COVID-19 and its impact on Latin America: challenge and opportunity

Energy producers, mining, airlines and consumer companies make up the riskiest group of companies in Latin America, amid the growing threat of the Covid-19 and a crude oil price war.

Indeed, fears over the virus’s impact and the collapse of oil prices have spooked credit investors, who have fled Latin American bonds. Debt tied to companies, such as oil producer Petroleos Mexicanos and Chilean airline LATAM Airlines Group SA, fell to record lows. Bonds issued by Colombian airline Avianca Holdings SA, Argentine oil company YPF SA and energy producer Peru LNG SRL are trading at or near distressed levels, according to data compiled by Bloomberg on March 2020.

Meanwhile, a global economic slowdown poses challenges for commodities’ producers, many of whom send their products to China (where the outbreak began).

Economic Slowdown, Trade and Economic Exposure

Countries more affected

Data shows that Chile and Peru have high exposure to weaker external demand, particularly from China. In Chile, shipments to China accounted for 32% of total export revenues and 8% of GDP in 2019. In Peru, shipments to China accounted for 29% of total export revenues and 6% of GDP in the same period. These exports to China relative to total export revenues and GDP are the highest among the six largest economies in Latin America.

Copper accounted for 48% of total exports in Chile and 29% in Peru. The share of commodities in total exports increases to 41% in Peru when other industrial metals are included and climbs to 47% if oil and gas are added. The share of commodities in total exports increases to 51% in Chile when including lithium and other industrial metals. Contrary to Peru, Chile is a net energy importer. Lower fuel prices due to concerns about weak global demand could provide some relief on trade, but not enough to offset it completely.

Countries less affected

China is Brazil’s main trading partner. It purchased 29% of exports and shipped over 20% of imports in 2019. Brazil’s trade exposure to China is high and similar to that of Chile and Peru. However, total exports accounted for only 12% of GDP and those to China for just 4%. Brazil’s relatively closed economy illustrates the lower exposure of the overall economy to problems in China and weaker global demand. Nonetheless, lower commodity prices also imply a problem for Brazil.

Oil, industrial metals and soybeans account for 39% of the total Brazilian export revenues. A more diversified export base helps reduce risks, but provides little relief as demand concerns drive prices down.

Brazil has a relatively big manufacturing sector, which could be prone to problems in global supply chains. However, imports accounted for only 10% of GDP and those from China explained only 20% of the total.

Mexico and Colombia do relatively little trade with Asia. Consequently, indirect effects like lower commodity prices and a potential hit to U.S. growth are bigger risks. Shipments to China accounted for 11% of Colombian exports in 2019 and only 2% of Mexico’s. They accounted for just 1% of GDP for both countries.

Total exports account for 37% of GDP in Mexico, with the U.S. buying the bulk of them. Weaker growth in the U.S. would be a major concern.

Oil accounted for 40% of total exports in Colombia. The commodities’ share of total exports increases to 56% when coal and nickel are added. Lower fuel prices translate into weaker terms-of-trade and a drag on export revenues and domestic demand.

Mexico has an important manufacturing sector, strongly integrated with global supply chains. It has the highest exposure in the region to potential supply-chain problems. Imports accounted for 36% of GDP, but those from China accounted for only 18% of the total.

Implications for political and social stability: challenges and opportunities?

The Covid-19 outbreak has turned into an unprecedented challenge for many countries around the globe. In the case of Latin America this challenge could as well become a welcomed political opportunity for some embattled governments.

Covid-19 as an opportunity

Chile has experienced strong business and social disruptions since generalized social and political unrest started on October 18, 2019. Chilean polls have consistently shown how president Piñera was losing popularity among the general population (reaching as low as 6% in popular support). Ironically, the Covid-19 outbreak has implied for the Chilean government a necessary break from protests and riots across Chile, and a huge political opportunity for president Piñera to tackle the pandemic with sound measures, improving his popularity along the way too. The latest Cadem poll has shown that the approval rate of president Piñera stands now at 21% and Piñera still has plenty of room for further improvement.

In the case of Argentina, the new president Alberto Fernandez (who took office on December 10, 2019) is facing an early test of his capacities to face a national-level sanitary crisis. Until now the public opinion suggests that president Fernandez has been taking timely steps in the control of the Covid-19 outbreak. However, like most Latin American countries, Argentina still has a few tough months ahead and president Fernandez must continue to perform properly.

Covid-19 as a challenge

For the cases of Brazil and Mexico, the public opinions on their respective presidents are far from flattering. Brazilian president Jair Bolsonaro has been widely criticized for not taking the Covid-19 outbreak seriously. Consequently, even the governors of several Brazilian states have defied Bolsonaro’s orders to lift lockdowns and reopen schools and businesses. In a similar trend, president Andrés Manuel López Obrador has been hardly criticized for asking the Mexican population to lives their lives normally until they are ordered otherwise.

Finally, regarding Venezuela, for several years the country has experienced severe problems with its medical services as many years of economic and political crisis have left hospital without even the most basic medical supplies. On March 2020 President Nicolas Maduro surprisingly requested US$5,000 millions to the IMF to face the effects of the outbreak in the country, only to be rejected as his government is not clearly recognized as a legit one by the international community.

About E.J.McKay

E.J. McKay is a Shanghai-headquartered investment bank with a special focus on mergers & acquisitions. We are one of the most long standing independent investment banks in China, with core business of mergers & acquisitions and financing advisory.