Monday, June 20, 2016

Latin America had attracted 172 billion dollars of FDI in 2015

Foreign Direct Investment (FDI) in Latin America in 2015 was 172 billion dollars, according to the June 2016 report of ECLAC. This is not bad considering the the poor economic performance of the region which suffered a GDP contraction of 0.4% last year. While the 2015 FDI was 9.5% less than that received in 2014, it was more than the FDI received in 2010 (168 billion dollars) during the peak of the economic boom of the region. What is even more interesting is that the outward investment by Latin American firms was 47.3 billion dollars in 2015. Chilean firms were the top investors with 15.8 bn.
Brazil continued to be the top recipient of FDI with 75 billion dollars (down from 96.8 bn in 2014) with a share of 42% of the total FDI in Latin America, in spite of the GDP contraction of 3.5% in 2015. 
Mexico had received 30 bn, increasing from 25.6 bn in 2014. Of this, fifty percent went into the manufacturing sector  and mostly into the automotive sector which is flourishing.
Chile received 20.5 bn ( down from 22.6 bn), Colombia –12 bn ( from 16.3 bn last year), Argentina-11.6 bn ( increase from 5 bn) and Peru –6.8 bn ( down from 7.8 bn ). 
The six countries of Central America had attracted an impressive 11.8 billion, the highest in the last ten years. Of this, Panama had received 5 bn and Costa Rica 3 bn.
USA was the major source of FDI with a share of 25.9%, followed by Netherlands (15.9%) and Spain ( 11.8%).
The fall in FDI in 2015 was due to the continuing low international prices of oil, minerals and metals, the decline in Chinese demand and the weaker domestic consumer demand. Mining sector has suffered  drop in FDI while manufacturing, renewable energy and telecom and other services have increased their share. 

ECLAC has predicted FDI decline of 8% in 2016, in view of the GDP contraction of 0.6% projected for the region in 2016.
Outward FDI by Latin American firms declined by 15% from 2014 to 47.3 billion dollars in 2015. Chile was the major foreign investor with 15.8 bn ( up from 9.8 bn in 2014) followed by Brazil-13.5 bn (down from 26 billion in 2014) and Mexico –12 bn (up from 7.4 bn in 2014) and Colombia-4.2 bn (up from 3.8 bn). 
There were two major Indian investments in Latin America in 2015. The biggest was the 342 million dollar plant established by the Jaguar Land Rover of Tata Motors in Brazil. The plant was inaugurated in June 2016. The second one was the 70 million dollar investment of Hero Motors in a motorcycle plant in Colombia. Some small acquisitions took place in IT and other sectors. 
Renuka, which had invested half a billion dollars in the Brazilian sugar sector in 2010 had declared bankruptcy in September 2015, due to operational losses and difficulty in servicing the debts.  Pidilite and Gravitas have been looking at divestment since their operations in Brazil and Honduras have been running in losses.
If any Indian company is interested in acquisitions in the region, this is a good time especially in Brazil and Argentina where the asset prices are low and exchange rates are favorable. 
The only notable Latin American investment in India in 2015 was from Mexico.  In January 2015, Cinepolis of Mexico acquired Fun Cinemas from Essel Group of India. With this acquisition, Cinepolis has added 83 more screens, making its total 193. Its target is 400 screens by 2017. Kidzania from Mexico has opened a second children's edutainment park in Noida, outside Delhi, after its successful first investment in Mumbai. 

Thursday, June 16, 2016

Mexico has overtaken Brazil as the top destination of India's exports in Latin America

For the first time ever, Mexico has overtaken Brazil as the top destination of India's exports to Latin America. Exports to Mexico were 2.865 billion dollars in 2015-16 (Indian financial year April to March) while the exports to Brazil were 2.65 billion. It is not surprising, given the economic recession and political turmoil in Brazil, the largest market of Latin America. India's exports to Brazil have fallen by 55.5% from 5.96 billion in 2014-15. On the other hand, Mexico, the second largest economy in the region has been growing and India's exports have also been steadily increasing. Mexico is the leading destination of India's car exports in the world. Mexico's share was 1.03 billion out of the total Indian exports of 5.6 bn. What is even more interesting is that the vehicle exports to Mexico have shown an impressive 31% growth from 2014-15.
India's trade with Latin America declined by one third to 29.7 billion dollars in 2015-16 from 43.4 billion in 2014-15.  While India's exports have decreased by 27 %, the imports have also gone down by 33% to 19.7 billion from 29.3 billion in the previous year. This should be seen in the context of the decline in the region's total imports by 10% and exports by 13.5% in 2015. 

Mercosur remained as the largest trading partner of India in the region with 15.9 billion dollars, followed by Pacific Alliance with 11 billion dollars and Central America with close to a billion dollars. Brazil has overtaken Venezuela to become the leading trade partner of India with 6.69 billion dollars. Trade with Venezuela was 5.8 billion, Mexico-5.1 billion, Argentina-3 bn, Chile-2.6 bn, Colombia-1.69 bn and Peru- 1.52 bn.

India's exports to Latin America have come down by 27 % to 10.05 billion dollars in 2015-16 from 13.75 billion in the previous year. Exports have shown decrease in ten out of the total of 19 Latin American countries.  The region's GDP contracted by 0.4 % in 2015 while Venezuela's shrank by 7.1% and that of  Brazil by 3.5%. Another particular reason for the fall in India's exports is the sharp drop in India's diesel exports to Brazil from 3155 million dollars in 2014-15 to just 564 m last year.
Colombia remained as the third largest destination of India's exports with 888 million dollars ( down from 1.1 billion last year), followed by Chile –679 m ( up from 566 m), Peru-703 m ( down from 820 m), Argentina-535 m (up from 460 m) and Venezuela-131m (down from 258 m). Among the smaller markets, exports to Guatemala were 256 million dollars (up from 229 m), Panama-201 m (down from 302 m) and Dominican Republic-175 m (up from 141 m). 
Latin America has become the largest destination of India's vehicle exports accounting for 19 % (2.7 bn) of the total exports of 14.35 bn in 2015-16. The vehicle exports to the region have increased by 20% from last year. Latin America accounted for 29% of India's global motor cycle exports with 516 million dollars. Colombia continued as the top destination with 231 million dollars, followed by Mexico-88 m, Guatemala-50, Argentina-50 m and Peru- 37 m.
Pharma exports of India to Latin America remained close to a billion dollars. Brazil continued to be the top destination of exports with 316 million dollars, followed by Mexico-153 million, Venezuela-74 m, Colombia-71 m, Peru-62 m, Chile-60 m, Argentina-44 m, Guatemala-31 m, Dominican Republic-27 m and Ecuador-24m. In these days of austerity and budget cut in the region, the affordable Indian generic medicines are preferred by Latin American consumers as well as governments.

Venezuela has remained as the largest source of imports in the region with 5.7 billion dollars, followed by Brazil- 4.04 bn, Argentina-2.47 bn, Mexico- 2.28 bn, Chile-1.96 bn, Colombia-808 million, Peru-820 m, Ecuador-564 m, Dominican Republic-479 m, Bolivia-240 m and Paraguay-112 m.
The decrease in India's imports is due to the fall in the price of oil, which accounts for 46 % of the total imports from the region. Crude oil imports were down to 9.1 billion dollars in 2015-16 from 20 bn in 2014-15. This is in line with the fall of total global crude imports of India to 66 bn dollars from 116 bn in the previous year. In 2015-16, Venezuela has maintained its position as the top supplier from the region with 5.7 billion dollars, followed by Mexico-1.4 bn and Brazil 1.2 bn.
South America accounted for 98.6% of India's soy oil imports last year. Argentina was the major supplier with 2.2 billion dollars while Brazil supplied 570 million and Paraguay 104 m. 
Latin America supplied 2.1 billion dollars of copper out of the total Indian imports of 4 bn dollars. Chile has continued its position as the top supplier with 1.6 bn.
The region has emerged as a new source for India's import of gold. Imports from the region have increased to 1.77 billion dollars in 2015-16 from 1.02 bn last year.The suppliers were Peru-464 m, Colombia-442 m, Dominican Republic-379 m, Bolivia-236 m, Brazil-205 m and Ecuador-48 m. 
Latin America is closer to India than you think
For those Indian businessmen who still harp on the distance factor, here are some eye-openers:
--India's exports to the distant Guatemala ( 255 million $) is more than the exports to the neighboring Cambodia (143 m). Both have populations of 15 million each.
-India's exports to Mexico (2.86 bn) are more than the exports to Indonesia (2.84 bn), Myanmar ( 1 bn), Russia ( 1.6 bn), Canada (2 bn) and Egypt ( 2.3 bn). 
- India's trade with the far off Dominican Republic (654 m) is more than India's trade with many European countries such as Hungary(588 m), Romania(565 m), Kazhakstan (505 m), Greece(445 m) and Bulgaria (239 m)
-India's trade with the distant Brazil ( 6.7 billion $) is more than the trade with Bangladesh (6.4 bn), Srilanka (6 bn), Russia (6.1 bn), Canada ( 6.2 bn) and Spain (4.8 bn). This is even after the 41% fall in the trade with Brazil which was 11.4 bn in 2014-15.
-Reliance imports crude oil from Brazil and export diesel to the same distant Brazil profitably.
-Latin America is the leading destination of India's vehicle exports, despite the freight.
- Chile, Peru and Argentina supply fresh fruits and vegetables to India, undeterred by distance.
Latin America's recession is predicted to get worse with GDP contraction of 0.6 % in 2016, due to the continuing low international price and demand for commodities and weakening domestic consumer demand. Venezuela's GDP is projected to shrink by 6.9% and that of Brazil by 3.5% in 2016. However, the region is expected to recover growth next year, except for Venezuela. Brazil is already showing signs of recovery. The macroeconomic fundamentals of the region are healthier with average inflation of just 5.5 % and external debt at just 39% of the GDP. 
Latin America, which has huge petroleum reserves and surplus for exports will continue to be an important contributor to India's energy security. Imports of gold, minerals and soy oil will increase in the future, in view of the large and growing gap between India's domestic production and demand. The new development of direct import of gold from the Latin American producers rather than through the intermediaries in Switzerland saves considerable foreign exchange for India.
India's exports to the region have better prospects for increase in the years ahead. There is need for proactive trade promotion as was done successfully during the Focus LAC programme days. The government should consider signing FTAs with Mexico, Colombia and Peru to get a level playing field for its exports vis-a-vis exports from the FTA partners of these countries. The Indian government could extend large lines of credit to promote its exports to the the region, as it is doing successfully in Asia and Africa. 
While Latin America's share in India's global trade is 4.6%, India's share in the region's external trade is just 1.5%. There is potential for India to increase its share to 5% of Latin America's foreign trade which was 1.88 trillion dollars in 2015 with 914 billion dollar exports and 974 bn imports. The Latin Americans are keen for more trade with India as part of their strategic policy to reduce overdependence on China and diversify their trade partnership. 

Sources of statistics: Ministry of Commerce of India, ECLAC and WTO

Monday, May 09, 2016

Latin America: a growth area for Indian pharma exports

India exported 995 million dollars of pharmaceuticals to Latin America in 2015-16 (April to March). In addition, India had exported surgical products worth 21.8 million dollars, herbal products- 6.4 m and Ayush products- 1.4 m. 

This billion dollar show of Indian pharma in Latin America is creditable in the context of the disheartening news headlines from Latin America about the Venezuelan crisis, the Brazilian presidential impeachment and the regional GDP contraction of 0.4% in 2015 which is projected to worsen to 0.6% in 2016. It is even more encouraging to know that exports to 16 out of the 20 countries have shown increase from last year. Exports to Mexico have gone up from 120 million dollars to 153 million, to Colombia from 65 to 71 m, to Peru from 48 to 62 m , to Chile from 56 to 60 m, to Argentina from 40 to 44 m and to SICA group (the group of 8 central american countries) from 136 to 138 m.

Despite the slowing down of the region's economy since 2011, the Indian pharma exports have been steadily increasing from 826 million dollars in 2011-12 to 916 million in 2012-13, to 943 m in 2013-14 and crossing a billion dollars in 2014-15. It is true that the pharma exports have declined marginally from 1035 million in 2014-15. But this 3.8% decrease is insignificant in comparison to the 10% (estimate) drop in the total imports of (all products) the region in 2015. 

In 2015-16, Brazil continued to be the top destination of exports with 316 million dollars, followed by Mexico-153 million, Venezuela-74 m, Colombia-71 m, Peru-62 m, Chile-60 m, Argentina-44 m, Guatemala-31 m, Dominican Republic-27 m and Ecuador-24m. 

Exports to Mercosur were 450 million dollars, to Pacific Alliance –346 million and to SICA - 138 m.

Out of the total exports of 995 million dollars, finished formulations accounted for 650 million and bulk drugs 345 million. It is worth noting here that India has been increasing its export of finished formulations in recent years even while the bulk drug exports have shown decline.

There has been a 50% fall in exports to Venezuela (from 145 m to 74 m), which is not surprising, given the shortage of foreign exchange and the mismanagement of the Venezuelan economy. The drop in the exports to Brazil from 363 m to 316 m is understandable, given the Brazilian economic recession. The other two countries which saw some decline in Indian exports were Haiti and Uruguay. Even in the case of Brazil, the fall in India's exports is just 13% while the total Brazilian pharma imports have fallen by 24% from 7 billion dollars in 2014 to 5.3 bn in 2015.

Brazil is the leading destination not only quantitatively but also qualitatively. It had bought 201 million dollars of finished formulation and 115 m of bulk drugs from India. But Mexico had imported  just 41 m of finished drugs but 112 million dollars of bulk drugs.

India's exports are set to continue to grow in the coming years in view of the (a) expected recovery of the economies (b) more proactive healthcare policies of the governments and  (c)the growth in pharma sales and imports predicted for the region. With the tightening budget for health care due to the slower income growth, both the governments and the consumers are likely to go in for more generic drugs and less patented ones. This is good for Indian pharma which has earned a good name in the region for having helped reduce the cost of healthcare with affordable generic drugs.

Here is a brief overview of the leading pharma markets of the region.

Brazilian pharma market

Brazil is Latin America's largest pharmaceutical market with sales of 19.7 billion dollars in 2015 which is forecast to reach 29 bn by 2020. In 2015, sale of prescription drugs were 14.7 billion ( 73% of total sales) and over the counter (OTC) drugs 5 bn. Sale of patented drugs in 2015 were 9.4 billion and generics 5.3 bn.

The proportion of generics has reached  35% of prescription drug sale and 25% of total drug sale. These have been increasing since 1999, when the Brazilian government introduced the Generic Law proactively promoting the sale and use of generics. Thanks to the governmental intervention, the Brazilian prices of medicines are much lower than in the other big countries of the region such as Mexico and Argentina. The local companies dominate the generic production with 70% of total sale in Brazil.

The country has over 6,700 pharmaceutical wholesalers and 56000 independent drugstores, which account for 90% of all drugstores in the country. The independents have a share of  49% of total pharmaceutical sales, while the chain stores have 51% share. Abrafarma chain, which accounts for only 5% of all drugstores has a 36% share of sales.  


Mexico imported medicines worth 3.9 billion dollars in 2015. This is forecast to increase to 4.9 bn by 2020. Of the totale sales of 11.2 billion in 2015, prescription sales were 9.7 bn and OTC sales 1.5 bn. Generic medicines which accounted for 30% of the total pharma sales in 2015 is projected to increase to 47% in the next ten years. There are over 25,000 pharmacies of which 70% are small and medium ones which account for 60 % of the total sales. 


Argentina imported pharma worth 2.1 billion dollars in 2015.  Of the Argentine pharma sales  of 6.9 billion dollars in 2015, prescription drugs accounted for 87% of the sales and OTC 13%.

Patented drugs have a share of  56% of the Argentine pharmaceutical market. Around 71.8% of the domestic market demand is met by locally produced pharmaceuticals, while imported products supply the other 28.2%. There are around 150 pharmaceutical wholesalers in Argentina. The distribution sector is dominated by three distributors - Disprofarma, Rofina Farmanet and Globalfarm - accounting for over 65% of sales. 

Central America

The pharma sales of six countries of the region ( Guatemala, Costa Rica, Panama, Nicaragua, El Salvador and Honduras)  increased to 3.9 billion dollars in 2015 from 3.7 bn in 2014. It is projected to reach 7.3 bn by 2024. The pharma imports are projected to increase to 3.5 bn dollars in 2019 from 2.8 bn in 2015. 

Sources:  Pharmexcil and BMI Research 

Tuesday, April 12, 2016

Latin America faces GDP contraction in 2016 too...

Latin America is projected to face a GDP contraction of 0.6 percent in 2016, after having suffered a decline of 0.4 in 2015, according to the 8 April 2016 report of ECLAC, the UN Commission for Latin America and Caribbean. The region has been sliding downwards in this decade, after reaching a peak GDP growth of  6% in 2010. The only consolation is that the economic contraction in 2016 is half of what the region had suffered in 2009, in the wake of the financial crisis. But then the region bounced back to a spectacular growth of 6% in 2010. Can the region repeat this magic in 2017? It does not look so. The forecast for the next year and in the coming 2-3 years is only modest growth.

The main contributors to the fall in growth of the region are Venezuela and Brazil whose GDP are expected to shrink by 6.9% and 3.5% respectively in 2016. Argentine GDP is forecast to decline by 0.8% and Ecuadorean one by 0.1%. With four countries in the negative growth zone, South America as a whole is set to suffer a GDP decline of  –1.9 % in 2016.

On the other hand, the Pacific Alliance members will enjoy some growth: Mexico- 2.3%, Colombia-2.9%, Chile-1.6% and Peru-3.8%. Central America will have a better growth in the region with 3.9%.  Panama will have the highest growth rate of 6.2%, followed by Dominican Republic- 5.5% , Nicaragua- 4.6% and Bolivia-4.5%.

The reasons for the poor performance of the economies of the region are the same ones which had caused the decline last year: fall in the global demand and prices of commodities, the sluggish global growth, the weak domestic consumer demand and most importantly, the slow down of the Chinese economy. According to the April 2016 annual report of the Inter American Development Bank, every one percent fall in Chinese growth, brings down the growth rate of Latin America by 0.6%.

Mexico and Central America, whose markets are oriented towards the US, have been somewhat insulated from the Chinese slowdown and benefited from the stronger US growth. In fact, Mexico has become more competitive after the rise in Chinese wages. Manufactured goods account for over 75% of Mexico's exports. A number of foreign and domestic companies are increasing their Investment in Mexico to sell their products to its NAFTA partners US and Canada as well as to the 40 plus countries with whom Mexico has Free Trade Agreements. Ninety percent of Mexico's trade is with its FTA partners. 

In the case of Brazil and Venezuela, the economic problems have been aggravated by the ongoing political crisis which has paralyzed economic policy making and stopped reforms and bold policy initiatives needed at this time. The political situation in both the countries could get much worse in the coming months and add to the economic problems.

There is a possibility of impeachment of the Brazilian President Dilma Rouseff. More business and political leaders could be convicted in the Petrobras corruption scandal. This has already affected seriously the ongoing projects and has dried up credit for companies under investigation. The firms involved in the scandal are downsizing their operations and selling assets to stop the bleeding caused by the free fall of their share values and to repay debts. Petrobras, which had the largest corporate investment plan in the world in 2010 with over 220 billion dollars has drastically cut its investment budget. The multinational oil companies are already salivating to feast on the carcass of Petrobras, which was a pride of Brazil and a global leader in deep sea exploration and production.

The Venezuelan President Nicholas Maduro is absolutely clueless to stop the deterioration of the economy. He has no control over his own ministers, military officials and party leaders who are trying to make as much money as they could make before the ship sinks. Maduro faces aggressive confrontation at every step from the Congress controlled by the opposition which is pulling out all the stops to overthrow his government. The fall in oil prices has handicapped him from resorting to any more populist polices to please the poor, who are angry like the rest of the population with the empty supermarket shelves and the endless queues for bread and toilet paper. Inflation is in three digits and the black market exchange rate is hundred times more than the official rate of 10 Bolivars to a dollar. Shortage of electricity has forced the government to declare three day weekend holidays to save energy. Cuba, the godfather of Maduro has ditched him as part of its process of  normalization of relations with US. Cristina Fernandez and Lula, the ex-presidents of Argentina and Brazil who used to offer external support have lost power. The new rightist Argentine president Mauricio Macri is openly opposed to the Chavista regime. The current Brazilian President Dilma Rouseff is fighting for her own survival and is least bothered about the fate of Venezuela. This makes Venezuela ripe and vulnerable for external destabilization with support from the domestic oligarchy. But the ugly truth is that there is absolutely no hope for Venezuela as long as the Chavistas are in power. The country needs liberation from the Chavism as early as possible.

The Argentine economy which was driven into a mess by President Cristina's disastrous mismanagement in her second term, has already started the process of recovery under the new President Macri. However, Ecuador, being dependent on oil exports, will continue to be affected as long as the oil prices remain slow. 

The continuing bear market and lower prices of commodities and the Chinese slowdown forecast for the near future, do not augur well for a quick and robust recovery of Latin America within this year. The depreciation of most of the currencies of the region will continue to dampen their global imports.

But the good news is that no Latin American country is going bust like Greece. Nor does any country need emergency IMF rescue. Except Venezuela, all the other countries of the region have relatively better macroeconomic fundamentals and have developed the resilience to withstand shocks and downturns better than in the past. The inflation ( average for the region-5.5% in 2015) and external debt ( 39% of GDP which is safe) are  under control except for Venezuela and to some extent Argentina.

India's trade with Latin America will decline in 2016 in view of the poor performance of the region's economies and the fall in its foreign trade. However, it will be the imports which will fall more ( in terms of value, not volume) than the exports. India will benefit from the lower prices of crude oil, minerals and edible oil which are its main imports from the region. For those Indian companies interested in acquisitions in the region, this is a good time to take advantage of the low price of assets. This is the reason why Brazil continues to attract the largest FDI in the region, despite the economic problems.

Wednesday, February 24, 2016

India's exports to Brazil fell by thirty five percent in 2015

India's trade with Brazil was expected to decline in 2015 in the wake of the Brazilian recession and the fall in commodity prices. But the 30% percent fall in the trade and 35% drop in India's exports have come as a surprise. 

The trade was just 7.9 billion dollars in 2015 (January to December), dropping from 11.4 bn in 2014. Before 2015, the bilateral trade had been growing by 20 percent annually from 2010 to 2014 despite the steady slowdown of the Brazilian economy after its peak growth of 7.6% in 2010.

India's exports had decreased by 35% to 4.29 billion dollars in 2015 from 6.64 bn in 2014. This was caused mainly by the 54 % fall in export of diesel to 1.58 billion from 3.5 billion in 2014. The other major items of export were: insecticides-121 million dollars, polyester yarn-113 million and ceramic tiles-55 m, besides chemicals and pharmaceuticals. 

Despite the fall in exports, India retained its position as the number one supplier of diesel to Brazil (with 46% share, as against the US share of 39.6%), polyester yarn (with 57% of total Brazilian imports while China's share was 27%) and of ceramic tiles and insecticides.

India's imports had decreased by 24% in 2015 to 3.61 billion dollars. Main imports were: crude oil- 1.1 billion dollars, soy oil- 552 million dollars, raw sugar-457 m, gold-280 m and Copper concentrates and sulphate- 250 million.

India's import of crude oil from Brazil had deceased by 52%, mainly due to fall in crude prices. However India had increased its soy oil imports by 50% in 2015. 

The decrease in India's trade with Brazil should be seen in the context of the overall fall in Brazil's global trade by 19% to 363 billion dollars and 25% drop in Brazilian imports in 2015, reaching 171 billion. It is important to note that even after the 30% fall in 2015, India remained as the tenth largest  trading partner of Brazil.

The decline in trade in 2015 was part of the overall worsening of the economic situation of Brazil which suffered a GDP contraction of 3.5% in 2015. Inflation was high at 10.6 %. Fiscal deficit reached 10%. The currency had depreciated by over 30%. Industrial production had gone down significantly. Global prices and demand for Brazil's export commodities had fallen. Brazil lost its investment grade rating and was moved down to junk status by the rating agencies. The cut in public spending and other austerity measures as well as the high interest rates have brought down consumer demand, which was one of the main drivers of growth earlier.

Many of the economic problems of last year are likely to continue and the GDP is projected to shrink by 2.5 to 3% in 2016. But there is no need for alarm. The economic problems are short term in nature and manageable. The Brazilian economy has sufficient resilience and depth to recover on its own. It has more than adequate foreign exchange reserves (357 billion dollars in January 2016) to deal with emergencies.There is no danger of hyper inflation nor debt default. Brazil's external debt is just 15% of its GDP. It does not need a IMF rescue as some European countries such as Greece needed. Brazil had bounced back from bigger crises in the past. The latest was the spectacular growth of 7.6% in 2010 after the GDP contraction of 0.2% in 2009 caused by the global financial crisis.

The economic difficulties were aggravated by the uncertain political situation caused by the moves to impeach President Dilma Rouseff and the massive Petrobras corruption scandal in which top businessmen, political leaders and members of the Congress besides the senior executives of Petrobras have been jailed and are being investigated. More evidence might come up in the ongoing investigations which are coming closer and closer to ex-President Lula as well as to the current President Dilma. The bribery scandal has felled Brazilian icons such as Petrobras,Odebrecht and even Lula. It has impacted adversely and paralyzed the ongoing and planned infrastructure projects and extension of credit to corporate sector by public sector banks. Many companies including Petrobras have drastically cut down their investments. 

The political situation could get worse. Seeing an unmissable opportunity to put an end to the rule of Workers Party which has been in power since 2002, the opposition will make the Dilma government bleed by resisting and refusing to cooperate in the Congress on urgent legislative reforms needed. In any case, it seems that the Workers Party has very little chance in the next elections in 2018, after having been discredited so badly. But there is an upside to the corruption scandal. Both the politicians and businessmen have learnt a historic and painful lesson in the Petrobras case. They have realized that they would not be able to continue with impunity their old practice of crony capitalism and free for all corruption. Independent and crusading prosecutors as well as the assertive civil society have come to be an effective check on the system of corruption.

The year 2016 is not likely to see any significant increase in India's trade with Brazil, given the projection of continuation of low prices for crude oil and diesel which account for one third of the total bilateral trade, as well as the Brazilian recession. If at all, the trade might increase only marginally. However, this is a good time for acquisition of assets and companies in Brazil, taking advantage of lower prices and weaker currency. Foreign Direct Investment was an impressive 42 billion dollars in the first half of 2015 and 96 billion in 2014. These figures represent 50% of the total FDI in Latin America. It shows not only the investment opportunity but also reflects the long term confidence in the business potential of the country among foreign investors. The Indian business should not be deterred by the current downturn of Brazil and should keep the bigger picture in mind. Brazil has the economic resources and potential as well as the political maturity and resilience to emerge stronger in the coming years.

Tuesday, December 22, 2015

Latin America limping forward to a less painful year in 2016

Latin America experienced the worst in 2015 in the last six years, suffering a GDP contraction of 0.4 percent, according to the December 2015 report of the Economic Commission for Latin America and Caribbean (ECLAC). After a peak growth of 6% in 2010, the regional GDP growth had steadily slowed down reaching 1.2% in 2014 and shrinking in 2015. However, the GDP contraction in 2015 is less than the 1.2 % suffered in 2009 in the wake of the global financial crisis. Venezuela had suffered the most with a GDP contraction of 7.1% followed by Brazil with 3.5% contraction. Brazil has lost its investment grade rating in December 2015. The ten countries of South America together had a GDP decline of 1.6% in 2015.

The main reasons for the cyclical economic downturn are the sharp fall in prices and commodities (oil, minerals and food products) exported by the region, the slowdown of the Chinese economy, sluggish global growth and the weak internal demand. Oil, Metal and agricultural commodity prices have declined by 57%, 50% and 30% respectively since 2011. Commodity prices are expected to fall further in 2016, although less steeply than in 2015. This will hurt South America which depends more on commodity exports and the Chinese market. Mexico and Central America which are aligned to the US market will be affected much less. It is worth noting here that Mexico has emerged as the 'manufacturing hub' of the Americas with the massive investments in production by foreign companies, its competitive wages and the major reforms undertaken by the government of President Penha Nieto in the last three years opening up the economy and stimulating investment.

In 2015, Dominican Republic would have the highest growth (6.6%) followed by Panama ( 5.9%) and Bolivia (4.5%). Mexico has increased its growth rate from 2.2% in 2014 to 2.5% in 2015 while Central American growth rate has gone up from 4.0% in 2014 to 4.4% in 2015.
ECLAC forecasts a GDP growth of 0.2% in 2016 for the region. Panama will have the highest growth of 6.2%, followed by Dominican Republic- 5.2% and Bolivia- 4.5%. Mexico's growth rate is projected at 2.6% and that of Central America at 4.3%. Venezuela will continue to be the black sheep in the region with a GDP contraction of 7% while the Brazilian GDP is expected to shrink by 2%. The two countries are dragging South America towards a 0.8% GDP contraction in 2016.
The good news is that the old curses of hyper inflation and excessive external debt will not come back. The average inflation of the region has gone up slightly to 6.6% in 2015 from 6.3% in 2014. Exceptions are the high inflation rates in Venezuela at 60% and Argentina around 20%.  The external debt of Latin America and Caribbean is just 33% of the GDP, which is very good in comparison to many European and other developed countries which have high external borrowings.  The international reserves of LAC region stands at a comfortable high level of 825 billion dollars in end 2015. So no country from the region needs any IMF rescue.
Many currencies of the region have depreciated in 2015. The Argentine peso, Brazilian Real and Colombian Peso have lost over 30% in value. These have made exports more competitive but imports more expensive.
Total imports of the region are projected to decline by 10.3% and exports by 14%, according to a December 2015 report published by the Inter American Development (IDB). Imports of the region have gone down to an estimated value of 932 billion dollars in 2015 from the trillion dollar plus levels of the previous four years. The exports are also down to 875 billion dollars in 2015 from over a trillion dollars each year since 2011.
Foreign direct investment (FDI) fell by around 22% in 2015 from its 2014 level and is expected to stand at around US$ 107 billion at the end of the year. 
Although the economic growth is negative, there is positive news on the political side. In Argentina, the Peronists have lost the elections to pro-business Mauricio Macri who has taken over on 10 December 2015. He has already removed the currency controls and some export taxes imposed by the previous regime which had mismanaged the economy with its obsessive command and control policies. The Argentine economy is poised for better times in the four-year term of the new President. The Venezuelan voters have defeated the Chavista party in the Congressional elections in the December 2015 elections giving a majority to the opposition. This should shake up the Maduro administration towards more sensible policies and economic management. In any case, the Chavista regime is likely to be voted out in the next elections in 2018. This is the only hope for the country since the Chavistas have run out of ideas and are clueless to get out of the deep hole in which they have put the country. The thaw in the diplomatic relations with US has brought Cuba out of its isolation with bright prospects for economic improvement.  The successful conclusion of the Colombian government's peace talks with the guerrillas should soon put an to end the civil war and open up the country for more agriculture, exploration for minerals and oil as well as for building better infrastructure.
The people of Guatemala created history in 2015 by forcing (through peaceful protests) President Otto Perez to resign and get him jailed on corruption charges. They punished the corrupt political oligarchy by voting a political outsider Jimmy Morales as president in the elections held in October 2015. In Brazil, several dozens of political and business leaders and top executives of Petrobras have been arrested and sentenced to imprisonment for their involvement in the Petrobras corruption scandal. In the Brazilian history, this is unprecedented and was unimaginable. These two examples as well as the mass protests against corruption in some other countries of the region have given a loud warning to the political and business elite that they cannot get away with impunity anymore and that they would be held accountable. Clearly, democracy has become stronger and more mature in the region.

The year 2016 promises to be a better year for Latin America with the exception of Brazil and Venezuela which will continue to suffer economic contraction and political instability.

Given the internal economic pains and political uncertainty, Brazil will not be able to focus on foreign policy and work actively with India for the revival of IBSA, permanent membership of UNSC and other such issues of Indian global agenda.
India's exports might not grow significantly in 2016, given the low growth and lower imports projected for the region in 2016. India's import figure will be less consequent to the lower prices of oil and minerals which constitute the bulk of India's imports from the region. It should, however, be emphasized that Latin America has become a regular and reliable source for India's crude oil requirements, accounting for about 20% of India's global imports and contributing to India's energy security. 
It is an opportune time for Indian investment and acquisitions in the region, taking advantage of the lower prices of assets especially in oil and mineral sectors. The Indian investors need not be discouraged by the bankruptchy declared in 2015 by the Brazilian subsidiary of Renuka Sugar in which the parent company had invested about half a billion dollars. Renuka's business model was right but the timing was wrong. It had paid  high price for its acquisition at the peak of the market boom and took too much of debt. While Renuka had excellent expertise on its sugar and ethanol business, it lacked understanding of the Brazilian culture.
After the Chinese slowdown, the Latin Americans have started focussing more on India which has exceeded the Chinese growth rate and has raised its global profile under the ambitious administration of Prime Minister Modi. It would be advisable for India to to have a long term perspective and and intensify engagement with Latin America, which will appreciate friends during bad weather.
India can learn from the successful example of Brazil's use of ethanol as vehicle fuel. Ethanol blending of petrol will reduce pollution, save foreign exchange and help the sugar cane farmers and industry to manage the cyclical crisis caused by low sugar prices. India can also study the smart city programme of Bogota which has made its roads more friendly for pedestrians and cyclists besides reducing pollution and improving the urban living conditions.