The UK’s departure from the EU will have minimal impact on bilateral trade between the UK and Brazil in the near term.
However, in the short to medium term the weakening of the EU will have a more marked effect on Brazil’s export receipts, as the EU is Brazil’s single largest export market: It accounts for 19% of total merchandise exports, followed by China (18%). At the regional level, Latin America is likely to see a reduction in investment as subdued EU business sentiment keeps the euro weak. In addition, already-soft export commodities will come under extra pressure via lower EU demand, a stronger US dollar and a weaker Chinese yuan. Given that commodities account for between 65% and 95% of export earnings for most regional economies, already-strained public finances could be further pressured (albeit to varying degrees across Latin America).
Positive Implications
Some Latin American economies could benefit if UK investors seek non-EU opportunities in the event of a Brexit outcome that severely limits the UK’s access to the European Economic Area. Delays in the EU concluding trade deals currently under negotiation (such as the Transatlantic Trade and Investment Partnership, TTIP) could be beneficial for Latin American countries that trade heavily with the US. A weaker EU export market could provide much-needed impetus for export diversification from primary commodities.
Negative Implications
- Europe is the leading source of foreign investment in Latin America, and its second-largest trade partner, so a weaker EU could drag down growth prospects in the medium to long term.
- The stronger US dollar is increasing the debt burden of regional governments and corporates with high dollar-denominated debt.
Recommendations
Expect the EU to continue discussions on trade deals currently under negotiation (e.g. with Mercosur, TTIP) but note these cannot be concluded until the detailed process for the UK’s exit from the EU is agreed. Monitor the UK’s negotiations to exit the EU, assess the likely impact on current business operations and planned strategies, and implement risk-mitigating contingency plans as necessary. Where possible, explore trade and investment opportunities in non-EU markets to diversify risks.