Containers in Port of Valparaiso in Chile
Port of Valparaiso, Chile: more than a third of the country's exports are sold to China. Creative Commons
Economy

Latin America braces for the threat of "economic contagion" posed by coronavirus

Countries that are most reliant on exports to China and commodity prices will be hit harder

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The epicenter of the coronavirus outbreak and its economic seismic consequences may be in China, but the tremors can be felt strongly across the world in Latin America. China is a leading trading partner with the region and the main export market for Brazil, Chile, Peru and Uruguay.

A slowdown in the Chinese economy would be particularly bad for Latin America, where countries are still recovering from a long period of instability and weak growth. Not only does the drop in commodity prices directly affect the region, but also a slower pace in the global supply chain has the potential to make countries with a large industrial base such as Brazil and Mexico grind to a halt.

If the Chinese economic slowdown reveals to be strong, exports from Latin American countries may plummet. China’s trade with Latin America rose from $17 billion in 2002 to $306 billion in 2018.

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A recent document released by the International Monetary Fund (IMF) has already included the coronavirus epidemic among the “significant downward risks” for Latin American economies in 2020. Before the outbreak, the fund projected growth in Latin America’s economy to be 1.6% this year. As a result of the virus, UBS bank has already reduced its growth forecast for the economy of Brazil, the largest in the region, from 2.5% to 2.1% in 2020.

According to the IMF, the countries most affected in the region would be commodity exporters from South America. Chile depends on China for 34% of its exports, Peru 28% and Brazil 26%.

If China’s economic growth drops from 6% to 5% this year, GDP growth in Chile and Peru will decline between 0.3% and 0.5% each, according to IMF scenarios.

For Brazil, the impact would be slightly lighter, because the country depends less on foreign trade. Oxford Economics forecasts that global economic growth will be reduced by 0.2%.

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Chile is the greatest example of this kind of economic contagion. The country sends to China more than a third of all its exports. According to Bloomberg, local government is already seeking other markets for its production of wines, cherries and seafood. Since the beginning of the coronavirus news, purchases of these items by China have plunged more than 50%. Loads of copper, the main product on the Chilean export basket, are awaiting shipment.

Mexicans are concerned

The proportion of Mexicans who say they are very concerned about the coronavirus has increased from 43% to 57% in the last two weeks, showing that the problem of the epidemic is already causing concern in the majority of the population. According to the survey by the newspaper El Financiero, carried out on February 7 and 8, respondents who say they are “very” or “a little” worried about the coronavirus add up to 79% of the population. In addition, 42% of respondents believe that the country is “not prepared” to face an eventual outbreak.

Andres Abadia, senior economist for Latin America at Pantheon Macroeconomics, told the online news outlet Quartz that there is considerable concern among companies in the region with a focus on exports. “We have to expect a big hit to Chinese demand for Latin American goods, particularly commodity prices, and disruption to China-based supply chains,” he reckoned.

Technology event

Outside Latin America, the outbreak also affects business. Several companies recently canceled their participation in the Mobile World Congress, the largest telecommunications event in the world that would take place in late February in Spain. Intel decided not to participate in this year’s edition, following  decisions made by LG, Ericsson, Sony and Amazon. On Wednesday, it was announced that this year’s congress was being canceled.