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Can Latin America Survive China Slowdown?

Can Latin Export-Driven Economies Survive a Chinese Slowdown?

Inter-American Dialogue 

A decade after its economy was on the brink of collapse and underwent major reforms, Uruguay has become a net creditor of the IMF, Mercopress reported Nov. 14. Meanwhile, JPMorgan has calculated that Chinese growth alone has had as large of an effect, or larger, on South American economies as has growth in the rest of the world combined, the Financial Times reported. To what extent is Uruguay's economic success the result of its reform efforts, or have high commodities prices and demand from China been the primary drivers? Will Uruguay and other export-driven economies of South America continue to thrive if the Chinese economy decelerates?   

Thomas Andrew O'Keefe, president of Mercosur Consulting Group Ltd. in San Francisco: Despite laudable efforts undertaken since the severe recession at the start of this century to diversify its export markets, about a third of Uruguay's exports still go to its two larger Mercosur neighbors, Argentina and Brazil. The country's lucrative services sector also depends heavily on demand from neighboring countries. A drop in commodity exports to China would have a big impact on Argentina's economic fortunes, and to a lesser degree, on those in Brazil. Accordingly, Uruguay would be indirectly affected by a significant slowdown in Chinese economic growth because of the direct impact on neighboring economies. Any negative fallout from an economic downturn in Argentina and Brazil, however, is unlikely to produce anywhere near the severe recession in Uruguay as the one the country experienced a decade ago. For one thing the country's finances and banks are in much better shape and there are enough reserves for the government to provide sufficient stimulus spending to weather any new regional recession. Overall, Uruguay, like Chile, is much better positioned to withstand any deceleration in the Chinese economy than a number of larger South American countries such as Argentina or Peru

Sun Hongbo, associate professor at the Institute of Latin American Studies of the Chinese Academy of Social Sciences in Beijing: South America now is on the way of jumping out of the historical debt trap. The spillover effect of China's sustainable growth has been only one favorable external factor for the new round of development in this region. More important, the past reform efforts made by some countries to establish a sound macroeconomic regulation framework with prudent fiscal and flexible monetary policies have functioned well, so that they have been capable of adopting countercyclical policy tools against the global financial crisis. Undoubtedly, China's strong demand for primary commodities improved the terms of trade of South American resource-exporting countries. For example, Brazil, Argentina and Chile have enjoyed great trade surplus with China, amounting to more than $115 billion from 2001 to 2010. In the case of Uruguay, its trade with China has been in deficit in recent years, but it is not large. The fluctuation of China's growth rate resulting from the development model transformation that is underway does not necessarily mean a negative impact for the South American economy. China's opportunity for South America has gone gradually beyond trade, extending to areas including investment, infrastructure and technical cooperation. By the end of March 2011, China's development bank signed credit deals worth more than $59 billion with 13 Latin American countries, bank President Chen Yuan, said in an interview with People's Daily. It has already released $38.3 billion and 20 billion renminbi in loans on nearly 60 projects. In case of Cuba, Uruguay and Chile, it reached $750 million. In other words, beyond trade, China can play a capital provider role as an external financial stabilizer for South America in the next few years. 

David Mann, regional head of research, Americas at Standard Chartered: Uruguay's economic success is a combination of both the reform efforts and the rises in commodity prices. The prospects remain bright as macro imbalances in Uruguay are limited and we expect commodities to remain supported by demand from other emerging markets, particularly China and further out even from India. Uruguay also has a strong regulatory regime and a solid banking sector. FDI rather than portfolio inflows are much more healthy from a financial flows vulnerability point of view as FDI is longer term in nature and therefore less fickle. If there is a bigger deceleration in China than expected and commodities decline as world growth disappoints this is a risk factor to be wary of. However we believe this would be a temporary issue. China still has substantial firepower to combat a downturn and the rising need for resources amid the global super cycle, driven by emerging markets, is likely to continue despite the challenges posed by the crisis in Europe. Only in the more extreme worst case scenarios in Europe would we become more worried about taking this view. Eventually the growth in China's seemingly insatiable demand will slow but this is still a long way off.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter

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