Mexico Seen Dodging Coronavirus Fallout Unlike Chile, Peru

The coronavirus crisis will not have an equal economic impact on Latin America's economies.

Among Latin American nations, Mexico may be better poised to endure the economic shock generated by the coronavirus crisis while Chile and Peru are expected to suffer as China curbs demand for their copper and silver exports. Brazil has the first case of the disease in all of Latin America and the economic ramifications of that for Brazil remain unclear.

“There could definitely be some winners, Mexico first and foremost,” said Alberto Ramos, chief Latin America economist at Goldman Sachs, when asked if a specific Latin American supply chain and/or economy would prove more resilient to the outbreak than others. “Mexico is more of a manufacturing-based export economy whereas others like Chile, Peru and Brazil are more commodities-focused.” 

Chinese exports account for just 0.6% of Mexico’s GDP while they make up 5% for both Chile and Peru, 3% for Brazil and 1.2% for Argentina, according to Ramos.

The novel coronavirus or Covid-19—which the World Health Organization warned could become a global pandemic—is rattling supply chains across South America that depend on Chinese feedstocks to make pharmaceuticals, cars, electric appliances and other goods. “Pharmaceuticals, appliances and auto manufacturers are starting to run thin [of Chinese parts] and may have to stop production if the situation continues,” warned Ramos.

The coronavirus crisis is threatening global growth too. According to the IMF, the epidemic could dent world GDP growth this year by 0.1% and lower China’s growth to 5.6%, below Beijing’s 6% target.

Fears are high in Peru and Chile where economists are bracing for a protracted slump.

“We are seeing a 1% decline in GDP from a forecast 2.5%-3.0% growth this year as the coronavirus could become a pandemic and we have an election year in Peru,” said Antoninho Linan, an economist at BBVA bank in Lima.

Compared to Peru, things look worse for Chile since it is a bigger exporter of copper whose prices are down more than 10% since the start of 2020, adding to already sluggish expansion triggered by massive demonstrations over high inequality. 

“Chile has political problems and there is a lot of instability surrounding its constitutional vote in May which could now be postponed and lead to more protests,” added Linan. 

Bank of America added that Chile—dubbed a “fallen angel” in its latest report—could see GDP growth contract to 0.9% from a previously forecast 1.3% thanks to combination of coronavirus fallout, fiscal woes and political volatility.

By contrast, Mexico—whose economy is limping along after sub-zero growth in 2019—Ramos said the country’s cost competitiveness, logistic benefits and proximity to the world’s biggest market (the US) should help buffer it against coronavirus economic fallout. As the crisis continues with no end in sight, U.S. companies may begin shifting their supply chains away from China and US-China relations remain shaky despite the “Phase 1” agreement tamping down the trade war.

“If Mexico plays it well and adopts open, investment-friendly policies, they could turn out to be major beneficiaries of the growing trade/strategic rivalry between the US and China and also by decisions [from some manufacturers] to move suppliers closer to home,” Ramos concluded.