Second-Order Effects Of Brazil, Ecuador And Venezuela's Recessions

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Summary

For 2016, Brazil, Ecuador and Venezuela are expected to contract 3.8, 4.5 and 8% respectively.

Argentina’s exports to Brazil, Ecuador and Venezuela decreased 28% y/y or $4.6 billion in 2015.

Chile sent in 2014 1.9% of its GDP in exports to Brazil, Ecuador and Venezuela, while Colombia and Peru sent 1.5% each.

Last week, we wrote about the effects that deliberate cuts in Venezuelan imports could have on its neighbors. We are extending that analysis to see how the major economic crises in the region, Brazil, Ecuador and Venezuela, affect trade and growth in other countries.

The commodity super cycle is over and for Brazil, Ecuador and Venezuela that came with deep economic recessions.

Economic crises in Brazil and Ecuador arrived after Venezuela's, given the smaller dependency that exports have in their economies. For Ecuador, the lag that public expenditures had on the economy even saved it from a contraction in 2015. But for 2016, Brazil, Ecuador and Venezuela are expected to contract 3.8, 4.5 and 8% respectively. IMF's estimate on Ecuador's growth was made before the devastating earthquake, which cost the country $3 billion (3% of GDP) according government figures.

Because of its size, Brazil's contraction is not good for the world and certainty not good for the region. Ecuador and Venezuela contribute with additional stress for other LatAm countries. Weaker aggregate demands in the Tres Amigos mean fewer imports, which translate to reduced exports for trading partners.

Although other countries in the region resisted lower commodity prices for their traditional exports, deep economic crises in the mentioned countries could add a second external shock through trade.

If we take into account aggregate exports to Brazil, Ecuador and Venezuela as a share of GDP in 2014, before the crisis hit in Brazil and Ecuador, Bolivia (12.4%), Trinidad y Tobago (4.6%), Paraguay (4.2%), Uruguay (4.1%), Guyana (3.6%), Nicaragua (3.4%) and Argentina (3.1%) are set to be the most affected.

But the largest economies after Mexico and Brazil will experience significant decreases in their exports too. In addition to Argentina, mentioned above, Chile sent in 2014 1.9% of its GDP in exports to Brazil, Ecuador and Venezuela, while Colombia and Peru sent 1.5% each.

Argentina's exports to Brazil, Ecuador and Venezuela decreased 28% y/y or $4.6 billion in 2015. Argentina's main export to these countries, vehicles, decreased 36.7% y/y in the same year, and although cereals, the second largest exports by value, increased in 15.4%, other significant exports such as plastics and dairy are down.

In the case of Chilean exports to the same affected countries, these were down 23.6% y/y, $1.2 billion, in 2015. Most of such a decrease came from a contraction in Chile's main exports, copper, which decreased in 25% y/y, followed by fisheries and fruits (apples, pears and grapes).

Colombian exports contracted in $1.8 billion last year or 33%, led by an almost 50% decrease in mineral fuels, mostly coal, and followed by lower plastics, chemical products and medicines exports.

Last, but not least, Peru experienced the deepest decline with 34% of its exports to Brazil, Ecuador and Venezuela down in 2015. The $1 billion decline was mainly due to decreases in copper, mineral fuels and clothes exports.

LATAM PM's Take: Last decade, Latin America experienced significant economic growth backed by high commodity prices and trade, which currently are providing to be a dual negative shock for the region.

Latin America's trade relations and integration not only strengthened with the world, but also within the region. This is why the deep economic declines in Brazil, Ecuador and Venezuela this year might echo in the growth prospects of their main trade partners.

The trends described above are just meant to be indicative of the direction of current trade flows and to illustrate the most exposed sectors and products. Although precisely the commodities' prices shock is included in the declines described, their magnitude also indicate a reduced aggregate demand effect coming from the trade partners.

Small and dependent countries on their trade with Brazil, Ecuador and Venezuela such as Bolivia, Guyana, Trinidad and Tobago, Paraguay, Uruguay and Nicaragua have a significant challenge to reorient their exports to other destinations. But even for Argentina, Chile, Colombia and Peru the weaker demand of their trade partners is likely to take a toll in its decelerating economic growth.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.