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By Jamie McGeever

BRASILIA, Brazil, Feb 21, 2020 (Reuters) – The coronavirus outbreak in China may be altering the 2020 investment outlook for Latin America, souring sentiment toward regional free market beacons Chile and Brazil, while turning heads – and cash – toward left-leaning Mexico.

The consensus among economists is that while the overall impact on Latin American growth and financial markets from the outbreak will be limited, there may be wide divergences across the region.

Chile’s heavy reliance on the export of commodities, especially copper, make it particularly vulnerable to weaker demand from China, its main trading partner and the world’s largest buyer of commodities.

It is a similar situation for Peru and Brazil – a leading iron ore producer – where almost a third of all exports go to China. In the case of Brazil, growth forecasts were already being reduced and the currency was sliding to all-time lows against the dollar before the global ripple effects of the coronavirus began.

“The most exposed economies are Chile, Peru, and to some extent Brazil,” said Alberto Ramos, head of Latin American research at Goldman Sachs. “The key source of downside risk to LatAm is a deterioration of the terms of trade triggered by deep long-lasting impact of a China slowdown on commodity prices.”

Much will depend on how long the outbreak of the fast-spreading virus that emerged in late December in central China and has killed more 2,100 people lasts, as the world’s second largest economy struggles to get back on track.

Meanwhile investors see Mexico, whose economy contracted last year for the first time in a decade under leftist President Andres Manuel Lopez Obrador, as far less exposed to China, either via direct trade links or from falling commodities prices globally.

There has not been a single confirmed case anywhere in Latin America of the new coronavirus that has spread to some two dozen countries, but investors in the region are getting worried.

Bank of America Merrill Lynch’s (BAML) latest monthly survey of Latin American fund managers showed that 56% say slowing growth and commodities demand in China is the biggest risk to the region.

Bullishness on Brazil is fading, with 37% of those polled by BAML forecasting the Bovespa stock market above 130,000 points by the end of the year, compared with 56% last month.

The survey of 52 fund managers with about $103 billion of assets under management also showed that 27% of respondents say the economic situation in Chile will deteriorate over the next six months. In January, that was 7%.

Chile has long been the regional poster-child for free-market economic reforms. But even before the coronavirus outbreak, its status as investors’ darling had been threatened by protests that blamed those policies for widespread inequality.

By contrast, 21% reckon the Mexican peso will outperform over the next six months, up from 4% in January. So far this year, the peso is up 0.6% against the U.S. dollar while Brazil’s real has slumped nearly 9%.

Economists and strategists at Citi have constructed a coronavirus “vulnerability index” modeled on four variables: economic growth, supply chains, commodities, and “external” market volatility risks.

Chile, Ecuador and Peru are seen as by far the most vulnerable countries, with index scores of 100, 98 and 97, respectively. Next are Brazil (66) and Colombia (63), while Mexico is second bottom of the table with a score of 27.

“After a dismal 2019, prospects for the region are favorable, but weak, as accelerating growth is predicated on sentiment improving for investment and consumption,” Citi said in a research note.

“A protracted outbreak will bring another round of growth downgrades.”

So far, Brazil is the only country whose 2020 growth forecasts have been cut by the bank’s economists.

Ramos and his Goldman colleagues calculate that a 10% drop in commodity prices would knock 1.3 percentage points off Peru’s gross domestic product and a similar amount off Chile’s GDP, while a 10% decline in export volumes to China would knock 0.34 of a percentage point off Brazil’s GDP.

For Mexico, a 10% decline in exports to China would knock just 0.05 of a percentage point off GDP, they estimate, noting that most Latin American currencies and stocks have fallen this year, with the notable exceptions being Mexico’s peso and BMV stock market, which is up 2.7% year to date.

(Reporting by Jamie McGeever; Editing by Christian Plumb and Bill Berkrot)

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