The coronavirus outbreak in China may be altering the 2020 investment outlook for Latin America, souring sentiment towards regional free market beacons Chile and Brazil, while turning heads — and cash — towards left-leaning Mexico.
The consensus among economists is that while the overall impact on Latin American growth and financial markets from the outbreak will be limited, there may be wide divergences across the region.
Chile’s heavy reliance on the export of commodities, especially copper, make it particularly vulnerable to weaker demand from China, its main trading partner and the world’s largest buyer of commodities.
It is a similar situation for Peru and Brazil — a leading iron ore producer — where almost a third of all exports go to China. In the case of Brazil, growth forecasts were already being reduced and the currency was sliding to all-time lows against the dollar before the global ripple effects of the coronavirus began.
“The most exposed economies are Chile, Peru, and to some extent Brazil,” said Alberto Ramos, head of Latin American research at Goldman Sachs. “The key source of downside risk to LatAm is a deterioration of the terms of trade triggered by deep long-lasting impact of a China slowdown on commodity prices’’.
Much will depend on how long the outbreak of the fast-spreading virus that emerged in late December in central China and has killed more 2,100 people lasts, as the world’s second largest economy struggles to get back on track.
Meanwhile, investors see Mexico, whose economy contracted last year for the first time in a decade under leftist President Andres Manuel Lopez Obrador, as far less exposed to China, either via direct trade links or from falling commodities prices globally.
There has not been a single confirmed case anywhere in Latin America of the new coronavirus that has spread to some two dozen countries, but investors in the region are getting worried.
Bank of America Merrill Lynch’s (BAML) latest monthly survey of Latin American fund managers showed that 56 per cent say slowing growth and commodities demand in China is the biggest risk to the region.
Bullishness on Brazil is fading, with 37 per cent of those polled by BAML forecasting the Bovespa stock market above 130,000 points by the end of the year, compared with 56 per cent last month.
The survey of 52 fund managers with about $103 billion of assets under management also showed that 27 per cent of respondents say the economic situation in Chile will deteriorate over the next six months. In January, that was 7 per cent. — Reuters
Jamie McGeever
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