Goldman Sachs warns Latin America's recession may be worse than 1980s

Latin America's economies are deteriorating faster than ever before and are heading for their worst post-World War II contraction, according to Goldman Sachs.

The New York-based bank reduced its regional growth forecast this year to a 3.8 percent decline from a 1.2 percent contraction just a week ago. That's even worse than the 2.1 percent drop during the global financial crisis in 2009 and the 2.4 percent drop during the Latin American debt crisis of 1983.

Policymakers are likely to respond by reducing borrowing costs to historical lows, Goldman economists led by Alberto Ramos wrote in a report. They expect Brazil's central bank to reduce rates to 3.0 percent, while authorities from Colombia to Peru and Mexico are doing the same with their own easing measures.

"The primary short-term goal is not fiscal orthodoxy, but preventing the collapse and deep freezing of economic activity," they wrote. "A sudden and deep contraction of activity could force out even financially sound and well-managed companies.”

This bleak outlook complicates an already challenging time for Latin American markets. Venezuela has been excluded from international markets since it began defaulting on its bonds in late 2017.

Meanwhile, Argentina is beginning debt restructuring and Ecuador is looking to re-profile its liabilities as the coronavirus ravages the nation's commercial capital.

The high level of public debt in countries such as Argentina, Brazil and Ecuador could reduce the size of fiscal packages aimed at addressing the public health crisis, Goldman economists wrote.

"These policy constraints and burdens are likely to increase the ultimate economic cost that the coronavirus pandemic can exert," they added.