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.
The China slowdown scenario in our recent analysis involves shocks
primarily to investment and consumption in China over a three-year
forecast period through year-end 2018, bringing average GDP growth to
2.3%. This hypothetical scenario, developed with the help of Oxford
Economics' Global Economic Model (see our "China Slowdown Scenario"
report for details), does not reflect Fitch's current expectations for
China's growth, but tests credit connections between China and the rest
of the world.
In recent years, major LATAM 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.
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 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 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% of all
regional exports to China, highlighting the region's commodity export
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% 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% of current external
Brazil leads all other LatAm exporters in terms of total exports to
China ($41 billion in 2014). However, 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% 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.
Chile is the world's top copper producer and has a high economic
exposure to China (its largest market), directly accounting for a higher
share of Chile's exports (25% 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.
Private and official estimates of potential growth have already been cut
substantially. Low public debt and good liquidity buffers built up
during the mining supercycle should mitigate the impact of slower
Chinese and global growth to some degree. However, weak domestic
confidence following the end of the copper boom has cut into economic
growth, and a more intense shock would push Chile into recession by 2017
under the analyzed scenario.
For more information on this topic, please see our special report
titled, "China Slowdown Scenario: Testing Credit Connections," dated
December 2015, which is available on our website at www.fitchratings.com.
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.
China Slowdown Scenario (Testing Credit Connections)
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