MercoPress. South Atlantic News Agency

Fitch warns Latam commodity-exporting countries of a ‘hard-landing’ in China

According to a new special report issued by Fitch Ratings released Wednesday, a potential 'double-dip' in the US or a hard-landing in China would have negative economic implications for Latin American countries.

“Commodity-exporting countries in the region would see their external accounts deteriorate, although in most cases, external buffers are relatively strong to prevent a currency or a balance-of-payments crisis”

The scale of dislocation would vary across the region contingent on countries' starting economic position, fiscal and external buffers, and policy flexibility. Sovereign ratings could suffer in some cases, depending on the depth and duration of the shock and the authorities' policy response. However, neither of these scenarios is Fitch's base case.

“We believe that economies with strong trade links to the US economy, particularly Mexico and the Central American nations, could contract or decelerate sharply if a 'double-dip' occurs in the US,” said Santiago Mosquera, Director at Fitch.

Demand for their exports would collapse, and given the nature of their export-oriented industries and the spill-over effects to other sectors, domestic demand and employment could be negatively affected.

A decrease of tourists and reductions in family remittances from the US would have a major effect in some of the smaller economies rated by Fitch including Aruba, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, and Jamaica. Contrary to other countries in the region, tourism and remittances-dependent economies have only modestly recovered from the previous recession as labour market conditions in originating countries remain weak.

Despite the increase in trade between China and Latin America in recent years, the impact from a potential hard-landing in China comes from its effects on commodity prices.

“Commodity-exporting countries in the region would see their external accounts deteriorate, although in most cases, external buffers are relatively strong to prevent a currency or a balance-of-payments crisis,” added Mosquera.

However, countries like Argentina and Venezuela may face increased currency pressures while Ecuador could potentially see a harder economic adjustment due to its dollarized fx regime. Broadly, adverse terms of trade shock will slow growth dynamics in the region due to spill-over effects on domestic demand and a possible reduction in capital flows.

More importantly, pressures will build on public finances, particularly where governments show strong dependence in commodity-related revenue (Bolivia, Ecuador, Venezuela, Mexico), have limited manoeuvre fiscal space (Argentina, Brazil, Colombia, Ecuador, Mexico, and Venezuela), and lack large fiscal savings (all but Chile and Peru).-