China’s hard landing would dent Latin America hard

A hypothetical China slowdown would negatively affect sovereigns and corporates in major commodity-exporting Latin American countries with extensive trade ties to China, according to Fitch Ratings.

It said in a statement that nn recent years, major Latin American commodity exporters have relied heavily on sales of commodities and basic materials as a driver of economic growth. “Chinese imports from South and Central America (excluding Mexico) grew to $116 billion in 2013 from $60 billion in 2009, accounting for approximately 6% of China’s total imports by value, supported by its growing demand for basic materials and resilient commodity prices,” it said.

Regarding growth shortfalls under the hypothetical China slowdown scenario, Latin American exporters would face material challenges given their extensive ties with Asian commodity importers, the statement said, adding that the largest negative effects on anticipated growth would be seen in Chile. “However, the cumulative growth impact through 2018 would be less dramatic than that seen in the APAC region.,” the statement added.

According to Fitch, the three largest categories of products exported by Latin American countries to China in 2014 included agricultural products, ores and minerals and fuels (including crude oil), representing 81 percent of all regional exports to China, highlighting the region’s commodity export dependence.

“A hard landing in China would lead to negative spillovers for Brazil primarily through the channels of trade, commodity prices, confidence and capital flows. Brazil has increased its trade exposure to China in recent years (close to 20 percent of exports), with iron ore, soy, oil and pulp being the primary exports. A sharp deceleration in China could hit broader commodity prices, particularly oil, and Brazil’s overall exports, as commodities account for over 50 percent of current external receipts, Fitch said.

While Brazil leads all other LatAm exporters in terms of total exports to China — $41 billion in 2014) — relative to GDP, Chile stands out as the regional exporter most sensitive to the Chinese market as a driver of economic growth. In 2014, exports to China represented 7 percent of Chile’s GDP due to its heavy reliance on copper exports.

“Brazil’s already weak domestic backdrop, including a weak fiscal position, high inflation rate and pressure on the currency, provide authorities very little flexibility to respond with countercyclical policies to ease the pain on the economy,” the statement said.

Chile is the world’s top copper producer and has a high economic exposure to China, directly accounting for a higher share of Chile’s exports (25 percent in 2014). “However, exposure to a China growth shock is much larger considering indirect impacts from its influence over global copper prices. Slower Chinese growth and lower copper prices have weakened mining profits and investment prospects in recent years, contributing to a growth slump, Fitch said.

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