NEW YORK--(BUSINESS WIRE)--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 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% 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 receipts.
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)