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We expect the region to contract by 7.9% this year, second only to the Eurozone that imposed tighter shutdowns on account of COVID-19. This marks the ninth consecutive year of Latin American growth underperformance relative to the rest of the world. As COVID-19 recedes, we expect the region to rebound by 4.6% and 3.1% in 2021 and 2022, respectively. Ìý

Countries that have provided the largest policy stimulus, such as Brazil and Chile, will return to pre-crisis levels of output faster than their peers. But even for these countries we expect COVID-19 to leave behind some deep structural economic challenges, including: higher public debt levels, larger poverty and inequality, elevated structural unemployment, a broader productivity gap between tradaeable and non-tradeables sectors, and a wider gender gap in the labour force. We believe this could raise the risk of more populist outcomes in upcoming presidential elections (Peru, Chile and Colombia) and in Chile's redrafting of the Constitution.

Brazil has successfully used fiscal policy to tame the economic effects of the pandemic. GDP growth will likely retreat "just" 4.2% this year, but we estimate public debt will increase about 16ppts to 92% of GDP, one of the highest levels in EM, while tradable inflation has accelerated, due to the increase in risk premia and BRL weakening. We foresee 2021 GDP growth rebounding to +3.5%, assuming some fiscal consolidation will come in H121. The outlook remains binary, and our baseline is conditional on the advance of macro reforms. The alternative outcome would result in weaker FX, inflation above official targets and lower growth in the medium term.

Mexico tends to be more criticized for its macro weaknesses (limited COVID-19 policy stimulus, Pemex, policy uncertainty) than recognized for its strengths (ties to the US, fiscal and monetary stability, low debt). Our worries about long-term growth notwithstanding, we think growth will continue to surprise positively relative to consensus in 2021 as the economy reopens, with recent vaccine news pushing our growth forecast to 5.6%. If, as we expect, inflation recedes in 2021, we see scope for Banxico to continue easing next year, particularly if the peso remains well supported.

For the Andean countries, we expect GDP to post a moderate recovery, back to pre-COVID-19 economic activity levels only by 2022. On top of this, countries face specific institutional challenges. In Chile, we expect the uncertainty around elections and the Constitutional overhaul to remain through our forecast horizon. In a similar fashion, Peru's still unsolved political crisis looms over medium-term growth and institutional stability. In Colombia, authorities will face pressure to turn back to fiscal consolidation in a credible and timely manner.

Irrespective of whether Argentina secures a new IMF agreement, we think a large devaluation is unavoidable. Despite the recent debt restructuring, the government needs a much larger fiscal adjustment to reduce its reliance on monetization of the fiscal deficit, itself the main source of pressure on inflation and the currency.