China rebalancing: Blessing and curse for Latin America
Research Briefing Emerging markets Author Magdalena Forster +49 69 910-30664 [email protected] Editor Maria Laura Lanzeni Deutsche Bank AG Deutsche Bank Research Frankfurt am Main Germany E-mail: [email protected] Fax: +49 69 910-31877 www.dbresearch.com DB Research Management Ralf Hoffmann China is undergoing a rebalancing of its growth model. In the process, real GDP growth has started to decline and the economy is gearing for a higher share of domestic consumption and services and a lower share of investment. As a consequence, the composition of Chinese commodity imports is likely to change, with a slowdown in the demand for base metals and oil for instance, and an increase in the demand for foodstuffs and natural gas. What does this mean for Latin America? Latin American countries are among the top suppliers of commodities to China, and, in turn, China is a key market for them. Venezuela, Cuba, Peru, Brazil, Uruguay and Chile sell between 15% and 25% of their exports to China, outstripping the Latin American average of 10% (see chart below). While Cuba and Brazil have a relatively low export-to-GDP share, the other four countries are more open to trade and thus more vulnerable to a drop in Chinese demand growth. Chile and Venezuela are the economies most exposed to China’s economic rebalancing given their concentration on copper and oil, respectively, while Uruguay is likely to benefit the most as a food exporter. Brazil and Peru are intermediate cases since they – to different degrees – ship both types of commodities, namely soya beans and fishmeal in the “favoured” group, and iron ore and copper in the “less favoured” group. Latin America: Exposure to a slowdown in exports to China 45% 1 BO 40% PY 35% Exports as % of GDP March 26, 2015 China rebalancing: Blessing and curse for Latin America MX 30% EC 25% CL VE CR PE LatAm UY 20% DO 15% AR CO BR 10% PA 5% CU 0% 0% 5% 10% Exports to China as % of total exports Sources: IMF DOTS, IMF WEO, UNCTAD, Deutsche Bank Research 15% 20% Colour code: Main export category to China Food & agricultural commodities Metals, ores & gold Fuels Manufactures Mixed 25% China rebalancing: Blessing and curse for Latin America Latin American exports to China skyrocket 2 China’s rapid economic growth over the last decade has been heavy industrycentred and reliant on natural resources imports. By value, China is the world’s largest consumer of iron ore, copper and soya beans. Thus, commodityexporting countries – including those in Latin America – have benefited from Chinese commodity demand and related high prices. Especially the southern part of the continent with its vast natural resources has been a perfect match. USD bn 100 80 60 40 20 CL VE PE MX AR CO 2013 2014* 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 0 BR China has quickly developed into a major export market for Latin America others Latin American exports to China rose from USD 11 bn in 2003 to almost USD 106 bn in 2013 (chart 2). This pushed up China’s share in Latin American exports nearly tenfold in that period, while the share of the US declined (chart 3). Emerging Asia (including China) became the second most important export partner for the region after the US in 2012, overtaking the EU, which now occupies third place. *2014: Jan-Oct China is No. 1 export market for Chile, Uruguay and Brazil Sources: Deutsche Bank Research, IMF DOTS nd Shift in trading patterns 3 LatAm export destinations, % of total 100 90 80 70 60 50 40 30 20 10 0 For Latin America as a whole China is the 2 most important market after the US, taking up 10% of the region’s exports (chart 4). Chile, Uruguay, Brazil, Peru, Cuba and Venezuela have a higher-than-average export share vis-à-vis China (chart 5). For the first three countries, China is actually their No. 1 market worldwide. Among countries with a smaller-than-average share of exports to China, Colombia stands out and is rapidly catching up towards the regional average (chart 6). Countries with high export exposure to China 00 02 04 06 08 10 12 5 Countries' export shares to China Countries' export shares to China 30% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2003 25% US China Emerging Asia (other than China) EU Latin America & the Caribbean Rest of the world 20% 15% 10% 5% Sources: IMF DOTS, Deutsche Bank Research 0% 2003 Ranking of export partners 4 Share in total exports, 2013 No. 1 No. 2 2005 CL PE LatAm 2007 2009 2011 UY CU Sources: IMF DOTS, Deutsche Bank Research Argentina BR 21% CN 7% Bolivia BR 33% AR 20% Brazil CN 19% US 10% Chile CN 25% US 13% Colombia US 32% CN 9% Costa Rica US 38% NL 7% Cuba CA 16% CN 15% Dom. Rep. US 39% HT 16% Ecuador US 45% CL 10% Mexico US 79% CA 3% Peru US 18% CN 18% Uruguay CN 22% BR 17% Venezuela US 34% IN 16% Latin America US 39% CN 10% Countries with smaller export exposure to China 2013 BR VE 2005 2007 2009 2011 6 2013 LatAm CO AR PA CR BO DO EC MX Sources: IMF DOTS, Deutsche Bank Research Sources: IMF DOTS, Deutsche Bank Research 2 | March 26, 2015 Research Briefing China rebalancing: Blessing and curse for Latin America Exports to China are disproportionally based on commodities Latin America has a relatively diversified export structure: 44% of its exports to the world are manufactured products while 56% are commodities (although for South America the share of manufactured exports is lower at 24%) (chart 7). However, only 8% of Latin American exports to China are manufactured goods. Within the commodities group, exports to China are heavily dominated by metals, ores, and agricultural products. Overall Latin American exports are relatively diversified ... ... but not so much in terms of exports to China Composition of exports to world, %, 2013 Composition of exports to China, %, 2013 Latin America South America Central America* Caribbean AR BO BR CL CO CR CU DO EC MX PA PE PY UY VE 22% 0% Food & agricultural products 14% 20% 20% 44% 40% Ores, metals & gold 60% Fuels 80% Latin America South America Central America* Caribbean AR BO BR CL CO CR CU DO EC MX PA PE PY UY VE 100% Manufactured goods 30% 0% Food & agricultural products 20% 41% 40% Ores, metals & gold 7 20% 60% Fuels 80% 8% 100% Manufactured goods * includes Mexico Sources: UNCTAD, Deutsche Bank Research Chinese growth model rebalancing will change its commodity demand Chinese growth slows down 8 yoy 12 11 10 9 8 7 6 5 08 09 10 11 12 13 14 15 Real GDP (quarterly) Avg. 2005-2014 16 In the wake of the global financial crisis, China’s economic growth has declined markedly, from 12% yoy in Q1 2010 to 7.3% in Q4 2014 (chart 8). At the same time, China has started to steer a change in its economic growth model, away from investment and commodity-intensive production and towards domestic 1 consumption and services. The IMF estimates that China’s new growth model will trigger a change in the composition of the country’s commodity imports. While the consumption of commodities on a per capita basis will continue to increase across the board, given the large scope to catch up compared to more developed economies, the demand for some commodities will rise more slowly than for others. For example, demand for some base metals such as copper or iron ore, very basic staple foods (e.g. rice), crude oil and coal will grow at a slower pace. On the other hand, demand for some metals such as aluminium and zinc, protein-rich 2 agricultural products and natural gas is likely to accelerate. Sources: IHS Global GmbH, Deutsche Bank Research 1 2 3 | March 26, 2015 Dorrucci, Pula and Santabárbara (2013). IMF (2014), pp. 36-40. Research Briefing China rebalancing: Blessing and curse for Latin America Along the lines of continued rapid urbanisation, rising disposable incomes and changes in eating habits, the United States Department of Agriculture (USDA) projects that China’s trend of soya bean imports, mainly used as animal feed, will rise rapidly over the next decade. The USDA expects a rise in China’s share in global soya imports from currently 65% to 71% by 2024. Meat imports may also rise faster, since China’s expanding meat production might not keep pace 3 with accelerating demand. China is also the world’s largest consumer of fish meal to support its fast-growing aquaculture sector, a trend expected to 4 strengthen with dietary changes in the Chinese population. Uruguay: A potential winner 10 Agriculture and metal exports depend on Chinese demand 9 % of total exports to China, 2013 % of total goods exports by country that are shipped to China 80% 14% Soya and other oil seeds Meat Other foodstuff Manufactured goods Other VE Crude oil UY Beef BR Wood pulp BR Crude oil CU Metal ores CL Wood pulp UY Soya beans CL Copper PE Silver ore PE Copper BR Iron ore PE Fishmeal 20% CU Sugar 40% 26% CL Iron ore 50% BR Soya beans 60% 7% AR Soya beans 3% 0% Sources: COMTRADE, UNCTAD, Deutsche Bank Research Sources: UNCTAD, Deutsche Bank Research Change in Chinese import matrix holds chances for Uruguay, risks for Chile and a mixed picture for Brazil and Peru Chile tops export exposure 11 Exports to China as % of GDP, 2013 Latin America CL VE UY PE BR CO BO AR CR EC CU MX DO GT PY PA SV Single export goods that are heavily dependent on Chinese demand include soya beans, iron ore, sugar, fish meal, wood pulp, and copper and other metals (chart 9). Assuming that demand for copper and iron ore declines and for soya and meat increases, Chile is likely to be affected negatively while Uruguay (chart 10) and Argentina might be in a sweet spot. For countries like Brazil and Peru, the picture looks mixed, since their exports to China specialise in both agricultural products and base metals. According to press reports, Cuba benefits from an agreement with China that guarantees annual exports of 400,000 t of sugar, potentially a stabilising factor in future trade flows. Venezuela ships less than a fifth of its total crude oil to China, but considering that oil is the country’s main (if not exclusive) export good, the impact is much higher – Venezuelan oil exports to China accounted for 5% of its GDP in 2013 (chart 11). On the other hand, the fact that a large part of oil exports to China are tied to loan-for-oil agreements may result in Venezuela’s oil exports to China remaining more stable than would otherwise be the case. 0% 1% 2% 3% 4% 5% 6% 7% Sources: IMF, Deutsche Bank Research Magdalena Forster (+49 69 910-30664, [email protected]) 3 4 4 | March 26, 2015 United States Department of Agriculture (2015). World Bank (2013). Research Briefing China rebalancing: Blessing and curse for Latin America References: Dorrucci, Ettori, Gabor Pula and Daniel Santabárbara (2013). China’s Economic Growth and Rebalancing (ECB Occasional Paper Series No. 142). Frankfurt am Main, Germany: European Central Bank. International Monetary Fund (IMF) (2014). World Economic Outlook: Recovery Strengthens, Remains Uneven. Washington D.C., USA: International Monetary Fund. United States Department of Agriculture (USDA) (2015). Agricultural projections to 2024. World Bank (2013): Fish to 2030 – Prospects for fisheries and aquaculture (World Bank Report Nr. 83177-GLB). Washington D.C., USA: The World Bank. Country key Argentina AR Bolivia BO Brazil BR Chile CL Colombia CO Costa Rica CR Cuba CU Dominican Republic DO Ecuador EC Guatemala GT Mexico MX Panama PA Peru PE Paraguay PY El Salvador SV Uruguay UY Venezuela VE © Copyright 2015. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. 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