Chinese Foreign Ministry spokesperson Mao Ning yesterday tried to pass off the balloon as an “unmanned airship for research purposes that had been blown off course by bad weather,” an explanation that does not hold up considering the civil aviation protocols that are in place for such an incident.

Civilian aircraft, including balloons, blimps and zeppelins must carry radio transponders that broadcast an identification signal to both identify the aircraft and avoid collisions. Protocol is such that should an aircraft accidentally travel off course, air traffic control of the underlying countries would be contacted. The Chinese government took no such action.

The US shot the companion balloon down six miles off the mid-Atlantic coast. According to US Secretary of Defense Lloyd Austin: “The balloon, which was being used by the PRC in an attempt to surveil strategic sites in the continental United States, was brought down above U.S. territorial waters.”

Colombia’s air force issued a statement (translated here) saying:

In relation to the publications of the incursion of a balloon flying in the territory, the Colombian Air Force, is allowed to inform the public opinion:

1. 1. 1. On February 3, 2023 in the morning, the National Air Defense System detected an object above 55,000 feet, which entered Colombian airspace in the northern sector of the country, moving at an average speed of 25 knots, identifying in it, characteristics similar to those of a balloon.
      2. Through the Defense Systems, the Colombian Air Force followed the object until it left the airspace.
      3. In this way, it was possible to determine that this element did not represent a threat to national security and defense, as well as air safety.
      4. The Institution carries out the pertinent investigations and coordination with different countries and institutions, to establish the origin of the object.

Photo: By Russotp – Own work, CC BY-SA 4.0,

Agriculture, mining and fuel shipments represent a material percentage of GDP for many Latin American countries and revenue for the region’s largest exporters with China being a key destination. More than 25% of Chile’s, Peru’s and Brazil’s merchandise exports go to China, according to International Monetary Fund Direction of Trade Statistics, and the ability to quickly redirect commodity exports to other countries will be a challenge.

Prior to the outbreak, our outlook for Latin America was for a mild economic recovery with fiscal, political and governability risks challenging the region’s economy and ratings in 2020. Coronavirus introduces a new downside risk to growth expectations. The likely adverse economic effect is coming at a time when several countries are facing higher government debt burdens and struggling with the challenge to consolidate fiscal accounts amid a sluggish recovery. Therefore, the potential for fiscal stimulus to mitigate the impact on growth from the increased external headwinds is limited. Social unrest is also a challenge for some countries, most notably Chile.

Ratings on seven sovereigns have a Negative Outlook (Aruba, Bolivia, Colombia, Costa Rica, Guatemala, Panama and Uruguay) and only one has a Positive Outlook (Jamaica). In addition, Argentina remains in severe financial distress as reflected by its ‘CC’ Foreign Currency IDR and ‘RD’ Local Currency IDR.

Prices for copper, aluminum, iron ore, zinc and oil noticeably declined after the coronavirus outbreak, which led to aggressive government restrictions on travel and other economic activities. Chinese purchases of many natural resources represent a significant portion of world demand and exporter revenue. Mexico, Colombia and Ecuador have fiscal dependence on oil prices, while Chile and Peru are dependent on copper, resulting in these countries being sensitive to price shocks. Lower commodity prices are also a revenue headwind for Latin American exporters.

Fitch views some Latin American corporates as better positioned than others to withstand heightened commodity price volatility. Vale and Southern Copper are well positioned to manage through a period of price weakness due to their strong balance sheets and low cost structures. Conversely, Codelco and Volcan may be more vulnerable. Weak copper prices could hamper Codelco’s ability to fund capex from operating cash flow and its standalone credit profile, increasing its reliance on lenders for the cash short fall. Volcan has failed to reduce its absolute level of debt during the 2017 and 2018 peak in zinc prices. Lower zinc prices would further pressure cash flow and delay debt reduction.

Ecopetrol’s ratings reflect the strong linkage to the credit profile of Colombia and, therefore, have a Negative Outlook. PEMEX’s Negative Outlook reflects the potential for further deterioration in its standalone credit profile, which could result from the company failing to stabilize production and continuing with unsustainable reserves replacement ratios and negative FCF. Lower oil prices could add to pressures.

Beyond natural resources, revenue growth for Brazilian protein processors and Mexican auto-parts makers could also be affected by Coronavirus’ effect on China. Coronavirus is disrupting meat shipments to China due to local businesses being closed and backups at ports. Exports represented 25% of JBS’s global sales in 2018. Asia, primarily China, Japan and South Korea, represented about half of export sales. China is the world’s largest consumer of pork and is the largest automobile market in the world.

Weakening fiscal dynamics have been a key driving factor in sovereign rating downgrades in the region over the past several years and the current high number of Negative Outlooks (seven of 19 rated sovereigns.)

Fiscal Pressures Have Been a Key Driver of Recent Sovereign Downgrades

General government debt and deficits in a large majority of Latin American countries are larger now than in 2008 prior to the last global recession, following years of tepid growth and a lack of significant recovery in commodity prices. While a global recession is not in Fitch’s base case, global growth slowed in 2019, and Fitch forecasts US, Eurozone and Chinese GDP growth to decline further (albeit at a much slower pace) in 2020. This places Latin America in a vulnerable position, with limited fiscal capacity to support growth in the event of a sharper than expected downturn.

While weak fiscal dynamics are generally shared across most countries, there is a high degree of variation among countries’ current fiscal conditions, consolidation paths and risk profiles in the region. Argentina and Ecuador are among the most vulnerable, with high fiscal deficits and financing challenges. Both countries have entered into IMF programs but the adjustment targets are ambitious and the political sustainability of such consolidation remains in question, particularly after the recent change in government in Argentina and the strong social push-back to subsidy cuts that occurred in Ecuador in late 2019. Argentina has not received any IMF disbursements since August 2019, and there is considerable uncertainty regarding the future of the program.

Bolivia, Brazil and Costa Rica face similar challenges from rising public debt and large deficits, though without IMF-led adjustments. Nonetheless, the home-grown consolidation plans are subject to implementation risks. Brazil’s passage of pension reform in late 2019 was a notable success, though this is a necessary but not sufficient condition for strengthening public finances and stabilizing the rising public debt. Future fiscal reforms embedded in constitutional amendments presented to congress last year may face political resistance that could lead to delays and/or dilution.

Higher rated sovereigns, including Colombia, Panama, and Uruguay, have also experienced fiscal deterioration in recent years and have struggled with meeting pre-set fiscal targets, reducing policy credibility. Frequent revisions to targets were a contributing factor to Rating Outlook revisions to Negative for both Colombia and Uruguay in 2019 and 2018, respectively. Mexico has maintained conservative fiscal targets but underpinned by optimistic underlying assumptions related to economic growth and oil production. Contingent liabilities related to Pemex are another fiscal challenge for Mexico.

Chile, Peru and Paraguay stand out in the region for having relatively stronger starting fiscal positions to respond to a sudden slowdown. However, fiscal deterioration has occurred to varying degrees in these countries as well. Most notably, Chile has significantly revised its fiscal targets (implying higher deficits) to respond to demands resulting from last year’s social unrest and weaker economic activity.

For analysis on fiscal conditions and the outlook for consolidation across Latin America, refer to the Fitch Wire + report: “Limited Fiscal Space Raises LatAm Vulnerability Ahead of Next Global Downturn,” available through the link here.

Image by Jan Mallander from Pixabay

Slower Chinese growth could particularly have an adverse effect on major Latin American economies given the rapid deepening of trade and investment ties over the past decade as well as their high commodity exposure. While Fitch’s base case for Chinese growth is for a gradual deceleration to 6% in 2020 and 5.8%in 2021, they conducted a hypothetical severe slowdown scenario to assess how a more significant deceleration would affect Latin America. The scenario, which was developed using Oxford Economics’ Global Economic Model, includes two major assumptions: first, the imposition of 25% tariffs by the U.S. on $300 billion of Chinese imports and, secondly, a sharp downturn in China’s business investment. Together, this would pull Chinese growth to average just 4.1% from 2019-2021 versus Fitch’s 6% base case. The scenario assumes a monetary but not a fiscal policy response as well as commodity and global equity price shocks.

Chile would be the most affected, with real GDP growth diverging from Fitch’s base case by 1 percentage point in 2020 and 5 percentage points in 2021. Brazil, Mexico, Peru and Colombia would also see a growth drag of over 1 percentage point in 2021. Larger exposures to trade in specific commodities, particularly crude petroleum, iron and copper, account for the vulnerabilities in most of these countries, with falling global prices weighing on export values and investment. In the cases of Chile, Peru and Brazil, a large direct trade volume effect would also be expected given that China is their single largest export destination. Adding to these challenges, Latin American countries are generally not in a strong position to respond to a Chinese slowdown. Several major economies are experiencing a cyclical deceleration this year following years of tepid growth.

The potential for fiscal stimulus is also likely to be highly constrained by ongoing consolidation challenges and increased or high debt levels. A monetary easing cycle has begun in several countries in the region, but the policy space to dramatically cut rates is also limited. This is especially so given that a sharp China slowdown would also likely include depreciating pressure on Latin American currencies and broader asset price volatility.

Additional information on how a severe China slowdown scenario could affect major Latin American economies and further detail on trade and investment linkages, see the Fitch Wire + report published today available to subscribers through this link. 

Image credit: “Japanexperterna” 

As technology adoption and infrastructure improvements bring more consumers online and familiarity and comfort with digital platforms increase, the continued growth of connected commerce is inevitable. The Nielsen Global Connected Commerce Survey polled 13,000 respondents in 26 countries to determine how and why consumers are approaching e-commerce.

E-Commerce is more and more mobile-oriented

Many regions still face significant infrastructure challenges, including low Internet penetration, high access costs and unreliable connections, a challenge that some innovative “e-tailers” are solving by offering fast-loading mobile apps and sites. Thirty-two percent of online survey respondents say their Internet connection is not stable enough to make them comfortable buying online. In these markets, mobile devices have been critical to e-commerce growth, bringing many new and underserved customers online—and their importance will only continue to grow.

India is one country leading the mobile trend. A few online retailers in India have shifted from a mobile-first to a mobile-only strategy. The shift toward mobile shopping is not just happening in emerging markets. In the U.S., IBM reported that mobile devices accounted for about 57% of all online shopping traffic this past Black Friday, the busiest shopping day of the year in the country, up 15% over the same period in 2014.

“As more consumers turn to mobile devices to shop, a coherent mobile strategy should be a key innovation pillar for retailers,” said Nielsen President of Global Retail Patrick Dodd. “The most successful strategies will be those that optimize and differentiate their mobile experience and improve the integration of their in-store and mobile services specific to the realities in each market.”

Credit cards face competition from emerging—and more traditional payment methods

As technology and the retail landscape rapidly evolve, payment practices are also changing. More than half of respondents who say they shopped online during the past six months paid with a traditional credit card (53%), but roughly four-in-10 used a digital payment system such as PayPal (43%), debit card (39%) or direct debit from their bank account (38%).

The use of digital payment systems in China is extremely popular. Eighty-six percent of Chinese respondents say they paid for some online purchases during the past six months via digital payment systems. This is also the most widely cited option by Western European survey respondents (56%), particularly in Germany (68%).

In India, direct debit and debit cards are common payment methods (61% and 71%, respectively) for online shoppers, but cash on delivery is the most widely used option, cited by 83% of online Indian respondents. In India, the popularity of cash on delivery is driven by a few factors. There is a sizeable group of unbanked consumers in the country, credit card penetration is relatively low, and many consumers with credit cards have security concerns.

“India illustrates that the growth of online shopping isn’t dependent on credit card penetration and development,” said Dodd. “Shoppers prioritize security above all else, and retailers need to collaborate with banks to ensure they’re providing secure and trusted ways to transact online.”

Cash on delivery is a popular e-commerce trend in many other developing markets, including Nigeria (76%),the Philippines (73%), Russia (70%), United Arab Emirates (68%), Saudi Arabia (59%), Colombia (57%) and Thailand (56%).

Technology & higher incomes driving cross-border retail e-commerce transactions

Consumers are increasingly expanding their shopping to online retailers outside their geographic region. Nearly three-quarters of Indian respondents who shopped online in the past six months say they purchased items from an overseas retailer (74%)—a trend that extends beyond the developing world. Roughly two-thirds of Western European respondents say they purchased goods from an overseas retailer, including 79% in Italy—the highest percentage in the study—and 73% in Germany.

“Retail has been one of the last globalization holdouts, but technology is giving consumers access to a world of products that were previously unavailable,” said Dodd. “Choice is greatly enhanced by cross-border e-commerce. In many developing markets, the growing middle class is trading up and demanding greater assortment not found at their domestic retailer. Consequently, these consumers are looking overseas to purchase authentic foreign brands, often at lower prices than they can find in their home country. Meanwhile, developed-market consumers gain access to a range of goods directly from foreign companies at often significant discounts to what they would pay domestically.”

The company has indicated in a statement issued by its board of directors that it will invest $30 million USD in Colombia Sunwin Co., and will develop and sell software, computer systems, and systems integration.

This is a developing story. Finance Colombia has reached out to ShenZhen Sunwin Intelligent Co. for further details and comment.