Thursday, July 25, 2013

Latin American GDP will grow by 3% in 2013 – ECLAC's midterm forecast





Latin America is likely to grow by 3% in 2013 (the same rate as in 2012) according to the 24 July 2013 report of the Santiago-based UN Economic Commission for Latin America and Caribbean ( ECLAC).  The report predicts above four percent growth in 2014.
The South American sub region is expected to grow by 3.1% in 2013 ( up from 2.5% in 2012) and  Central America by 4% ( down from 5% in 2012). 
Growth projections for the major countries in 2013 are: Brazil – 2.5% ( better than the 0.9% in 2012), Mexico-2.8% ( down from 3.9% in 2012), Argentina-3.5% ( up from 1.9% in 2012), Colombia –4% ( no change from 2012), Peru –5.9% ( down from 6.5% in 2012), Venezuela- 1% ( from 5.6% in 2012), Chile-4.6% ( 5.6% in 2012). 
The highest growth in the region will be 12.5% in Paraguay  which was the only country in the region which suffered a negative growth of 1.6% in 2012. This is not surprising since Paraguay is known for such ups and downs. Panama will have the second highest growth of 7.5%.
The region's growth rate of 3% looks modest but is not at all bad given the external environment of GDP contraction in the Eurozone successively in the last two years and the lower growth in the rest of the world. 
The primary driver of growth during 2013 continued to be consumption which has been helped by expanding credit, improving labour market conditions and increase in wages. 
The macroeconomic fundamentals continue to be healthy and strong with the following indicators:
-In May 2013, the cumulative 12-month inflation for the region stood at 6%, compared with 5.5% in December 2012 and 5.8% in May 2012.  Venezuela and Argentina were the exceptions with  double digit inflation figures.
- Unemployment stood at 6.7% in the first quarter of 2013.
-  Foreign Direct Investment in Latin America in 2012 was 122.86 billion dollars, the highest in the last eight years.
-Total Gross External Debt of the region in 2012 was 1.18 trillion dollars. The ratio of gross external debt to GDP stood at 20 % in 2012 coming down from 34.8% in 2004.A number of countries have decreased their public debt in recent years and have access to funding for their deficits.
- The International reserves of Latin America and Caribbean has steadily risen from 226 billion dollars in 2004 to 826 billion in May 2013. 
-The overall current account deficit for Latin America is likely to be 2% of GDP in 2013. 
The region faces slowdown in exports due to the reduced external demand and the drop in the prices of some of the region’s export commodities  such as minerals, metals, oil and some food items.  Sugar and coffee prices have gone down while wheat and maize have increased in the first half this year. Although the prices of oil seeds had increased modestly in the first half of 2013, they are expected to go down due to the bumper harvest expected. While some experts say that the super cycle of high commodity prices are over, others expect the prices to remain relatively high in the coming years. Exports of the region are expected to increase by 4% and imports by 6% in value terms in 2013.
The total GDP of the region reached 5.64 trillion dollars in 2012. Brazil and Mexico are in the trillion dollar league with 2.25 trillion and 1.17 trillion dollars respectively. Argentina is the third largest economy with 477 billion dollars followed by Venezuela with 381 billion, Colombia 370 billion, Chile 268 bn and Peru 204 bn. The remaining 13 countries of the region have double digit billions as GDPs except for Haiti whose GDP was in single digit (7.8 billion).

Sunday, July 21, 2013

Lessons from Jindal’s Bolivian failure


Lessons from Jindal’s Bolivian failure

Jindal’s integrated mining and steel project in Bolivia was the largest contract secured by an Indian company in Latin America. The project, which ultimately became a victim of the country's domestic politics, has lessons for Indian companies venturing into Latin America
FORMER INDIAN AMBASSADOR TO ARGENTINA, URUGUAY AND PARAGUAY
¨Hermano… Yo tambien soy Indio ¨ ( “Brother …I am also an Indian”). This is how Bolivian President Evo Morales greeted Naveen Jindal, when they first met in 2006. The two “Indians” signed an agreement in July 2007 for an integrated mining and steel project in eastern Bolivia. The iron ore was to be mined from “El Mutun” which has one of the biggest iron ore reserves (40 billion tonnes) in the world. Jindal was allowed to exploit 50% of the reserves and export annually over 10 million tonnes for a lease period of 40 years. The company agreed to set up a pellet plant of 10 million tonnes per annum, a 6 million tone sponge iron unit, a 1.7 million tonne steel plant and a 450-MW power plant. The total investment was $2.1 billion, spread over a period of eight years.
This was the largest foreign investment contract signed in the history of Bolivia. The government was to earn $200 million annually from it, and generate 12,000 jobs. It was also the biggest ever contract secured by an Indian company in Latin America. The project held the promise of other spin-off opportunities in gas, railways, infrastructure, and export opportunities for Indian companies. Naturally it assumed a high profile in India’s rapidly developing economic relations with Latin America.
But in July 2012, the contract was terminated by Jindal after the Bolivian government encashed the guarantee of $18 million, saying that the company failed to adhere to its investment commitment. Jindal blamed Bolivia of not honoring its commitment to supply natural gas for the project. Negotiations broke down and the Bolivian government took some high-handed measures including ordering of the arrest of key Jindal employees, who managed to leave the country in time. Now the matter is under arbitration. There is absolutely no hope for Jindal to revive the project.
What happened? The most fundamental problem is that Jindal did not conduct a proper political risk analysis before venturing into this project, and ended up becoming the victim of a local power tussle.  In 2006, Evo Morales became the first-ever native Indian president in the history of Bolivia, wresting power from the European-origin oligarchs who controlled politics, business and media till then.  Morales had an agenda empowering the native Indians and he show-cased the first-ever steel plant project as a monument of his glorious Indian government. His opponents and vested interests instead decided to sabotage the project and use the failure to bring Morales down and return to power.  The Jindal project thus became a high stakes game and was caught in the crossfire.
Understandably, Morales attached great personal importance to the project and its completion during his term. Its slow progress frustrated him. Initially the falling price of iron ore was thought to be the reason for the delay. But later, as time went on with very little to show for it, he suspected the Indian company of not being serious about the investment commitment. When asked, Jindal had no convincing explanations. Instead, the company made the mistake of blaming Morales publicly for not providing gas, land and other infrastructural support. This played right into the hands of the opposition who glessfully exploited the controversy. Instead of a triumph, President Morales realized that the project might end up as his graveyard. Thereafter, limiting the damage by terminating the contract and hence the project, became a priority.
The Jindal project may have lived up to its potential, had the company done its homework on four counts:
1. Ascertain the politics of the area. The El Mutun mine is located in the Santa Cruz province – fertile ground for the tug of war between the federal government of Morales in La Paz and the provincial government of Santa Cruz, the latter controlled by the European-origin elite.  Prosperous Santa Cruz which produces 35% of Bolivia’s GDP and attracts 40% of foreign direct investment, had long been threatening to cecede from the centre and its new government dominated by the poorer native Indians who comprise 60% of Bolivia’s population. The Santa Cruz politicians and businessmen used every opportunity to attack Morales and manipulated and used the Jindal project. Had the mine been located in an Indian-dominated province, it would not have had this fate.
2. Understand the leadership. Jindal underestimated Evo Morales, who rose from a poor coca farming background with very little education and understanding of the world before becoming President.  Jindal assumed a superior knowledge of iron ore and steel, and that it would snare the contract by initially waving the billion-dollar figure but later find a way to get out of the excessive investment commitment. Morales, however, is different from the politicians in New Delhi that Jindal is used to. He is uncorrupt and deeply committed to his people and the country. The nationalistic-leftist Morales was aware of the manner in which foreign companies had managed to get sweetheart deals from the previous corrupt regimes in his  country, and that modus was unacceptable to him. He had already shown astuteness in picking an Indian company for the project rather than a large western multinational or a Brazilian or Venezuelan company which would inevitably bring their superior bargaining strength and the political influence of their governments, to the project. He also understood that unlike western governments, New Delhi did not have a track record of supporting or rescuing Indian companies abroad. In any case, Morales was already disappointed with the Indian government which had failed to honor its commitment of providing a line of credit for the supply of Dhruv helicopters.
3. Size the investment wisely. The proposed investment of $2.1 billion in the poorest country of the region (pop. 10 million, GDP $18 billion in 2007) was too much. It raised expectations all around, becoming the target of intense public focus and media scrutiny in the politically charged and polarized atmosphere of Bolivia. Had Jindal committed to a few hundred million dollars of investment, the controversy may not have been outsize. The project would have been better broken into two parts: first, just mining and exports with a reasonable royalty to the government, then expanding into the steel plant and other facilities, if feasible.
4. Ask the obvious question. In their eagerness to get the contract, Jindal didn’t ask the obvious question: If El Mutun with its massive reserves, was such a prize, how did it stay so long without being captured by the established global players such as Rio Tinto, BHP and Vale – which operates iron ore mines across the border in Brazil? Or, more significant, the Chinese who have been acquiring mining assets around the world? There are no answers yet, though some Bolivians whisper about a conspiracy by Vale and Brazil to prevent competition from Mutun.
The first lesson for the Indian companies is that a brilliant business plan is not enough when venturing into Latin America, a continent where people matter more than systems, rules and regulations. Political and cultural understanding and sensitivity are equally important. A thorough political risk analysis is necessary.
Jindal was not the first Indian company to fail in Latin America. Dr. Reddy’s Laboratories’      joint venture in Brazil – the very first Indian venture in Latin America in the nineties – failed because of a poor understanding of Brazilian management culture. The made up for the loss by managing better their entry into Mexico with a $60 million investment which is now  doing well. TCS failed in Brazil during the same period; its contract with a local bank was terminated for alleged unsatisfactory execution.  TCS too learnt from its mistake, and is now a success story in Latin America. Its key learning: hiring the right regional manager from Latin America who understood well  both the Latino and Indian mindset. Transporting Indian managerial talent, as many Indian companies do, often fails; they do adjust well to the region and are unable to get the best out of their investment and talented and skilled Latin American staff. Understanding local politics and culture is critical.
The second lesson: don’t announce disproportionately large investments in small countries. London-based Indian metals commodity entrepreneur Pramod Agarwal is learning the hard way: he made the mistake of announcing with big fanfare, a $2 billion iron ore project in Uruguay, a small country of 3 million people. His project has, unsurprisingly, run into a storm of controversy between government, opposition, environment activists, farmers and vested interests. At one stage Uruguayan President Mujica even talked of holding a referendum on the project but fortunately did not. The company is now working with the government on the environmental impact. Rumors swirled that Agarwal wanted to sell his project to Jindal –  but the latter, burned from Bolivia, has wisely declined the offer.
Ambassador Viswanathan is a Distinguished Fellow at Gateway House, an expert on Latin America, having served as India’s Ambassador to Argentina, Uruguay and Paraguay and also to Venezuela, and as Consul General in Sao Paulo.
This article is part of the Ambassadors’ views section, a collection of articles featuring eminent Indian diplomats written for Gateway House: Indian Council on Global Relations.
For interview requests with the author, or for permission to republish, please contact Gautam Kagalwala at kagalwala.gautam@gatewayhouse.in or 022 22023371.