The ongoing “Coronavirus Pandemic” has severely disrupted economic activity worldwide with certain industries and national economies afflicted more than others. In fact, this pandemic, also known as “COVID-19”, has been unprecedented in over a century since the “Spanish Flu” and one of the worse alongside others in the history of humanity such as the “Plague of Justinian”, the “Black Death”, “HIV-AIDS” and colonization of the Americas when entire indigenous American civilizations were decimated after catching viruses from the Old World brought on shore by European colonizers that were inexistent then in the New World. Currently, with over 10 million confirmed infections on the planet while leaving a death toll reaching half a million human lives within a very short time span, worldwide efforts led by the most developed nations such as the US are geared towards containment of the disease by enforcement of mitigation strategies like social distancing and shutting down congregations aimed at flattening the curve. The latter means aggressively diminishing the spread of new infections by employment of mitigation techniques such as wearing masks in public spaces, frequent hand-washing, disinfecting surfaces to be touched, social distancing and quarantines. Accordingly, the whole purpose of flattening the curve consists of allowing the capacity of the health care sector to respond efficiently to the emergency without overwhelming both the public and private health care systems available within it which is something of very serious concern right now in Latin America. Altogether, according to the Economic Commission for Latin America and the Caribbean or ECLAC, all Latin American countries except for Uruguay and Cuba are at the present time ill-prepared to handle such as a surge of hospital patients infected with the virus. As a result, multilateral organizations like the Inter-American Development Bank or IDB have begun assessing the socioeconomic impact of the pandemic in terms of expected growing needs throughout the region and lining up financing accordingly to boost their respective public health care systems while having a few loans already disbursed by now. Nevertheless, not only the health care sector is in trouble globally but certain industries have now begun facing distress like aviation, transportation, health insurance, life insurance and hospitality including hotels, restaurants, cruise liners, airport operators and car rental companies. Moreover, particularly in the region of interest for this article, the two biggest airline multinationals in Latin America have entered bankruptcy proceedings and overall according to ECLAC, economic output is expected to close the year with negative growth of at least 5% and as a consequence, total nominal GDP will decrease from close to $ 5 trillion in 2019 to over $ 4 trillion in 2020. Likewise, household net worth is also expected to retreat a little bit after reaching close to $ 10 trillion regionwide in 2019 according to the Credit Suisse Group A.G. since people have to dig up into their savings and other assets in order to spend them out after facing massive layoffs, quarantines and higher medical bills. In similar fashion, the poverty rate throughout the subcontinent according to ECLAC has gone from at least 30% of its total population standing at roughly 650 million people right before the initial outbreak of the pandemic to close to 40% now and projected to increase even further. In addition, all Latin American governments are projected to run huge budget deficits in 2020 with Brazil being the most affected after being the new epicenter of the pandemic in terms of number of cases now reported at more than 1.5 million infections, a figure surpassed only by the US. Accordingly, from transfer payments to backing national industries that are state-owned or state-controlled, public debts owed by governments in Latin America including a good chunk of them held by foreigners today are also projected to skyrocket to new peak levels never attested before in absolute terms of close to $ 3 trillion as a whole regionwide.
Furthermore, in Latin America the country experiencing the lowest negative real GDP growth is the Dominican Republic. However, although the country has had a burgeoning tourism industry right before the start of the pandemic, other industries such as the sugar business remain robust. In addition, we have to take into consideration that right before the outbreak of the Coronavirus Pandemic, the Dominican economy was the fastest growing inside the region having overtaken Panama by attaining a positive real GDP growth in high single digits. Altogether, the Dominican Republic will have an impact of -1% real GDP growth for 2020 according to ECLAC. Brazil, on the other hand, lies somewhere in the middle with negative real GDP growth projected in the mid-single digits for 2020. Finally, the Mexican economy is the one projected to be the most afflicted in Latin America besides Venezuela. The latter remains an outlier having been severely depressed after suffering an impact of lingering collapse of its economy and social fabric with an estimated real GDP growth of -15% for 2020. By the same token, Mexico is experiencing a triple hit to its growing and diversified economy. In fact, one of these hits comes in the form of lower revenues from oil exports after the acute drop of crude prices per barrel as well as plummeting demand since the outbreak. Currently, futures derivative contracts for crude prices per barrel trade at record lows in more than a decade on the NYMEX due to increased production from hydraulic fracturing or fracking for pumping oil out of the ground and the trade war between the Gulf States and Russia for dominance in this sector worldwide having created in the process an industrywide supply glut. Moreover, another hit to the vibrant Mexican economy is its vital tourism industry which is hurting tremendously after accruing records lows of international tourism receipts with national hoteliers and airport operators adjusting to the collapse of occupancy and passenger traffic respectively. Similarly, the other hit to the Mexican economy I need to make mention of is the sharp fall of remittances from the US. In fact, Mexican-Americans are sending fewer dollars to their relatives south of the Rio Grande because they need to adjust to the unfavorable and dramatic socioeconomic events happening in America created by the ongoing and conflicting COVID-19 pandemic. Altogether, the Mexican economy will see its output contract a 6% to 10% in real terms after adjusting for inflation this year.
Moreover, on the business side, the industries most injured by the pandemic in Latin America are aviation and hospitality. In fact, a good case in point is the bankruptcy of the leading airline in the region of interest known as LATAM Airlines Group S.A. Nevertheless, notwithstanding the fact that the second biggest air passenger and cargo carrier throughout the region known as Avianca Holdings S.A. suffered the same fate, the latter was going broke even before the initial outbreak of the pandemic after going through an inefficient and expensive expansion from taking on new air routes that weren’t profitable extinguishing in the process its cash flow generating ability to service a heavy pile of liabilities incurred including debt and lease agreements. LATAM Airlines Group, on the other hand, had much healthier finances after solidly reporting four consecutive years of strong profits amounting to an accumulated figure of $ 700 million including $ 190 million of net income reported for 2019 alone. Similarly, when filing for bankruptcy in May of this year, the corporation had $ 1.3 billion in cash on hand sitting on its balance sheet and $ 18 billion of total liabilities incurred including roughly half of them in outstanding debt. Likewise, total assets on its books were $ 21 billion giving the company a book value of around $ 3 billion and a market value hovering $ 10 billion right before the collapse of air travel demand in the second quarter due to the outbreak of the COVID-19 pandemic. Consequently, the reason LATAM was coerced by management into filing for bankruptcy was the abrupt destruction of revenue overnight after losing over 90% of its passenger bookings for flights. In fact, although its cargo operations were much less damaged, the whole scenario of losing your air passenger business overnight was too much of a heavy blow to sustain for its operating activities. In addition, the company also has sizable finance lease agreements on its books difficult to disentangle from because they give the airline ownership interests in over two thirds of its fleet of more than 300 aircraft, most of them grounded as we speak. Nonetheless, I think LATAM will make it through the ongoing crisis caused by the pandemic without entering liquidation proceedings and accordingly, the market is discounting this feature into its calculations as well. Presently, the company trades at over $ 1.8 billion while the controlling ownership has kept a good faith in the airline having given it a lifeline of $ 900 million in debtor-in-possession financing. However, the company remains unprofitable after accumulating losses of $ 2.2 billion for 2020 so far until the bankruptcy filing and after having booked a non-cash impairment charge to goodwill in the amount of $ 1.7 billion for the first quarter of this year.
To conclude, the current Coronavirus Pandemic has been one of the biggest nightmares the modern world has faced. Thankfully, after the Chinese admitted human-to-human transmission was occurring, the world reacted in a responsible, harmonious and concerted effort to combat this health emergency successfully by implementing steps such as slowing down the spread of new infections through mitigation, something health experts have coined as “Flattening the Curve”. Moreover, when it comes to Latin America in particular which is the region of interest for this article, I think the subcontinent has not seen the worse yet. However, required adjustments and measures to withstand the health emergency are happening. As a consequence, from the ECLAC to the IDB and Pan-American Health Organization, the region should be able to get back on the right track in terms of economic growth within two years before recouping losses incurred in the process in the foreseeable future with the exception perhaps of Venezuela. In fact, the latter represents a shattering disappointment for anyone covering the region after having all the trappings of a failed state. On the business side, on the other hand, one case worth mentioning is the lack of government willingness in Latin America to extent bailouts to what is probably the most distressed industry of them all from the ongoing crisis which is aviation. Accordingly, the legendary Warren Buffet unloaded his airline stock holdings on time along with other investors who keep on dumping aviation stocks worldwide and as a result, the industry is in the doldrums. In fact, the International Air Transport Association estimates the industry to lose over half of its combined revenues of close to $ 700 billion in 2019 by closing 2020 with just under $ 300 billion of combined revenues overall. Likewise, in Latin America, the region confronts the sad scenario of LATAM not getting government help taking into account that the stock was one of the main investments held by billionaire and incumbent President of Chile Sebastián Piñera Echenique. The latter kept a 27% shareholding in the publicly-traded enterprise and second only to the one Spanish-Chilean businessman Juan Cueto Sierra had at the time before assuming his first term as President of Chile when he sold at a large profit his bulky ownership stake to avoid potential conflicts of interest arising from exercising his duties as President of Chile back in 2010.