Latin America Lockdowns vs. Re-Openings

By Ilan Solot and Kieran Chard

 

We apply the five-factor model used to analyse lockdowns and openings in developed markets to Latin America. It evaluates the restrictions imposed by different countries in the region, how they compare in terms of severity of lockdown, and where they are heading in the spectrum of reopening. The scale we use measures grade restrictions from 1 (open) to 4 (closed) across the following five factors: (a) schools/universities, (b) non-essential businesses, (c) borders, (d) social distancing and (e) severity of penalties/prosecution. Please see the below table for the breakdown of the measure’s ratings.

Brazil

The first Covid-19 case was on February 25, the first in Latin America, and 29 days later 1000 cases had been confirmed. The government has been widely criticized domestically and internationally for being complacent on its response. On March 18, Brazilian states issued state of emergencies along with closing borders for non-freight travel. Disagreements between national and state governments has created strong political frictions in the country. Despite pressure from the national government, state governors continue to implement quarantining measures and reduce trade. Schools also remain closed as Brazil continues to see steady increase in confirmed cases. Fines for breaching quarantine are dependent on the state and vary widely.

The central bank cut rates 75 bps to 3.75%, continuing the easing cycle from last year. Like most other central banks, they cut reserve requirements (to 17% from 25%) and relaxed capital buffer rules to ensure ample liquidity. They also created a lending facility for financial institutions to pledge corporate bonds as collateral. Separately, the bank announced a $7.7 bln emergency line to help companies finance payrolls. On the dollar funding side, the BCB can rely on the Fed swap facility (for up to $60 bln). They have also been intervening in both spot and forward to contain volatility in the real but has had limited success so far. Fiscal measures taken so far add up to around 6.5% of GDP. They include direct support for families, informal workers, states and municipalities, expending existing transfer programs, as well as tax breaks and credit lines via state banks.

Mexico

The first case was confirmed on March 1 and 29 days later 1,000 cases had been recorded. Phase 2 of the Mexican government’s response started on March 24 when all gatherings of more than 100 people were banned, and social distancing encouraged nationally. There hasn’t been a national policy to close borders and, despite pressure from northern regions, travel to and from the US remains possible, albeit highly restricted. By March 31, 90% of business in Mexico City have closed. Fines and prosecution depend on the states, with Yucatan threatening fines of up to 86,000 pesos ($3500) and three years in prison for those who test positive and do not quarantine. Phase 3 started on April 21, which included stricter social distancing guidelines but still with a refusal to adopt “authoritarian” measures such as curfews. Schools remain closed for the foreseeable future. Tentative plans for re-opening of the economy are taking shape, including consultations with Canada and the US regarding cross-border industries such as the automotive sector.

Mexico’s central bank cut rates by a cumulative 125 bps to 6% this year, accelerating its pre-pandemic easing cycle. The bank has also been active in FX markets, extending its NDF hedging program by $10 bln to $30 bln. In addition, it reactivated the dollar swap lines with the Federal Reserve in mid-March. To improve liquidity, officials reduced reserve requirements by 50% of the costs of repo operations. On the fiscal side, the government has focused on providing resources to the health department and accelerating public spending. Officials are also making funds available to support pensioners and credit to SMEs and homeowners.

 

Chile

The first case was confirmed on March 3 and 22 days later 1,000 cases had been recorded. The government started imposing social distancing restrictions on March 13 and closed borders soon after. The first full lockdown started on March 26 with 7 communes (including Santiago). This followed a policy of rolling lockdowns in order to keep the economy running. Borders were closed for 14 days on March 16, with all land, sea, and air borders shut. Schools initially shut for 14 days on March 15 and remain closed in regions imposing a lockdown. During lockdown, virtually all non-essential businesses have been closed.

The Chilean Central bank has cut rates by a cumulative 125 bps to 0.5% across two meetings. But more importantly, it expanded its liquidity operations in peso and dollars, created a new funding facility, and a program to purchase up to $8 bln in banks bonds. Furthermore, it is engaging in US repo operations and US Dollar swaps in order to add further market liquidity. Chile has largely refrained from intervening in the FX markets, allowing it to adjust to supply and demand conditions. Chile’s main fiscal package was announced on March 19, worth around 4.75% of GDP. Measures were geared to supporting healthcare, unemployment benefits, and liquidity provisions to SMEs. The government then supplemented the package a few weeks later with help for the most vulnerable.

Peru

The first case was confirmed on March 5 and 25 days later 1,000 cases had been recorded. Only 9 days after the first recorded case, Peru announced a national 15-day lockdown/quarantine effective March 16. A ban on all travel between provinces was applied, along with closing of land, sea, and air borders, leading to some tourists being trapped. On March 18, even stricter measures were brought in, including a night time curfew enforced by the police. Social distancing measures are very strict with fines of 86 to 430 soles ($25-$125), and only one member of the household to leave the home in a week. A gender rotation policy was scrapped. Schools remain closed and non-essential business are not open during the lockdown.

The central bank has cut rates by 200 bps to 0.25% in two moves this year. It has also provided some PEN30 bln (4% of GDP) in liquidity assistance to support lending, along with increased repo operations and lower reserve requirements. The bank has also been active in FX markets, selling around $2 bln through swaps as of the end of April. The Peruvian government announced about 7% of GDP in fiscal spending. The funds will be directed towards healthcare support, tax breaks, lending to SMEs and direct payments to poorer households.

 

Colombia

The first case was confirmed on March 6 and 26 days later 1,000 cases had been recorded. Borders were closed for 14 days for visitors who had been in Asia or Europe. All borders with Venezuela were closed in mid-March due to worries about the influx of refugees, then all land, sea, and air borders were closed once national curfews were imposed in mid-April. Schools are closed indefinitely. National quarantine was extended until May 11 but some sectors, including construction and manufacturing, are due to re-open with very specific protocols. Restaurants are allowed to operate on a delivery-only basis.

The Colombian central bank cut the policy rate 50 bps to 3.75%, but more cuts are likely. Officials also implemented host of liquidity measures including lowering reserve requirements, repo operations and security purchases from credit institutions. Officials have been active in the FX market, auctioning around $800 mln in FX swaps and introducing a new hedging facility through NDFs. In terms of fiscal policy, the government announced delays for poorer household’s utility payments and a national emergency mitigation fund equivalent amounting to around 2% of GDP. It will also provide budgetary support for healthcare services, credit lines for affected industry and assistance to SMEs.