Bogota — For the better part of the last two decades China has been gaining prominence among Latin American countries’ main trading partners. The arrival of left-wing governments in countries like Ecuador, Venezuela, and Brazil warmed relations with the Asian powerhouse, which has also strengthened ties with nations such as Chile, Colombia, and Peru.
Bloomberg Línea spoke to Luis Gonzali Saucedo, Vice President and Co-Director of Investments at Franklin Templeton, in order to gain insight on how investors are currently gauging opportunities in the region. The expert was also consulted about China’s ongoing trade quarrels with the United States and how it might benefit or harm Latin American countries.
One of the key factors at play for the region’s economies has been China’s economic slowdown over the last year. While growth continues to clock in above 4%, the pace has been winding down, implying potential repercussions for Latin America’s balance of trade.
The Most Vulnerable Countries
For Gonzali Saucedo, the relationship between Latin America and China has hinged upon the latter’s demand for commodities and raw materials. In that sense, a slowdown in the Asian economy would have an impact.
“The issue with Latin American countries is that they are highly dependent on raw materials. Mexico, at one point, was strongly dependent on commodities, but due to its proximity to the United States, it has industrialized and is now more reliant on manufacturing. Roughly 10% of Mexico’s trade consists of raw materials, unlike other countries,” in the region explains Gonzali Saucedo.
The Colombian case supports this view, as by the end of September this year (the most recent data), Colombian exports amounted to US$36.792 billion, with 52% attributable to fuels and extractive industry products.
That’s why Gonzali Saucedo maintains that to the extent that China doesn’t have optimal economic performance, the countries most dependent on selling commodities to the Asian giant could face increasing challenges.
“One of the major consumers of raw materials has been China, so its slowdown could impact some countries. Colombia would be among the least affected, but countries like Brazil or Chile could face a significant hit,” he stated.
Although 52% of Colombia’s external sales are linked to raw materials, the main destination for exports (26.8%) is the United States, while China is the country’s third-largest export destination, accounting for only 4.5%.
China’s economy grew by 4.9% in the third quarter, which was above market expectations but lower than the 6.3% growth seen in the same period of 2022. For 2024, the World Bank lowered its growth projection to 4.4%, citing reasons such as the liquidity crisis in the real estate sector, which manifested in Evergrande’s bankruptcy. The company is now struggling to push forward a restructuring plan while its founder and chairman, Hui Ka-yan, reportedly remains under house arrest.
Deeper Ties
Gonzali Saucedo also argued that if the United States’ interest in the region should resurface, significant opportunities for Latin American countries may arise.
He explained that “since the fall of the Berlin Wall up to a few years ago, the US forgot about the region. Before that, the US had the need to develop the area to prevent communism from spreading through the southern border. Communism ceased to be a concern with the fall of the wall, and Latin America was forgotten.”
“Now, as China and Latin America share close ties, trade has increased. As a result, we might see the United States intending to develop Latin America precisely to break that bond that exists with China,” he added.
More Resilient Emerging Markets
In fact, the analyst considers that investments in emerging countries are becoming increasingly attractive due to the current level of rates and monetary easing forecasts globally.
Gonzali Saucedo asserted, “Emerging markets, unlike other moments such as in the 1980s, are better prepared. If we look, for example, at the crisis of the 80s where the Fed’s rate hikes caused crises in many emerging debt markets, it’s different today. They are much better positioned now. Back then, there was much more indebtedness, even more than in developed countries. Now, they only have a fraction of that. Developed countries are much more vulnerable to high rates in terms of indebtedness.”
In response, he says, “Emerging markets could now have a quite interesting position. They started raising rates earlier, most emerging markets are already on hold, and others are even considering rate cuts, making fixed income positions attractive. Being invested there for when those rates start to drop makes it an appealing moment.”
New Risks
Gonzali Saucedo argues that the current interest rate levels are very interesting considering what might come afterward when interest rate cuts begin.
However, he also warned that there are risks in emerging markets, especially in relation to currencies.
“It doesn’t help that in the last year or so, the exchange rates have been quite strong. So, there might be a weakening of emerging countries’ exchange rates, which takes away some attractiveness in terms of investment. Rates continue to be high, and the prospects for rate cuts are much sooner than in the developed market. In that sense, we see emerging markets as an interesting investment opportunity,” he stated.
The Political Pendulum
Despite the noise that the arrival of a left-wing government has sparked in countries like Colombia, for the investment firm political issues are taking a backseat in discussions around investment.
“The left has been in the region for a while now, I believe it’s already part of the model. In fact, we could even consider that in politics something similar to what we see today in Argentina might happen: when the left doesn’t deliver the results the population wants, then attention will turn to the right. The risk lies in falling into extremes, both right and left. For now, politics, I believe, continues to be a not-so-central issue. In selected countries, like for example Mexico, politics is secondary, it doesn’t have as much impact on the economy, and as long as that remains the case, it’s more noise than anything else.”
Finally, Gonzali Saucedo acknowledged that sectors like renewable energies will continue to be an investment catalyst because they will keep gaining ground in the coming years.
“Renewable energies are attractive because the more we have of them, the easier it will be to attract foreign investment. Right now, global companies have internal regulations that mandate the use of sustainable energy. Therefore, it’s part of the requirements for foreign investment. Anything focused on renewables, like wind or solar fields, is increasingly crucial to attract foreign investment to countries,” he concluded.
