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The announcement came on Friday from the Casa Rosada in Buenos Aires. After days of speculation, several members of Alberto Fernández’s cabinet reported that the Argentine State will pay part of the salary of companies that have up to 800 employees. The measure, which covers more than 1.6 million people, was described as the first round of support aimed at reducing the impact on employees of the coronavirus-associated pandemic.
This example is only the most recent of the determinations adopted in most of the capitals of Latin America. To the best of their ability, the region’s governments are in the process of ‘scraping the pot’ in order to seek resources to mitigate the economic and social effects that the spread of covid-19 has left.
As on other continents, it is about preventing the mandatory confinement caused by the health emergency from degenerating into additional and even more lasting ills. Crossing arms in any country leads to a single outcome: bankruptcy of countless businesses, jumps in unemployment figures and deterioration in the quality of life of a high proportion of households.
Some more, others less
In response, most western democracies deployed a veritable arsenal of resources, beginning in mid-February. This includes state loans and credit guarantees for private firms, payroll subsidies, deferment of tax payments, freezing of social security obligations and direct money orders to citizens.
Although the account changes every day, the calculation is that the different commitments assumed range between eight and ten trillion dollars across the planet. The boldest are the developed nations where the prudence of bygone days was left behind.
To cite just one case, the United States is heading for a fiscal deficit that would equal 15 percent of its gross domestic product this year, a lag that in other circumstances would have been viewed as a huge factor of instability. After a first package, more federal funds are coming, something that seems indispensable given the revelation that 26 million Americans have lost their jobs in the last five weeks.
For their part, Latin American countries do what they can. According to Alicia Bárcena, ECLAC’s executive secretary, the different governments “have implemented immediate measures to contain the virus, protect the workforce and household income.” For the head of the entity attached to the United Nations, they are “committing resources ranging from 0.6 to 12 percent of GDP.”
As is obvious, the size of the effort varies from place to place. The underlying reason is that the region was coming from a difficult time, as growth rates plummeted from 2014.
The fall in the prices of primary goods put those who spent full-fledged in the fat cow era on the spot. An example of this is Ecuador, whose reality was very complex for a couple of years and who failed in its attempt to bring order to the house due to popular rejection of austerity purposes.
When the pandemic hit came, the room for maneuver in the public coffers was almost nil, which undoubtedly had to do with the slow response of the institutions to the emergency. It is not risky to affirm that the Guayaquil tragedy – where everything indicates that the actual number of deaths is several thousand – would have had a different course in circumstances of greater comfort.
Those with what
The other side of the coin is presented by those who did as in the fable of the cicada and the ant, by saving part of what came to them at the time of the bonanza.
That is the case of Peru and Chile, which have spared no action to contain the economic and social avalanche. Both nations showed not only a low level of public debt, but a relatively prudent management of their accounts.
Peruvians are the most daring, since the outlined plan to face the impact of the covid-19 is equivalent to one eighth of the internal product. The strategy comprises three stages, and for each one there would be an amount close to nine billion dollars.
The initial phase includes a universal bond that is about 800,000 Colombian pesos per family. Additionally, there is a 35 percent subsidy on payrolls, along with strengthening health. As for credits for companies, the state guarantee scheme ranges between 80 and 98 percent, depending on the destination.
As for Chileans, the program is equivalent to seven percent of the size of their economy. Although there were reservations here, too, the commitment is notable because it adds to the obligations assumed last year when street protests rocked the southern nation.
The tools are of the same cut seen elsewhere. Aside from informing workers’ subsidies, there is an employment protection plan that guarantees at least 75 percent of salary for those who are on the payroll. In total, the amount for labor income reaches the equivalent of 2,000 million dollars.
There will also be loans for the private sector, as well as the postponement of various commitments, ranging from taxes to contributions to social security. A specific purpose is to accelerate payments to state providers in order to inject more liquidity, among other policies.
Alongside those two notable cases, there are a few more worth mentioning. The Uruguayan fiscal package is close to six percent of its GDP, while that of Brazil exceeds four percent. Paraguay, Trinidad and Tobago or Argentina itself are not far behind these proportions.
All that you can?
In comparison, Colombia appears far behind in the table. According to international measurements, the commitments made to date amount to around 1.7 percent of the domestic product. When looking at a sample of 14 countries in the area that measures the size of the aid packages announced, it is observed that we only surpassed Mexico, Barbados, Venezuela and Ecuador.
The reason that this is so is part of a tight situation. Although the fiscal deficit this year could reach six percent of our GDP, we do not have the same space as some of our neighbors, among other reasons because the weight of the existing debt is greater.
To add insult to injury, the anticipated recession in the Colombian economy will be felt in the budgets. Speaking before the House plenary this week, the Minister of Finance pointed out that treasury income may fall by more than 10 percent in 2020, against an original goal of 158 billion pesos.
When adding and subtracting, the conclusion is that the current room for maneuver is very little. To date, the Government has allocated some 15 trillion pesos to the emergency, of which half is for health, just over four trillion went to the vulnerable population and 3.25 trillion more were used to capitalize the Fund of Guarantees, which in turn supports the loans granted by banks to companies up to 90 percent. If those obligations are not paid, there would be a large contingency for the Nation. Hence, the Colombian effort could amount to 4.5 percent of GDP.
In parallel, the sources of additional resources reach almost 29 trillion pesos, but not everything will go to the emergency. A constant headache is maintaining government liquidity, especially after some collections have been deferred.
The extension of the quarantine, which was accompanied by the presidential promise to give a new stipend to the poorest families, will demand an additional turn.
As things stand, the feasibility of assuming part of the payrolls or of giving millions of Colombians a bonus close to a minimum wage that meets their needs for one or several months is minimal.
However, there are more and more specialists who think that we must go further, starting by knocking on the doors of multilateral entities. Among the options mentioned is the possibility that at least part of the flexible credit line of almost 11,000 million dollars that the International Monetary Fund would renew for us will be disbursed to the Banco de la República so that it, in turn, can provide it to the government. Although the idea is raised, those who know the matter say that there are not even preliminary conversations about it.
The danger is that the reaction will be late, when the damage is irreparable. For Daniel Velandia, of Credicorp Capital, “more is needed, putting all the meat on the grill, because if the most vulnerable companies and people are not saved, everything will be more painful for us.”
Mauricio Santamaría, from Anif, considers that “the Government must give direct subsidies” that in some cases may include “very long-term, partially forgivable credits.” And he adds: “Although it is true that the fiscal space is now complicated, increasing the deficit should not be a concern. The concern should be to obtain liquidity and give it to companies, always aware that this will still have to be paid in the future ”.
This depends on the speed with which different activities can return to operate in the national territory, even with a reduced rate. Recognizing that the evolution of infections and deaths in Colombia is far from what the models showed before the current restrictions were imposed, the emergency is far from over.
Therefore, the challenge is to identify a reasonable point between the extremes that speak of a quarantine of more than a year until a vaccine appears, or of returning to the reality of before March 1. On the one hand, continuing with the current paralysis would make more than ten million jobs disappear with devastating consequences on a vast segment of the population. On the other, opening the floodgates wide and forgetting the precautions related to distancing, threatens to leave a long trail of deaths.
Due to this, there is no way out other than charting a path, with opening dates and biosecurity protocols required by sector. Marcela Eslava, a professor at the Universidad de los Andes, talks about the need for a credible strategy that allows owners of hundreds of thousands of businesses to know what to expect. Still, he warns that “the lifting of restrictions needs to be tied to the availability of medical infrastructure consistent with society – and the economy – being functional, which goes through, among others, more massive tests.”
Looking ahead means accepting that the ability to implement mitigation strategies in economic and social matters is not unlimited. Even if Colombia decides to do more now and get closer to the spending averages seen in Latin America, it is impossible to make temporary subsidies permanent, and less so with an economy in recession.
In fact, the greatest justification for directly or indirectly assuming the cost of payrolls or preventing a good number of companies from going bankrupt now is the conviction that in the second semester we will find a way to live with the coronavirus. If that is not the case, the immediate sacrifices will have been in vain, since they would simply serve to postpone the inevitable: the economic depression and the spread of the pandemic.
RICARDO ÁVILA
SENIOR ANALYST
@Ravilaricon
