Slower Chinese growth and weaker commodity prices will add to the
challenges facing Latin America's commodity exporters and test their
external and fiscal buffers, Fitch Ratings says. Each sovereign's credit
impact will be a function of the size of these buffers and the
effectiveness of authorities' policy responses.
We forecast Chinese real GDP growth to slow to 6.8% this year from 7.4%
last year. Chile ('A+'/Stable), Uruguay ('BBB-'/Stable), Peru
('BBB+'/Stable), Venezuela ('CCC') and Brazil ('BBB'/Negative) have the
largest direct export exposure to China, but export volumes in these
countries have mostly been stable or only declined moderately. Slower
Chinese growth is being felt mostly through its contribution to lower
commodity prices and weaker confidence. This has had a negative effect
on investment, both in commodities sectors and more broadly by reducing
confidence and weakening local currencies (making capital imports more
expensive). Foreign direct investment inflows and fixed capital
formation have shrunk in several of Latin America's commodity-dependent
economies in 2015. Energy importers like Chile and Uruguay have seen the
impact somewhat offset by the decline in oil prices.
As China rebalances, private consumption will emerge as a more important
driver of growth. This could be more supportive for agricultural
exporters (e.g. Argentina, Paraguay and Uruguay) relative to metals
Chile and Peru are the region's economies most exposed to a China
slowdown (directly through trade and indirectly through its impact on
copper prices), but they are also the best prepared. In the past decade,
they have built policy buffers to weather a commodity downturn,
including low public debt and fiscal rainy day funds. Peru's proposed
2016 budget targets a 15% increase in public investment. Chile's 2015
budget included a capital spending-based stimulus, although this is
unlikely to be repeated in 2016 to preserve fiscal buffers.
Click here to view chart showing Latin American countries' export
exposure to China by type.
Higher debt, low fiscal savings and widening fiscal deficits in Brazil,
Colombia ('BBB'/Stable) and Uruguay limit the scope for their
governments to support growth via stimulus packages to offset their
varying commodity dependence and direct exposure to China.
All of the investment-grade economies benefit from strengthened external
buffers thanks to their large international reserve holdings and
flexible exchange rates. Considerable currency depreciation is
containing external imbalances, primarily by reducing imports, but has
yet to boost non-commodity exports, suggesting underlying
competitiveness issues and similar depreciations throughout emerging
markets could hinder takeoff of manufacturing and diversification in the
near term. Rising inflation has narrowed the scope for maintaining
accommodative monetary policy in these countries. Especially high
inflation in Brazil and Uruguay has led central banks to adopt tight
monetary policy stances, which could weigh further on growth.
Venezuela and Argentina ('RD') have the least scope for counter-cyclical
policies to mitigate lower commodities prices, lacking flexible exchange
rates, fiscal buffers and financing flexibility. Bilateral loans from
China have been particularly important for Venezuela and Ecuador
('B'/Stable). These have remained forthcoming in 2015, preventing more
drastic fiscal adjustments to lower oil prices. Chinese lending to Latin
America totaled approximately USD90bn from 2010-2014, according to
Inter-American Dialogue, more than reported disbursements from the World
Bank and Inter-American Development Bank.
China's slowdown has different implications for the region's less
commodity-dependent economies. While lower oil prices will hurt Mexico's
('BBB+/Stable') fiscal income, the broader impact on the economy is
likely to be more moderate as a weaker peso, a U.S. recovery and some
structural reforms should boost prospects for manufacturing. For the
energy-dependent economies of Central America and the Caribbean, cheaper
oil can have a beneficial impact, supporting growth, reducing current
account deficits and, in some cases, lowering energy subsidy costs.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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