Severe Q2 economic contraction expected
The number of COVID-19 cases continues to rise. As of last week, more than 6,500 people had been confirmed positive, and nearly 300 had died. The daily number of new infections has declined, which could mean social distancing is working. But it’s early to draw conclusions. The number of daily tests remains low. Though optimistic, the authorities are also cautious, and indicate that it’s still early to lift restrictions. In fact, the president requested authorization from Congress to extend the state of emergency by 25 days, to May 25th.
The Central Electoral Board has postponed the national elections, to July 5th. But it’s not clear that elections can be held then, either.
Though campaigning has stopped, the presidential candidates are competing by maximizing their efforts to support people and the government in fighting the contagion, thereby increasing their media exposure. A lack of political mobilization may have weakened the opposition’s momentum.
The Organization of American States found no evidence that the failure of municipal elections in February was due to sabotage or attempted fraud; it attributed the cause to poor design of the voting software and related processes. Last week new leaders took office, in nearly 400 local governments. The PRM took control of 54% of the mayoralties, the PLD of 33% and other parties of 13%.
In January and February, before the first cases of COVID-19 were reported, economic growth was stabilizing at around 5%. But, due to the lockdown, we now expect a severe (and highly differentiated) economic contraction, well into Q2.
Liquidity facilities launched by the Monetary Board on March 20th do not seem to have yet had significant effects. In a context of forced paralysis, the monetary stimulus is hardly effective. Devaluation continued to accelerate in April, and nominal depreciation over the year is heading toward the 8% mark, twice the initial official estimate. It is difficult to discern the causes, since contradictory forces are in play. We believe the Central Bank is taking a much more tolerant stance toward depreciation.
Public finances are already being hit. In March, revenues fell by 10.7% compared to March 2019. Revenues from income and property taxes fell by 7.3%; from domestic taxes on goods and services by 16.9%; and from taxes on foreign trade by 18.9%. Total revenues also fell below the target, by more than 20%. And remittances are taking a hit.
The government’s new social protection programs are fully operational, and seem to be working well. But the impact on the labor market appears huge – and the length of these programs might be insufficient.
The IMF, the World Bank and UN’s ECLAC agree that this country will be one of the region’s least affected. They project 2020 growth at -1.0% to zero. Though the government welcomed these numbers, most domestic economists have greeted them with skepticism.
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