I’ve been in Peru for the last month now, but it may as well have been Beijing. In every meeting, one of the first topics of conversation is China. Or more precisely, how China’s meltdown is hitting Peru.
You might think you’ve been hearing a lot about China in Britain, but imagine this: just 1% of the UK’s exports go to China compared to around 18% in Peru. So even though they’re 10,000 miles apart for most people here, China feels a lot closer.
As we know, Latin America, the once booming commodities giant, is unravelling big time. Prices have fallen, projects are stalling and growth across the region is slumping.
It sounds like a nightmare, right? Yet, after spending four weeks interviewing Peruvian CEOs, government ministers and presidential candidates, I am convinced that the doom merchants have got it wrong.
Investors are running scared
It’s just a coincidence that I was in Peru at the exact moment China’s stockmarket started to blow up. But it’s the perfect place to examine how badly the China storm will batter Latin America.
You see, Peru was something of a poster-child for the China-fuelled boom that gave Latin America a ‘golden economic decade’. China’s demand for commodities helped push up the price of copper, zinc, gold and fishmeal – Peru’s biggest exports. Indeed, for the first time ever, China overtook the US as Peru’s largest trading partner.
The same is true, to varying degrees, across South America. Whether it’s silver or soybean, if Latin America had it, China wanted it. The roaring export trade helped governments fix their macroeconomic standing, although not everyone – yes, Venezuela, I am looking at you – took the opportunity. Meanwhile, the influx of investment boosted economic growth. During the good times, Latin America was growing at an average of 5% per year – this year analysts expect it to be more like 1%.
No wonder then that investors have been running scared. Shares, bonds, currencies – they have all taken a hammering. As Neil Shearing, chief emerging markets economist at London-based consultancy Capital Economics, notes, the MSCI Latin America Index is down by 8% (in local currency terms) month-to-date. Unsurprisingly those markets with the most commodity exposure have been hit the worst.
The same turmoil is being played out in the currency markets with most regional currencies down by 4% to 5% against the US dollar so far this month. This, of course, has a knock-on effect on any dollar-denominated bonds. Both Latin American countries and companies raised record amounts of dollar-denominated debt in the good times. Now the steep currency falls make those debts harder to pay back.
Given the scare stories being printed in the papers, I don’t blame investors for heading for the hills. But I think the panic is overblown.
This is a great buying opportunity
The first point to make is that while China’s stockmarket explosion is new, the rest of this stuff has been happening for years. Copper and co started falling from their highs in 2011. One reason why I’ve steered clear of Latin American ‘hard’ commodity tips – just one miner in three years of The New World – is because it was clear that record prices couldn’t be maintained forever. I’m not trying to make out that I’m Mystic Meg; the world and his dog has been talking about the end of the commodity supercycle for years now.
So a lot of the bad news – even the oil price drop – was already in the price, which means that this latest August sell-off seems overblown.
Secondly, I think that these sell-offs create buying opportunities. The other day I had lunch with a Chinese Peruvian dealmaker. Incidentally, Peru is home to one of the biggest Chinese communities outside of China – it’s led to some great cuisine.
Anyway, I digress…
Over lunch, this businessman told me how he’s using his connections to secure some oil concessions for Chinese companies. Some of the big ones – such as CNPC – already operate here, but now a lot more are on their way.
“Aren’t they worried about the plummeting oil price”, I asked.
“No”, came the answer. “They are delighted because it means less competition and assets on the cheap.” In short, they don’t mind if they make money now or in five years. They are strategic investors looking to the long term.
I doubt many of us can be as patient as strategic national resource investors. But if you have a long timeframe for your investments, then market falls like the ones we’re seeing this August are exactly what you’ve been waiting for.
Latin America’s problems are largely self-inflicted
But I don’t just see this in terms of investing. I spend a lot of my time living and working in Latin America and I think this shock is good for the region’s development too. During the ‘golden decade’, there was plenty of talk of diversifying economies and structural reform. But talk is cheap and when metals are selling for record prices, there isn’t much incentive to make tough decisions.
Yes, China might be slowing down – but the fact is, a lot of Latin America’s problems are homemade. That might sound like a negative, but actually it’s an opportunity, because it means they can be fixed regardless of what happens in China.
Here again, Peru is a good example. The country could compensate for lower commodity prices by executing much-needed infrastructure works. Basic but hugely important works, such as improving roads, increasing irrigation schemes and deepening ports would create a short-term boost during construction and a longer-term improvement in productivity.
I was talking about this with Pedro Pablo Kuczynski, who’s almost certainly going to be a candidate in next year’s presidential elections. “The infrastructure programme has become bogged down with local opposition and bureaucracy. But a new president would be able to kick-start the process again. There are lots of achievable projects that could quickly boost growth.”
This view was shared by almost all of the CEOs I have interviewed so far. They all acknowledge the problems in China, but they see their slowdown as largely self-inflicted. Crucially, most are optimistic. Over the last few weeks, I’ve been shown investment plans, partnership agreements and expansion strategies. In short, they’re putting their money where their mouth is.
The mood among the business and political elite here is far more upbeat than you’d expect given market chaos. As one interviewee put it to me, “we’ve been through dictatorships, terrorism and natural disasters – this is nothing”.
He was half joking, but he’s right about one thing. Compared to previous cycles of boom and bust, Latin America has emerged in a far better state this time around. Sure there are some countries – yes, I am looking at you again, Venezuela – where the situation looks dire. But overall, Latin America seems to have got enough from its ‘golden decade’ to start the next one from a better position.