Latin America's GDP growth is projected to increase to 2.2% in 2018 from 1.3% in 2017, according to the 14 December report of the UN Economic Commission for Latin America and Caribbean(ECLAC). Although the growth of 2.2% is modest, it would be the highest since 2013.
The GDP growth prediction for the major countries are: Brazil - 2%, Mexico-2.4%, Argentina-3% and Colombia-2.6%. Panama will have the highest growth with 5.5%, followed by Dominican Republic-5.1% and Nicaragua-5%. In South America, the growth champion in 2018 will be Bolivia with 4%. Venezuela is the only country which will face GDP contraction, at 5.5%. The consolation is that the contraction would be less than the 2017 figure of 9.5%.
The growth of the region in 2018 will be driven by increase in domestic demand, higher exports and favourable growth of global economy and trade. The commodity prices which increased by 13% in 2017 are expected to maintain the same level of prices in 2018 too.
In 2017, imports of the region are estimated to increase by 11% to 949 billion dollars and exports by 9% to 929 billion. The trend of increase in trade is expected to be maintained in 2018.
The average inflation of the region has come down to 5.3% in 2017 from 7.3% in 2016. It is creditable that the inflation of the region has remained in single digit in the last ten years. The highest was 7.9% in 2015. The only black sheep is Venezuela with a four digit inflation. Argentina is struggling with a double digit inflation of 22.9% in 2017.
The ratio of external debt to the GDP of the region in 2017 was a manageable 38.6%. It is important to note that it has remained below 40% in the last decade. This means that Latin America has come out of its bad old habit of excessive external borrowing and debt default is a thing of the past.
The international reserves of the region reached 851 billion dollars in 2017, the highest in the last ten years. Venezuela is the only country with the problem of acute foreign exchange shortage.
The stronger macroeconomic fundamentals, the financial discipline of the governments and their Inclusive Development policies augur well for growth and prosperity of the region in the future.
In the elections held in December, the business-friendly billionaire Sebastian Pinera was elected as President of Chile. Lenin Moreno, who was elected as President of Ecuador in February, is more moderate and pragmatic than his predecessor Rafael Correa who had confrontations with foreign companies and got carried away by his anti-imperialist rhetoric. Argentina, Brazil, Peru and Paraguay have changed their leftist governments with centre right ones in recent years. While the Pink Tide of the last decade seems to have receded for the moment, the good news is that there is a clear trend of moving towards a pragmatic centre and avoiding extreme left or right. Even the centre-right governments have pro-poor policies and higher public spending for health and education.
In 2018, Brazil, Mexico, Colombia, Costa Rica, Paraguay and Venezuela will have presidential elections. Although Lula is leading in the opinion polls, he faces the risk of disqualification if his conviction in the corruption case is confirmed by the Supreme Court. The right wing media gives generous coverage to Bolsanaro, the extreme rightist candidate but he is not expected to make it. Alckmin, the non-controversial former governor of Sao Paulo state has a chance. Meanwhile the current temporary president of Brazil is pursuing some reforms, privatisation and liberalisation, some of which could materialise. The country will have more political stability in 2018 after the four scandal-filled disastrous years since 2014.
In Mexico, Lopez Obrador, the leftist candidate who lost narrowly in the last two elections, is the favourite to win. His strong personality and nationalistic position is considered as positive to stand upto Trump who heaps insults upon the Mexicans. Although Obrador is against the opening of the energy sector to private sector, he is not likely to roll back significantly the reforms already done.
In Colombia, President Manuel Santos will leave office after having achieved peace in the country with the FARC agreement. FARC, in its new avtar as a political party, will participate in the 2018 elections but they have very limited chances. The next president of the country will have a fresh start focussing on economic development free from the war burden. Thanks to the end of the guerrilla war, vast new areas of the country have now opened up for agriculture, mining, oil exploration and infrastructure development.
While most of Latin America has firm democratic foundations, three countries have remained as exceptions. The political crisis in Venezuela will continue in 2018 and could get even worse. President Maduro of Venezuela will try to get reelected in 2018 by hook or crook. Honduras is living upto its reputation of “Banana republic” with its ongoing agitation against the reelection of President Hernandez after alleged electoral malpractices. Cuba, which was opening up, has slowed down its reforms in reaction to Trump’s revival of the failed policy of restrictions and isolation of Cuba. Raul Castro will step down as President in April 2018 but will continue as the communist party head.
Car wash (Lava Jato) and Odebrecht corruption scandals
The Car wash corruption scandal in Brazil has given a traumatic shock to the business and political elite of Brazil. Over 150 business leaders, executives and politicians have been arrested, of which a majority has been convicted. Many large Brazilian infrastructure companies have been blacklisted for government contracts and credit facilities. It will take quite some time for the affected Brazilian firms to come out of this stain. The Odebrecht scandal has claimed many victims among politicians in other countries too. The Vice President of Ecuador is already in jail and the Peruvian Congress had almost impeached President Kuczynski in December for involvement in the Odebrecht bribery scheme. Before 2014, Odebrecht was the largest Latin American infrastructure company and had done many prestigious projects in the region.
These scandals have given a strong anti-corruption message to the region, where corruption was accepted as part of doing business. But the scandals have left many infrastructure projects paralysed, delayed or scrapped in Brazil besides other countries. They have tarnished the reputation of the Brazilian companies and have opened the field to Chinese and other foreign firms in the region.
Latin America is more serious about India now
Trump has revived the Ugly Gringo fears of Latin Americans. Humiliated by Trump’s insults and anti-NAFTA stand, Mexico is keen to diversify its trade partnership. Other Latin Americans too are disgusted by the protectionist policies and Caudillo tantrums of Trump. They are also disillusioned with Europe which is mired in trade protection, anti-immigration and other such issues. On the other hand, China has emerged as the second largest trading partner of Latin America overtaking European Union. It has given around 150 billion dollars of credit and invested around 120 billion dollars in the region. But the Latinos are wary of the non-transparent and sometimes high-handed business practices of the Chinese and the hidden agenda of Chinese government owned enterprises. Realising the risk of the overwhelming dominant presence of China, they want to reduce their overdependence.
Caught between the bullying Trump, indifferent Europe and the trust deficit with the Chinese, the Latin Americans have started looking more seriously at India, which has become more important for Latin America's exports than any European country. In 2016, Latin America exported 16.7 billion dollars of goods to India while their exports to Germany were 14.4 billion, Spain-13.5bn, UK-10 bn, Italy-9.3 bn and France – 7.2 bn. In 2014, India was the third largest export destination for Latin America’s exports after US and China. The Latin American business is attracted by India's huge and growing market. They have taken note that India has already overtaken China in GDP growth rate and the Indian population is set to exceed that of the Chinese in the coming years.
The Latin Americans perceive India as a non-threatening and benign economic partner. India's growth story within a large, diverse and sometimes chaotic but vibrant democracy resonates with Latin American aspirations and realities. The Indian culture and traditions of yoga, meditation, philosophy and Gurus are comfort zones for them. The Indian companies have a positive image in the region. The Latin Americans appreciate the contribution of Indian pharma companies to lower the cost of medicines and increase the share of affordable generics in their markets. They are inspired by the success story of Indian IT companies which have helped human resource development by employing over 25,000 young Latin Americans in their operations in the region.
India’s exports to Latin America
In the fist six (April-September) months of 2017-18 fiscal year, India’s exports to Latin America have increased by an impressive 17% reaching 6.2 billion dollars. It is heartening to note that the growth is seen across all the six major markets of the region: Brazil, Mexico, Argentina, Colombia, Peru and Chile.
India’s exports to some Latin American countries are larger than the exports to some neighbouring countries and traditional trade partners. For example, India exports more to Mexico than to Thailand, Myanmar, Iran, Canada, Russia, Egypt or Nigeria.
Latin America is the largest destination for India’s vehicle exports with Mexico as the largest for cars and Colombia for motorcycles. In some countries such as Guatemala and Colombia, Indian motor cycle brands are the leaders with the highest market share.
Indian companies have started getting infrastructure projects and contracts for supply of equipments and machinery in the region. Sterlite Power Grid of India has won a billion dollar power transmission line project in Brazil in the public auction held in December this year. Other major companies such as Shapoorji and Palonji, Suzlon, KEC, Praj, Paharpur Cooling and Thermax have got business in the region. BFL Hydro, a small company from Bengaluru is doing a mini hydel project in Honduras.
India’s total exports to the region were 6.2 billion dollars in the period April to September 2017. It was 10.4 billion dollars in 2016-17. There is potential for India to increase its exports to 20 billion dollars in the next five years to Latin America which is a large and growing middle income (over 8000 dollars of per capita income) market of 19 countries with a total population of 615 million and GDP of over 5 trillion dollars
New paradigm of synergies and complementarities
In the past, distance was perceived as the major barrier for trade with Latin America. The economists saw Indian and Latin American exporters as competitors for the same consumer markets of the developed world, exporting raw materials and importing finished products. But these perceptions and theories have been upended with a new paradigm of business in the 21st century. The Indian and Latin American companies and markets are discovering new synergies and complementarities.
Here are some examples of the new paradigm:
- Reliance imports crude oil from Brazil, refine it in Jam Nagar and export diesel to Brazil besides other countries. Renuka Sugar imports a billion dollar worth raw sugar from Brazil, refine it in India and then export the refined sugar to Asia and Middle East. A Brazilian firm Surya Brasil imports henna ingredients from India, makes its own brand of products and export them to twenty countries including India.
- Chile, Peru and Argentina export fresh fruits and vegetables to India.
-Two dozen Indian IT firms have been using the distance and different time zone factors as advantages by developing a new 12/12 business model in which they do near-shore delivery of services to their US clients for 12 hours from the same time zone in Latin America and shift to India for the next 12 hours. They employ 25,000 Latin American staff from Mexico to Chile.
It is worth noting that India has beaten China in export of pharmaceuticals to Latin America. What is even more impressive is that India imports substantial quantities of bulk drugs from China, converts them into finished products in India and export to Latin America.
Energy and food security
Latin America has become a regular new source for India's imports of crude oil in the last fifteen years, supplying 15-20 percent of India’s global imports. Crude oil is the largest global export of Latin America, which has the capacity to double its exports in the future. Having lost a substantial part of exports to the US (which has started shale oil production), the Latin Americans are now more keen to diversify and penetrate large oil importing markets such as India and China. This fits in perfectly with India’s strategic energy security policy to diversify its import sources and reduce over dependence on the volatile Middle East. In any case, the Latin American crude option has put pressure on the the suppliers from Middle East (who had enjoyed undue monopoly in the past) to better their prices and terms of supply to India.
While India has achieved self sufficiency in cereals, there is perpetual shortage of edible oil and pulses which are being imported in ever increasing quantities. India has been sourcing soy and sunflower oil as well as pulses from South America. Since the gap between India’s demand and production has been widening due to the relentless increase in population and consumption, India’s import from South America will go up in the future. Indian agriculture faces daunting challenges caused by the diversion of agricultural land for other purposes ( residential, commercial, industrial and infrastructural uses), shortage of water and low productivity due to inadequate investment by most farmers whose land sizes are small. On the other hand, South America has vast tracts of fertile land, abundant water, advanced technologies and best practices with which the region has emerged as a global agricultural powerhouse. Argentina and Brazil are world leaders in some areas of agricultural research and innovation. The region has the potential to bring in another 40 million hectares of land into agriculture and feed an extra 500 million people.
Investment and joint ventures
In 2017, Indian firms have increased their investment in Mexico and Brazil especially in auto parts, IT and agrochemicals. It is interesting that UPL, the largest Indian agrochemical company has more revenue in Latin America than in India. This is a good time for acquisitions in Brazil where the asset prices are depressed due to the political and economic situation. The Chinese have invested over 50 billion dollars buying up Brazilian power plants, mines and oil fields.
Mexican companies have increased their investment in India in 2017. Group Bimbo has invested 50 million dollars. Cineopolis has become the fourth the largest owner of multiplexes in India.
Aje, a Peruvian company has bet on the Indian cola market with production of Big Cola brand of soft drinks in Maharashtra.
In 2017, there have been more joint ventures in entertainment business. “ Thinking of him”. a film on Tagore’s romance with the Argentine celebrity Victoria Ocampo was coproduced by an Argentine-India venture and was premiered in the Goa Film festival in November. Prabhakar Sharan from Motihari in Bihar became a hero in a Latin American film “ Enredados: La Confusion” ( Entangled: the confusion) produced in Costa Rica and released in February. It is the first Latin American film produced in the Bollywood style of songs and dance.
This is an opportune time for India to take the win-win economic partnership with Latin America to the next level, when the Latin Americans are the most serious about India. The appointment of Mr Suresh Prabhu as Commerce Minister of India is welcome news for economic relations with Latin America. He has been taking interest in the region in the last several years much before he became minister. He has deep knowledge and understanding of the region. A stand alone visit to the region by Prime Minister Modi and announcement of credit of a billion dollars would also help.