We think the employment outlook is likely to deteriorate because:
In Colombia, labour force participation fell sharply (Fig. 2), from 63.2 per cent in February to 51.8 per cent in April, excluding many from unemployment figures. As of August, there are an estimated 2.7 million fewer jobs and 1.7 million more inactive workers relative to February at a national level2. Had all workers remained active with these levels of employment, the unemployment rate would be higher than the current 19.6 per cent.
In Peru, 7 million people lost their jobs between February and June, pushing the unemployment rate to 16.7 per cent in June. At the same time, 6.8 million dropped out of the labour force. Unemployment would currently top 43 per cent if those workers were still included as unemployed3.
Smaller firms (up to 10 workers) have been the most affected, with a 65.5 per cent free fall in employment over a year ago (oya). By comparison, employment fell by 36.5 per cent oya in larger firms (more than 50 workers).
In Colombia, lackluster labour demand has been tied to economic activity, hindered by further lockdowns in cities, making urban employment recovery more volatile.
A third of the fiscal stimulus (2.5 per cent of GDP) is directed towards job retention schemes (Fig.3). This takes the form of credit to struggling SMEs and postponement of income tax payment; subsidised payrolls for companies with a 20 per cent income loss for up to three months.
August’s labour national survey data shows gains in the participation rate, which is now up to 59.3 per cent, closer to its pre-pandemic level. The reopening of more sectors clearly had a positive impact on employment.
In Peru, only 5 per cent of the fiscal stimulus (4.6 per cent of GDP) funds job retention schemes. In addition to tax relief arrangements and other measures introduced to support companies and the poorer population, the government has launched the “Arranca Peru” (Peru jumpstarts) programme, for a value of USD1.8 billion. The aim is to create more than 1 million public-sector jobs in areas such as transportation, communication and housing.
Job losses during the health crisis have been significant. Only a share of those lost jobs have been recovered in recent months, and not at the same conditions. It is likely that the normalisation of employment will continue for the remaining of 2020, but the drop in conditions weigh on wages and households’ spending.
By Mary-Therese Barton, Head of Emerging Market Debt
Despite challenges in the region, such as the examples presented above, we believe that Latin America can still offer long-term investment opportunities for the following key reasons:
At a country level, Brazil has shown improving manufacturing activity over the last 3 months, despite a drop in September (1-month change). An increasingly large fiscal deficit however needs to be monitored closely.
The fiscal response in Mexico has been generally well handled with the country running a relatively small fiscal deficit and we are starting to see improved manufacturing data emerge.
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