Editor's note: This is the first of a three-part series looking at the longer-term economic and financial impact of the COVID-19 pandemic in Latin America. You can read the second part here, and the third part here.

With medical workers administering the first batches of COVID-19 vaccines, an end to the pandemic appears to be in sight. In Latin America, however, the economic and financial scars left in the disease's wake may never fully heal.

Public debt levels across the region skyrocketed as governments scrambled to stave off economic collapse with stimulus payments, credit relief and other support. Some even resorted to quantitative easing-like measures, a tactic rarely used before in emerging markets. As result, several governments now have elevated debt levels that experts said will take years to normalize.

"Even in an optimistic scenario where the pandemic ends next year, the biggest legacy on LatAm is higher public debt levels across the board," said Nikhil Sanghani, a Latin America economist with Capital Economics.

Latin America came into the pandemic already in a precarious position. According to the Inter-American Development Bank, the region's debt likely will end 2020 at 74% of GDP, compared to 57% in 2019.

Such a high debt-to-GDP ratio undermines the prospects of an economic recovery, economists said. After suffering an expected 9.2% contraction this year, GDP in the region is only expected to rebound by about 4% in 2021.

Most major Latin American economies will not return to their pre-pandemic GDP output levels until 2022 or 2023 at the earliest, according to Moody's. In the meantime, banks likely will continue to face a challenging operating environment.

"Fiscal constraints limit the government's ability to support banks," Moody's analysts noted in a recent report. While the rating agency expects the focus of Latin American governments to "gradually shift from pandemic management to dealing with higher debt," conditions will remain "fragile" and vulnerable to setbacks.

"What we will see in LatAm is a more permanent and widespread deterioration in the fiscal and credit quality position," said Martin Castellano, head of Latin American research at the Institute of International Finance. "Adjustment aimed at putting public accounts in order will be much more gradual and will take much longer this time."

The greatest challenge for budgets will be to avoid having COVID 19-related expenditures turn into something permanent, he said. Discussions to pare back emergency aid are already underway in some countries.

Regional variance

Brazil, the region's largest economy, likely will face one of the most demanding cases. To temper the economic impact, the government resorted to an unusually large stimulus for an emerging market. Fiscal aid there grew to 11.8% of GDP, a percentage more similar to those of advanced economies. The average COVID-19 stimulus package in emerging economies equated to just 6.6% of GDP.

"We are going to see greater demand for political reforms in a context of income and job losses," Castellano said. "Greater pressure on economic policymakers will be another legacy of the shock."

According to a study by Bank of America, Chile, Argentina, Brazil and Mexico need the largest fiscal consolidations after 2021 in order to stabilize debt, with cuts equivalent to between 3.5% and 4.5% of GDP.

"Deficits will improve, but LatAm countries will remain far away from stabilizing their debt ratios," BofA analysts wrote in the study.

Although its 2020 GDP downturn is expected to be modest, Brazil also will have one of the sharpest increases in debt. Public debt-to-GDP is expected to hit 96.5% this year, up from 75.8% in 2019, making it one of the most indebted countries in the region, alongside Argentina.

Other nations, such as Chile and Peru, have lower levels of debt. And while they face their own problems, largely stemming from political uncertainty, economists are not as worried over their eventual recovery.

"It is less of a concern in Chile and Peru where the balance sheet is fairly strong," Sanghani said. "In the case of Argentina and Brazil, debt levels are so high that there is not such scope for government to provide further support."

The lack of resources could become a major issue in the months to come as some believe that the full economic brunt of the pandemic is still to play out. Credit deterioration is not expected to peak until the first half of 2021, and most economist believe that labor markets still do not fully reflect the lasting impact of the crisis.

Some believe that unemployment rates will shift markedly higher as workers begin searching for jobs once again.

In Colombia, for instance, the unemployment rate is expected to peak at about 16.5% at year-end and only gradually decline to 14.2% by late 2021, according to estimates from S&P Global Ratings. Colombia's unemployment rate prior to the pandemic was 10.5%.

With the exception of Mexico, all of Latin America's major economies are expected to have double-digit unemployment rates in the coming quarters.

"That is something that could weigh on the recovery," Sanghani said.