401kRollover Blog

The shock Chinese devaluation of the yuan is yet more bad news for Latin American economies, which are already in or hovering close to recession. The strength of the dollar and the collapse in oil prices combined with this latest development mean South American exports are fetching a lot less in the international marketplace. Importantly, China is one of Latin America’s biggest markets.

One of the most affected countries in the region will be Brazil, which is heavily reliant on the income it gets from exporting raw materials to China. Today, Brazil’s currency, the real, is trading at 3.49 to $1- a new 12-year low. Economic forecasters are predicting the worst Brazilian recession for over 25 years. The strength of the dollar is also causing problems for other Latin American economies, who borrowed on a weaker dollar and now have to pay back with more of their own currency. Venezuela is being forced to accept lower repayments on money it lent to its neighbours under the Petrocaribe initiative as it continues to struggle with cash flow. The Venezuelan government has stopped publishing inflation figures, but Barclays are predicting a serious risk of default for the country next year.

Low oil prices are the other major factor affecting the region’s economies. Colombia’s sound fiscal policy means it fares better than its neighbours, but the country’s central bank has still been forced to revise down growth forecasts for this year with oil down more than half of last year’s highs, and a lot of Venezuela’s problems can be traced back to the loss in revenue from the Venezuelan oil basket’s new low of $40 a barrel.

If you believe the U.S. economy, heavily reliant itself on Chinese trade, will be drawn into the same scenario as Latin America, please Like & Share this post.