Wednesday, December 12, 2012

Latin American economies have continued to show growth and resilience despite the global economic downturn in 2012

Despite the continuing crisis in Europe, the sluggish recovery of US and the Chinese slowdown, Latin America has 
  • shown growth of 3.1% in 2012 with promise of 3.8% in 2013
  • Increased its international reserves to a historic record of 780 billion dollars
  • Increased net FDI to 189 billion dollars in 2012 from 126 bn in 2011
  • Increased imports to 1075 billion dollars in 2012 from 1035 billion in 2011
  • Reduced unemployment to 6.4% in 2012 from 6.9% in 2011
  • Reduced inflation to 5.8% in 2012 from 6.9% in 2011
These are according to the report of Economic Commission for Latin America and Caribbean ( ECLAC) released on 11 December 2012. 
Highlights of the report:
The region’s GDP growth rate in 2012 is estimated at 3.1%. This exceeds the global growth of 2.2%. Panama showed the highest growth of 10.5%, followed by Peru-6.2 %,  Chile- 5.5%, Venezuela –5.3% and Colombia 4.5%.  Lower growths were witnessed for the three largest countries; Brazil- 1.2 %, Mexico- 3.8% and Argentina 2.2% . Paraguay was the only country which had experienced a negative growth ( - 1.8% ) in 2012.
The region is expected to increase its growth to 3.8 % from 3.1% in 2011. It may be noted that the region grew by 5.9% in 2010 and 4.3% in 2011.
In 2013, Brazil is projected to grow by 4%, Mexico- 3.5%, Argentina 3.9% and Colombia 4.5%
With external demand weakening, growth in the region was driven by domestic demand, fuelled partly by monetary or fiscal policy measures in most of the countries. The rise in demand was chiefly a reflection of consumption, with public consumption making a larger contribution than in 2011, consistently with the expansion of public spending in many countries.The increase in private consumption is based mainly on the expansion of credit to the private sector and on the continuous improvements in labour indicators.
Unemployment eased down to 6.4% in 2012 from 6.9% in 2011. It was 8.1% in 2009 and 7.3% in 2010.

In 2012, real wages rose, which helped to bolster domestic demand, particularly consumption. Higher minimum wages in many countries contributed to the rise in real wages.  

Inflation has gone down to 5.8% in 2012 from 6.9% in 2011. The region’s highest inflation rates —into double digits— were recorded in Argentina and Venezuela. Inflation has come down in Venezuela from 29% in 2011 to 18.5% in 2012. Argentine inflation should be over 20% but the government cooks the books and shows the official rate at less than half of the actual inflation. 
It may be noted that the average inflation rate of the region has remained in single digit in the last ten years. The maximum inflation rate was 8.2 % in 2003.
While the fiscal position deteriorated in most of the countries, the fiscal policies have remained predominantly prudent
Debt levels rose only slightly and did not pose a threat to fiscal sustainability 

International reserves of the region in 2012 is estimated to be around 780 billion dollars, increasing from 723 billion in 2011 and 413 billion in 2007. Brazilian reserves are an impressive 378 billion dollars while the Mexican reserves are 166 billion.

The Latin American countries posted a balance-of-payments current account deficit equivalent to 1.6% of regional GDP in 2012, a slight deterioration from the 1.3% in 2011. 

Net FDI in Latin America in 2012 was 189 billion dollars as against 126 billion in 2011 and 75 billion in 2010. Brazil had the highest FDI of 132 bn $, followed by Peru –18 bn $ and Colombia-14 bn $. Mexico had a negative 4.7 bn $ since the outflow of FDI was more than the inflow.

The average Debt-to-GDP ratio for 19 countries of Latin America is estimated to have continued on its downward path, falling from 30.5% of GDP in 2011 to 29.57% in 2012 at the central government level. 

Total external debt of the region reached 1104 bn$ in 2012 from 1080 bn $. Brazil's debt has increased to 303 bn $ in 2012 from 298 bn in 2011. Mexican debt stands at 218 bn in 2012 as against 209 bn in 2011. The Argentine debt has marginally gone up to 142 bn from 141 bn in 2011.
Brazilian Real and Mexican and Argentine Peso had depreciated in value in 2012 while most other currencies of the region had appreciated.

In 2012, a number of the region’s countries implemented new macroprudential measures to strengthen their financial systems. The most common measures of this sort were changes to legal reserve requirements and reforms to the regulatory frameworks of financial systems. 

Total trade of the LAC region in 2012 is estimated to be 2196 billion dollars. Exports will be 1122 billion dollars, marginally increasing from 1106 billion in 2011. Imports of the region is estimated to be 1074 billion dollars, increasing from 1035 billion in 2011. Mexico, the top trading country of the region will have exports of 370 billion dollars in 2012 increasing from 350 billion in 2011. Their imports will be 370 billion in 2012. Brazilian exports in 2012 is to decline to 244 billion dollars from 256 bn in 2011. Their imports would remain at 226 billion, the same as in 2011. The third largest trader in 2012 is Venezuela with 96 bn exports and 56 bn imports. Surprisingly, Chile ( market of 17 million people)  has overtaken Argentina ( 40 million population) and Colombia ( 50 million population ) in trade with exports of 80 bn and imports of 73 bn in 2012.

India should target 2% of the total imports of Latin America. Two percent of 1074 billion dollars in 2012 is 20 billion dollars. In 2011 India's exports were 11.6 billion dollars.  Indian exports could reach 20 billion dollars by 2015 if the exporters and the government of India intensify their export promotion to this under explored and promising market.

Saturday, December 01, 2012

Made in Mexico ( Hecho en Mexico)

Hecho en Mexico ( Made in Mexico ) is the title of a musical documentary film released on 30 November. It takes the viewers through an odyssey of Mexican music featuring performances by rockers, rappers, folk artists and pop stars and narrates the diverse and colorful history, culture, poetry, philosophy, ethnicity and tradition of Mexico. 
According to the projections of Economist ( 24 November issue) Made in Mexico  products are going to overtake Made in China in the US market by 2018. Mexico will become the top supplier to US accounting for 16 % of the US imports as against 15.8 % projected for China.  In 2012, Mexican share stands at 12.3% while that of China is 17%. The Mexican  ascendancy has become possible thanks to the bridging of the wage gap with China. The average manufacturing wage of China has risen to 1.6 dollars per hour in 2011 ( from 0.3 dollars in 2000) while the Mexican wage was 2.1 dollars an hour in 2011, increasing from 1.5 dollars in 2000. The minimum wage in Shanghai is now more than that of Mexico city and Monterrey. This new wage situation combined with the increased cost of freight due to high oil prices have given a competitive edge to Mexico, from whose border towns goods reach US cities in a matter of hours or days while it takes several weeks from China. The businesses which had fled to China in the past have now started returning to Mexico. 
Today Mexico is the fourth largest exporter of vehicles. With several new plants being set up, the production capacity is set to go up to four million vehicles. The country has become the world's largest exporter of flat-screen TVs, Blackberries and fridge-freezers. A number of foreign companies including Chinese are putting up plants in Mexico to supply to the US market 
As member of NAFTA, Mexico has free access to the markets of US and Canada while China's access is being limited by growing protectionism. Besides, Mexican products have access to the markets of 42 countries with whom it has signed FTAs.
The Mexican industry and economy are going to benefit from the opening up of the energy sector, expected in the near future. Mexico, which is among the top ten oil producers in the world with 2.5 million barrels per day of production, is set to increase exports with new investment in exploration and production. Last month,Pemex, the Mexican oil company announced discovery ( the largest in the last ten years) of a new field with reserves of 500 million barrels. The shale gas/oil revolution, which has transformed the US energy situation, is also likely to spread to Mexico, which has large shale reserves. 
It is creditable that the Mexican economy has withstood the global financial crisis without any major damage, despite the proximity and exposure to the epicenter of the crisis. This is attributed to the prudent macroeconomic management of the Mexican policymakers who have learnt  lessons from the previous crises. The inflation has been kept under control and it is estimated at 4.6% in 2012. International reserves exceed $160 billion, a record.  Interest rates and External Debt are relatively low. Though the growth has been modest in recent years, it is expected to pick up. 

Encouraged by the new trajectory of the economy and industry some Mexicans even talk about overtaking Brazil, the largest economy of Latin America.They highlight the fact that their boom in manufacturing is more sustainable than the commodity boom of Brazil driven by China. In trade, Mexico is, of course, way ahead of Brazil with 700 billion dollars in comparison to the Brazilian trade which stood at 484 billion dollars in 2011. While Mexico is gaining edge in manufacturing, Brazil suffers from  high cost of production, interest rates, wages and antiquated labour laws as well as strong currency and is losing its competitive edge in industry. Recently, the Brazilians had to wriggle out of a bilateral automobile accord after the huge increase in import of cars made in Mexico. While the Brazilians are protectionist, the Mexicans have become more outward-looking. Earlier this year, they signed up as member of yet another grouping called as the Pacific Alliance ( with Chile, Peru and Colombia). 
Although Mexico has been ruled by the centre-right party PAN for the last ten years, Inclusive Development has been the priority of the governments. The Calderon administration has brought 50 million Mexicans (unaffiliated with any health insurance) under the Seguro Popular programme. The number was just 15 million six years back. His administration has built 21,000 kilometers of new roads and bridges. Unfortunately, Calderon got bogged down in the futile war against the drug gangs. While, the drug war and mindless violence of the drug cartels have given a bad image, it is believed that the violence has started declining. In any case, the fundamental cause for the drug trafficking and gun violence comes from US, the consumer of drugs and supplier of guns.
The manufacturing and export boom of Mexico is coinciding with a good news. On 1 December, Mexico is getting a 46-year old dynamic and energetic new President in Enrique Pena Nieto who won a comfortable victory in the July elections. He promises to take Mexico to greater heights and prosperity. His party PRI shares some common agenda with PAN, the party of the outgoing President Calderon. The two parties collaborated in passing the labour reform legislation recently. In a gesture of goodwill, he has included PAN as well as the leftist PRD members in his cabinet. 
While Pena Nieto is a fresh face, his party PRI had ruled Mexico for 71  years uninterrupted till 2000 as a one-party dictatorship. Having been out of power in the last ten years, the party has learnt lessons to adapt to the new realities of Mexican democracy. Conscious of the criticism that his administration will be old wine in a new bottle, Pena Nieto has a low key and sober inauguration today without the usual Latino pomp and show.
The Mexicans are, understandably, upbeat and optimistic about the future. They have started dreaming ( like the Brazilians and Indians) that their time too has come. 

Wednesday, November 28, 2012

Business with Nicaragua

A Nicaraguan delegation lead by Commandante Bayarde Arce, Advisor to the President on economic and financial affairs was in CII for interaction with the Indian industry on 27 November. The delegation sought Indian investment in IT, agriculture, food processing, infrastructure and renewable energy. They were also interested in importing buses and equipments and machinery. The delegation was encouraged by the presence of 20 Indian companies in the CII meeting.

Caplin Point, the Chennai-based pharma company hosted a dinner for the delegation. They are the leading exporter of pharmaceuticals to Nicaragua and some other central american countries.

India's exports to Nicaragua were 53 million dollars in 2011. Pharmaceuticals, two wheelers, three wheelers, automobiles and engineering goods were the major exports. Bajaj three-wheelers and Mahindra vehicles are popular there.

Praj has done a distillery project. Gammon India is starting a hydropower project with World Bank funding. Suzlon is into a wind energy project. Gravitas from Rajasthan is doing a Lead extraction project.

The Indian Ministry of External Affairs has already extended a Line of Credit of 10 million dollars as part of the 80 million to the SICA group of 8 central american countries. More credit is being requested by the Nicaraguan delegation.

Nicaragua has authorized their Honorary Consul in Mumbai Mr Mehta to issue visas. Mr Mehta informed in the CII meeting that he has issued 0ver 40 visas in the first ten months of 2012. The Delhi Honorary Consul Mr Burman has also been authorised to issue visas from November 2012. This is a rare and commendable gesture by the Nicaraguan government. Normally governments around the world do not allow the honorary consuls to issue visas.

Nicaragua has become politically stable with credible democratic functioning. The economy has been growing over 5% in recent years. The leftist government of Ortega is committed to business-friendly polieies besides Inclusive Development. More and more people are coming out of the poverty line. Nicaragua is the safest country in central america, free from violence and crime witnessed in some of the Latin American countries.

Despite being an authentic Marxist, President Ortega has shown pragmatism in external policy too. He has continued the traditional policy of recognition of Taiwan and has resisted the pressure from China.  USA which waged a bloody proxy war to overthrow Ortega's regime in the eighties, has now become the principal market for Nicaraguan exports.

This is a good time for Indian business expansion in Nicaragua. India's exports can be increased to over 200 million dollars in the next three years, if the Indian business takes Nicaragua seriously.

Thursday, October 25, 2012

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.

Sunday, October 21, 2012

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". page13image42600

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 Chinapage13image42760
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 %page13image41088
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.

Wednesday, October 03, 2012

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.

Monday, September 17, 2012

Trade scenario of Latin America at this time of global not bad at all.

Latin America and the Caribbean was the region with the highest export volume growth in the last quarter of 2011 and the first four months of 2012, amidst the global trade slowdown, according to the 13 September Annual report " Latin America and the Caribbean in the World economy 2011-12 " by the Economic Commission for Latin America and Caribbean (ECLAC). This performance is explained in part by the fact that the region is less dependent than others on the European Union as a destination market.
More from the report..
The value of the region’s goods exports and imports will climb by around 4% and 3%, respectively, in 2012.
The commodities “supercycle” which began in 2003 could last until 2020, with price growth below the peaks of mid-2008 but higher than the historical trend. This is good news for South America, but less auspicious for Central America and the Caribbean. commodity prices are expected to remain above their historical averages in the coming years
Major shifts in the region’s foreign trade over the past decade in terms of export destination structure have built greater resilience. Between 2000 and 2011, the United States’ share dropped by almost 20 percentage points, from 58% to 39%. In contrast, Asia’s share rose steeply (from 6% to 18%), with China jumping from 1% to 9%. Exports within Latin America and the Caribbean also increased, from 16% to 20%. In short, developing regions have grown as destinations for Latin American and Caribbean exports; since they are also the world’s fastest-growing economies, lower demand for Latin American and Caribbean exports in the industrialized countries has had less of an impact.
Trade between developing nations (South-South trade) will be more buoyant than trade between industrialized countries (North-North trade) and at the current rates, South-South trade could exceed North-North trade by 2020. 
As in the rest of the world, trade restrictions have increased in Latin America and the Caribbean, although not across the board. Particularly in Argentina and Brazil, faltering growth in the past few quarters has fuelled demands from certain sectors to protect national industry. This has occurred in the context of a trend, already observed prior to the crisis, towards greater penetration of Asian manufactures (especially from China) which have displaced imports from the rest of the world as well as local production. As a result, in recent months some countries of the region have introduced measures or made announcements that point to further import restrictions, mainly on industrial products. Some of these actions have been called into question, both within and outside the region.  

Monday, September 10, 2012

Import restrictions in Brazil, Argentina and Venezuela

Brazilian restrictions on imports
The Brazilian government has imposed 25% customs tariff on 100 itmes imported from outside Mercosur since September 2012. They propose to add another 100 items soon. The proposal to impose extra tariff was approved in the Mercosur summit in end 2011. The Brasilian government has taken recourse to this measure to protect local industries who could not compete with the less expensive imports. The strong Real has made imports cheaper while the domestic cost of production remains high.

Argentine government imposes more stringent restrictions on imports from 1 February 2012
As part of the strategy to reduce outflow of foreign exchange and to encourage domestic production, the government has imposed these measures in addition to the already existing restrictions since 2010. Under the new system, before placing import orders, the importers have to file an Anticipated Import Affidavit Declaracion (Jurada Anticipada de Importacion) to the Tax Authority AFIP, who are expected to take a decision in 72 hours. After this, the same information should be sent by email to the Secretary of Domestic Trade, who is expected to decide in 15 days. The import request can be approved, delayed or rejected or negotiated by the authorities. In general, the government insists that for every dollar of import, importers should export a dollar worth of goods. In some cases, import permission is not given on the ground that the products should be made domestically and cannot be imported. The importer might also be asked to reduce prices or quantity of imports. The import authorization process is arbitrary, non-transparent and personalized by Mr Moreno, the Secretary for Trade.
These restrictions applies to all imports and all countries including Mercosur partner countries.
In addition to these import restrictions, there are also severe foreign exchange restrictions, which has given rise to a  growing black market ( the Argentines call it as Blue market ). The official rate in September 2012 is 4.65 pesos to a dollar while the black market rate is 6.33 pesos to a dollars.
The forex restrictions has become one more hurdle for Argentine importers, already facing import restrictions.

Venezuelan restrictions on imports
The Venezuelan government has a system of complete control of foreign exchange. The government releases foreign currency for imports only for such items and quantities it thinks are needed for the Bolivarian socialist economic system. Any company or importer not in the good books of the government cannot get foreign exchange or import anything.

How long will these restrictions stay?
The Venezuelan restriction is ideology-based and is likely to stay as long as President Chavez stays in power. The Argentine restrictions might be removed when the foreign exchange situation improves, although President Cristina also likes to use the restrictions to control private sector. Brazilian restrictions on selected items are temporary and might be removed when the domestic production becomes competitive.

Saturday, August 18, 2012

India increases its crude oil purchase from Latin America

Essar Group of India has signed a one year contract to buy 12 million barrels of its Castilla crude oil worth 1.2 billion dollars from Ecopetrol of Colombia in July 2012. 

The first shipment of 2 million barrels of oil in a Very Large Crude Carrier left on July 29 from 
Covenas port and it would take 35 days to arrive in India at the Vadinar port.

Essar aims to buy 15-20 percent of its crude oil needs from the domestic market, 35-40 percent from Latin American sources, and 30-40 percent from the Middle East. Essar has been importing also from Venezuela, Mexico and Brazil.
Reliance has also signed a term contract with Venezuela to import over 300,000 bpd, in addition to its purchases from Brazil, Colombia, Mexico and Ecuador.

The import of these two companies from Latin America forms more than ten percent of India's global imports of crude oil. Given the discovery of new oil fields and the increasing production of crude oil in the region, India can count on Latin America as a reliable long term source for 10-15 percent of its import needs.

Saturday, June 30, 2012

Mercosur suspends Paraguay and includes Venezuela, 29 June 2012

During their biannual summit meeting on 29 June, the leaders of Brazil, Argentina and Uruguay decided to suspend Paraguay till elections are held in April 2013 to elect a new president in Paraguay. This is a punishment to the Paraguayan Congress which removed 
President Lugo from power on 22 June through a constituitional coup.
The three leaders also decided to admit Venezuela as a new member of Mercosur from 31 July. The proposal for Venezuelan membership had been pending for ratification by the Paraguayan senate for the last six years. While the other three countries had ratified Venezuelan admission, it was the Paraguayan right-wing dominated senate which refused to ratify. Now they have been taught a lesson.
Parguay has also been suspended from the 12-member South American Union called as UNASUR
The ideal solution would have been to restore Lugo to the Presidency. But since this is difficult, given the current circumstances, Mercosur has taken recourse to the second best option. I wholeheartedly support and applaud this.
However, Mercosur has rightly decided not impose economic sanctions against Paraguay.This means that trade will continue. Paraguay has no other option but to accept and suffer this isolation.
The entry of venezuela, the Saudi Arabia of Latin America, adds weight to Mercosur and increases its importance. However, the leftist radical Chavez might give more political headache to Mercosur than the rightist Paraguayan Congress.
Mercosur agreed to allow individual members to raise tariffs on imports from outside the bloc to up to 35 percent on 200 products to protect local industry.  Brazil and Argentina are likely to make use of this agreement.

Friday, June 15, 2012

ECLAC mid year report on Latin America –14 june 2012

In the " Macroeconomic Report on Latin America and the Caribbean" issued on 14 June, ECLAC ( Economic Commission for Latin America and the Caribbean) maintains its 3.7% growth forecast for the region, following a growth rate of 4.3% in 2011. While making this projection, the report has taken into account the euro zone risk factors, a slowing Chinese economy, precarious growth in the United States and the potential for oil price increase due to geopolitical conflict.  

Other highlights of the report:
The main driver of growth was domestic demand, not external demand. Private consumption remained buoyant on the strength of rising employment and real wages, continuing expansion of lending to the private sector 
In 2012, the fastest growing economies will be Panama (8.0%) and Haiti (6.0%), followed by Peru (5,7%), Bolivia (5.2%) and Costa Rica (5.0%), Venezuela (5.0%), Chile 4.9%, Mexico 4.0%, Argentina 3.5% and Brazil 2.7%   
With domestic growth outpacing external growth and a general worsening of the terms of trade, imports of Latin America are expected to climb by 10.2% during the year, outstripping a 6.3% rise in exports. As a result, the trade surplus would go from 1.3% of GDP in 2011 to just 0.7% of GDP in 2012. The current-account deficit will be 1.7% of GDP as against 1.2% in 2011.  
Unemployment in the region will touch a record low of 6.5% in 2012. Employment continued to rise in 2012, the quality of employment improved, real wages grew and, as a result, consumption and domestic demand jumped. In sum, the positive labour trends of 2010 and 2011 remained in place.
Inflation maintained its downward trend and in April 2012 stood at an annual rate of 5.5%, compared with 6.7% in March and 7% in December 2011. Venezuela and Argentina are the only exeptions with double digit inflation of over 20%
In case the global economic scenario worsens beyond the current expectations, the Latin American countries have an array of policy instruments at their disposal to address such a scenario and the fiscal room for manoeuvre to implement a countercyclical policy that would contain the immediate effects of the crisis on their economies.

This report reconfirms my optimism and confidence about the resilience and strength of the New Latin America 

Tuesday, June 12, 2012

Pacific Alliance - yet another Latin American bloc

12 JUNE 2012
Gateway House
The Pacific Alliance, yet another bloc in Latin America
The newly-formed Pacific Alliance bloc seems more like a political club to counterbalance the Atlantic-facing, Brazil-led Mercosur group. However, the bloc accounts for 30% of India’s trade with Latin America. Can India engage the group so it is not left out from their Asia focus?
Share on Facebook
The Presidents of Chile, Colombia, Peru and Mexico signed an agreement establishing a regional group called as “Pacific Alliance” in their summit meeting on 6 May at the Paranal observatory in the Atacama desert of Chile. The Presidents of Costa Rica and Panama, who attended the summit as observers, have expressed interest in joining this new bloc. The Pacific Alliance idea was initiated by Alan Garcia, the then President of Peru in April 2011 in the first summit he had convened. It took two more summits to give shape and finalize this new regional integration.
Chile’s President Sebastián Piñera, in his speech at the signing ceremony said, “[the] Pacific Alliance is much more than a Free Trade Agreement. It is an Agreement of deep and broad integration that involves the exchange of goods, services, investment, people, and at the same time is committed towards physical, infrastructure and energy integration.” Colombian President Juan Manuel Santos described the new bloc as “one of the most significant processes towards integrations that have taken place in Latin America.” The Alliance is starting with free movement of goods and people by the end of 2012. The bourses from Lima, Bogota and Santiago joined together and formed in 2011 an integrated exchange known as Mila, which will soon have Mexico’s main stock exchange too. 
The new economic bloc has a combined population of 204 million (36% of Latin American population), GDP of $1.7 trillion (35% of region’s GDP) and global trade of $1045 billion which is half of the region’s global trade.
Chile, Colombia and Peru are already part of the Andean Community, which is one of the oldest and best institutionalized among the five Latino regional blocs, namely, Mercosur, UNASUR, SICA and NAFTA. The Andean Community , which has its own secretariat and development bank, was wrecked by Venezuelan President Chavez who pulled Venezuela out of this group in 2006 as part of his personal fight against the then Colombian President Alvaro Uribe. The exit of Venezuela was followed by the entry of Chile in the group. However, the Andean Community’s future remains uncertain because of the political incompatibility between the leftist-led Bolivia and Ecuador on the one hand and the right of centre-led Colombia and Chile on the other side. Mexico is part of NAFTA and eighty percent of its trade is with U.S. and Canada.
The four member countries of the Alliance have some common features: All four of them have investment grade markets. They are more open economies, outward looking and are keen to diversify their trade and economic partnerships. Chile and Mexico have signed the maximum number of FTAs (Free Trade Agreements) with other countries around the world. Peru and Colombia are following their examples. All four of them have FTA partnerships with U.S. 
There is also political convergence between the four members of the Pacific Alliance. Chile, Colombia and Mexico have centre-right governments. The Peruvian President Ollanta Humala, although a leftist, has emerged as a pragmatist, following the example of Brazil’s Lula.
But there is no great complementarity in trade. The intra-alliance trade is insignificant and less than three percent of their combined global trade. Most of their trade is with external partners. In contrast, Mercosur countries do significant trade (20% of their trade) with each other. Another obstacle for integration is the fact that geographically they are not contiguous.
The Pacific Alliance has not spelt out if they plan to set up institutions such as secretariat and common parliament. Nor have they set any time table for a customs union or common external tariff. 
It seems that the Pacific Alliance bloc is more of a political club. It is perceived as a new force to counterbalance the Atlantic-facing and Brazil-led Mercosur group ruled by leftist Presidents. Besides forming Mercosur, Brazil had taken the initiative to form the Unasur group in 2008, bringing together all the twelve countries of South America. They went further and created CELAC ( Community of Latin American and Caribbean States) in 2010, in a clear challenge to the Washington-based and U.S.-led Organisation of American States (OAS ). Apart from asserting their autonomy through these integrations, the South American leftist Presidents managed to defeat the U.S. proposal to form FTAA (Free Trade Area of the Americas) under which the whole hemisphere was to be made as a common market in which sub-regional groups such as Mercosur were to be dissolved.  The climax of this Latin American assertion of independence and refusal to be the U.S. backyard was demonstrated dramatically at the Mar del Plata Summit of the Americas in 2005 when the U.S. stood completely isolated in the hemisphere and found its FTAA proposal shred to pieces. With this background, the U.S. is seen as the hidden hand behind the formation of the Pacific Alliance to divide the region, hobble the growing Latin American autonomy and counter the rising leadership profile of Brazil. 
The rivalry of the new alliance with Mercosur was let out by President Calderon of Mexico, who mentioned in his speech, “Even when we are less in population and in the size of our economies compared to our brothers from Mercosur, we export double in volume and value than Mercosur. We have an extraordinary potential.” The Peruvian and Colombian Presidents downplayed the Mercosur rivalry saying that Pacific Alliance was not directed against any other group.
One of the stated objectives of the Pacific Alliance is to increase trade with Asia. The Alliance is planning a FTA with ASEAN. Chile and Peru have signed FTAs with China, Japan and Korea, while Colombia and Mexico are in the process of negotiating FTAs with China, Korea and Japan.  
India does not have FTA with any member of the Pacific Alliance except for a PTA with Chile. Indian exports therefore, face disadvantage in the markets of the Pacific Alliance vis-à-vis those who have FTAs. It is, therefore, imperative that India should take the initiative to sign PTAs or FTAs with members of the new Alliance. India’s trade with the Pacific Alliance in 2011 was $7.7 billion of which exports were $3.1 billion and imports $4.6 billion.  The trade with Pacific Alliance countries is 30% of the total trade with Latin America. There is potential to double India’s exports to the growing markets of the new Alliance in the next three years. Chile and Peru are important sources of copper and other minerals while Mexico and Colombia are sources of crude oil for India. Although Brazil is the most important strategic partner in Latin America, India should consider engaging the Pacific Alliance (keeping in mind Brazilian sensitivity) so that it is not left out from their Asia focus.
R. Viswanathan, who has just retired as Ambassador to Argentina, is an expert on Latin America. His email:
This article is part of the Ambassadors views’ section, a collection of articles featuring eminent Indian diplomats.