Low Oil Prices And China Pull The Rug From Under Latin America
When China sneezes, the world gets a cold.
The world’s second largest economy is suddenly looking unstable, with economic growth slowing, the stock markets gyrating, and a surprise currency devaluation having taken worldwide markets by surprise. That could be bad news not just for China, but for a lot of countries that depend on exporting to China.
China’s phenomenal growth over the past two decades led to boom times for other countries as well. China is a voracious consumer of all sorts of commodities – oil, gas, coal, copper, iron ore, agricultural products, and more. For countries exporting these goods, the run up in commodity prices since the middle of the last decade has been extraordinary.
Nowhere is that more true than in Latin America. Countries like Brazil, Argentina, Chile, Peru, and Colombia have enjoyed strong economic growth rates because of China’s rapid expansion.
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But the boom times are over. Latin America is getting hit with a double whammy: the collapse in commodity prices and the sudden economic turmoil in China.
Low oil prices are hurting Latin America’s exporters. Mexico’s state-owned oil company Pemex has already slashed its budget for the year, cutting spending from $27.3 billion to $23.5 billion. Pemex has also borne the brunt of government spending cutbacks. And the much-anticipated first auction of Mexico’s offshore oil resources following a historic liberalization of its energy sector produceddisappointing results, as low oil prices scared away bidders.
Brazil has fared worse. Compounded by a colossal corruption scandal, Brazil’s Petrobras is drowning in debt as oil prices have plummeted. In late June, Petrobras announced it would slash spending by one-third, divest itself of billions of dollars in assets, and it lowered its long-term oil production target to just 2.8 million barrels per day (mb/d) by 2020, down from a previous target of 4 mb/d.
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