Coronavirus economics

By Luis F Lopez-Calva, UN Assistant Secretary-General, UNDP Regional Director for Latin America and the Caribbean
Resilience is one of the main pillars of UNDP’s regional and Caribbean narrative and key foundation to promoting sustainable development in Latin America and the Caribbean. History demonstrates that in the region volatility is the norm and not the exception, and that the development trajectories of countries are not monotonic. Resilience is the ability to return to a predetermined path of development in the shortest possible time after suffering from an adverse shock.
A new source of potential volatility has emerged. While too early to fully grasp its impact, a recent threat to the macroeconomic stability of the region is the viral outbreak of the coronavirus in China. How strong will the impact of the virus be on Chinese growth, how it will translate to a slowdown in the region, and how prepared is the region to weather these impacts, are all questions to be determined.
What we know so far is that the coronavirus is spreading at a rapid pace and has resulted in a halt of economic activity in China, as the government limits the mobility in and out of the country. As of today, the number of people infected has surpassed 31,000, with more than 600 casualties and cases reported in 28 countries. While no cases have been confirmed in Latin America and the Caribbean to date, it is very likely that the impact of the virus on Chinese growth and commodity prices will represent a shock to the region.
Latin America and the Caribbean is significantly exposed to China, as economic relations between the two have soared in the past decades, particularly through trade and FDI and lending.
Trade between China and LAC increased from $12 billion in 2000 to $306 billion in 2018. China is indeed Latin America’s second-largest trading partner, and three years ago China represented already 9 percent of Latin America’s total exports and 18.4 percent of total imports. There is heterogeneity across countries, but just as an indication, exports to China represent 28.1 percent of total Brazilian exports, as well as 10.5 percent of Argentina and 32.4 percent of Chile’s exports. While China imports mostly primary products such as minerals and metals, agricultural products, and fuel, from the region, its exports consist of machines and electrical equipment, textiles, chemicals, metals, and others.
The six main trading partners of China in Latin America and the Caribbean are Brazil, Argentina, Chile, Peru, Colombia, and Venezuela, whose exports are concentrated in four products, which represent 75 percent of Latin American exports to China: copper, soybeans, crude oil, and iron ore.
Similarly, FDI and lending from China have surged in Latin America and the Caribbean over the past decade. Between 2005 and 2017, China’s investment in the region represented 5 percent of total FDI (more than $90 billion). According to Inter-American Dialogue, China has positioned over USD 141 billion in loans into the region since 2005, which represents more than the World Bank, the Inter-American Development Bank (IDB) and the CAF Development Bank of Latin America combined. Venezuela is by far that largest recipient of these loans, amounting for USD 67.2 billion since 2005, followed by Brazil (USD 28.9 billion), Ecuador (USD 18.4 billion) and Argentina (USD 16.9 billion).
The full extent of the impact of the coronavirus will ultimately depend on how well the outbreak is contained, but it is expected that Chinese growth in the first quarter of the year to fall sharply and rebound later in the year. While China has estimated its growth for 2020 at 6 percent, several banks have revised their projections to between 5 and even 4.5 percent. The Chinese government is taking measures to smooth the impact, inserting, for example,
USD 240 billion into the banking system on Monday, prior to the reopening of markets.
There is likely to be three channels through which these shocks will be translated to Latin America and the Caribbean: trade, commodity prices and FDI. In terms of trade, a slowdown of Chinese demand for goods driven by an economic slowdown will have strong impacts on countries such as Brazil, Chile and Peru who are net exporters to the country; Argentina Colombia and Ecuador are likely to also feel the impact, albeit to a lesser extent. Using the 2003 SARS outbreak as a benchmark, Chinese trade growth slowed down by 2-3 percentage points in the three to six months after the outbreak.
Additionally, many countries will suffer disruptions to their supply chains as Chinese production of goods has come to a halt due to mandatory factory shutdowns. Notably, today the Chinese government announced that it will delay reporting its January trade data. Commodity prices will also likely be impacted by a slowdown of the Chinese economy. Chinese oil demand, for example, is already being reported to have dropped by 20 percent by some news outlets.