FDI in Latin America and Latin American investment abroad increase in 2012, despite the global crisis

Inflows of foreign direct investment (FDI) into Latin America rose by 8% in the first six months of 2012  reaching 94 billion dollars from 87 billion in the first half of 2011, according to figures released by the Economic Commission for Latin America and the Caribbean (ECLAC) on 23 October.

In the first six months of 2012, Brazil received 43 billion $, followed by Chile 12 bn, Mexico 9.6 bn, Colombia 7.8 bn, Peru 5.4 bn and Argentina 5.3 bn. Among the smaller countries Uruguay got 1.4 bn and Costa Rica 1 bn.

At the same time, investment by Latin American enterprises abroad surged by 129% in the first half of the year reaching 21 bn $ as against 9.3 bn in the same period in 2011. Mexican companies lead with 11.5 billion followed by Chile with 10 bn.

The rise in FDI income is attributed by ECLAC to economic buoyancy and stability in most countries and high commodity prices, which continue to encourage investment in mining and hydrocarbons, particularly in South America. Peru is the hottest destination for investment in mining while Colombia has also become attractive for energy and mining investment.

The manufacturing sector in Mexico and Brazil have been steadily attracting FDI.  With the closing of the gap  (at one time it was four to one) between Mexican and Chinese wage levels, Mexico has regained its privileged position as the factory for US. Mexico has become is the world’s second-largest exporter of fridges, and the second-largest supplier of electronic goods to the United States and a competitive automobile exporter. 

It should be noted that FDI had increased in Latin America by 31% in 2011 from 2010, reaching a record 153 billion dollars. Latin America was the region that recorded the highest percentage increase in  2011 taking its global share to 10%.

The increase in FDI in Latin America and even more impressively the jump in the increase of  Latin American investment abroad at this time of European crisis, American sluggish recovery and the Asian slowdown are indeed remarkable. They reconfirm the general trend of the new paradigm of economic stability, growth and promise of the New Latin America.

There was no new significant Indian investment in Latin America in 2012 except for the Godrej acquisition of a Chilean cosmetic firm. Many Indian companies have plans to increase their existing investment in IT/BPO, agrochemicals and energy. Some new players are exploring opportunities in mining. The cumulative Indian investment in the region is around 10 billion dollars.

Latin American investment in China

During the sixth China- Latin America Business summit in Hangzhou in October 17-18, the Inter American Development Bank (BID) brought out a report on Latin American investment in China. 

BID starts the report saying, " it is difficult to make a meaningful statement about Latin America’s economic future without mentioning China". 

The report is useful for Indian companies and policy makers interested in attracting FDI from Latin America, although the amount that can be expected might not be substantial. 
According to the BID report, the total Latin American FDI in China is 858 million dollars of which the share of Brazil is 314 million, Argentina-58 million, Mexico – 48 and Chile – 47 . There are 85 Latin American companies which have invested in China.

The BID report has given short but interesting case studies of the entry strategy and experience of the following companies which have invested in China

- Techint, the Argentine steel tube company ( turnover 24 billion dollars) has set up a plant to produce for local market as well as for exports.

- Vale, the Brazilian mining giant which exports around 20 billion dollars of iron ore to China, has some local plants for pelletisation.

- Bimbo , the Mexican bread and bakery products maker (the third largest in the world with a global turnover of  11 billion dollars ) has become one of the top ten bread suppliers in China with a presence in 27 Chinese cities with sales of 40 million dollars

- Gruma (Grupo Masecho) of Mexico, the maker of tortillas and other food products ( global turnover 4.6 billion dollars) has significant investment in China.

- Weg, the Brazilian electrical motors company with a turnover of 3.6 billion dollars has a unit in China employing 620 Chinese staff.

- Stefanini, the largest Brazilian IT company with a turnover of 400 million dollars is well established in China

- Concha y Toro, the Chilean winery with a turnover of 872 million dollars is aggressively marketing its wines in China

Trade highlights of the the BID report 

 - Trade between China and Latin America has increased at an annual average rate of 25% since 2000, reaching $236 billion in 2011 

- The Southern Cone countries, along with Peru and Venezuela, have enjoyed booming exports to China, leading to bilateral trade surpluses in the cases of Brazil, Chile, and Peru. For Mexico and Central America, however, manufacturing imports from China have swamped any gain in exports, resulting in considerable trade deficits with China.

- The composition of Latin America's exports to China - Iron ore 26%, Soya beans – 19%,  copper –21% and Petroleum crude 9 %

China has become a member of BID and has become the mover and shaker within the organization with its enormous financial clout. The Chinese credit to Latin America is much more than the credit being given by BID and World Bank together. 

BID is very keen to have India as a member. The President of BID Mr Luis Moreno visited India in 2011, met the Indian policy makers and expressed interest in India's membership. While the Indian Ministries of External Affairs and Commerce realize the strategic importance of membership, the Finance Ministry is dragging its feet saying that the amount of subscription is high. They need to see the long term opportunities for our companies to get projects and contracts which are possible through BID membership.. 

There is only a limited window of opportunity for India to become a member of BID by purchasing the left over shares of an East European country which broke into pieces. BID does not offer new shares, under pressure from the existing members who do not want competition. Even in the case of China, they were blackballed by USA for a year and finally the Chinese managed to force themselves in. I hope the Indian policy makers will move quickly to become BID member and will not miss the last window of opportunity.

The Indian chambers of Commerce and Industry as well as the Government of India should also consider organizing regular business summits with Latin America as the Chinese have done for the sixth time this year with over 1100 companies. India should seek the collaboration of BID, ECLAC and other regional organisations and banks of Latin America who would be willing.

Latin American growth rate in 2012 is modest but going to be better in 2013

GDP growth rate of Latin America in 2012 is projected to be 3.2% (down from 4.3% in 2011). This is not bad, given the background of the European crisis, uncertain recovery in US and the slow down of China. The good news is that the GDP growth rate is expected to increase to 4% in 2013. This is according to the annual report of the Economic Commission for Latin America and Caribbean ( ECLAC) released on 2 October. The highlights of the report, with my comments, below:

Brasil's growth is projected to be 1.6 % in 2012 and 4 % in 2013. Brasil is struggling with its high cost of production and doing business (Custo Brasil). The government is determined to to put the economy back on fast track with massive public investment, infrastructure development and lowering of interest rates.

Mexico's growth expected to be at 4 % in 2012 and in 2013 too. Mexico has been gaining ground in manufacturing and labour cost competitiveness vis a vis China to which it had lost jobs and production in the past. The recent labour reforms legislated by the Mexican Congress and the prospects of reforms in energy and other sectors as well as the election of the young and dynamic Enrique Pena Neto as the next President augur well for the economic prospects of Mexico in the coming years.

Colombia, which is aspiring to overtake Argentina as the third largest economy of the region is projected to grow by a healthy 4.5 % in both 2012 and 2013. Part of this growth story is credited to the administration of President Juan Manuel Santos, who has managed to neutralize the FARC guerrillas and pursue prudent external policies. With its investor-friendly approach, Colombia has emerged as the hottest destination for foreign investors in the region.

Argentina is expected to grow by 2% in 2012 and 3.5% in 2013. The government of President Cristina continues its policies of restrictions and controls of imports, foreign exchange, remittances, prices of many items, retail shopping and foreign travel. There is a strong black market for foreign exchange at a rate of 6.5 pesos for a dollar while the official rate is 4.3. Inflation continues to be high at more than 20% while the official figure is 9%.

Peru remains on the top of the growth chart among major economies of the region with projection of growth in 2012 at 5.9% and in 2013 at 5.5%, after having experienced growth of 6.9% in 2011 and 8.8% in 2010. President Humala has proved to be a true follower of Lula with his pragmatic pro-poor and pro-market policies.

Chile will grow by 5% in 2012 and 4.8% in 2013. Chile continues to be an admirable market of good growth, predictable and transparent policies, least corruption and the best managed economy in the region.

Venezuela is expected to grow by 5% in 2012 thanks to the high oil prices. The elections to be held later this week will be crucial for the long term interests of the country.

Panama has shown the highest growth in the region with 9.5% in 2012 after its double digit growth in 2011. 

The nine countries of Central America have shown a collective performance of 4.4 % growth in 2012 and 4% growth expected in 2013.

Paraguay is the worst in the region with GDP contraction of 2% in 2012. The country which had an exceptional 13.1% growth in 2010 is facing fall in agricultural production due to adverse weather conditions. However, it is expected to recover in 2013 with a 5% growth.

The continuing growth of the region has been driven mainly by domestic consumption followed by investment, improving employment and wage levels. The governments of the region have been following, in general, prudent monetary and fiscal policies, Inclusive Development Agenda, reduction of external debt and stimulation of local industry and business. 

The average Inflation of the region in the twelve month period upto june 2012 declined to 5.5%, the lowest since November 2010. The only two countries with double digit inflation ( in fact, over 20%) are  Venezuela and Argentina. The government of Argentina continues it policy of Magical Realism by showing inflation figures around 9%, while increasing the salary of its employees (including those of INDEC, the agency which cooks up the official inflation figures) by over 20% to compensate for inflation.

Current account deficit of the region is expected to reach 1.9% of GDP in 2012 from 1.2% in 2011.

Unemplyment rate continues to fall in the region as a whole and wage levels are going up.

The countries of the region continued to build up forex reserves which reached 767 billion dollars in June 2012 increasing from 687 billion dollars in June 2011 and 453 billion in December 2008.

Public debt to GDP ratio has been falling in the region and domestic debt accounts for a much larger share of the total debt. The region’s external public debt now represents around 15% of GDP, compared with 85% in 1990. 

Thanks to the stronger macroeconomic fundamentals and resilience, the countries of the region have some room for manoeuvre if the external context takes a turn for the worse.