Changing China still seen as key LatAm business partner

Updated: 2016-02-01 09:33

By PAUL WELITZKIN in New York(China Daily Latin America)

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China's economic transformation from an economy based on manufacturing and exports to one focused on services and increased domestic consumption should continue to play an important role in Latin America's economy.

Alejandro Werner, Western Hemisphere director for the International Monetary Fund (IMF), told an audience at the Americas Society/Council of Americas in New York on Tuesday that the region faces a rocky economic outlook in 2016.

"The regional recession masks the fact that most countries continue to grow modestly but surely," he said. A negative growth projection for Latin America will be driven by four countries (Argentina, Brazil, Ecuador, and Venezuela) Werner said, due to a decline in commodity prices in conjunction with sharp declines in private investment.

China, still an important source of infrastructure investment for Latin America, noted Werner, is expected to grow about 6.3 percent this year.

"China has and will remain an important source of investment for countries like Argentina, Ecuador and Venezuela," Werner said.

Werner believes that Latin America remains vulnerable to a stronger-than-expected slowdown in China - a main trading partner for the region - and to further declines in commodity prices.

One area that should hold up fairly well will be farm exports, Werner said. "Consumption (in China) will increase, and that should help agricultural exports," he said.

Venezuela continues to be hammered by low oil prices, now around $30 a barrel, down from more than $100 a barrel two years ago. Werner said the country's gross domestic product (GDP) could contract by 8 percent this year after a 10 percent decline in 2015.

Noting that Venezuela is experiencing widespread shortages of essential goods, including food, Werner believes that prices in the country will continue to spiral out of control.

"We expect inflation to rise to 720 percent this year, from a world-high inflation of about 275 percent in 2015," he said.

In addition to commodity prices, another potential problem for Latin America this year could be US interest rates. The increase in US interest rates last December had limited impact on US and Latin American asset prices because "… markets had largely priced in the decision", Werner said.

The risk for Latin America and other emerging-market economies is how often the US Federal Reserve raises rates this year, he said.

One of the region's most important economies is Brazil, and after a 3.8 percent contraction in 2015, output is expected to fall 3.5 percent this year — the largest contraction since 1981-83, according to Werner.

He said Brazil will continue to be hampered by a slow adjustment to macroeconomic changes, such as the fall in commodity prices; a scandal involving government and corporate officials; and political problems that have paralyzed investment and dominated the economic outlook.