Brazil crisis: Argentina most exposed to any economic fallout

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Friday, May 19, 2017

"When Brazil sneezes, Argentina catches pneumonia."

The saying is used by Argentines to describe what can happen if their neighbor is struck by economic malaise.

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Argentina is Brazil's main trading partner in Latin America and would be hardest hit should Brazil – currently in the midst of a political crisis and eking out meager growth – slip back into recession.

"If production in Brazil contracted those principally affected in the region would be its commercial partners, in this case principally Argentina," Juan Camilo Rojas, investment strategy manager at financial services company Credicorp Capital, told BNamericas.

Argentina exports to Brazil, which have been falling since at least 2009, were US$9.01bn in 2016. That year Argentina imported US$13.6bn in goods from Brazil. Chile is Argentina's second biggest regional trading partner.

Brazil was plunged into political turmoil earlier this week after it was alleged that President Michel Temer had given consent to paying off a witness in a corruption scandal.

Temer has denied any wrongdoing and said he would not resign,

Stocks fell on Thursday after the news emerged.

However, Rojas said despite the immediate reaction of markets, the actual effect on the Brazilian economy may not be severe, citing the nature of the "noise" – in this case political – and the fact that foreign investors know developments like this are not unexpected in Latin American countries.

"[What is happening in Brazil] will not necessarily lead to contagion in the rest of the region owing to the [local political] nature of the problem," Rojas said.

But he said that if the scandal begins impacting the financial sector, regional contagion "could be of a much greater magnitude."

The Brazilian economy returned to growth in the first quarter of this year after two years of deep recession.

The central bank's IBC-Br economic activity index, a proxy for monthly GDP, rose 1.12% in 1Q17 from 4Q16, in seasonally adjusted terms. Economic activity in the first quarter was helped by falling inflation and the reduction of the country's key interest rate (the Selic).