Should Latin America cosy up to China given the confusion over trade policy in the US, the region’s biggest partner and investor? Not necessarily, says UBS.
Two charts in a new report from UBS Wealth Management’s chief investment office explain why: while the Chinese-driven commodities boom of the start of the last decade was great for resource-rich Latin America, it squeezed out exports of higher value-added Latin goods to China that could have accelerated longer-term growth.
Nothing appears to have changed since the commodity boom ended and prices declined. A staggering 91 per cent of the region’s exports to China in 2015 were made up of primary products and resource-based manufactured goods - a full eight percentage points more than at the turn of the millennium, says the UBS report, “Latin America - Beyond Peak Trade”.
By contrast, a larger - and growing - proportion of China’s exports to Latin America are higher value-added goods. As Alejo Czerwonko, one of the reports’ authors, told the FT: “Latin America is moving down the value chain and China is moving up.”
Despite the confusion in the region about President Donald Trump’s trade plans after he pulled the US from the Trans-Pacific Partnership and as he delays putting detail on his desire to renegotiate the North American Free Trade Agreement with Mexico and Canada, there are no signs that a closer trade partnership with China would unlock Latin growth, UBS says. Latin America sent about a third of its $850bn exports in 2015 to the US and a quarter to China.
“Unless the trade and FDI agreements start to pivot away from raw-material exports and incorporate reciprocity arrangements to open Chinese sectors of interest to Latin American companies, the relationship may not be as beneficial for the region as it is for China,” the report argues. “For this reason, we believe Latin America will need to look for domestic sources of growth.”
That means boosting infrastructure - Latin America is spending less than the 6 per cent of GDP a year that the World Bank believes is necessary to satisfy new demand, UBS notes - as well as addressing poor education and health services and tackling longstanding and deep-seated problems, including low productivity, a large informal sector, corruption and low credit penetration in some countries, constraining access to capital.
Mexico, despite being Latin America’s second-biggest economy, has less corporate lending than Peru (equivalent to 19 per cent of GDP versus Peru’s 23 per cent) and just over half as much personal lending as in Colombia (equivalent to 11 per cent of GDP versus Colombia’s 20 per cent), UBS noted.
But Latin America has some advantages. While China’s workforce is expected to shrink by a fifth by 2050, the rate of growth in Latin America’s working population between 2020 and 2025 is better than anywhere except Africa. Mexico and Peru in particular stand out for favourable demographics. Mexico’s working-age population is expected to grow by 14.1 per cent between 2015 and 2025, according to the report, the most in the region.
However, as UBS notes, good demographics does not automatically translate into economic gain. Mexico, which has one of the highest rates of young people neither employed nor in education, and Peru, where spending on education is among the lowest in the region, “will need to make major investments in education - and they face challenging starting points,” it said
In addition, political headwinds are increasing. The region faces an intense season of presidential elections, starting with Chilean polls in November and continuing in Costa Rica in February, Paraguay in April, Colombia in May, Mexico in July and Brazil in October. The risk of a populist swing, especially in Mexico, where maverick leftist Andrés Manuel López Obrador is leading the polls, is real.
In short, “the export-led growth model is a risky one in a world of global rebalancing and more protectionist developed economies,” UBS said. Driving domestic growth is tough, but it may be a better long-term bet.
