04 de June, 2020

World Bank chief economist predicts complex scenario for Chile and Latin America due to pandemic

“This crisis is truly global, there are no regions that are escaping from this great shock. You have to go back to the 1930s to have a point of comparison", said Carmen Reinhart, chief economist at the World Bank, regarding the magnitude of the impact of the pandemic on the global economy. She also warned that, from her perspective, “Latin America is unfortunately going to be very impacted and for a long time by this pandemic. Not only because of the vulnerability caused by high debt levels, which will be global, but there were also problems of lower growth, and dependence on primary commodities and tourism".

This was part of the analysis carried out by Reinhart, who today stands out as the most cited Latin American female economist in the world, in a webinar organized by the School of Economics and Business of the Universidad de Chile and the MIT Sloan Latin America Office. In the broadcast, the academic from Harvard University discussed the consequences of the COVID-19 crisis and the measures to support emerging economies in the region, alongside the Dean of the School of Economics and Business, José De Gregorio, and MIT Sloan School of Management Academic Roberto Rigobón. 

Recession and Debt
The sudden and deep paralysis of a large part of the world´s markets is the greatest economic consequence of the pandemic at a global level, Reinhart stressed, stressing the differences with the last crisis of 2008-2009. To gauge the magnitude of this crisis, she noted that in the case of the United States, “it took a year to reach the point of contraction that we now experienced in six weeks. This applies not only to capital flow indicators. The unemployment graph reflects the same trend. In 2008-2009 it took 64-65 weeks to reach the level of unemployment that has been reached in a month and a half”.

Regarding the impact on our region, she stated that “another parallel with the crisis of the 1930s is that this current crisis has a greater impact on Latin America, since - unlike the crisis of 2008 and 2009 - it is accompanied by a sharp drop in the price of oil and primary commodities. While in 2008-2009 the United States, Europe and Japan went into recession, China was still growing at an average of more than 10 percent, and that was a great engine for emerging countries".

A worse pre-crisis financial situation has compounded the problems brought on by the depression in the current commodity markets. "When the 2008-2009 crisis hit Latin America, many emerging countries had considerably lowered their levels of public and external debt, and some even had current account surpluses," she said.

Reinhart also maintained the possibility that “the banking systems of the region, and outside it as well, including the United States, will be greatly impacted by late payments and loans which will not be easily recovered. These solvency problems are something that I emphasize because historically what begins as private debt ends up being public debt too”. This high-risk scenario in emerging economies, even for more financially robust countries such as Peru and Chile, will generate greater difficulties in accessing capital markets. For this reason, she warns of the risk that debt issuance poses today.

She said that the pandemic will bring lasting consequences, especially if it translates into banking crises, where recovery can take five to seven years. In this sense, she indicated that we may witness a reactivation, but a recovery that will bring us back to pre-crisis levels of income and employment will take much longer. Moreover there is the addition problem of inflation. "It is not a nice message, but it is realistic," she maintained. 

Another of the possible consequences observed by Reinhart is the advance towards a deglobalization cycle. In this regard, she stated that “an important issue to understand the impact and consequences of COVID-19 is that this is not only a huge shock to aggregate demand, it is also a shock to supply. This may lead to another wave of deglobalization because all the channels that had been established for trade have been impacted by the different closures of economies at an international level”.

This phenomenon, she adds, "fuels the perception that countries have to depend on themselves much more than before. Instead of looking outward, many national policies are going to look more inward". Adding to the current reality, she says, is the fact that the growth in the volume of global trade in the 10 years before the financial crisis of 2008-2009 was around 6 percent, while in the last decade it has been less than half, around 2.5 percent.

Support for emerging economies
Reinhart insisted that in this scenario it is essential to find support mechanisms for emerging countries in the face of lack of liquidity, an action that requires a great financial architecture. The biggest problem, she noted, is the lack of access to international financial markets, since "there is no lender to finance fiscal expansion ... something that is necessary to keep economies alive during this period”.

In the case of countries where the problem is one of solvency rather than liquidity, she suggested to start thinking immediately about debt restructuring. Multilateral institutions can play a role in the debt renegotiation process, but these processes are complicated and can take up to seven years in a scenario like the current one. She also stated that it is time to think about other forms of aid, "perhaps more permanent facilities that support the emerging debt market".