By Pan Kwan Yuk and Humay Guliyeva
In a couple of hours China will release second-quarter GDP figures and the numbers are likely to reinforce the view that the Chinese economy is slowing faster than the government would like.
A good time then for beyondbrics to take a closer look at the potential impact that a slowdown in China could have on Latin America – a continent that has vastly benefited from the Middle Kingdom’s dizzying pace of growth in recent years.
First, some context.
As the graph below from Bank of America Merrill Lynch shows, LatAm’s exposure to China has increased exponentially over the past six years. Exports from the continent to China surged more than five-fold from $18bn in 2005 to $97bn in 2011. In percentage terms, China accounted for 11.7 per cent of total LatAm exports last year, compared to 5 per cent in 2005.
Country-wise, Brazil, Peru and Chile now count China as their single biggest export market. The three respectively send 17.3 per cent, 18.4 per cent and 22.8 per cent of their exports (mostly commodities) to China.
By contrast, Mexico and Colombia, whose biggest trading partner is the US, send only 1.7 per cent and 3.5 per cent of their exports to China.
The picture gets more interesting if you look at exports to China as a percentage of each countries’ GDP. Chile, Peru and Venezuela stand out on this metric.
That said, here comes the million dollar question: how much bruising would the various LatAM countries see from a China slowdown?
According to Fitch, the rating agency:
a one percentage point slowdown in China’s annual GDP growth is associated with a 1.2 percentage point deceleration in the average growth rate of the seven largest commodity exporting economies in Latin America (Argentina, Brazil, Chile, Colombia, Peru, Venezuela and Uruguay).
BofA Merrill Lynch for its part reckons an 8 per cent growth rate in China – compared with 9.2 per cent in 2011 – would cause LatAm’s export volumes to China to drop by at least 2.2 per cent. The figure is conservative, its analysts say, because it does not take into account two additional factors:
- The impact of lower China growth on other trading partners. We estimate 1 per cent lower growth in China would spark a 0.7 per cent deceleration in ASEAN countries.
- The impact on commodity prices. We estimate a 1 per cent drop in China’s growth rate would impact commodity prices by 5-10 per cent, depending on the commodity.
Not everyone is as glum however. In its April regional focus report , the IMF argued that “external conditions remain stimulative for much of Latin America”. It said:
…sustained demand from emerging Asia will support commodity prices, keeping terms of trade high for South America’s commodity exporters.
Indeed, prices for soy, copper and iron ore are still high when viewed from historical perspective. Soy prices peaked during the food crisis in July 2008 at $554 per tonne, while copper and iron ore prices hit the roof in February 2011 at $9,880 and $187.80 per tonne, respectively. The price for soy hit $522.33 per tonne in June, but copper and iron ore prices have slid to $7,480 a tonne (driven by high-price driven expansion in copper projects coming online and slowing Chinese imports) and $134.62 a ton, respectively.
“In recent years, the prices for these commodities hit record levels for the past 30 years. We are seeing some decline, but the current levels are still closer to those peaks than to price levels seen prior to 2008,” Barbara Kotschwar, Research Associate at Peterson Institute for International Economics told beyondbrics.
Fair enough. But with uncertainty pretty much the only certainty in the global markets at the moment, LatAm countries would do well to take a hard look at their economies and undertake structural reforms rather than wait and hope that commodities demand from China and elsewhere will pick up steam again.