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(CMC) – The World Bank said on Monday economic conditions in Latin America and the Caribbean (LAC) have worsened dramatically as the effects of the coronavirus (Covid-19) pandemic have rippled through the region, predicting that the shocks stemming from the pandemic will cause regional economic activity to plunge by 7.2 per cent this year.

In its June 2020 Global Economic Prospects, the World Bank said outbreaks in the region have recently spread rapidly, and the economic impacts of nationwide business closures and mobility restrictions have been sudden and severe.

“The sharp fall in global commodity prices has been a headwind for much of the region, particularly for oil and gas producers. Financial conditions have deteriorated, with large economies experiencing sharp capital outflows and risk premia in sovereign bond markets higher across the region than in early 2020.”

The World Bank said the abrupt economic slowdown in the United States and China has disrupted supply chains for Mexico and Brazil and caused a sharp drop in exports from commodity producing economies such as Chile and Peru.

The severe contraction in the US economy is adversely affecting Central America through trade and remittance channels.

The Washington-based financial institution said the plunge in tourism, on which Caribbean countries and Mexico depend heavily, has likewise had negative impacts.

“The monetary policy response has included provision of liquidity, loosening of reserve requirements for banks, interest rate reductions, establishment of US dollar swap lines, foreign exchange market intervention, and asset purchasing programmes.

“Numerous countries have announced fiscal stimulus packages. These have included social assistance, support for small businesses, additional health sector spending, postponement of tax deadlines, and suspension of loan and utility payments.”

But the World Bank said the multiple domestic and external shocks deriving from the pandemic will cause regional economic activity to contract by 7.2 per cent in 2020, warning “this will be a far deeper recession than the ones that occurred during the global financial crisis in 2008-2009 and the 1980s Latin America debt crisis.

“The outlook assumes economic activity will fall to its lowest ebb in the second quarter of the year, when mitigation measures are at their highest levels. Under this scenario, a normalisation of domestic and global conditions would enable regional growth to recover to 2.8 per cent in 2021.”More in Home

The World Bank said the Caribbean is anticipated to contract by 1.8 per cent in 2020, and by 3.1 per cent excluding Guyana, where the offshore oil industry is developing rapidly, adding that the region will be “hurt by falling tourism and remittance inflows”.

The Bank said the risks to the outlook for the region are firmly weighted to the downside. “Intensification of the outbreak would stress health systems and be devastating to countries with modest health care capacity. Outbreaks of the virus in large economies of the region could have spill-over effects, and second wave of the pandemic in advanced economies would reverberate negatively in the region.”

It said widespread informality will limit the reach of social assistance efforts to soften the economic impact of the pandemic and that the region’s recent progress in alleviating poverty and inequality could be at risk. “Negative income shocks could reignite last year’s wave of social unrest. Rising government debt levels in 2020 will heighten vulnerability to financial sector stress and could result in debt servicing challenges as interest rates rise in a recovery, while weakened cash flows may strain corporate balance sheets materially.

“Consumer demand for tourism, personal services and entertainment may be slow to recover fully even after the pandemic fades,” the World Bank warned.

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