Contrasts Between Latin America’s Largest Economies: Impact of Fiscal Response to the Pandemic
We look at the impact of two of Latin America’s largest governments’ response to the Coronavirus pandemic this week. We also touch upon recent fintech and hospitality news (industries that have not escaped the wrath of COVID). For the full details and weekly updates delivered to your inbox subscribe to our newsletter, LATAM Business Weekly.
Short vs. Long-Term of COVID Fiscal Policy: Brazil vs. Mexico
Brazil and Mexico, two of Latin America’s largest economies, enacted starkly different spending patterns in response to COVID-19. Reuters recently shared insight from Credit Suisse economists on the impact of their fiscal decisions:
Brazil Heightens Spending in Pandemic Response
Brazil’s right-wing president, Jair Bolsonaros “opened the taps” on government spending when COVID-19 hit, with billions going towards unemployment benefits. In fact, spending was three times higher than the median for emerging market economies. It also surpassed the average wealth of countries. Economists pegged the spend at a whopping 6.5% of GDP.
In perhaps a sign of payoff, Brazil’s economy picked up in the third quarter. This prompted economists to revise forecasts upwards.
Mexico More Conservative Spending Hold
Holding tighter to its wallet, Mexico’s left-wing government, under the leadership of President Andrés Manuel López Obrador, spent an equivalent to just 0.7% of GDP in pandemic-related fiscal efforts. Mexico’s economy plunged by a staggering 17.1% in the second quarter. Mexico’s central bank recently warned that the country’s output could contract by almost 13% this year: the deepest drop since the Great Depression.
Investor Impact & Insight
Although Brazil’s economy also shrank (by a record 9.7%) at the same time as Mexico’s, economists predict that the Brazilian economy in 2020 and 2021 (will) be “less affected than that of the median of emerging countries.” Many credit Bolsonaro’s largesse for these improved forecasts.
However, in the long-term, Mexico’s government bonds and credit markets may become more attractive to investors. López Obrador’s actions could put upward pressure on Brazil’s long-term interest rates. Gabriela Siller, an economist at bank Banco BASE, notes “Mexican bonds could outperform provided there isn’t speculation about a possible downgrade to Mexico’s credit rating.”
As the impact of COVID fiscal policy plays out on a macro level, we also notice its impact on key industries.
LATAM Fintechs Must Evolve Despite Funding Boom
While the fintech industry shows immense growth across the largest LATAM markets, it also prepares to survive the economic impact of the Pandemic. We gather insights from the inaugural 2020 LATAM Fintech Report:
In it, financial technology firms report raising at least $8 billion which is a substantial increase from the $45 million raised in 2014. On a somber note, the Report calls the pandemic a “powerful level-settler” for all fintech companies, regardless of their age. This includes banks in addition to “payment habits, merchant solutions, and lending capabilities which will be upended by COVID-19. Fintechs with outdated business may find themselves outdated or slow to adapt.”
Thus, established fintechs must evolve or risk “being made obsolete by the rapid societal and economic changes coming from this pandemic” According to Latin America Reports.
Hospitality Joint Venture: SoftBank Partners with India Hospitality Group
SoftBank Group will manage the LATAM operations of India-based hospitality company, Oyo in a joint-venture deal. SoftBank, already Oyo’s largest investor, will take over 1,000 hotels predominantly in Brazil and Mexico. Though Oyo slashed costs and laid off 500 employees in Brazil due to the Pandemic, its President still considers Latin America a key area for growth. He states:
“Latin America has proved to be a good fit for Oyo, with a super fast growth pace because the hotel market is extremely fragmented in the region.”
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