## Spillovers to Latin America from Growth Slowdowns in China and the United States

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**Canonical URL:** [Spillovers to Latin America from Growth Slowdowns in China and the United States](https://www.imf.org/-/media/files/publications/reo/whd/2019/october/english/spilloverspresentation.pdf)

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### Motivation
- Growth in China and the United States is slowing, with potentially large spillovers to other countries.
- Growth in China and the United States is projected to slow in the coming years, which will have important spillovers to the rest of the world, including to Latin America.

### Spillover channels and country exposures

#### Trade
- LAC trade exposures to China and the U.S. are large; Mexico with the US; Chile and Peru with both.
- LAC trade exposures to China and the U.S. also large when measured in trade in value added.
- Growth slowdown and trade tensions have affected exports and imports in China and the U.S. this year (export and import values and volumes shown as three-month moving averages).

#### Commodity prices
- LAC is exposed to swings in commodity prices, which could be driven by growth shocks in China or the U.S.
- Commodity Exports (three-year average of 2013–15) and Net Commodity Exports (percent of GDP) for selected countries:
  - Argentina: Commodity Exports 5.7% ; Net Commodity Exports 3.7% ; Top 3 Commodities: Soybean meal (16.5%), Soybeans (6.2%), Corn (6.2%)
  - Bolivia: Commodity Exports 26.4% ; Net Commodity Exports 21.8% ; Top 3 Commodities: Natural gas (45.8%), Zinc (7.8%), Soybean meal (5.4%)
  - Brazil: Commodity Exports 5.2% ; Net Commodity Exports 3.0% ; Top 3 Commodities: Iron ore (11.3%), Soybeans (10.2%), Sugar (4.4%)
  - Chile: Commodity Exports 18.5% ; Net Commodity Exports 11.7% ; Top 3 Commodities: Copper (51.0%), Salmon (6.1%), Timber (3.8%)
  - Colombia: Commodity Exports 10.2% ; Net Commodity Exports 7.0% ; Top 3 Commodities: Oil (35.7%), Coal (12.2%), Coffee (5.4%)
  - Ecuador: Commodity Exports 19.4% ; Net Commodity Exports 14.3% ; Top 3 Commodities: Oil (34.9%), Bananas (11.6%), Shrimp (9.9%)
  - Mexico: Commodity Exports 4.0% ; Net Commodity Exports -0.1% ; Top 3 Commodities: Oil (3.4%), Lead (0.4%), Copper (0.3%)
  - Peru: Commodity Exports 10.5% ; Net Commodity Exports 6.1% ; Top 3 Commodities: Copper (24.7%), Zinc (4.5%), Fishmeal (3.4%)
  - Trinidad and Tobago: Commodity Exports 32.4% ; Net Commodity Exports 17.6% ; Top 3 Commodities: Natural gas (21.2%), Oil (9.8%), Iron ore (4.6%)
  - Uruguay: Commodity Exports 9.4% ; Net Commodity Exports 5.0% ; Top 3 Commodities: Beef (17.7%), Soybeans (17.6%), Rice (5.3%)
  - Venezuela: Commodity Exports 37.7% ; Net Commodity Exports 35.2% ; Top 3 Commodities: Oil, Iron ore, Hides
- Moderation in both export prices and volumes in the first half of 2019 is observed across Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay (year-over-year percent change series).

#### Financial flows
- Financial exposures are sizable given the region’s generally open capital accounts (de facto and de jure openness depicted).
- LAC financial exposures through direct and portfolio investment are larger with the U.S. than with China (direct and portfolio investment as percent of GDP).
- Latin America: Net capital flows (percent of GDP) and EPFR portfolio flows show sensitivity to the VIX; equity and bond flows respond to spikes in the VIX.
- Another financial spillover channel is spikes in the VIX in response to growth shocks in China and the U.S.
- Direct and portfolio investment exposures: inflows "From USA" and "From China" and outflows "To USA" and "To China" plotted for selected LAC economies (percent of GDP).

### Quantifying the size of spillovers

#### Empirical and model-based evidence
- GVAR estimates show spillovers to LAC from growth shocks in China are larger than from U.S. shocks for most countries, except Argentina and Mexico.
- GVAR: Shows the percent change in GDP of each country associated with a one-time 1 percent decline in China's real GDP growth (with 16th and 84th percentile error bands). Selected one-year impacts (percent):
  - United States: -0.11
  - Japan: -0.26
  - Germany: -0.28
  - China: -1.00
  - Canada: -0.21
  - Peru: -0.38
  - Mexico: -0.23
  - Chile: -0.27
  - Brazil: -0.34
  - Argentina: 0.05
- GVAR: Shows the percent change in GDP of each country associated with a one-time 1 percent decline in US real GDP growth (with 16th and 84th percentile error bands). Selected one-year impacts (percent):
  - United States: -1.00
  - Japan: -0.21
  - Germany: -0.30
  - China: -0.07
  - Canada: -0.58
  - Peru: -0.18
  - Mexico: -0.47
  - Chile: 0.15
  - Brazil: 0.17
  - Argentina: -0.61

#### Model (IMF staff calculations)
- Model: One-year growth response in each country associated with a 1 percentage point decline in China's growth driven by a shock to aggregate demand. Selected impacts (percent):
  - United States: -0.04
  - Japan: -0.17
  - Euro Area: -0.07
  - China: -1.00
  - Uruguay: -0.10
  - Peru: -0.15
  - Mexico: -0.06
  - Costa Rica: -0.19
  - Colombia: -0.07
  - Chile: -0.23
  - Brazil: -0.01
  - Argentina: 0.02
- Model: One-year growth response in each country associated with a 1 percentage point decline in US growth driven by a shock to aggregate demand. Selected impacts (percent):
  - USA: -1.00
  - Japan: -0.11
  - Euro Area: -0.16
  - China: -0.05
  - Uruguay: -0.02
  - Peru: -0.12
  - Mexico: -0.53
  - Costa Rica: -0.47
  - Colombia: -0.20
  - Chile: -0.12
  - Brazil: -0.02
  - Argentina: 0.04

#### Amplification via tighter financial conditions
- GVAR: Percent change in GDP associated with a one standard deviation increase in the financial market stress index (FSI) of the advanced economies (one-year impact). Selected impacts (percent):
  - United States: -0.21
  - Japan: -0.41
  - Germany: -0.61
  - China: -0.23
  - Canada: -0.22
  - Peru: -0.48
  - Mexico: -0.32
  - Chile: -1.12
  - Brazil: -1.25
  - Argentina: -0.82
- Model: One-year growth response associated with a 1 percentage point decline in China's growth plus an increase in sovereign spreads by 100 basis points. Selected impacts (percent):
  - USA: -0.07
  - Japan: -0.31
  - Euro Area: -0.30
  - China: -1.20
  - Uruguay: -0.38
  - Peru: -0.45
  - Mexico: -0.27
  - Costa Rica: -0.45
  - Colombia: -0.42
  - Chile: -0.51
  - Brazil: -0.25
  - Argentina: -0.26
- Model: One-year growth response associated with a 1 percentage point decline in US growth plus an increase in sovereign spreads by 100 basis points. Selected impacts (percent):
  - USA: -1.04
  - Japan: -0.25
  - Euro Area: -0.39
  - China: -0.25
  - Uruguay: -0.30
  - Peru: -0.42
  - Mexico: -0.74
  - Costa Rica: -0.74
  - Colombia: -0.55
  - Chile: -0.39
  - Brazil: -0.26
  - Argentina: -0.25

### Key findings and policy recommendations
- Empirical and model-based analyses show large spillovers to countries with high trade, commodity price, and financial exposures to China and the United States.
- A fall of 1 percentage point in China’s growth would reduce growth in Chile and Peru—the two countries most exposed to China—by 0.2–0.3 percentage points.
- A similar US shock would lower growth in Costa Rica and Mexico—the two countries most exposed to the U.S.—by 0.5 percentage points.
- These spillovers could be much larger if the slowdowns in China and the United States also lead to tighter financial conditions in emerging market economies.
- These large potential spillovers highlight the need to maintain adequate policy buffers and enhance resilience by diversifying exports and trading partners.

*INTERNATIONAL MONETARY FUND, Spillovers to Latin America from Growth Slowdowns in China and the United States, OCTOBER 2019.*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2019/october/english/spilloverspresentation.pdf_