Uruguay , Chile , Paraguay and Argentina
Analysis

Southern Cone govts implement coronavirus measures amid foggy investment outlook

Bnamericas Published: Monday, March 16, 2020

Governments in the Southern Cone are implementing measures to slow the spread of coronavirus while trying to bolster their economies as companies focus on weathering the storm.

Argentina, Chile, Uruguay and Paraguay have all introduced border restrictions and internal initiatives – such as suspending school classes. 

Paraguay’s government has even told citizens they must stay in their homes between 8pm and 4am. 

Following in the footsteps of Argentina, Chile on Monday said it would close its borders to non-cargo flights from Wednesday as the number of confirmed cases doubled in a day.

Rating agency S&P has said, globally, cases may peak next quarter. This year could see a global recession, followed by a recovery in 2021. 

On the economic front, as part of a battery of measures, Chile’s central bank cut its benchmark interest rate 75 basis points on Monday to 1.0% to help spur activity as headwinds gust. British research firm Capital Economics expects more cuts could come.

The loosening in Chile follows moves this month by Paraguay – which brought its key rate down 25 basis points to 3.75% – and Argentina, whose benchmark rate stands at 38% after the latest in a series of cuts since President Alberto Fernández took the helm of the embattled economy in December.

Growth in relief measures – such as loan schemes and initiatives to support the financial system in Chile and Paraguay – will likely be seen. Paraguay has also announced plans to accelerate infrastructure projects – including public health initiatives. 

Meanwhile, the director of Uruguay’s budget and planning office, Isaac Alfie, told broadcaster Teledoce the government was in touch with multilaterals such as IDB and CAF over the creation of a coronavirus fund, local newspaper El Observador reported. The country was not seeking large-scale assistance, he said.

“Temporary but deep impact”

Most South American countries, because of their commodity-export dependent economies, are particularly exposed to fallout from weaker demand. 

Key consumer China said industrial production fell 13.5% year-on-year in January-February. 

In a tweet, Chile’s economy minister, Lucas Palacios, said containment measures would come at a price and referred to the impact of a weakening of the peso against the dollar.

“The effect of the virus on the Chilean economy will be transitory but deep,” Palacios said. “People will have to stay in their homes to look after themselves, which may dampen commerce, services and recreation. There are effects on exports because of reduced demand, and on imports because of the increase in the price of the dollar.”

Capital Economics said that, globally, fiscal and monetary measures “will at best only cushion the economic effects of the virus."  It added: "A significant downturn is looming over the coming months, the only question is how deep it becomes.”

Argentine economist Martín Tetaz cited in a report the risk of capital outflows from the region, which is still licking its wounds after the commodity plunge.

The region “faces the most brutal outflow of capital in recent years, including 2009, which will pressure local currencies and raise country risk, above all in those countries with high financing requirements in relation to their reserves,” he said.

Tetaz added that among the more fortunate sectors is agriculture – a bright spot amid the gloom for hydrocarbons-producer Argentina, which also faces fallout from a plunge in oil prices. 

For Argentina and the rest of the Southern Cone, much depends on how soon infections peak and demand picks up.  

Fog of uncertainty 

The coronavirus outbreak plus the recent fall in oil prices have made the job of economic forecasting and identifying investment trends more complex than usual. 

“The effects of the coronavirus and oil price wars on the financial markets have been devastating,” Karla Fernandes, director of capital markets services at TMF Group in Brazil, told BNamericas.

“They’ve halted all discussions about new investments, making it impossible to identify trends. What has been largely discussed is the form and the size of the financial aid governments will offer to their citizens. With the economy deteriorating and unemployment increasing, a unilateral approach from countries has become stronger.”

As countries implement containment measures, companies are trying to navigate through choppy seas, implementing the likes of schemes that permit employees to work from home.

Fernandes said that “right now, from family offices to funds to companies to financial institutions – the focus is to cope with reduced production, business continuity plans like remote work, and any financial losses.” 

Growth outlook

Latin American banking federation Felaban said in a report: “Paying the short-term costs today seems a rational choice. In this scenario, the economy of Latin America will grow much slower than originally forecast (1.6%, according to the IMF) and it could even be the case that the region grows just above 0% towards the end of 2020.”

As things currently stand, Chile, Uruguay and Paraguay will likely see weaker than expected growth while Argentina's recession may be deeper than originally forecast. Local consulting firm Ecolatina estimates Argentina may shrink 2.0%, compared with an original forecast of a 1.5% contraction.   

Felaban said a crisis of this nature “open the doors” for opportunities in areas such as telecommunications, remote working and inventory management.

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