US rating agency Moody’s has predicted that a large majority of countries in Latin America and the Caribbean will see their economic output increase by 3% in 2021, but the growth will remain far below the pre-pandemic levels until the end of the year.
That’s largely because the pandemic has reversed the progress made in the last decade. In addition, current social pressure is undermining governments’ ability to restore the fiscal space in a short period of time.
Although the economic activity is set to rebound, tax collections are expected to remain below pre-pandemic levels.
“As a result of eased lockdowns and the deployment of policy support by central banks and governments, the economic recovery that began in the second half of 2020 will continue. Most of the region’s economies will expand by more than 3%, but the output will remain below pre-pandemic levels after contracting by more than 5% in 2020,” says Moody’s Vice President Jaime Reusche.
The disease has increased poverty rates and income inequality, pushing demands for governments to expand social safety nets, the report noted.
“Social demands will weigh on fiscal balances increasing the likelihood that politicians are tempted to favor populist policies, a development that would compromise fiscal prudence,” the report added.
If governments continue to borrow in a bid to cushion their economies from the pandemic’s blow, they might slide deeper into a debt trap.