Coronavirus will further dampen exports in Latin America

WTO's Goods Trade Barometer pointed that trade was already subdued in late 2019 and will take longer to recover due to the outbreak

Container ship being loaded in Santos, Latin America's biggest port. Photo: Shutterstock
  • WTO mais indicator of trading goods fell to 95.5. Readings of less than 100 indicate trade contraction;
  • Analysts forecast shrinking exports in Brazil, Mexico and Chile and significantly lower trade growth in Argentina and Colombia in 2020.

Growth of global trade in goods, which already started weak in 2020, is likely to remain subdued because of coronavirus, according to the World Trade Organization (WTO)

The Geneva-based trade body said its Goods Trade Barometer indicator fell to 95.5 from the 96.6 reading reported one month earlier, and the new figure does not even take into account the outbreak now affecting three dozen countries. Readings of less than 100 indicate trade growth below medium-term trends.

“[The recent figure] does not account for recent developments such as the outbreak of COVID-19, the new coronavirus disease, which may dampen trade prospects further. World merchandise trade growth is likely to remain weak in early 2020”.

WTO Goods Trade Barometer report

In Latin America, the scenario is bleak. In the fourth quarter of 2019, exports from the region, heavily relying on commodities, had already contracted 1.2% in volume compared to the previous quarter, given lower global demand.

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According to Valor Investe, Société Générale, a French bank, now projects further deterioration. It points to shrinking exports in Brazil, Mexico and Chile and significantly lower trade growth in Argentina and Colombia in 2020.

Chile, Peru and Brazil have China as a big trade partner that buys 33%, 28% and 26% of their exports, respectively. As the share of foreign trade in Brazilian GDP is relatively low, the country is relatively ”shielded” against external turmoils, in the bank’s assessment, compared to the foreign dependence of Mexico, Chile, Colombia and Peru. In total, China’s trade with Latin America rose from $17 billion in 2002 to $306 billion in 2018.

A recent document released by the International Monetary Fund (IMF) has also included the coronavirus epidemic among the “significant downward risks” for Latin American economies in 2020. 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.

Supply chains

In an assessment of China, Société Générale estimates that supply chains in various industrial sectors, such as automotive and electronics, may suffer a ”total freeze” if Chinese production fails to resume its normal pace within a month or so.

In that case, it would take longer to return global production to normal levels even after the end of the Covid-19 outbreak. In the longer term, the bank reckons this scenario could lead more foreign companies to diversify their supply chains outside China, a trend that had already begun during the trade war fought by Chinese and American officials.

After a week of intense appreciation, the dollar retreats

As new infections by the coronavirus are now growing faster outside of China than within, investors are turning to the safety of the U.S. government debt.

The fear is that the virus will have a greater economic impact than previously anticipated as companies report lower revenue expectations due to disruptions in their supply chain and a falling demand.

This week the dollar’s appreciation was particularly high against the currencies of emerging Latin American countries. The strong price volatility led the dollar in Brazil to briefly surpass the BRL 4.50 mark in the morning, but now it’s negotiated at BRL 4.47. In Colombia the coronavirus’s effect was worst. the dollar rose 67 pesos and was negotiated at an average price of COP 3,508.

But it is important to remember that the process of devaluation of Latin American currencies began in the last months of 2019. The coronavirus is just another factor that contributes to the distrust of investors about these countries, where structural and political issues have a greater weight in the exchange rate than the disease that comes from China.

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