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Moody's: Brexit has minimal direct effect on Latin American economies

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Moody's: Brexit has minimal direct effect on Latin American economies

The directeffect on Latin American economies from Britain's decision to leave theEuropean Union will be minimal, due to the region's limited trade ties withboth Britain and the EU, Moody's said in a report.

Exports toBritain and the EU account for only 0.2% and 1.7% growth in the region,respectively. Among Latin American countries, only Chile, Colombia, Mexico andPeru have free trade agreements with the EU.

Moody'sdoes not expect the so-called Brexit to derail ongoing free trade negotiationswith the EU. Other direct financial linkages — like foreign direct investmentsfrom Britain and British banks' claims in the region — are also fairly small,the rating agency said.

However,Brexit's main transmission channel to Latin American economies will be throughthe ongoing global financial volatility, Moody's said. While Latin America isless globally integrated compared to other regions, it is still exposed toswings in global investor sentiment given higher increased risk aversion,leading to higher spreads, as well as the likelihood of capital flight fromemerging markets.

The rating agency expects the most significant trade-relatedrisk for the region to stem from even lower commodity prices for an extendedperiod due to Brexit. "Even though the effect of lower commodities pricesis already reflected in our current ratings, if global demand weakens further…and commodities prices adjust accordingly, this will put additional pressure onthe credit standing of commodities-dependent sovereigns," Moody's warned.

Meanwhile,monetary policy decisions of Latin American countries are unlikely to bematerially affected by Brexit, with the exclusion of Mexico, Moody's said.Central banks in the region will likely continue focusing on domestic factors,such as inflation containment, in their monetary policy planning while payinglimited attention to higher global rates. Mexico, on the other hand, is anexception given how cross-over investors tend to use the Mexican peso andpeso-denominated assets during periods of financial volatility, the ratingagency noted.