Latam Trade Outlook: Very Different Patterns

Mexico:

Figure 1: Mexico Exports and Imports (12 months sum, USD Bn)

Source: INEGI

Mexico’s main trading partner is the United States, which corresponds to 80% of their exports values. Additionally, Mexico is a relatively open economy as trade corresponds to around 40% of Mexican GDP. The main story for Mexico is whether their main trading partner will increase their ties with the Mexican economy as they have expressed their desire to nearshore most of their value chains. The current workhorse of Mexican exports is the so called “maquila” industry in which semi-manufactured products from U.S. are send to Mexico, finalized in Mexico and then exported back to the U.S. Therefore, this movement is closely related with the capacity of U.S. consumers to absorb those manufactured products. 

In recent meetings, Joe Biden and Mexican President Manuel Lopez-Obrador have sketched a plan to nearshore the microchip value chains from Asia to Mexico. We are still viewing the nearshoring sceptically (here) and we expect the main trend of exports and imports in the short term to be led by the “maquila” industry. As U.S. consumption lost strength during the first semester, Mexican exports are set to continue its path with less dynamism and we see a more “flat” line for exports. We are expecting a narrow trade deficit to continue during the rest of the year. In case nearshoring takes place, we believe the rise of exports would take some time to materialize as plants needs to be constructed and some part of the labour force needs to be trained to support a higher technological value chain. Therefore, nearshoring effects would only be felt in 2024.

Argentina

Figure 2: Argentina Exports and Imports (12 months sum, USD Bn)

Source: INDEC

Argentina main exports are related to agricultural goods especially soybeans products, wheat and corn. In a situation of short FX reserves, high inflation and capital controls, one of the biggest sources of Dollars for the Argentine economy are  agricultural exports. However, latest weather information suggests Argentina is facing one of the severest droughts in years which will affect strongly the 2023 harvest and in consequence, their main source of exports. The estimates of the IMF points to a USD 9 Bn loss due to the lack of rains, which represents around 10% of Argentina total exports.

Moving forward, we believe the impact of the droughts are going to be clearer in the coming months. The good news for Argentina is that the pipelines of natural gas of the “Vaca Muerta” field is set to become operative around June, this will reduce the natural gas imports from Bolivia and some part of this gas will be even exported to Brazil, which will give around USD 2 Bn relief between lower imports from Bolivia and exports to Brazil, but still will not be able to offset the impact of the droughts. We believe Argentina government will further increase  import restriction, which will still guarantee a small trade surplus during 2023, but at the cost of lower growth during the year.

Brazil

Figure 3: Brazil’s Import and Exports (USD MM)

Source: IBGE

Brazil is currently seeing a boom on their trade surplus, which have two main factors as a root. Brazil currency is undervalued making Brazilian exports competitive and agricultural exports are on the rise. Additionally, Soybeans production are set to increase around 23% during 2023 and Brazil could be a good substitute for the Argentine soybeans, which are going to be affected by a  drought. Lula’s return to the Presidency and his good relation with the China is a good fuel for Brazilian exports and the upward revision to China  growth prospects  will be another tailwind for Brazilian growth.

It is important to say that Lula diplomacy is likely to continue to play both side in the discussion of Ukraine war. As Russia is an important provider of fertilizers for Brazil, good relations with Moscow is vital, as so it is moving on with the Mercosur and European Union trade deal. Brazil is still a relatively closed economy with its trade mounting only 5% of the GDP. As we expect imports to show restricted dynamism due to a low growth for the Brazilian economy in 2023, we expect the trade surplus to widen during the year.