Update Country Report Curaçao 09 Mar 2020

• The continuing spread of the novel coronavirus (Covid-19) will have dramatic economic and financial market implications, and we have made substantial downgrades to our forecasts for Latin America and the Caribbean.
• We had already downgraded our forecasts for several vulnerable economies, including Chile, Peru and Brazil, in February. However, the downside risks to our assumptions that we highlighted in February have materialised, and the coronavirus will produce a severe hit both to external trade and to domestic activity.
• Based on our current baseline assumptions around the path of the coronavirus outbreak, we now expect GDP growth of only 0.2% in 2020 in Latin America and the Caribbean, down from 0.9% at the start of the year. Under a more pessimistic scenario to which we currently attach a probability of 30%, real GDP in Latin America and the Caribbean will contract by 0.4% in 2020.

We have developed four global scenarios (optimistic, baseline, pessimistic and "nightmare") for the path of the coronavirus, which make assumptions around infection and mortality rates, along with the capacity of governments to contain the spread of the virus and cope with demands on the healthcare system. The two most likely scenarios are our baseline, to which we attach a 55% probability, and the pessimistic scenario, to which we attach a 30% probability.

Our current baseline forecast, in brief, assumes that the virus will be under control in China by end-March, in the rest of the northern hemisphere by end-June and the southern hemisphere by end-September. We then expect the virus to re-emerge as a seasonal virus, but for governments to be better prepared to handle its return. In a more pessimistic scenario, the virus spreads further to infect a much larger proportion of the population, and the death rate is higher as healthcare systems are overwhelmed.

Even under our baseline scenario, the global growth outlook is grim. We are in the process of revising all of our global forecasts down, and expect to bring global growth as a whole down to just 1.9%-its weakest level since the global financial crisis of 2008-09.

The threat of recession rises

For Latin America and the Caribbean, as we have previously highlighted, the direct and indirect impacts of the coronavirus will be severe, but will vary depending on which countries are most reliant on trade and commodities. For South America's large commodity exporters, the shock from reduced global demand, especially from key trade partners such as China and the EU, and from weak prices of oil, copper, iron ore and soybeans, will be severe. The more open, trade-reliant economies of Chile and Peru will be especially hard hit.

Mexico, Central America and the Caribbean are more closely reliant on trends in the US, and our expectation that US GDP growth will remain positive (albeit weak) will be of some support. However, these countries will be far from immune to the economic effects of the coronavirus, not least because the disease continues to spread in the region, producing precautionary consumer behaviour that will dampen domestic spending and depress investor sentiment. The Caribbean in particular will suffer the effect of weaker tourism expenditure. For all of Latin America and the Caribbean, business disruption and uncertainty will cause inward foreign direct investment (FDI) to fall sharply. This will be severely damaging in a region where domestic savings are weak and FDI accounts for 3% of GDP and 15% of total fixed investment. For the Southern Cone countries, meanwhile, the approach of the southern hemisphere winter raises the prospect of a difficult, prolonged epidemic.

The policy response will be complicated by generally weak fiscal positions (with some exceptions, including, importantly, Peru and Chile, where we expect to see substantial stimulus measures). Assuming that the coronavirus expands its presence in the region, healthcare systems will be stretched; we expect increased health spending but, even with more funds, the capacity of regional healthcare systems to deal with the outbreak will vary. In our 2019 global health security index, which assesses countries' preparedness for epidemics, some countries fared well: Brazil, Argentina, Chile and Mexico were in the top 30 in the ranking (out of 195 countries). However, there were clear weaknesses in other countries, particularly in some small Caribbean islands and in parts of Central America.

Monetary loosening will be insufficient to prevent growth from falling sharply

Amid fiscal limitations, very weak domestic demand and flagging local currencies, there are questions around monetary policy and the potential for central banks to cut rates to support growth. In what is now likely to be the weakest year for the global economy since the 2008 financial crisis, it is worth looking back to the response of the region's central banks to that crisis. Almost universally, there was an initial tightening of policy in response to currency weakness, followed by much sharper rate cuts to support the economy. Central banks may again find policy initially complicated by currency depreciation. The region's major currencies have all weakened substantially since the start of the year amid falling commodity prices; the collapse of oil prices on March 9th has, for example, caused the Mexican peso (which had previously held up relatively well compared with the currencies of South America's big commodity exporters) to plummet. Even so, we do expect several central banks in the region to act to cut rates, with the caveat that real rates are already very low after last year's easing cycle and that the capacity of monetary policy to support growth in the absence of demand will be limited.

Bearing all of this in mind, we are making significant downgrades to our forecasts for all of Latin America's major economies. We do believe, moreover, that risks are weighted to the downside. Depending on the success or failure of governments in containing the coronavirus (and coronavirus market panic), the economic impact on Latin America and the Caribbean could be much greater than we currently expect, and the region could be facing another year of recession.