Mexico , Peru , Chile , Argentina and Brazil
Analysis

Trump's China tariff, Fed rate cut: What they mean for Latin America

Bnamericas
Trump's China tariff, Fed rate cut: What they mean for Latin America

The US Fed's recent rate cut helps provide space for Latin American central banks to follow suit – but more favorable borrowing costs alone may not be enough to spur investment in the region.

Each of Latin America’s three economic powerhouses – Argentina, Brazil and Mexico – face internal issues in addition to fallout from the escalating trade spat between the US and China.

And these two factors could dampen the impact of a better borrowing environment on levels of domestic investment, said Shelly Shetty, senior director, sovereigns, at rating agency Fitch.

“There's been a fair degree of external as well as domestic factors that have held growth back and weighed on investment,” said Shetty.

“It's not very clear to us that by simply reducing domestic interest rates that there would be a significant resurgence in investment, which also reacts to the broader economic picture, the broader reform picture in the region.”

The Fed's 0.25 percentage point interest rate cut – the first since 2008 – may also help Latin American governments on the external financing front, Shetty said.

Chile and Brazil cut rates recently – and more are expected, with Peru thought likely to follow suit.

Many investors looking to pump money into Argentina are in wait-and-see mode ahead of October’s presidential elections. In Brazil all eyes are on President Jair Bolsonaro's pension reform bill – seen as vital to making the system fiscally sustainable.

In Mexico, populist President Andrés Manuel López Obrador (AMLO) continues to butt heads with the investment community over policy objectives (energy in particular), while simultaneously committing untested troops to the country’s southern border to halt migration under threat of potentially devastating US tariffs. 

Against this backdrop, the UN's Eclac this week made a downward revision to its regional GDP growth forecast for this year to 0.5% from 0.9%, citing an “international context of greater uncertainty and complexity, and weak performance by investment, exports and consumption.”

REGIONAL IMPACT OF TRUMP’S CHINA TARIFFS 

US President Donald Trump whipped up the winds of market volatility again earlier in the week, when he announced the US would, next month, introduce a 10% tariff on an additional US$300bn-worth of Chinese imports.

Trump has already slapped a 25% levy on US$250bn-worth of US imports of Chinese goods.

Uncertainty linked to trade tensions “will likely remain since the problems between the US and China are not just commercial, as the world's biggest economy wants to avoid the Asian country increasing its technological capacity and becoming a threat to its position,” Bci Asset Management, a unit of Chilean lender Banco Bci, said in a report.

US tariffs are expected to hurt China, potentially chipping up to 1.7 percentage points off GDP growth, while the impact of the latest hike in the US would primarily be shouldered by US consumers, rather than the likes of importers of capital goods.  

Commodity-producing nations in Latin America, meanwhile, are particularly exposed to fallout, as any drop in Chinese demand for raw materials could negatively impact revenues. 

“Chinese growth is still fairly important for the region, there are clearly direct trade links of several countries in Latin America with China,” Shetty said. “To the extent that you see a re-escalation in trade tensions, that can only have an adverse impact on business confidence, even domestically, especially in countries that are commodity-dependent.

“This is another source of uncertainty for the region.”

Chile, a small, open economy, is in the front line. Prices of key export copper have already taken a hit. 

“The trade war is an area of concern for Chile and is one that will not clear up in the short term,” Claudia Torres, Bci Asset Management’s asset research and selection manager, said during a press training event.

“It’s clear that this war is not just commercial, it's also about strategy, technology,” Torres said. 

OUTLOOK

Bci Asset Management said in a report that, despite headwinds facing regions such as Latin America, “no economic deterioration is observed that could lead to an emerging markets crisis. Rather, what is seen is a general slowdown.”

Bolsonaro is expected to succeed in passing a pension reform bill this year, while there is little visibility on the outcome of Argentina’s elections, where business-friendly President Mauricio Macri’s biggest challenger is currently Alberto Fernández and his electoral copilot, the populist former president Cristina Fernández de Kirchner.

Chile, meanwhile, is trying to push through a tax reform bill designed to spur the SME segment in particular. In Mexico there is still a lack of long-term policy visibility. 

Pictured: Workers at a copper mine in Chile (credit: Claudio Reyes)

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