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.

Wednesday, December 02, 2015

Latin American contribution to India's energy security

Latin America has become a regular new source for India's imports of crude oil in the last fifteen years. In 2014-15 (April to March), the region supplied  36 million tons and held a 19% share in India's global imports of 189 mt . Out of the 700,000 bpd imported from the region, typically 400,000 bpd comes from Venezuela, 100,000 bpd each from Mexico and Brazil and about 50,000 bpd each from Colombia and Ecuador, depending on prices and availability.
It was Reliance which opened Latin America as an import source in 2000. Before that, Indian oil companies did not have the capacity to refine Latin American crude. The Reliance refinery established in 1999, with its versatile capacity to refine many crude varieties from around the world, was the first one to use the Latin American crude. Later, Essar has set up a similar refinery and the public sector oil firms have also followed this model now. 
In the past, there was another mental barrier of Indian business which was deterred by the distance factor and high freight cost. Reliance found a smart solution by making use of the VLCCs (Very Large Crude Carriers) which were coming empty from US after discharging the Middle Eastern crude there. The freight through this arrangement works out to just 2.5 to 3 dollars per barrel in comparison to 0.5 to 1 dollar from Middle East in regular oil tankers.
Reliance continues to be the leading importer of  Latin American crude with 400,000 bpd, while Essar and the Public Sector oil companies import about 150,000 bpd each. It is interesting to note that Reliance exports diesel to Brazil regularly. It amounted to 3.1 billion dollars in 2014-15.
India's global import of crude is projected to reach 7.2 million bpd from 3.7 m in 2014 and import dependency to go up from 70% of demand in 2014 to 90% in 2040, according to the November 2015 'World Energy Outlook' of International Energy Agency. The IEA  predicts India's dependency on Middle East to go up from 57% in 2014 to 63% in 2040.
It is India's strategic policy to reduce the over dependence on the politically unstable Middle East and diversify its crude import sources. This Indian objective fits in with Latin America's own strategy to cultivate India as a market for its crude exports.
Latin America has the potential and capacity to increase crude exports from its current 4.5 million bpd to over 7 million. The Venezuelans will be able to raise their production and exports, as soon as the political situation stabilizes. Brazil already has the capacity to increase exports. Mexican production will increase with the entry of private sector and foreign companies in the oil sector, made possible after the 2013 energy reforms. 
The region has discovered more new reserves in the last decade and its current total is 336 billion barrels, which is one fifth of the total global reserves of 1.4 trillion barrels. Venezuela has the world's largest reserves of 298 billion barrels and has overtaken Saudi Arabia's 266 billion barrels. 
Besides conventional oil, the region has 58 billion barrels of shale oil reserves, which is beginning to be exploited. Argentina has the fourth largest shale oil reserves of 27 billion barrels. Chevron has just started production in a joint venture with the Argentine national oil company YPF. Unlike the shale reserves near cities in US and the consequent controversies, the Argentine reserves are in the remote and sparsely populated Patagonia region. 
The US, which used to be the principal market for Latin American crude, has almost halved its imports and doubled its domestic production of oil, thanks to the shale revolution. Canada has eaten into Latin American share of the US market by steadily increasing its supplies. Canada itself has huge oil reserves.
So, the Latin American crude exporters are desperate for new markets and are targeting India along with China which have large markets with fast growing economies and consumption.  The Latin Americans are willing to give extra discounts to increase their market share. This gives additional bargaining power for India vis-a vis the Middle Eastern and other suppliers.
Indian companies have invested about 3 billion dollars in oil fields in Venezuela, Brazil and Colombia. OVL is the major investor with 2.5 billion dollars and the balance is by public sector oil companies, Videocon, Gammon India and Assam Oil Company. Given the current low prices of  crude and the oil fields, it is a good time for more acquisitions and investment in Latin America.
Crude oil imports from Latin America (20 billion dollars) accounted for 66 % of the total imports of 30 billion dollars and 46% of the total trade of 43 billion with the region in 2014-15. The total trade figure goes up or down corresponding to the crude oil price fluctuation. In any case, crude imports will continue to be the largest part of Indo-Latin American trade in the future. India can source 20 percent or more of crude regularly from Latin America and can count on the region as a reliable contributor to its energy security.

Thursday, November 19, 2015

Latin America: a billion dollar destination for Indian pharma exports

Pharmaceutical exports of India to Latin America crossed the billion dollar milestone in 2014-15 ( April to March - India's financial year) reaching 1063 million dollars. 

Brazil is the largest destination of exports with 374 million dollars, followed by Venezuela-146 m, Mexico-126 m, Colombia-67 m, Chile –56 m, Peru-49 m, Argentina-41 m, Dominican Republic –27.6 m,  Guatemala – 27.1 m  and  Haiti – 26.9 m.
Pharma exports were 7.7% of India's total exports of 13.7 billion dollars to Latin America in 2014-15.
Latin America accounted for seven percent of India's global pharma exports of 15.3 billion in 2014-15. The pharma exports to Latin America have increased by 12 % from 949 m in 2013-14, while India's global exports have shown only a marginal increase of 2.6%. 

The exports to the region have steadily increased from 826 m in 2011-12 to 916 m in 2012-13 to 943 m in 2013-14 and to 1063 million dollars in 2014-15 despite the slow down in the growth of the region since 2011.

In the past, India exported more bulk drugs (raw materials and intermediates) and less finished formulations to Latin America. But this trend has reversed since 2012-13. Out of the total of 1063 m in 2014-15, formulations were 680 million dollars and bulk drugs 350 m. The bulk drug exports have declined from 426 m in 2011-12 to 350 m in 2014-15 reflecting the trend of growing value addition by Indian exporters. The export of finished formulations have shown a remarkable increase from 393 m in 2011-12 to 680 million in 2014-15. Exports of formulations to Brazil have almost doubled from 113 m in 2011-12 to 222 m in 2014-15 despite the more stringent inspection procedures of ANVISA, the Brazilian drug regulator. In the case of Venezuela, most of the exports are formulations. Mexico is a contrasting case where finished formulations accounted for just 20 m  while bulk drugs were 100 m. 

There is scope for india to increase the exports in the future. The pharma market of the region, estimated to be around 80 billion dollars, is expected to reach 100 billion in the next five years. The governments of the region are promoting generic medicines to cut the cost of health care in their budget as well as for the consumers. The governments (majority of them centre-left) are spending more on health care as part of their inclusive development agenda. Millions of people are coming out of poverty, thanks to the pro-poor policies of the governments and this new lower middle class can afford to buy medicines. The governments and the consumers in the region have come to realize the value of affordable Indian generic medicines. In fact, the governments of Brazil and Chile had taken initiatives in the last decade to invite and encourage the Indian pharma entry into their countries to put pressure on the MNCs and local drug makers to increase the availability of generics and reduce the cost of medicines. The Indian pharmaceutical companies have established their image and brands in the region. The long distance factor has kept out the small unscrupulous Indian traders and it is only the reputed Indian exporters and manufacturers who have invested in the entry into Latin America. 

India's export of generics to Mexico, Chile and Peru will, however, face some challenges when these three countries ratify the just-concluded Trans Pacific Partnership (TPP) which is said to be more MNC-friendly with stricter patent protection.

Some Indian companies such as Reddy Labs, Lupin, Ranbaxy, Torrent, Cellofarm and IPCA Labs have local production facilities in the large markets of Brazil and Mexico. Glenmark has a plant for oncological products in Argentina. Some of these Latin American units are also used for exports. 

In a seminar organized at the National Autonomous University of Mexico in the first week of October 2015 ( in which I had also participated as a speaker) a Mexican expert on pharma patents made a comparison between the pharma patent regimes of Mexico and India. According to him, Indian and Mexican pharma companies had the same levels of scale, technology and growth till the eighties. The government of Mexico had adopted the patent regime of the developed world under pressure from US and the European Union with whom it has signed FTAs. This has favored the domination of the multinational drug makers at the expense of the Mexican domestic firms who have failed to grow like the Indian pharma firms. The Mexican expert expressed admiration for the policy of the government of India which has helped create a formidable Indian pharma industry. 
The growing popularity of Ayurveda in the region has opened up opportunities for export of Ayurvedic medicines and preparations too. There are some Latin American universities and institutions which give regular courses in Ayurvedic system. The Indian government needs to extend support to these Latin American initiatives and facilitate collaborations and exchange programmes with the Indian Ayurvedic institutions. 

Financial Express of 20 November 2015 published this article 

Thursday, October 29, 2015

Latin America's foreign trade declines in 2015

Latin America's imports are projected to decline by 9.8% in 2015, according to a report issued by the  the Economic Commission for Latin America and the Caribbean (ECLAC) in October. The imports of the region are expected to go down to 974 billion dollars in 2015 from 1082 billion in 2014 and 1087 billion in 2013.

Brazil will have the highest decrease in imports with 22.6%, followed by Ecuador-20.9%, Venezuela-15.7%, Colombia-13.8%, Chile-13.7%, Argentina-9.9%. However, Mexico's imports are expected to drop by just 1%  and Peru- 5.5%. 

While the South American sub region will experience a fall in imports of of 16.7%,  Central America will have just 3.4%

The region's exports are estimated to shrink by 13.8 % in 2015  to 914 billion dollars from 1060 billion in 2014 and 1089 billion in 2013. There is a possibility of further decline in exports in 2016, going by the current trends in the global market.
Venezuela will have the highest fall in exports by 40.6 %, followed by Colombia-29.2%, Argentina-16.9%, Chile-16.8%, Peru-16.3%, Brazil-15.1%. But Mexico's exports are projected to decrease by just 4.1%.

The South American sub region will suffer a decline in exports by 21% while Central America will have a drop of just  3.7%.

The year 2015 will be the third consecutive year of decline in Latin American exports. This has made the three-year period from 2013 to 2015 as the region’s worst in terms of export performance in the last eight decades.

The sharp drop in international prices of crude oil, metals, minerals and agro products exported by the region,  the decline in demand from China, the weak economic recovery of Euro zone and the general slow down in global growth are the main factors for the decrease in exports. The steep fall in crude oil prices have affected Venezuela and Ecuador severely while the impact is moderate in the cases of  Mexico and Colombia, the main exporters of the region. 

The South American countries which are more dependent on China have suffered steeper fall in their exports while Mexico and Central America whose main market is US, have suffered only marginally.

Most of countries of the region are expected to ride out the current situation with their high forex reserves, low external debt, macroeconomic resilience and prudent policies. It is important to note that Brazil, Argentina and Chile are likely to end the year with trade surplus despite the fall in their exports.

The currencies of most of the countries in the region have depreciated since mid-2014. This has made imports more expensive and given boost to exports. For example, the Brazilian Real has depreciated by sixty percent in the last one year from 2.46 Reais to 3.94 for a dollar. Foreign currency conversion is open and transparent in most countries of the region except in Venezuela and Argentina which have imposed severe restrictions on imports and foreign currency transactions due to inadequate foreign exchange reserves.  

The Indian exporters need not be alarmed by the fall in imports of Latin America. India's exports have increased from 12.31 billion in 2013-14 to 13.75 billion in 2014-15 despite the fall in the imports of the region from 1083 billion in 2013 to 1082 billion in 2014. In fact, India's exports have tripled in the last five years from 4.47 billion in 2009-10, although the GDP growth rate of the region has fallen from 6.2% in 2010 to 1.1% in 2014.

Tuesday, October 20, 2015

Brazil has received more FDI than India in 2015

The Indian media was ecstatic last month reporting that India had overtaken China and US in Foreign Direct Investment (FDI) in the first half of 2015. They quoted a Financial Times report which had estimated that India had received FDI of 31 billion dollars as against 28 billion received by China and 27 billion by US. It is not clear how FT arrived at this figure, since DIPP shows a figure of just 19.4 billion dollars. 
The Indian media have, however, missed the news that Brazil had received 42 billion dollars of FDI in the first semester of 2015 which is more than India's. In 2014, Brazil got FDI 97 billion dollars in FDI.
According to the 15 October report of ECLAC (the UN Economic Commission for Latin America and Caribbean), Brazil's FDI of 42 billion is 47% of the total FDI in Latin America and three times more than the 13.7 billion received by Mexico. 
The Brazilian FDI data becomes interesting in the light of the fact that Brazil is at the moment in the middle of painful political and economic problems including the massive Petrobras corruption scandal which has lead to arrest and jailing of dozens of top business barons and politicians. Brazil's GDP is projected to contract by 2.8% in 2015 and 1% in 2016 after an insignificant growth of just 0.1% in 2014. The Brazilian Real has depreciated by 38% in the last six months to 4 Reais to a dollar from 2.9 in April 2015 and from a strong peak of 1.66 in 2010.  Despite these issues, foreign investors have shown confidence in the long term prospects of Brazil.
According to ECLAC, Latin America had received a total FDI of 88.7 billion dollars in the first half of 2015. Chile was the third largest destination of FDI with 8.2 billion, followed by Colombia-6.8 billion, Argentina-5.3 billion and Peru-4 billion.
For Indian companies with global ambitions, this is an ideal time for investment and to build on the cumulative Indian investment of 15 billion dollars in Latin America. Details in http://www.businesswithlatinamerica.com/.  The asset prices in the region are low due to depreciation of currencies against the dollar, the fall in prices of commodities and the low growth of the region. But this is a cyclical downturn caused mainly by the Chinese slow down and decline in domestic consumption. The region has healthy macroeconomic fundamentals (with a few exceptions, of course) and the policy makers have learnt from past mistakes and misadventures. Latin America has done better than all the other regions in reducing poverty and inequality in the last decade. Democracies have become stronger with the rise in middle class which has become more assertive in holding the politicians more accountable.
Indian energy companies could expand investment in the oil sector of Brazil, Mexico and Colombia. They could enter the shale sector of Argentina, which has the third largest reserves in the world and  has just started producing oil and gas from shale. Indian companies could invest in mining in the region where mines are cheaper these days due to the low price and demand for metals at this time. There are also a number of manufacturing plants available for acquisition across the region from ethanol plants to pharmaceuticals.
The outgoing FDI from Latin America in Jan-June 2015 was 30.66 billion of which Brazil accounted for 13 billion, Chile-7.8 billion, Mexico-7.3 billion and Colombia-1.4 billion.
The Latin Americans have invested about 1.5 billion dollars in India in steel, auto parts and even cola drinks. Carlos Slim, the Mexican billionaire, who reclaimed his position as the world's richest person in 2014 with net worth of 79 billion dollars had visited India in May this year, on his first business exploratory trip. There are a number of other big Latin American investors and pension funds for whom the growing Indian market is an attraction. It is time that DIPP include the Latin American investors too as targets in their global FDI campaign.

Tuesday, October 13, 2015

Latin America faces GDP contraction in 2015

Latin America is projected suffer a negative growth of –0.3% in 2015 and resume marginal growth of 0.7% in 2016, according to the 5 October 2015 estimates of ECLAC, the UN Economic Commission for Latin America and Caribbean.
Among the main factors behind the growth drop are a weak internal demand; a global environment marked by a low growth of the developed world; an important deceleration in emerging economies, especially China; the strengthening of the dollar and a growing volatility in financial markets; and an important fall in primary goods prices
South America is expected to contract by –1.6% while Mexico and Central America would grow by 2.6%.
Brazil's GDP is projected to contract by 2.8% and that of Venezuela by 6.7%. Both the countries are likely to continue the negative growth in 2016 too with Brazil shrinking by –1% and Venezuela by –7%.
Mexico's growth projection for 2015 is 2.2%, Argentina's 1.6%,Colombia's 2.9%, Peru 2.7% and Chile 2.1%.
Panama will have the highest growth at 5.8%, followed by Dominican Republic at 5.6% and Bolivia at 4.4%
The Indian business need not be discouraged by this lower growth. There are many overall macroeconomic indicators of the region which are positive. The economies of the region have developed resilience and have the capacity to accelerate growth in the coming years. India's trade with the region continues on its trajectory of growth. It can reach 100 billion dollars by 2020 from the 43 billion in 2014-15. The good news is that the Latin Americans have started paying more attention to India after the slow down of the Chinese market.

Wednesday, September 02, 2015

Latin American countries closer to India in trade than some traditional trade partners

Latin America.. hmm … too far. This is a typical dismissing comment of some Indian businessmen who have the old mindset that distance is a barrier for trade. They also presume that Latin American countries are less important for India's trade in comparison to European countries and the traditional trade partners. Here is a surprise for them. India does more trade with the distant Latin American countries than with some of the neighboring countries as well as European and Asian countries considered as close trading partners. This is evident from the following 2014-15 (April-March) statistics of the Indian Ministry of Commerce.
India's trade with Venezuela ( $12 .24 billion ) and Brazil ( $11.36 bn) in 2014-15 were more than her trade with close neighbors Srilanka ($7.4 bn), Bangladesh ( $ 7 bn), Thailand ($9.3 bn) and Vietnam ($9.2 bn) as well as with traditional partners France ( $9.4 bn) and Netherlands ( $8.7 bn) 

India had more trade with Mexico ($ 6.25 bn) than with Nepal ($ 5.2 bn), Egypt ($ 4.7 bn) Canada ($5.9 bn), Italy ( $5 bn), Spain ( $ 5.1 bn) and Israel ($5.6 bn) 

Trade with Chile ($ 3.65 bn) and Colombia ($ 3.24 bn) were more than with Ukraine ( $2.58 bn) and Sweden ( $ 2.48 bn)
Argentina accounted for more trade with India ($ 2.45 bn) than Myanmar ($ 2 bn)

Trade with Peru ($ 1.41 bn) was more than with Ireland ( $1.29 bn)
Ecuador ($ 1.29 bn) had more trade with India than Portugal ( $ 0.78 bn), Austria ($1.17 bn), Norway ($ 1.26 bn), Denmark ($1.18 bn), Kazhakstan ( $ 0.95 bn), Morocco ( $1.24 bn) and Newzealand ( $ 0.91 bn)
Trade with Dominican Republic ($ 432 m) was more than with Bulgaria ($370 m)

India's import of crude oil from the far off Venezuela in 2014-15 was $12 bn while it was just $ 11bn from Kuwait and $ $ 11.4 bn from UAE, which are closer sources.
India exported more to Brazil ( $5.96 bn) than to Japan ( $5.4 bn), Republic of Korea ($4.6 bn), Malaysia ($5.8 bn), Indonesia ( $ 4bn), Thailand ( $ 3.4 bn),  Nepal ( $ 4.5 bn), France( $4.9 bn), Italy($5 bn), Spain ( $3.1), Turkey ( $ 5.3 bn), Egypt ( 3 bn), and South Africa ( $ 5.3 bn)
India's exports to Mexico ($ 2.8 bn ) exceeed those to Russia ( $ 2 bn), Australia ( 2.78 bn) and Canada ( $ 2.2 bn)
India exported more to Colombia ($ 1.1 bn) than to Switzerland ( $1.06 bn) 
Peru was a more important destination ( $ 820 million) for Indian exports than Myanmar ( $ 773 m), Bhutan ( $ 337 m), Sweden ( $ 740 m), Portugal ( $ 636 m), Ireland ( $ 759 m), Austria ( $ 363 m), Ethiopia ( $ 783 m) and many Central and East European, Central Asian and some European Union countries.
Exports to Chile ( $566 m) were more than exports to Austria ( $ 363 m), Greece ( $361m), and Czech republic ( $ 328 m)
Exports to Panama ($ 302 m) and Guatemala ( $ 229 m) were more than exports to Cambodia ( $143 m), Maldives ( $152 m) and  European Union countries such as Slovak Republic ( $ 104 m), Slovenia ($ 212 m), the Baltic countries and some Central Asian countries such as Armenia ( $ 91 m), Azerbaijan ( $ 110 m), Belarus ( $ 48 m) and Georgia ( $ 86 m)

It is interesting to note that India exported vehicles worth $ 1.8 billion to Latin America. Mexico is the top destination for India's car exports which reached $ 780 million in 2014-15. Motorcycle exports to Colombia were $270 m. 
Latin America is a large market of 582 million people, GDP of 6.2 trillion dollars and average per capita income of $11,000.
India's trade of $ 43 bn in 2014-15 has the potential to reach $ 100 bn. India's exports of $ 13 bn could be doubled by 2020 if the Indian exporters target the region seriously and systematically. 

Monday, August 03, 2015

India's vehicle exports to Latin America were an impressive 1.82 billion dollars in 2014-15

India' s exports of vehicles including two and three wheelers to Latin America were an impressive 1.82 billion dollars in 2014-15 ( April to March). The cars accounted for 1.29 billion dollars, motorcycles- 460 million dollars and three wheelers- 63 million dollars.

Mexico is the leading destination for exports of cars at 788 million dollars. Exports to Chile were 117 m, Colombia-110 m, Peru-112 m, Uruguay-43 m and Central America- 80 m

Latin America accounted for 23 % of the total car exports of India which were 5.643 billion in 2014-15.

Colombia is the top destination for two wheeler exports at 273 million dollars. Exports to Mexico were 63 m, Guatemala-41 m, Peru-35 m and Argentina-27 m. Exports to Central America as a whole were 66 million dollars.
Latin America's share of India's total exports of motorcycles was 23% in 2014-15.

Peru is the leading destination for the three wheeler exports at 35 million dollars. Other export markets include Mexico, Colombia and Central America.

Bajaj, Hero and TVS have successfully established their brands in the region. Pulsar of Bajaj is said to be the number one sports motorbike brand in some countries of the region. It is creditable that Bajaj is the market leader in motor cycles in Colombia and Central America. Given the tough competition given by low-cost motorcycles from China and the established Japanese brands, the Indian companies have to be commended for their export performance and brand establishment in Latin America.

As millions of people come out of poverty line ( thanks to the pro-poor government policies such as conditional cash transfers ), there will be more demand for two and three wheelers in the region.

Brazil, Argentina and Venezuela remain virgin markets for Indian vehicle exporters. Import restriction is the main reason. When their economies recover in the next few years, there is significant scope for Indian exporters.

Although Mexico and Brazil are big hubs of automobile manufacturing, some multinational companies find it cheaper to produce cars in India and export them to Latin America. 

India's exports of vehicles have been increasing rapidly in recent years. For example, India's export of cars to Mexico increased by 46% and to Colombia by 33% from 2013-14 to 2014-15.  There is scope for India to increase the vehicle exports to 4 billion dollars by 2020 if the exporters keep up their marketing campaign. The Government of India could facilitate by revitalizing the Focus-LAC promotion programme.

Thursday, July 30, 2015

Latin America is projected to post lower growth in 2015

Latin America is projected to post a lower GDP growth of 0.5% in 2015, according to the Economic Survey released by ECLAC (Economic Commission for Latin America and caribbean of the UN) on 29 July. This is the lowest growth since the decline started in 2011 after the boom period of 2003-10.
Panama is expected to have the highest growth of 6% followed by Dominican Republic and Nicaragua with 4.8% each and Bolivia with 4.5%. Mexico's growth projection is 2.4%, Colombia's 3.4%, Argentina 0.5% Peru 3.9% and Chile 2.5%. Brazil is likely to face a GDP contraction of -1.5% and Venezuela –5.5%. 
South America is expected to contract by 0.4% but Central America and Mexico are likely to expand by 2.7%. South America which is more dependent on commodity exports has suffered mainly due to the slow down of the Chinese economy. On the other hand, Mexico and Central America which are aligned more to the US market have benefitted from the increase in the growth of US. 
The main reasons for the low growth are the fall in demand and prices of commodities, the slowdown in domestic consumption, investment and manufacturing. 

The growth rate in 2015 has come down from 1.1% in 2014 and it is the lowest since the decline started after its peak of 5% in 2010. This corresponds to the trend of fall in demand and prices of commodities including oil, metals and agroproducts since 2011.

The total GDP of the 20 Latin American countries reached 6.172 trillion dollars in 2014 doubling from 3.2 trillion in 2006.

Average inflation of LAC region reached a decade-high level of 9.5% in 2014 from 7.6% in 2013. The lowest rate was 4.6% in 2009. Venezuela and Argentina are the only countries with double digit inflation. Venezuela had the highest inflation of 68.5% in the region. Even Brazil is struggling with inflation which was 8.5% in May 2015.

Despite the low growth, the unemployment rate in the LAC region reached its lowest level of 6% in 2014 declining from 8.1 % in 2009. It has been under 7% since 2011.

The total external debt of Latin America has increased to 1.385 trillion dollars in 2014 doubling from 738 billion in 2006. However, the ratio of gross external debt to GDP in 2014 was a manageable 24.5%. This is way below the situation of many developed countries including US and Germany.

The exports of the region fell in 2014 to 1.083 trillion dollars from 1.116 trillion in 2013. The imports have also gone down to 1.091 trillion in 2015 from 1.104 trillion in 2014.
The trend of fall in trade is likely to persist in 2015 too.

Net Foreign Direct Investment (FDI) of Latin America in 2014 was 135.43 billion dollars, an impressive fourfold increase from just 30.96 billon in 2006. 
Gross international reserves of Latin America have reached a high of 828.96 billion in May 2015, having steadily increased from 639.79 billion in 2006. This has given extra strength and cushion to the policy makers to be prepared for external shocks. Venezuela has however seen dwindling of its reserves to 17 billion, its lowest level in the last decade.
The Indian business need not be discouraged by the lower growth of the region. There are many  overall macroeconomic indicators of the region which are positive. The economies of the region have developed resilience and have the capacity to accelerate growth in the coming years. India's trade with the region continues on its trajectory of growth.  It can reach 100 billion dollars by 2020 from 43 billion in 2014-15. The good news is that the Latin Americans have started paying more attention to India after the slow down of the Chinese market. 

Note:  Latin America consists of  20 Latin American countries while LAC includes the 13 Caribbean countries also. Full report of ECLAC http://repositorio.cepal.org/bitstream/handle/11362/38715/1500453_en.pdf?sequence=23

Monday, July 20, 2015

Latin America is getting closer to India in trade

Mention Latin America, many Indian businessmen dismiss it as distant and marginal for India's trade. Here is an eye opener for this old mindset. In 2014-15 (April to March) India's trade with Venezuela (12.24 billion dollars) and Brazil (11.36 billion dollars) were more than its trade with France (9.37 billion). India's exports to Brazil last year were more (5.96 bn) than the exports to France (4.96 bn), Japan (5.38 bn), Malaysia (5.81 bn), South Africa (5.29), Indonesia (4.04 bn) and Republic of Korea (4.6 bn) which are considered as close trading partners of India. Brazil has emerged as the ninth largest global destination of India's exports.

Venezuela supplied more crude oil (11.85 billion dollars) to India than United Arab Emirates (10.93 bn ) and Kuwait ( 11.48 bn) in 2014-15. Venezuela was the fourth largest supplier of crude to India after Saudi Arabia, Iraq and Nigeria. Latin America (Mexico, Colombia, Brazil and Ecuador besides Venezuela) has come to account for (17.96 bn) 15% of India's total crude imports. 

India's trade with Latin America was 43 billion dollars in 2014-15 of which exports were 13.74 billion and imports 29.26 billion. Venzuela was the largest trading partner in the region with 12.24 billion dollars, followed by Brazil- 11.36 billion, Mexico- 6.26 bn, Chile-3.65 bn, Colombia-3.24 bn, Argentina- 2.45 bn, Peru 1.41 bn and Ecuador 1.29 bn.
Among the regional economic groupings, Mercosur (Brazil, Argentina, Uruguay, Paraguay and Venezuela) was India's largest trading partner with 25 billion dollars, while the Pacific Alliance ( Mexico, Colombia, Peru and Chile) had a share of 14 billion dollars.
Main exports of India to the region were: diesel- 3.25 bn (to Brazil), vehicles and autoparts- 2.47 bn, pharmaceuticals-726 m, organic chemicals- 824 m, equipments and machinery-700 m, garments-654 m, synthetic yarn and fibres-573 m, iron and steel products-455 m, chemical products- 470 m and cotton-406 m.
After Brazil and Mexico, the third largest export destination was Colombia (1.1 bn), followed by Peru (820 m), Chile (566 m) and Argentina (460 m).
It is an encouraging news that India's exports to Central America reached almost a billion dollars in 2014-15. This region consisting of Guatemala, Costa Rica, Panama, El Salvador, Honduras and Nicaragua deserves more attention from the Indian exporters. Dominican Republic, a spanish-speaking Caribbean country with a population of ten million accounted for 141 m exports and 291m imports of India. 

After crude oil, the other major imports from the region are minerals (mainly copper from Chile) worth 3.48 bn, edible oil (mostly soy oil from Argentina)- 2.08 bn, gold and precious stones- 1.13 bn, raw sugar- 596 m (from Brazil) and wood- 350 m besides chemicals, machinery and iron and steel items.

Latin America is a large market with a population of 580 million people, six trillion dollars of GDP and global trade of over two trillion dollars. The consumer segment of the population is growing thanks to the successful poverty reduction programmes of most governments. Over sixty million have come out of poverty line in the last decade. Although the GDP growth of the region is projected to be less than one percent in 2015, the region has stronger macroeconomic fundamentals with high foreign exchange reserves, low external debt and inflation, stronger resilience and potential for higher growth. The democracies of the region have become better institutionalized and more mature. The policy makers follow balanced pragmatic mix of pro-poor and pro-business policies. Exceptions are Venezuela and Argentina which have recontracted the old diseases of high inflation and unstable exchange rates among other problems.

India's trade with the region has the potential to reach 100 billion dollars by 2020. The Indian and Latin American businessmen are still in the process of discovering synergies and complementarities between the markets of the two sides. 

Given the large untapped potential of the region, the Commerce Ministry of India could revitalize its Focus-LAC programme which had helped in the opening of the region's market for Indian exports in the late nineties. India could consider signing FTA/ PTA with Mexico, Colombia and Peru which have signed FTAs with many countries. India should expedite the deepening and widening of the PTA with Mercosur and Chile.The Indian government could increase the lines of credit to boost its exports to the region. India's cumulative credit to the region is just under 300 million dollars in contrast to the 120 billion dollars extended by China. It would be useful for India to become a member of the Inter-American Development Bank so that Indian companies can participate in their projects in the region. A major visit to the region by Prime Minister Modi would  highlight the importance of the region to Indian business. The Chinese Presidents have been regularly visiting the region every year. 

The forthcoming annual India-Latin America Business Conclave being organized by the Confederation of Indian Industries (CII) on 8-9 October provides an occasion for the Indian government to announce some major policy initiatives.

Monday, June 22, 2015

Brazil is still the largest recipient of FDI in Latin America

Here is a cheerful news for those sickened by the gloom and doom talk of Cassandras about Brazil in recent years. Brazil received 62.5 billion dollars of Foreign Direct Investment (FDI) in 2014 and continued to be the top recipient of FDI in the region according to the 27 May report of the Economic Commission for Latin American and Caribbean(ECLAC). Brazil got 40% of the total FDI of 153 billion received by Latin America in 2014 and almost three times the FDI received by Mexico, currently the darling of marketeers. 
FDI received by Brazil is more than twice the FDI flow into India which was 29 billion dollars in the fiscal 2014-15. 
Other major Latin American recipients of FDI in 2014 were Mexico-23 billion, Chile-22 bn, Colombia-16 bn, Peru-6.7 bn and Argentina- 6.6 bn. Central America got 10.5 bn of which Panama accounted for 4.7 bn
Services sector received the largest share of FDI followed by manufacture, mining, infrastructure and renewable energy.
Netherlands was the largest investor in Latin America in 2014 accounting for 20% share of the FDI in the region, followed by USA-17% and Spain-10%. 
Not surprisingly, even ECLAC could not find actual figures of FDI from China, since the Chinese activities are non-transparent. ECLAC estimates that the Chinese investment in 2014 might have been 10 billion and has guessed that China's annual FDI in Latin America could have been around 10 billion dollars from 2010 to 2013. The Chinese Premier, who has just made a tour of Brazil, Colombia, Peru and Chile, has announced billions of dollars of credit for investment including in railways and infrastructure
FDI received by Latin America has decreased by 16% in 2014 from 2013 when it reached a record of 183 billion. ECLAC predicts further decline of 10% in 2015. Falling prices of oil and metals are the main reason for the projected decrease in FDI
Outward FDI of Latin America was 30 billion dollars in 2014. Chile was the largest foreign investor with 12 billion dollars, followed by Mexico-7.6 bn, Colombia-3.8 bn and Argentina –2.1 bn. Most of the outward FDI has gone into Latin America itself.
There has been no big Indian investment in Latin America in 2014. But there has been a number of small investments and announcements in areas such as two wheelers and auto parts. Nor was there any significant Latin America investment in India last year. 2015 might see some large investment by Carlos Slim, the Mexican billionaire ( the second richest person in the world, according to Forbes) who visited India last month to explore the opportunities offered by the large and fast growing market of India.
Although the Brazilian economy has slowed down and the country is mired in corruption scandals, this is a good time for Indian investment in Brazil, since the prices of assets are low and the currency is weak. Argentina, with more difficulties, offers even better opportunities. In any case, these two countries are certain to recover next year and get back on the path of growth and prosperity. The decline in prices of minerals and commodities have made mining and agribusiness assets cheaper. The opening of the Mexican energy sector to private sector and the emergence of Mexico as a 'manufacturing hub for the Americas' offer new opportunities for Indian investors. The Indian energy companies, especially, should seriously look at acquisition of oil fields in Brazil, Mexico, Colombia and shale reserves in Argentina. It is timely that an Indian delegation of oil companies lead by the Minister of Petroleum has just visited Mexico and Colombia. 

Thursday, June 11, 2015

The rise and fall of Petrobras

Petrobras, the Brazilian national oil company raised a record $72.8 billion in the IPO in September 2010. This was the largest amount raised by any company in the world till then. With a market value of $214 billion, Petrobras had become the fourth biggest company in the world.  
After the IPO event, a beaming and proud President Lula said ¨It wasn’t in Frankfurt, it wasn’t in New York, it was in our Sao Paulo exchange that we carried out the biggest capitalization in the history of capitalism.” The shares of the company are also traded in NYSE besides in Sao Paulo.
Petrobras's investment plan of $220. 6 billion in the period 2014-18 is one of the largest corporate investment plans. The company has assets and operations in 18 countries around the world and is a global leader in deep sea oil production.
It was the bluest of blue chips in the national stock exchange and its bonds were the benchmark for other Brazilian companies.  It was also the largest patron of culture and sports and  in the country. Petrobras became a crown jewel of the Brazilian industry and its rise was seen as emblematic of the emergence of a New Brazil. 
Petrobras even made it to the 2008 list of top 50 companies in the world for high transparency levels, compiled by Transparency International which monitors global corruption.

It was a remarkable achievement for a company which was founded as a government undertaking in 1953 without any meaningful oil reserves or expertise. In the beginning, Petrobras had the monopoly in the national hydrocarbons sector but in 1997 the government allowed entry of private sector. While retaining 64% of the controlling shares, the government partially privatized Petrobras by selling shares to national and foreign investors. The listing in NYSE helped Petrobras to raise funds and enhance its management and financial information systems to the best practices in the developed countries. 
Today its reputation remains shattered after the corruption scandal which has been unfolding since March 2014. The prosecutors have found 800 million dollars of bribe shared between Petrobras executives, private contractors and politicians. Assets and contracts of the firm are found to have been inflated. The auditors had initially refused to certify its balance sheet in the absence of quantification of the losses caused by the scam. 
Over thirty executives of Petrobras and its contractors have been indicted and investigations have been initiated against 54 politicians and two dozen top private building and engineering firms.  A senior Petrobras executive Pedro Barusco, who has turned approver, has agreed to return about 100 million dollars from his Swiss bank accounts.  Of this, 57 million dollars has already been received. Some US law firms have filed class action suits on behalf of minority share holders. The US Security and Exchanges Commission has started an investigation. 
The CEO of Petrobras along with five directors were forced to resign in Februaryand a new CEO has just been appointed. The share value of the company has come down by seventy percent. This is, of course, mainly due to the drastic decline in oil prices. Since the company has lost its investment grade rating, it will find it difficult and costly to raise finance from the global market and service its large debt of 137 billion dollars. The construction and engineering firms involved in the scandal have also faced credit squeeze and financial problems. This means that the ongoing projects of Petrobras as well as the country's infrastuctural projects will also face delays and uncertainties.
The fall of Petrobras is now seen as reflecting the fall of Brazil itself from its go-go growth years of 2003 to 2010 when the country looked as though it had arrived on the global stage. But now Brazil is facing a combination of political uncertainties, economic recession, water and power shortages besides the corruption scandal.
What caused this disaster for a company which was earlier considered as a role model for other national oil companies in the developing world?
The first reason is corruption in the Brazilian society. Petrobras could not escape the national disease for long. While the company was relatively clean in the past, the executives and politicians became greedy after seeing the large number of multibillion dollar contracts. 
Second, the company became too big and diverse for control. It has gone beyond its core competence and has ventured into petrochemicals, fertilizers, biofuels, electricity and wind energy. This massive and diverse structure lent itself to malpractices by crooked executives.
Third, hubris. In the euphoria of success of discovery of large pre-salt fields and the largest IPO, the top management and the government got carried away and did not pay attention to internal details of the company.
Fourth, the government has caused considerable loss to the company by forcing it to sell petrol at prices much below the market prices. 
Fifth- the incompetence of CEOs, the Board and the auditors who failed to detect and stop the corrupt practices. Or they found it difficult to stop the corrupt executives who were too powerful with political connections.
However, Petrobras has the potential to recover from the current mess. It remains as one of the largest oil producers in the world with ample reserves to increase production to produce 5 million bpd in the next decade doubling its current output.  
Petrobras is a research and innovation driven company. It earmarks one percent of its gross receipts for R and D. It has created world records in deep-sea production and obtained many patents by smart collaboration with suppliers and subcontractors besides in-house development. 
The government cannot afford to let Petrobras fail. It is the largest tax payer and the largest corporate contributor to GDP. 
The company can exit from loss making operations and sell some assets to recoup finances. But the full financial recovery of the company depends on the oil prices. If the prevailing low prices persist, recovery will take a longer time. 
How does Petrobras compares to India's oil companies?  Petrobras was established around the same time as ONGC and IOC were formed in India. Thanks to Petrobras's  relentless, aggressive and innovative search for oil through the deepest parts of the sea, Brazil became self reliant in oil in 2006 and has now become an exporter too. Besides discovering oil, Petrobras has helped in the country's strategic goal to reduce dependence on fossil fuel and increase the share of renewable energy. It enthusiastically took to ethanol, bio-diesel and other biofuels and collaborated with car companies and ethanol producers to make the pioneering 'fuel ethanol' programme of the country a success. Thanks to this team spirit of the company, Brazil has reduced consumption of oil, contained pollution and increased the income of sugar cane farmers and strengthened the domestic sugar-alcohol industry. 

But India is becoming more and more dependent on imports of oil. ONGC has not been as aggressive and innovative in exploration as Petrobras. The Indian public sector oil marketing companies keep merrily increasing the imports. More imports, more consumption and higher prices of oil mean more revenue for them. They do not align their business model to the strategic energy policy of the country to reduce imports and generate more energy through renewable sources and reduce pollution. They do not play for Team India in energy and are stuck in their own narrow silos of earnings without a larger vision.

The Petrobras scandal is not likely to adversely affect  the investment by OVL and other Indian companies in consortium with Petrobras in the Brazilian oil fields. India has been importing crude from Brazil and likely to increase the imports in the future. Reliance has been exporting diesel to Brazil whose refining capacity is inadequate. The diesel exports are likely to go up since the new refinery projects of Petrobras have been hit and delayed by the corruption scandal.