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EM Monitor - Impact of Covid-19 on EM labour markets

October 2020

Colombia and Peru in the grip of the Covid-19 economic crisis

Unemployment in Peru and Colombia has surged in the face of the Covid crisis. We look at how their respective governments are tackling the challenge.

Unemployment double pre-Covid crisis levels

Colombia and Peru stand out in emerging markets by the surge in their unemployment rate (Fig.1). Nearly one in five people are unemployed in Colombia, while in Peru, unemployment has jumped from 6.8 per cent in December 2019 to 17.1 per cent based on the latest available data.
Fig.1 -  EM unemployment rate: latest available versus December 2019
Fig.1 -  EM unemployment rate: latest available versus December 2019

Source: Pictet Asset Management, CEIC, Refinitiv, Bloomberg, 30.09.2020

Looking beyond unemployment numbers

We think the employment outlook is likely to deteriorate because:

  1. current figures do not account for underemployment, or only partially;
  2. lower labour participation rates1 have biased unemployment rates to the downside. In other words, had the participation rate been constant, the unemployment rate would have been much higher.

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.

Fig.2 - Colombia: unemployment rate & labour force participation rate
Fig.2 - Colombia: unemployment rate & labour force participation rate

Source: Pictet Asset Management, CEIC, Refinitiv, Bloomberg. Unemployment rate data to July 2020; participation rate to August 2020. 

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). 

Tackling the challenge...

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.

Fig.3 - Change in unemployment rate (December 2019 to June 2020) & fiscal spending
Fig.3 - Change in unemployment rate (December 2019 to June 2020) & fiscal spending

Source: Pictet Asset Management, CEIC, Refinitiv, Bloomberg

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.

Stephane Couturier for Pictet

THE VIEW FROM OUR EM DEBT TEAM

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:

  • Although LatAM was one of the hardest hit regions by COVID, economic growth has started to recover, albeit lagging behind other EM regions;
  • The region has delivered extensive fiscal and monetary support which will continue to be supportive for the economic recovery;
  • LatAm central banks are close to the end of their easing cycle and there is little room for further monetary stimulus, but our expectation is that rates will remain at their lower bound for some time;
  • Manufacturing production is recovering fast (see chart below);
  • A faster than expected US recovery could provide further support.

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.

Manufacturing PMIs by region
Manufacturing PMIs by region

Source: Bloomberg, Pictet Asset Management, 01.10.2020. 
* +/-50: A reading above 50 indicates an expansion of the manufacturing sectors whereas below 50 indicates a contraction.