LatinFinance - September/October 2015 - 58

tries such as Mexico that compete with
China on manufactured exports.
"The Mexican peso's steep fall against
the renminbi in recent years had helped to
raise the cost-competitiveness of Mexican
products in the key US market," said InnesKer at the EIU.
The Bloomberg JPMorgan Latin America
currency index dropped by 33.2% between
May 2013 and the end of July 2015. Brazil's
real and Colombia's peso are down by more
than 30%, the Mexico's peso is off almost
20% while the Peruvian and Chilean currencies are all down by 10% to 15% over the
last 12 months alone.

Source: Reuters

supplying to the market.
These concerns gathered pace this year,
following a sharp fall in commodity prices,
and rising expectations that the Fed would
start lifting interest rates in September, after
this edition of LatinFinance was printed.
The impact of falling Chinese growth,
lower commodity prices, rising capital
costs and reduced capital inflows is very
visible in the foreign exchange markets.
Latin American currencies have taken a
particular battering compared with other
emerging markets. The effect on the region
has been heightened by speculation of
imminent rate hikes in the US that would

GIVE ME A BREAK: China's stock market
crash tested nerves in August

strengthen the dollar. The 3% devaluation
of the renminbi against the dollar in August,
which triggered falls in many Latin American currencies, was a stark reminder of the
impact that policy in Beijing can have on the
region's economies.
While the weaker renminbi will make
imports of commodities more expensive in
China, economists were cautiously optimistic that Latin America would cope with the
move.
The prices of commodities, which make
up the bulk of Latin America's exports to
China, are already at or close to their lowest
levels in a decade, says Edward Glossop,
Latin American analyst at Capital Economics. "With prices at these low levels, we do
not expect Chinese demand to fall further
as a result of the weaker renminbi."
However a lower Chinese currency will
mean China's exports become significantly
cheaper, which may be bad news for coun-

58 L ATINFINA NCE.COM - September/October 2015

Tightening the strings
That China will be less keen to lend to Latin
American countries, is another substantial
concern. China has provided more than
$119 billion in loan commitments to Latin
American countries and firms since 2005,
according to the Inter-American Dialogue, a
US-based think-tank.
In 2010, China lent $37 billion to Latin
America - more than the World Bank,
Inter-American Development Bank, and US
Export-Import Bank (Exim) combined. This
volume plunged by almost 90% to just $3.8
billion in 2012, but has recovered to $22.1
billion in 2014.
Beijing is showing signs of growing
concern over the government's policy of offering cheap loans without adequate conditions to troubled Latin American countries
that might never be able to repay them.
"Certainly Venezuela has been an absolute
disaster for them and I don't think you find

many people in China with a lot positive to
say about that relationship," says Innes-Ker.
Venezuela has received around $45 billion in Chinese loans since 2003, as part of
a deal to supply oil to China's then-booming
economy. The China Development Bank
(CDB) alone has lent $37 billion to the country since 2008. Amidst falling oil prices,
soaring inflation and Venezuela's ratings
downgrade at the beginning of this year, the
CDB has had to loosen the repayment terms
of its debt. Moody's downgraded the sovereign to Caa3 from Caa1 in January, pointing
to a significant increase in default risk.
"China has had really bad experiences in
two or three countries in Latin America,"
says Innes-Ker. The Chinese strategy to ensure repayment had been to provide more
money to make sure the country could continue growing economically. Whether this
approach will result in desired outcome,
however, is yet to be seen.
Structural change
A reversal in exports, growth and financing
is a poisonous cocktail. Although the IMF is
not forecasting a Latin American recession,
its expectations are not high either: the fund
expects the region's GDP to expand just 0.9%
in 2015. Over the five years to 2020, the IMF
forecasts LatAm economies to pick up by
2.7%, while it predicts Chinese growth will
average close to 6%.
"The problem for these economies in
Latin America, of course, is that the scale
of China's investment boom - and its insatiable appetite for the region's commodity
exports - was unsustainable," says Glossop.
The series of sharp falls in China's stock
markets in July and August rekindled fears
over the outlook for the economy and led
to renewed anxiety about the spillovers to
emerging regions such as Latin America.
The impact on some Latin American
countries could be much worse than others, Kotschwar says. "Brazil is the poster
child. It was growing at pretty robust rates
in the 2000s and is now not growing and
has high rates of inflation. If China slowed
down even more, then that would be even
worse for Brazil."
Other countries such as Venezuela, Ecuador and Argentina, that had grown industries on the back of the commodities boom,
would feel even more of a crunch if China
slowed sharply and cut its international
lending. "Economies that are not highly
diversified and haven't been saving the
benefits of the boom time will be severely
hit," Kotschwar says.

http://www.LATINFINANCE.COM

Table of Contents for the Digital Edition of LatinFinance - September/October 2015