

What's happened since March -- a multicountry economic crash caused by the coronavirus -- is such that the United Nations said the number of poor people across Latin America could rise this year by 45 million to a total of 230 million. Those categorized as extremely poor, people at risk of malnutrition and homelessness, could grow by 28 million to 96 million.

"We've entered a tunnel, and we don't know how long it is," said Alejandro Izquierdo, an economist at the Inter-American Development Bank, or IDB. "One thing we know for sure is the region will emerge more indebted, poorer and more unequal, and the risk of default is going to increase."

Those toiling on the lower rung have been hit hardest. Seventy percent of households in the lowest quintile of Latin American society report losing at least one job, compared with 30% of households with the highest earnings, according to an IDB household survey of 17 countries in the region. The survey also showed that nearly half of households with a business owner report having had to close.

The economic blow is particularly devastating in what was once Latin America's fastest-growing big economy, Peru. The IMF is now predicting the economy will contract 14% this year, highest of any of the region's large economies.

Back in the 1980s and early '90s, Villa El Salvador, a barrio on Lima's edge settled by poor Andean migrants, was a metaphor for Peru -- a place with little hope. Maoist insurgents fighting the state destroyed electricity towers, detonated car bombs, and assassinated local leaders, including a prominent activist who was shot in front of her children before rebels blew up her body with dynamite. Then the rebels were defeated, hyperinflation was tamed and, in the early 2000s, democracy was consolidated.

It isn't a middle-class district, but Villa El Salvador has made great strides. It is now on Lima's metro line, has private schools, universities and a modern shopping mall. Its industrial sector is home to nearly 3,000 businesses, which until the pandemic attracted throngs of shoppers from across Lima buying beds, couches and dining room tables.

(MORE TO FOLLOW) Dow Jones Newswires

08-06-20 1151ET

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ChangeLast1st jan.
CENCOSUD S.A. -1.90% 1376.4 End-of-day quote.8.81%
DOW JONES AFRICA TITANS 50 INDEX -0.30% 524.29 Delayed Quote.-0.80%
EURO / ARGENTINE PESO (EUR/ARS) 0.11% 114.7691 Delayed Quote.11.61%
EURO / BRAZILIAN REAL (EUR/BRL) 2.66% 6.188 Delayed Quote.-5.00%
LONDON BRENT OIL -0.82% 75.16 Delayed Quote.46.69%
MODERN TIMES GROUP MTG AB -2.40% 122.2 Delayed Quote.-5.80%
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SOYBEAN MEAL FUTURES (ZM) - CBE (ELECTRONIC)/C1 -1.09% 352.6 End-of-day quote.-17.93%
THE GOLDMAN SACHS GROUP, INC. -0.71% 374.88 Delayed Quote.42.16%
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