Crude crash: How soon can Latin America recover?

As the coronavirus pandemic escalates and international oil prices plummet to decades-old lows, risk analysts have been scrambling to reassess their outlooks for 2020 and beyond. 

The International Monetary Fund declared on March 27 that the world economy was already in recession, revealing that more than 80 countries had requested emergency assistance.

But what is the impact on Latin America and the energy sector that makes much of its economy tick?

According to Nicolás Urrutia, a senior analyst at Control Risks, Latin America is among the world's most vulnerable regions. 

"We believe that the global economic cycle, particularly in developing countries, is likely to be hard hit and a return to relatively normal conditions is very unlikely before the end of 2020 and early 2021," Urrutia told BNamericas. 

"Developed countries have more resources to mitigate the coronavirus itself and they are able to respond to get the economic cycle back to normal, something that is less clear for developing countries."

Venezuela, Argentina, Colombia and Ecuador are the Latin American economies likely to be impacted most by the oil price downturn, Urrutia said. All are reliant – though to varying degrees – on oil revenue to finance their expenditures, either through the locally dominant positions of their state oil companies or via royalty payments, he added.

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In a research note published on Thursday, Fitch Ratings said widespread lockdowns adopted by governments to counter COVID-19 is resulting in falling energy demand and "significantly larger oversupply than previously anticipated."

Even so, Fitch expects Brent crude to average US$35/b in 2020, having hit an 18-year low of US$22.76/b on March 30. 

"We estimate that oil prices will bottom out in 2Q20 and expect a gradual recovery afterwards," the agency said. "We have cut our 2021 assumptions to US$45/b as oversupply will greatly increase volumes in global oil storage facilities, which will restrain price growth to a certain extent."

That prognosis compares favorably to forecasts offered by AxiCorp and Barclays, both of whom warned prices could fall as low as US$10-15/b in the coming weeks. 

Continuing its optimistic tone, Fitch stressed it does not anticipate portfolio-wide negative rating actions for oil and gas companies, but said it will assess credit impacts on a "case-by-case" basis.

"We expect the oil price recovery to be driven by a combination of rebounding economic activity once lockdown measures are lifted and supply adjustments due to selective production shut-ins by high-cost producers, lower investments in US shale and potential voluntary production cuts by OPEC producers," it said. 

Dutch bank ABN Amro believes oil prices will remain volatile "in the coming months" before taking an upward turn.  

“We think that this will be temporary and an oil price rebound towards US$45/b could be seen as soon as the coronavirus measures are cut back and the economy starts to recover,” it said. 

WORSE THAN 2008 

The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) has warned that the impending economic turbulence could have devastating consequences for Latin America.

The Santiago-based body said the region is now on track to shrink by at least 1.8% this year, having previously projected growth of 1.3%

In its view, the looming recession will be worse than the 2008 crash or any other in Latin America's recent history. 

"Latin America and the Caribbean ... [is] facing the pandemic from a weaker position than that of the rest of the world," CEPAL said in a new report. 

"Even before the dissemination of COVID-19, the social situation in Latin America and the Caribbean was deteriorating, with increasing rates of poverty and extreme poverty, the persistence of inequalities, and widespread social discontent. In this context, the crisis will have negative repercussions on health and education, as well as on employment and poverty."

TIME TO INNOVATE

The International Institute for Democracy and Electoral Assistance (IDEA) said the "worst is yet to come" for Latin America as coronavirus infections multiply.

"The economic and financial situation in Latin America will continue to deteriorate rapidly," the Stockholm-based entity said in an article published on its website on Thursday. 

"The two largest regional economies [Brazil and Mexico] will suffer major impacts, while the third largest, Argentina, is facing an extremely complex situation that could increase the possibilities of a default."

It said predictions of a recovery in 2021 hinged on whether the virus can be contained and the ability of governments and businesses to remain solvent amid diminishing liquidity.

Meanwhile, the crisis is forcing Latin American governments to re-think their priorities, giving greater importance to public healthcare and social inclusion, according to IDEA.

"COVID-19 will cause suffering, but it will also make possible institutional reforms that expand citizen participation and social dialogue, that empower persons, that correct inequalities, and that give impetus to innovation and education, to recover growth," it concluded.