Interview, Fireside Chat
Latin America’s Response to the Economic Downturn
- Goldman Sachs forecasts Latin American economic contraction of 3.8% for the current year; the IMF projects a deeper decline of 5.2%.
- These projected declines represent the region's most significant economic contraction since the end of World War II, exceeding the 2.4% drop during the 1983 debt crisis and the 2.1% drop in 2009.
- Economic pressure in the region is exacerbated by a sharp downturn in commodity prices, driven by global demand destruction and oil pricing dynamics.
- The commodity price crash is negatively impacting regional economies through three primary channels:
- Reduced sales revenue for commodity-dependent companies.
- Lower government taxation derived from royalties and corporate earnings.
- Constrained capital expenditure (capex) decisions, leading to potential impacts on employment and future investment.
- Export declines are causing a sharp year-to-date depreciation of most local Latin American currencies.
- Government fiscal responses are constrained by limited fiscal resources and the necessity to manage existing dollar-denominated debt burdens post-crisis.
- Goldman Sachs led a new bond issuance for the Republic of Peru to fund COVID-19 responses, noting it was issued at a record low rate.
- Equity markets in the region have performed poorly, with the MSCI Latin American index down 44% year-to-date; the decline is driven by currency depreciation and commodity sell-offs.
- Fixed income markets have stabilized as a "bright spot," with central bank interventions pushing rates back toward pre-crisis levels:
- Mexican 10-year nominal rates retreated from 8.5% in March to mid-6%.
- Brazilian 5-year rates retreated from 8.25% in March to 6%.
- Goldman Sachs executives anticipate a regional economic recovery beginning in the second half of the year, citing stronger institutional frameworks and market sophistication compared to 2008.
- Regional central banks have maintained independence, collaborating with multilateral agencies to implement special funding programs.