By Gabriel Burin
BUENOS AIRES (Reuters) – Latin America’s biggest economies, Brazil and Mexico, will likely struggle with increasing deficits this year as governments are forced to fight recessions sparked by the coronavirus pandemic, a Reuters poll showed.
But any relapse into longer-term fiscal laxity could threaten the future recovery, adding a new risk to existing concerns over the attitudes of Brazilian President Jair Bolsonaro and his Mexican counterpart Andrés Manuel López Obrador towards the global emergency.
Brazil’s gross domestic product (GDP) will contract 2.5% in 2020, according to the median estimate in a survey of 45 analysts taken April 13-21, sinking Latin America’s No. 1 economy again into recession after three years of feeble growth.
The grim view, a downgrade from a forecast for a marginal expansion of just 0.3% in a preliminary survey last month, is now coupled with emerging fears about Bolsonaro’s “war budget” against the virus.
For 2021, analysts predict growth of 3%, against estimates for 2.3% growth in a poll in March.
Higher spending and lower revenues resulting from the crisis would reverse years of restraint and see Brazil’s primary deficit jump to 6.0% of GDP, pushing gross debt to a record 85% by the end of 2020, according to analyst responses to separate questions.
Officials say these extreme metrics are still manageable and a majority of 10 out of 15 economists in the poll agreed in principle, saying fiscal emergency steps, combined with interest rate cuts by the central bank, should boost growth in 2021.
However, 12 out 14 analysts who responded to a different question saw risks for the economy skewed to the downside if the country is unable to show clearly how it is going to reinstate austerity once the worst of the coronavirus pandemic is over.
“We need to understand how long will be the pause in reforms that were leading markets to price in positive structural changes and what will be the deviation in expenditure,” said Rafael Silotto, portfolio manager at Brasilprev in Sao Paulo.
Brazil’s latest recession, currently undergoing its first and worst quarter with an estimated GDP loss of 5.7% in the period, is set to push up the unemployment rate to 13.1% by the end of the year from 11.6% in February.
However, if the base scenario takes shape, it would be more forgiving than the contraction of 2015-2016, when Brazil endured the deepest economic crisis in a generation amid domestic political turbulences.
MEXICO ON FISCAL TIGHTROPE
Tensions related to the overall handling of the pandemic are another source of anxiety, as Bolsonaro clashes with powerful state governors over his plans to reopen the economy quickly, minimizing the disease he calls “a little flu”.
Mexico’s López Obrador has also drawn fire for downplaying the pandemic, following his initial suggestions last month that people should keep going to restaurants and spending money to keep the economy afloat.
As in Brazil, Mexico’s public accounts are in a delicate condition. The primary result is expected to swing to -2.5% of GDP this year from a 1.4% surplus in 2019, while gross debt is forecast at 54%, around 9 percentage points higher.
López Obrador “has a difficult tightrope to walk,” said Christian Lawrence, market strategist at Rabobank. “Stimulus is needed but it can’t be afforded without risking Mexico’s investment grade rating”.
Mexico’s government also faces a “contingent liability” equivalent to a whopping 9% of GDP, represented by the debt of national oil company Petroleos Mexicanos [PEMX.UL], which totals $105.2 billion, Fitch Ratings warned last week.
While some say Mexico is entering its biggest recession since the so called “Tequila Crisis” of the early 1990s, or even worse, the survey actually pointed to a contraction of 5.1%, slightly less than the 5.3% drop in 2009. Analysts predicted a less severe contraction, of 2.6%, in an earlier poll in March.
“Time is the key factor,” said Alejandro Saldaña, chief economist at Banco Ve por Más in Mexico City. “The more the emergency and social distancing steps last, the more time activity will be frozen”.
Analysts surveyed expect growth of 2.1% in 2021, higher than 1.7% predicted in a previous poll in March.
The economies of Colombia and Perú will likely fare much better, falling less than their big neighbors this year and picking up faster in 2021. Chile will probably make up for all the lost production, while Argentina just half of it.
Apart from the virus impact, the expected 5.1% collapse in Latin America’s No. 3 economy after Brazil and Mexico includes domestic issues, like shunning global markets and funding expenditure via 1980s-style deficit monetization instead.
“The only alternative (for the government) is to print money and since confidence in the local currency is low, there are risks that already high inflation will accelerate,” said Miguel Zielonka, associate director of Econviews in Buenos Aires.
(For other stories from the Reuters global economic poll:)
(Reporting and polling by Gabriel Burin; Editing by Ross Finley and Bernadette Baum)