Global Rebalancing To Prompt A Secular Shift In Export Trends

BMI View: We continue to believe that global rebalancing pressures will prompt a secular shift in the export dynamics of the major Latin American economies in the coming years. Namely, while the regional commodity plays are likely to be hit hard by a slowdown in Chinese demand, rapidly rising wages in China will see Latin America's manufacturing powerhouse, Mexico, becoming increasingly cost competitive, bolstering its export growth.

Most Latin American countries look set for a considerable deceleration in export growth over the coming years. D espite devaluations in Argentina and Venezuela, which should help to increase the cost competitiveness of the countries ' exports, we note that growth is likely to be stemmed by the lingering effects of a major erosion of productive capacity and price fixing . Moreover , we also expect exports of the major regional metals producers to slow sharply. Indeed, a fter having benefitted substantially over the last decade from rising demand for their mineral resources, Peru, Chile and Brazil look set to face a painful readjustment as China ' s robust growth story begins to wind down. In contrast, Mexico is the only country in the region where we anticipate stronger average year-on-year export growth in the coming decade t han over the last 10 years. Namely, a fter the country lost a substantial chunk of its US market share to its Asian ri val between 2002 and 2012, rapidly rising Chinese wages have resulting in Mexican manufactured goods becoming more cost competitive ( see our online service April 19, '10 Year Forecast: Stronger Growth Ahead, But Reforms Still Needed') . Combined with recent labour market and education reforms we expect this will see Mexico substantially bolster export growth over the coming years .

Export Growth Heading Lower Over The Long Term, Except In Mexico
Latin America - Goods Exports, Average Annual Growth, %

Looking solely at 2013, these trends are somewhat less clear cut, with Brazil, Peru and Chile all set to see export growth recover, while Mexico's export growth slows. That said, we note that this is largely due to base effects rather than long-term fundamental drivers. Indeed, after industrial metal producers' exports contracted sharply in 2012 as Chinese demand began to wane, we forecast a modest uptick in export growth in Brazil, Chile and Peru this year. In contrast, with US pent-up demand for Mexico's manufacturing goods having largely exhausted itself in 2012, we expect the country's export growth will take a leg down in 2013.

Base Effects Buoying Metal Producers
Latin America - Goods Export Growth, %

Commodity Exporters Set For A Long-Term Slowdown

After China's slowing growth prompted a contraction in exports in Chile, Brazil and Peru in 2012, we expect only a modest recovery this year. Indeed, despite a cyclical upswing in China's growth in the first quarter of 2013, exports have continued to contract, with Peru down a substantial 18.0% year-on-year (y-o-y) in the first two months of 2013, and Chile and Brazil recording export growth of -0.9% y-o-y and -7.8% y-o-y respectively over the same period. Moreover, while we anticipate that the moderate uptick in Chinese growth in the first half of the year combined with more favourable base effects in H213 will filter through to positive export growth by end-2013, over the medium term weaker external demand will continue to weigh on the goods trade dynamics of the major Latin American commodity exporters.

Indeed, all the major commodity exporters look set for weaker year-on-year growth in the coming 10 years, though we note that copper-producers Chile and Peru are likely to be hit the hardest. China receives approximately one-quarter of Chile's total exports and one-fifth of Peru's, with copper comprising the largest proportion. As such, with the Asian giant set for a structural slowdown in the coming years, we forecast Chile to see average annual export growth fall to 8.1% between 2013 and 2022 from 15.8% over the last decade, while Peru's export growth decelerates from 19.7% y-o-y to 7.0% y-o-y over the same time period.

Copper Key Driver Of External Demand
Chile - Goods Exports To China, US$mn

Brazil is somewhat less heavily exposed to the ongoing global rebalancing due to a more diverse commodity mix, but with China having recently overtaken the US to become the country's largest trade partner, it will not escape unscathed. As such, after average 15.1% growth between 2002 and 2012, we forecast a more moderate 8.4% average expansion in exports over the next decade.

Increasingly Dependent On Chinese Demand
Brazil - Breakdown of Exports By Destination, US$mn (LHS) & Exports To China (RHS)

Of all the major Latin American commodity exporters, oil-producing Colombia is the least vulnerable to the slowdown in Chinese growth, though we still expect to see exports tick down modestly over the long term. Unlike Peru, Chile and Brazil, the country posted relatively strong 7.1% export growth in 2012 with substantial investment into its oil sector boosting production. Moreover, we expect a further pickup in 2013, with the country's manufacturing sector likely to benefit from a weaker peso. That said, while more buffered than the other major commodity exporters, with our Oil & Gas team anticipating that the high prices seen in recent years are unlikely to be repeated, we forecast a moderate slowdown in export growth, falling from 16.5% in the last decade to 14.2% between 2013 and 2022.

Mexico Set For A Boom

In contrast, manufacturing powerhouse Mexico looks set to see a pickup in export growth over the long term. Low-cost Chinese manufacturing had severely hindered the competitiveness of Mexican manufacturers over the last decade, eating into the country's share of the US electronics and non-electronic machinery markets. However, with wages on the rise in China, Mexico's increased cost competitiveness, combined with its high productivity and proximity to the US consumer market suggests the country will become an increasingly attractive destination to manufacture goods. Moreover, with the Mexican government having recently passed a number of new reforms which we believe will boost the manufacturing sector's competitiveness over the long term, including measures to ease labour market rigidity and boost human capital, we expect the country's manufacturing sector to continue to post gains over the long term. As such, we forecast 9.9% average growth in exports over the next decade, compared to 8.8% between 2002 and 2012.

China Is More Expensive
Average Annual Wages, US$

In the coming year, the country's advantage is likely to be a little less clear cut. Indeed, after Mexican manufacturers began to slow production sharply in Q412 due to concerns about the US fiscal cliff's potential impact on demand for their goods, we anticipate only a slow reacceleration. Moreover, with the substantial US pent-up demand seen in H112 having largely exhausted itself, we forecast export growth of 5.8% - a deceleration from the 6.0% in 2012

Devaluation's Differing Effects

Finally, we highlight that despite our view that we will see devaluations in both Venezuela and Argentina this year, with Venezuela already having done so and Argentina likely to follow, we expect there to be a wide divergence in the impact on exports. On one hand, after Argentine exports contracted by 3.6% in 2012, we forecast 8.0% export growth in 2013, with the devaluation likely to help bolster cost competitiveness. Moreover, despite our Agribusiness team's view that the last decade's explosion in agricultural prices will not be repeated and our expectation for there to be some hang over effects on productivity from the government's capital controls, we anticipate only a modest slowdown in export growth, from 11.7% in the last decade to 11.5% in the coming 10 years.

Too Reliant On Oil Exports
Venezuela - Export Breakdown

On the other hand, with dollar-denominated oil exports comprising 95% of Venezuela's total exports, and production rapidly slowing due to underinvestment, we see the devaluation as likely to have a limited positive impact in Venezuela. Indeed, after 5.1% growth in 2012, we forecast a 5.0% contraction in 2013 on the back of sharply declining oil production. Moreover, with output and prices likely to continue to slump over the long term, we anticipate a sharp deceleration from average export growth of 15.4% over the last decade to 1.6% between 2013 and 2022.

This article is tagged to:
Sector: Country Risk
Geography: Latin America, Latin America