Latin America and the financial crisis - Article by Jorge Heine

Here is the Article of Prof Jorge Heine published in Hindu newspaper of 4 feb 09.

Jorge Heine holds the Chair in Global Governance at the Balsillie School of International Affairs and is a Distinguished Fellow at the Centre for International Governance Innovation in Waterloo, Ontario. He serves currently as Vice-President of the International Political Science Association.

He was earlier the Ambassor of Chile to India. He is the top India expert from Latin America

Latin America and the financial crisis

For the first time in a century, Latin America has managed to at least partially “cushion” itself from the seismic waves of economic turmoil in the U.S. and Europe.
The United Kingdom will face a 2.8 per cent negative growth rate in 2009, the worst economic performance since World War II (in fact, the British economy has already shrunk by 2.7 per cent since last April). In Spain, unemployment has reached 14 per cent, and the government is offering a “golden handshake” to recent immigrants to leave the country for three years. Ireland, so often held up as an example for the developing world because of its relentless tax-cut ting, is in dire straits, and Iceland is bankrupt.
In the United States, Dow Jones slipped below 8000 in the very week President Barack Obama took office, the automobile industry continues its downward spiral (Toyota has already displaced GM as the world’s largest automaker) and in one day in January, some leading companies announced shedding 72,000 jobs. In California, unemployment is just below 10 per cent, and the State faces a staggering deficit. In Canada, which lost 34,000 in December, Ontario, the nation’s industrial heartland (40 per cent of Canada’s GDP), is in trouble and looking for ways to renegotiate existing financial arrangements with Ottawa.
Projections indicate that the developed world will have a negative growth in 2009. What about Latin America?
The standard line is that “when the United States sneezes, Latin America catches a cold.” And that was exactly what happened in the past. The Great Depression had a devastating effect on Latin America — so much so that in the late 1930s and early 1940s, it begot the import-substitution-industrialisation (ISI) strategy, as governments realised that in times of global slowdowns they could not be left at the mercy of having enough hard currency to buy essential goods from the industrialised North; they needed some installed capacity of their own.
Something similar happened in the early 1980s when rising interest rates in the U.S. pushed the region into its worst debt crisis and a “lost decade,” in which countries like Chile saw 14 per cent negative growth in 1982 and unemployment rates of 30 to 35 per cent for several years. According to the conventional wisdom, Latin American economies should be in the doldrums, with the Northern recessionary waves hitting Southern shores with a multiplier effect leading to an even deeper economic downturn there.
Yet, this isn’t happening. Yes, this is a global recession and the region has not been spared. Growth will be cut in half; commodity prices have dropped and so have export volumes, thus affecting regional exports which reached a record $902 billion in 2008. International credit has tightened, and some projected FDI is not materialising. Remittances to the region, which also reached a record ($67 billion) in 2008, will take a hit.
After six consecutive years of over 4 per cent economic growth rates, the region is projected to grow 1.9 per cent in 2009. Unemployment, at 7.5 per cent in 2008, is projected to rise to between 7.8 and 8.1 per cent. Whatever else it may be, this is not a recession.
Countries like Peru, the star economic performer over the past few years, may grow as much as 5 per cent in 2009, with smaller economies like Cuba, Panama and Uruguay clocking 4 per cent or more. And the larger economies like Argentina (2.6 per cent), Brazil (2.1 per cent), Chile (2 per cent) and Venezuela (3 per cent) should perform quite respectably. In fact, South America as a whole, according to ECLAC, will grow at 2.4 per cent. It is Mexico (0.5 per cent) and many Central American and Caribbean nations that will be especially affected by the drop in tourism and in remittances and by lower demand in the U.S. market.
This does not mean that if the financial meltdown continues to wreak havoc on the North and the economic wreckage is extended over time, it will not eventually have a greater impact in Latin America. My point is a different one. For the first time in a century, Latin America has managed, if not totally, to “decouple,” at least to partially “cushion” itself from the seismic waves of economic turmoil in the U.S. and Europe, markets on which it traditionally depended. The fact that several countries from the region (Brazil, Mexico and Colombia) are placing bonds in international markets in these difficult times speaks for itself.
That this should happen at a time when eight of ten countries in South America are ruled by Left or Left-of-Centre parties is ironic. For much of this decade, we have repeatedly been told how Latin America, by veering towards the Left, was once again “missing the boat” on economic development, and how it risked being caught in a time warp, left behind by the twin imperatives of globalisation and economic interdependence, beholden to outmoded ideologies at a time of the end of ideology.
Instead of dollarising their economies (as Ecuador did in 2000, much to its subsequent chagrin) and opening themselves up to whatever Washington demanded, many countries (led by Brazil) preferred a different path, one that turned out to be not so misguided after all. If anything, many Latin American governments seem to have shown a better understanding of the perils of unfettered globalisation and “casino capitalism” than several of their counterparts in the North.
What does the Latin American Left stand for today and what has it done in government?
Far from the “populism” so much of the Western media labels it with, the modern Left in the region today embodies a set of beliefs very different from the mid-20th century populist movements associated with this term.
It is fully democratic, believing in free and fair elections, having strongly opposed the military regimes supported by the Right in the 1970s and 1980s; it is secular, standing apart from the integrista Catholicism of so many conservative forces in the region; it is committed to greater social equality in a region with the dubious distinction of having the highest economic inequality; it believes in diversifying trading and investment partners, as well as the number and variety of export products, thus moving away from the econom’a monoexportadora syndrome of the past; finally, it is fiscally responsible — starting from the premise that only by having macroeconomic equilibria (that is, if the government balances the books) and tackling inflation will you be able to make progress. Prudent economic policies combined with aggressive social programmes — like Brazil’s Bolsa de Familia or Chile‘s recent pension reform — are at the heart of this approach.
It is these principles and the policies that flow from them that have allowed the countries in the region to bring down their foreign debt from 37 per cent of the GDP in 2000 to 20 per cent today. They have permitted Brazil to start a $48-billion infrastructure programme, and Chile to launch a $4-billion stimulus package to deal with the global slowdown.
But the region being partially cushioned from the worst effects of the latter is also due to something else. For large export-oriented economies today, diversifying their export markets means targeting Asia. This is what South America’s leading economies have done. China, Japan, South Korea and India are the prize markets. For Chile, in 2007, China was its number one export market (displacing the U.S.), Japan was number three, South Korea six and India 10 (displacing Germany). Asia received 43 per cent of Chile’s exports that year; not surprisingly, a dip in the U.S. market, which gets a little over 20 per cent of Chilean exports, is not a major blow to its economy. Though Chile, because of its Asia-Pacific orientation, is a bit of an extreme case, for Argentina, Brazil and Peru the pattern is not too different.
In this context, a critical question is whether the “Asian giants,” China and India, will also be dragged down by the recession in North America and Western Europe. Initial indications are that they have already been, with their growth projections going down from double digits to 6-7 per cent. A second question is to what extent this growth will be export- or internal demand-driven. China’s $ 600-billion stimulus package is designed to pump up domestic demand in an economy that until now has been largely driven by exports. India, on the other hand, has based its high growth mostly on its internal market.
These are, make no mistake about it, perilous times, and the treacherous waters of the world economy need to be navigated with a steady compass. Nonetheless, it is refreshing to see, for once, that Latin America may well grow its way through a global recession, as opposed to being once again the region most seriously affected by it.

Brazil emerging as a major oil producer

Petrobras, the national oil company of Brazil has announced( January 2009) plans for investment of 174 billion dollars in the period 2009-13 in exploration and production of its newly discovered oil fields. The scale of investment is a confirmation of the emerging new status of Brazil as a major oil producer in the region and in the world.

production in 2008 was 2.18 million barrels per day and the target is 3.31 million by 2013 and 5.1 million by 2020.

Oil reserves in the new fields discovered in 2007 are said to be 100 billion barrels. The current level of proven reserves is 14 billion barrels.

This development is of direct interest to India and Indian business. We have been importing crude oil from Brazil for the last 4-5 years regularly.This can increase in the years to come and Brazil could be a regular source in Latin America besides venezuela, mexico and ecuador.

ONGC Videsh Ltd ( OVL) has already acquired some oil concessions in Brazil and has invested around a billion dollars.

Brazil has one of the best technologies and expertise for deep sea exploration and production.

Reliance which has been importing crude oil from Brazil has also been exporting diesel oil to Brazil regularly. In 2008 their exports of diesel oil was around 1.8 billion dollars, half of our total exports to Brazil last year. This is likey to continue for some more years since Brazilian refining capacity does not yet match its crude production or requirement of refined products.

More immediately, the massive Brazilian investment in the oil sector offers opportunities for our companies to supply equipments and machinery to the new projects.

In 2008, Latin American growth slowed down but not India´s exports

According to the December 2008 report of ECLAC ( Economic Commission for LatAmerica and Caribbean) the GDP growth of Latin America and Caribbean in 2008 is estimated as 4.6%. This makes it as the sixth consecutive year of growth for the region, a record in the last forty years. From 2003 to 2007, the region grew by an annual average of 5%. The growth was combined with reduction in poverty, increase in employment and surplus of fiscal and external accounts in general.

Uruguay had the highest GDP growth of 11.5 % in Latin America. Peru was the number two with 9.4% followed by Panama with 9.2%. Brazil, the largest market of the region grew by 5.9% while Mexico the second largest market grew by 1.8% and Argentina the third largest market grew by 7%.

In 2009, GDP growth for the region is projected to decline to 1.9%, following the global crisis and slowdown of economies. The highest growth projected is 5% for Peru, followed by Panama at 4.5% and Uruguay 4%. The lowest growth predicted is 0.5% for Mexico. Brazil growth is forecast at 2.1% and that of Argentina 2.6%.

Although the region is better prepared than before to handle external shocks, the global crisis and slowdown will drive down export volumes and prices, remittances, foreign direct investment and the demand for tourism services. In addition, external financing will be more expensive and will be more difficult to obtain for the countries of the region.

Average inflation of the region is expected to go down to 6% in 2009 from 8.5% in 2008.

According to Latin Business Chronicle estimate, exports of the region in 2008 grew by 18% to 902 billion dollars. Imports increased by 23% to 857 billion dollars in 2008. Service exports went up by 18% to 116 billion dollars while imports increased by 20% to 145 billion.

India´s exports to the region had increased by 25% in 2008. Brazil remained as the top destination with 2.7 billion dollars. Mexico maintained its second position with 1012 million dollars in Jan- Sept, followed by Colombia with 452 million dollars in Jan-Oct, Peru with 478 million in Jan-Nov and Argentina with 386 million in Jan-November.

Latin America has withstood the Western financial crisis with relatively modest impact

One would have expected the Latin American economies to come crashing down as a fall-out of the historical crisis in USA and Europe. In the past, Latin America used to sneeze when USA caught a cold. Not any longer. Not a single bank or financial instituition went bust in the region while USA and Europe faced collapse of companies and banks with turnover of more than that of the GDP of many of the Latin American countries. None of the Latin American countries have gone to IMF for rescue, even as some East Europen countries have done so. While Iceland, situated far from the epicenter (USA) of the financial earthquake collapsed and had to seek rescue from Russia, none of the Latin American countries, which are in the proximity of the earthquake zone have suffered serious damage. There has been no panic summit meetings or rescue packages or nationalization of banks in Latin America.

In 2009, the US economy is projected to contract 0.7 % and the Euro economy by 0.5%. The advanced economies will suffer recession in 2009. But in Latin America, the growth story is going to continue, but at a lesser pace.

Welcome to the New Latin America! The region has withstood the external shock and surprised the stereotypes.

According to the October report of ECLAC (UN Economic Commission for Latin America and Caribbean),

¨ The economic slowdown and financial crisis in the United States will have a relatively modest impact on the Latin America and the Caribbean region in 2008, except for its exports. Compared to previous shocks in the United States economy and the world at large, Latin America and the Caribbean(LAC) is much less vulnerable than in the past, with a current account surplus, sounder public finances, a lower level and better profiles of public and external debt, and larger international financial reserves. Considering the severity of the global shocks, LAC economies are, on average, weathering the crisis significantly better than in the past.
The LAC region is relatively well placed to withstand a slowdown in the United States and the resulting direct and indirect effects on its exports. The region also enjoys strong fiscal and debt positions that may discourage drastic shifts in financial flows. Latin America is better prepared because of the progress it has made in macroeconomic management.¨


What does the IMF say?

This is even more important because of the love-hate relationship between the instituition and many of the region´s left-leaning governments and intellectuals. According to the October report of IMF, ¨the LAC region is expected to deal with the current global shocks better than in previous crises. This reflects the progress many countries in the region have made in improving their macroeconomic fundamentals over the past decade. The substantial buildup of international reserves, stronger fiscal positions, more credible monetary policy frameworks and improved structure of public debt have made Latin America more robust to external shocks.
The region is better placed than in the past to absorb the sharp slowdown foreseen in global growth. The high level of reserves coupled with strong banking systems, lower public debt levels, reduced public sector financing requirements and generally flexible exchange rates provide Latin America with more room to deal with adverse global developments than in the past. One major plus, so far at least, has been the stability of money and bond markets in Latin America despite the turmoil in financial markets in the advanced economies. Moreover, reserve levels are high, and flexible exchange rates provide room to maneuver in a number of countries. Latest available financial soundness indicators continue to point to the overall robustness of banks across the region.
LAC region’s resilience to shocks has increased in recent years. Public debt levels and financing requirements have been reduced, and external current accounts have been strengthened. Moreover, the credibility of macro policy frameworks in many countries has been strengthened, while flexible exchange rates have provided an important shock absorber for several countries. Financial sectors too are more robust, with higher levels of capitalization and profitability.¨

Financial Times of 4 November has an article with a title ¨ Latin America sidesteps the worst of the crisis,¨ which says ¨the region´s banks have weathered the current global financial storms in relative comfort. The domestic funding markets have for the most part continued to function, in spite of the dislocation in industrialized markets. In general, Latin America´s banks are proving very resilient. Learning from the past crises, the central banks have curbed bank borrowing in dollars and insisted that the banks are well capitalized.¨

Changes in the market and mindset

The governments and the companies of the region have learnt lessons from the past crises and are exercising more discipline and are better prepared to face external shocks. ECLAC praises the notable improvements in macroeconomic and financial policies; reduced dependency on external capital inflows; major reduction of currency and rollover risks in the governments´ debt portfolios; deepening of local currency debt markets; substantial increase in foreign exchange reserves; flexible exchange rates as part of more robust and credible monetary policy frameworks; and a shift to external current account surpluses or significantly lower deficits.

The Latin American firms have become, on average, substantially more insulated from currency risk. Over the past ten years, many firms have sharply cut their balance sheet exposure to a sudden devaluation by reducing the share of debt contracted in foreign currency. The average share of foreign-currency-denominated liabilities in Latin America dropped from 35 percent in 1998 to 17 percent in 2007. Also, many firms have built up considerable foreign exchange buffers, by hedging a higher share of their dollar liabilities with export revenues and assets denominated in foreign currency.

The way the Latin American economies have withstood the storm from the north is an indication of the new paradigm of stability and growth of the region. It is farewell to the boom and bust cycle of the past.

Growth

Despite the crisis, region’s economic growth is projected to be 4.6% in 2008 and around 3.6% in 2009. Argentina´s GDP will show a growth of 6.5% in 2008 and 3.6% in 2009. Brazil´s growth in 2008 is projected to be 5.2% in 2008 and 3.5% in 2009 while Mexico will have lower growth of 2.1% in 2008 and 1.8% in 2009. The growth of the region is sustained by a strong domestic demand.

The crisis, has of course, ended the boom of the last six years when the region was growing around 5% a year compared to the average of about 3½ percent in the period 1970-2000. In the last six years, per capita growth was over 3% in a row. Unemployment fell from 11% to 7.7%. The current account was in surplus. This period saw the best sustained performance since the 1970s, because of the adoption of strong policy frameworks and favorable global economic conditions. The region’s current account balance is expected to move to deficit in 2008 and 2009, but it will remain quite low.

Now let us see how the triple curses ( inflation, external debt and exchange rate) which had tormented the Latin American economies in the past, are behaving now.

Inflation

Inflation for the region as a whole is projected to reach 8.5 percent in 2008, the highest rate in five years, resulting from strong domestic demand and rising world food and energy prices. But it is expected to decline to 6.6 percent in 2009, helped by softening international commodity prices, tighter monetary policies, and slowing demand growth. It will, however, remain at double-digit levels in some countries such as Bolivia, Paraguay, Venezuela, and Argentina.
It may be noted that Inflation is no longer a curse in the region. It has been decisively tamed and has been kept in single digit in this decade.

External debt

External debt, which was another curse, has also become manageable. IMF has no more clients in the region. Brazil and Argentina paid off their entire debts to IMF in 2006, ahead of due dates. External debt as a proportion of GDP has halved from 42.2 percent in 2002 to 20.2 % in 2007. The average share of foreign-currency-denominated liabilities in Latin America dropped from 35 percent in 1998 to 17 percent in 2007. In the top six countries of the region, firms have built up considerable foreign exchange buffers, by hedging a higher share of their dollar liabilities with export revenues and assets denominated in foreign currency

Exchange Rate

The major currencies of the region had been appreciating since 2002 when the dollar started falling. This trend has reversed after the current crisis and the central banks have intervened in the markets to arrest depreciation. But the currencies and exchange rates are by and large stable and predictable, unlike in the past.

Foreign Trade

Latin American exports are projected to grow by 2.8% this year while the imports are expected to increase by 11.8%. In 2007 exports had increased to 752 billion dollars from 670 billion in 2006. Imports went up to 677 billion dollars from 573 billion in 2006. The South American countries had accumulated large trade surpluses. However the fall in commodity prices and demand this year will reduce the trade surplus. Many governments of the region have started putting some brakes on imports to protect local industries and jobs.


Downside risks

Of course, Latin America cannot escape the inevitable pain arising from the global financial crisis and economic slowdown. They will be affected by the decline in demand and price for their commodity exports and the reduced access to credit. Most analysts expect agricultural commodity prices to peak in 2008 and flatten or decrease slightly in the following years, although on average they will remain higher than during the decade prior to the boom. A prolonged slowdown in the United States will not only threaten the economies of Latin America and Caribbean economies directly through lower import demand and a decline in remittances, but also indirectly through its impact on Asian economies and trade.

Mexico and Central America will face greater impact of the crisis and the recession in the US market since they are more dependent upon USA for their exports and remittances by their expatriates.

Diversification of Latin American exports

One of the reasons why the region has been affected less from the contagion from the west is the decline in the share of USA and EU in Latin American trade. The share of USA in the exports of Latin America and the Caribbean has fallen from 60% to just 42% between 2000 and 2007. Even the Mexican exports to the United States has reduced from nearly 90% of the total in 2000 to 78% in 2007. According to Latin Business Chronicle, Latin America´s exports to USA grew by 4.2% while their exports to China grew by 49.4%. The European Union too is losing ground as a trading partner for the region. Imports from the European Union as a share of total Latin American and Caribbean imports declined from 20% in 1990 to approximately 14% in 2006. In the same period exports to the European Union declined from 25% to 13%. Intra regional exports accounted for 18 % of the total exports of LAC while the exports to EU were just 13%.

The Latin American countries have been consciously diversifying their export markets and reducing their dependence on traditional markets, as seen from the following trade statistics of 2007. For example, 55% of Argentina´s exports went to Latin America and Asia while USA and European Union together accounted for only 27%. Latin America and Asia accounted for 43% of Brazil´s exports while USA and EU took 39%. Chile´s exports in 2007 to Asia Pacific were 36 % while their exports to USA and EU combined were just 37%. Colombia exported more to the rest of Latin America (36%) than to USA ( 31%).

The reduction in dependence on USA and Europe is happening not only in trade but also in investment. Historically, the United States has been the most important source of FDI in Latin America. In the 1990s, Spain came to be a big player acquiring Latin American banks, utilities, telecom companies and manufacturing units. The Spanish were the first movers during the wave of privatizations in the eighties and ninties. In the present decade, the share of intraregional FDI in total FDI inflows in Latin America has doubled (from 5% to 10%) due to the emergence of a number of companies of Latin American origin, the so-called trans-Latins.

Asian attraction

While the shares of USA and Europe are coming down, Asia is increasing its share of Latin American trade. According to ECLAC the dynamic Asian region, led by China, will help offset some of the decline in export demand in the developed countries. Since 2001 more Latin American and Caribbean imports have originated in the Asia-Pacific region rather than in the European Union, and the share of Asia-Pacific imports is rising steadily. If the current trend continues, by 2010, as much as 30% of Latin American and Caribbean imports could come from the Asia-Pacific region.

Nearly 36% of Chile’s exports go to Asia- Pacific region; the figure for Dominica is 31%; for Cuba, 29%; Peru, 24%; Costa Rica, 24%; Brazil, 18%; Bahamas, 17%; Argentina, 16%; Uruguay, 12%; and Bolivia, 12%.

The Latin Americans do not expect increase in their exports in 2009 to the developed markets because of the recession which is setting in the advanced economies. Their hope is on the emerging markets which are going to grow by 5 %, much of which is going to come from Asia.

The Latin Americans are not only facing a declining share of USA and Europe in their trade and investment but are also disillusioned by the western mindset. Many of the Latin American countries in the region who were subjected to neo-liberal policies of the Washington Consensus are now seeing the hypocrisy of the west which is doing exactly the opposite of what they preached by rescuing the market through government intervention. The Latin Americans are frustrated with the protectionist trend in USA and Europe even while the latter are clamouring for the opening of the Latin American markets for their exports and investment. More than these, they are disenchanted by the current dominant mood of doom and gloom, fear and paranoia in the west. They contrast this with the cheerful Indians and Chinese who are brimming with optimism and confidence. They are inspired by the Asian story of growth. They are encouraged by the large and growing markets of India and China which offer increasing opportunities in the short and long term for their exports and business. The Chileans and Argentines dream of putting one glass of their wine in the hands of each of the 500 million middle class people in India and China !

All the reports on Latin America by ECLAC, IMF and global consultancies always have a chapter on China and India and highlight the growing importance of these two giants for Latin America. The latest report of ECLAC advises the Latin American and Caribbean region’s authorities
- to redouble their efforts to identify and capitalize on new opportunities to enhance their countries’ potential complementarities with the Asia-Pacific region.
- To take full advantage of Asia’s trade and investment dynamic, Latin America and the Caribbean must, as a matter of urgency, reorient and realign its relations with the Asia-Pacific region in order to sustain its commodity exports while producing more value added and more technologically complex manufactures for that market.
- With imminent risks bearing down on the world economy and the emergence of a new geography of the world economy increasingly centered around Asia-Pacific, Latin American and Caribbean authorities should redouble their efforts to identify and capitalize upon the potential complementarities between the region and Asia-Pacific.
- Latin America and the Caribbean should take advantage of its current favourable position to lay the foundations for sustained trade and investment relations by creating biregional business alliances, enhancing cooperation in innovation and human capital in order to diversify trade, add greater value and knowledge to exports, and help create more stable conditions for growth.


Opportunity for India

There is a saying in Latin America ¨A Rio reveuelta, ganancia de pescador¨ – means when the river is turbulent, the fisherman will gain. Simply put, every crisis is an opportunity. And the Indian businessmen should take advantage of the current situation of Latin America which is looking towards Asia more seriously than ever.

While talking about the new China- India phenomenon, the Latin Americans tend to have a bias towards India. Surely they are dazzled, like everyone else, by the spectacular growth of China. But they are able to relate themselves, their problems and their situation more with India, which has shown by its example that growth and transformation is possible in a democratic system despite so many challenges arising from such a vast diversity and political spectrum.

Latin America and the Caribbean is a net exporter of fuels, metals and agricultural products and a major producer and exporter of commodities on a global scale. In 2006, the region produced 44% of the world’s soybeans and 13% of global maize output. Its share in the production of zinc, aluminium and copper is also sizeable, at 28%, 22% and 19%, respectively, of the world total. India needs to import edible oils, pulses, petroleum and minerals and metals to sustain its new growth trend and to cope with the ever-increasing consumption. Latin America is a region which can satisfy some of the requirements of India. Already India has started importing copper, soy oil, and crude petroleum from Latin America and these will increase in the coming years.

This is a good time for the Indian companies to acquire assets ( agricultural land, mines, oil fields, forestry, manufacturing units) and expand their business in the region, since at this time the risk-shy companies from US and Europe are reducing their exposure and are relatively less active here.

India exported 5 billion dollars worth of goods to Latin America in 2007. It can be doubled in the next three years, given the large and growing market of 530 million people in the region.

While India´s trade with the region was 11 billion dollars in 2007, the Chinese trade was 103 billion dollars. The Chinese had increased it from 12.6 billion dollars in 2000.

Indian IT companies have established software development centres, BPOs and KPOs in the region employing 8000 young Latin Americans, as part of their new business model of providing 12 hours of service from Latin America (same time zone as USA) and 12 hours from India. The Indian companies have also started picking up local business from Latin American companies including a 150 million dollar contract by TCS from Banco Pichincha of Ecuador.

In the past, Indian companies had a ¨barrier mindset¨, considering distance and language as barriers for business with Latin America. Now the Indian IT companies consider these two factors as advantages and make use of them merrily. Distance is not a barrier either for the Chileans who export fruits to India.
The ex-Chilean Ambassador Jorge Haine used to say, the distant Chile exports more (2.2 bilion dollars) to India than the neighbouring Bangladesh (257 million dollars).

Welcome to the new paradigm of business with Latin America!

Peru gets investment grade rating

Peru's foreign currency debt rating was lifted to investment grade by Standard & Poor's on 14 july. The agency, which raised the ratings to BBB- from BB+, cited the significant decline in Peru´s fiscal and external vulnerabilities as reasons for the upgrade. The move by S&P follows Fitch Ratings upgrade in March of Peru's long-term foreign currency issuer default rating to investment grade.

Peru's low level of inflation and strengthening macroeconomic fundamentals are trends that S&P expects "will remain in place over the medium term despite an increasingly riskier international environment and the continuation of challenging local politics." The upgrade is supported by the significant decline in Peru's fiscal and external vulnerabilities,'' S&P' said in a statement. ``Economic growth has diversified over the last three years evolving from a path mostly driven by external demand into a more complex structure with more reliance on dynamic domestic demand.''

Strong domestic demand and exports of minerals have helped push the Andean country's economy up 9% in 2007. The economy has grown at an average rate of 5% over the last five year and is expected to grow at 8% in 2008.

Peru this year could pay ahead of schedule $1.1 billion to the World Bank and Inter-American Development Bank, the government has said. The nation plans to reduce its foreign debt to the equivalent of 13 percent of gross domestic product this year, from 18.4 percent at the end of 2007.

Meanwhile, inflation is running at 5.7% so far this year, above the central bank's inflation target of 1% to 3%. The central bank in July raised its benchmark interest rate to 6% in a bid to slow the impact of rising prices for commodities.

Peru is the fourth country in Latin America to receive investment grade. Chile was the first country to get investment grade in 1992, followed by Mexico in 2000 and Brazil in May 2008. Colombia is the likely next candidate for this status.

A common denominator of policymakers in the four countries was a sustained effort to diversify their national debt structure and convert a greater portion of it into national currencies as opposed to U.S. dollars. According to a study by the IDB Research Department, the foreign currency composition of the public debt of the seven largest economies of Latin America fell from 65 percent in 1998 to 38 percent in 2007. More than 80 percent of Mexico’s debt is in local currency.In Brazil, local currency accounted for about 92 percent of the country’s sovereign debt in 2008 compared with 60 percent in 2000.Peru’s debt composition moved from 6.3 percent in local currency in 2000 to more than 36 percent in 2008.

India´s first Latin America Equity Fund

Here is the news from today´s Business Standard of India

ING Investment Management India has launched India's first Latin America Equity Fund, an open ended Fund of Funds (FoF) Scheme for Indian investors.

The Scheme opens on June 19, 2008 and closes on July 10, 2008. The scheme will primarily invest in ING's existing Luxembourg domiciled fund thereby seeking to provide an Indian investor long-term capital appreciation and exposure to countries which are amongst the fastest growing economies in the emerging market space. The Lux fund will try and achieve this by investing primarily in stocks of companies based out of Latin American countries or stocks of companies deriving a majority of their revenues from Latin American economies.

Vineet K Vohra, managing director and CEO, ING Investment Management India said, "The emerging markets as a whole have held up fairly well considering that they are generally volatile than the US indices.
All emerging countries have some political risk associated with them, some much higher than others. However, what makes Latin America so attractive is the stable government in place in the recent years and their pro-growth policies. This is one part of the backdrop that isn't always visible to investors, but it plays an important role in medium & long term stability."
Latin America is a lucrative market on account of infrastructure investments, robust domestic demand, strong private consumption & surging commodity exports due to increasing demand from countries like India and China. Valuations for most of the Latin American economies look attractive as compared to their counterparts in the emerging markets.

This adds an additional dimension to India´s business outreach to Latin America reflecting Indian confidence and optimism on the prospects of the region.

UNASUR - Union of South American Nations

On 23 May, Presidents of the 12 countries of South America signed the Treaty under which formation of this regional group was formalised in the third south american summit held in Brasilia. The initiative for UNASUR was taken in 2004 with the Cuzco Declaration on 8 December 2004.

This is a fascinating and formidable alliance of all the 12 countries of south america, uniting the 5-member Mercosur with the 4-member Andean Community plus Chile, Guyana and Suriname. The secretariat of UNASUR will be located in Quito, its parliament in Cochabamba and its South Bank in Caracas. The presidents will meet once a year and the foreign ministers of the group will meet once in six months. The Union will have its own flag.

UNASUR aspires to become a Single Market, beginning with the elimination of tariffs for non-sensitive products by 2014 and sensitive products by 2019. UNASUR members have already allowed visa-free movement of their citizens between their countries. They have already taken up projects for the integration of infrastructure( roads, ports, communications etc) and energy. There is also a proposal to form a Defence Council. A common currency and passport are also part of the UNASUR dream whose role model is European Union.

Critics and those whose interests are affected by the regional grouping predict failure of this Union and highlight the political problems and conflicts between the member states and the immaturity of some of the political leaders. Some observers quote the failures of such attempts in the past and dismiss this as yet another doomed venture Latin Americans to integrate.

I believe that UNASUR is going to stay and flourish. The conditions of the market and the mindset for integration are ripe and favourable at this time than ever in the past. Nine out of the 12 countries have been part of the two main integrated groups namely Mercosur and Andean Community. Despite the imperfection of these two Groups, they have been successful in many ways. The governments, business and the people of these two groups have realised the values and advantages of integration. The trade between the UNASUR members have become a significant and growing portion of their external trade. Cross-border investment and collaborations of the business of these countries are already flourishing. More importantly, their dependence on their traditional markets namely USA and EU have come down and UNASUR countries have successfully diversified their exports and foreign trade. For example, Argentina´s trade with Mercosur is more than the combined total of their trade with EU and USA.

UNASUR has a total population of 382 million and GDP of 2,3 trillion dollars. It is an Agricultural Power and a supplier of conventional and biofuels to the world. All the countries of UNASUR are democracies with sustained economic growth and have become less vulnerable to external shocks. All these have given a new confidence and optimism and the leaders of these countries have realised the value of collective strength. It is not ideology or dreams which are behind the current integration process, as it was before the eighties. ....No more Magical Realism... It is sheer realism, pragmatism and the experience of the failures of the past which are the guiding forces of the current integration.

It is noteworthy that Brazil,the biggest power of the region is the one which is pushing seriously for UNASUR integration. And equally to be noted... Argentina, the second biggest power of the region is also betting on the same goal. Imagine a combined football team of Brazil and Argentina !

The world should take note of what President Lula said at the Brasilia summit on 23 may, "A united South America will rearrange the pieces on the board of power in the world."

Bravo..... UNASUR !!!

Latin America receives record FDI in 2007

According to a report released on 8 May by the UN body ECLAC, based in Santiago FDI received by Latin America and Caribbean in 2007 was a record 106 billion dollars surpassing the previous record of 89 billion in 1999.

Highlights of the report
- FDI increased from 72.5 billion dollars in 2006 to 106 billion in 2007. This 46% increase is the highest among various regions.
- natural resources were the main area of investment in south america except in brazil where services received most investment. manufacturing was the main investment area in mexico.
-The main FDI recipient country in 2007 was Brazil, with US$34.6 billion, followed by Mexico (US$23.2 billion), Chile (US$14.5 billion) and Colombia (US$9 billion, Argentina- 5.7 billion, Peru-5.3 billion
- Brazil has come back to claim its top position after having been overtaken by mexico in recent years.
- Costa Rica, Dominican Republic, Panama and El Salvador received between 1.5 and 1.8 billion dollars each in 2007.
- South America received 71 billion dollars while the rest went to Mexico, central america and caribbean.
-The main foreign investors in 2007 were the United States, the Netherlands and Spain

-Outward investment flows from Latin America and the Caribbean to other regions in 2007 fell to US$20.6 billion, after reaching a maximum high of over US$42 billion in 2006. Brazil invested abroad 7 billion dollars followed by Mexico- 5.5 billion, Chile-3.8 billion and Argentina 1.1 billion.

The record FDI is a sign of the confidence of the foreign investors in the stability and growth prospects of the region.

Brazil upgraded to Investment Grade

Last week, Brazil was upgraded to Investment Grade ( triple B minus ) by Standard and Poor. This is a reaffirmation of the health and soundness of the Brazilian market which has got its fundamentals right. International economic experts have concluded that Brazil has finally come out of its boom and bust cycle. Brazil is the third country after Chile and Mexico to get investment grading.

Last year the growth was 5.4 % and in 2008 it is expected to be around 4.8 %. Inflation has fallen. Primary budget of the government has been in surplus. Exports are booming thanks to the high demand and price for its agroproducts and minerals. Brasil´s stock market Bovespa has risen by 14 percent this year, while the stock markets around the world are getting beaten.

Foreign direct investment in 2007 was 34 billion dollars. At the same time Brazilian companies have been on an acquisition spree of land, assets, mines, factories and business in the region and outside. CVRD bought a Canadian co for about 15 bilion dollars, the largest acquisition by any Latin American company.´

Brazil is already an agricultural power with its large fertile land and high exportable surplus. It can bring in more land under cultivation without affecting the Amazon.

The recent discovery of large new oilfields has put Brazil in the same league as the OPEC members. Brazil is already the world leader in fuel ethanol.

Brazil´s agricultural strength combined with its energy surplus has given it an edge in these days and coming years of global concern with the rising prices and demand for fuels and food.

What is remarkable is the change in the mindset of Brazilian business and political leaders. They are putting their act together to make the country as a global leader. President Lula has announced support for the Brazilian companies to become multinationals. He wants to create a large Brazilian giant in pharma sector through merger of some existing companies. Brazilian government and business are reaching out to Africa, middleeast and Asia.

Politically, Brazil has set an example in the region for achievement of equilibrium between pro-poor and pro-business policies, pleasing the Wall Street and Favelas with equal earnestness. This is important since progress of some countries in the region have been hampered by domestic ideological conflicts and divide between government and private sector.

Even my Argentine business friends have expressed admiration for the new energy, vision, ambition and aggressiveness which drive the Brazilian business.

What is even more remarkable is that despite the growing strength on its own , Brazil is strongly commmited to regional integration through Mercosur and Unasur. The Brazilian leadership takes their Mercosur partners into confidence while strategising their future. They leverage the collective strength of the region to reinforce their own.

Viva Brazil !!!

Latin American economies continue their sixth consecutive year of growth in 2008

There used to be a saying " when USA catches cold, Latin America sneezes". The region had been susceptible to external shocks and had suffered in the past. The last time the economies of the region went into a tailspin were following the Asian and Russian crises. With the subprime crisis and the looming recession in USA, the latino economies should have normally gone into crisis situations. But they have withstood the external crisis thanks to the new paradigm of economic stability and growth. The economies have become resilient with stronger macroeconomic fundamentals. The policymakers have learnt their lessons and are now more careful, clever and disciplined. Of course, Lady Luck has rewarded the latin americans for their good behaviour with high demand and price for their primary commodity exports.

According to a report ( 23 April) of the Economic Commission for Latin America and the Caribbean (ECLAC), Latin America and the Caribbean will grow an average of 4.7% in 2008, 0.2% lower than the 4.9% estimate issued by them in December 2007.

ECLAC projects that the countries with the highest growth rates this year will be Panama (8%) and Argentina, Cuba and Peru (7%). Mexico and Ecuador will have the lowest growth, with 2.7% and 3%, respectively.
The countries with growth rates nearing the regional average will be Bolivia and Paraguay (5%), Brazil (4.8%), and Chile, Costa Rica, Guatemala and Honduras (4.5%).

South America is projected to grow by 5.7% while mexico and central america is expected to grow by 3.1%.

Last year, average Gross Domestic Product growth in Latin America and the Caribbean reached 5.7%.

The region is into its sixth consecutive year of growth in 2008, with annual growth of over 4% since 2003. Besides growth, the other fundamentals are also healthy. Inflation is in single digit, exchange rates are stable and predictable, external debt manageable and industry, business, agriculture and consumption are showing significant growth.

Latin America's trade with India and China in 2007

India’s trade with Latin America in 2007 crossed 11 billion dollars, increasing from 9 billion dollars in 2006.

India's exports were 5 billion dollars and imports 6 billion dollars. The total should have crossed 12 billion dollars, if we take into account the trade through third countries and add the figures in respect of smaller countries for which statistics for 2007 is not available yet.

Brazil was the main destination of exports... exceeded two billion dollars. Second top destination was mexico with 1127 billion dollars( jan-november). Colombia has over taken Argentina as the third largest market for India's exports in 2006 and in 2007.

Chile was the top exporter to India with 2.2 billion dollars. It has overtaken Brazil in the last two years. Argentina exported one billion dollars, maintaining its second position.

Chemicals and pharmaceuticals were the top exports of India followed by Engg products.

Reliance was the top trading company with Latin America with their crude oil imports from venezuela, mexico, Brazil and ecuador and export of diesel to brazil ( about 800 million dollars).

Copper accounted for 90 percent of Chile's exports to India. Vegetable oils formed 80 percent of Argentine exports to India.

China's trade with Latin America reached 102.6 billion dollars in 2007

It was just 12.6 billion dollars in 2000, increased to 26 billion in 2003 and to 70 billion dollars in 2006.
Trade with Brazil was 29.7 billion dollars, Mexico-14.9 billion dollars, Chile- 14.6 billion and Argentina-9.9 billion.
Main destination of exports: Mexico- 11.7 billion, Brazil-11.4 billion, Panama-5.6 billion, Chile-4.4 billion and Argenina- 3.6 billion
Major sources of imports: Brazil-18.3 billion dollars, Chile-10.3 billion, Argentina-6.3 billion, Peru.4.3 billion, Mexico-3.2 billion and Venezuela- 3 billion dollars.

Argentine TechTango with Indian IT

Antonia Pena, Francisco Okecki and Jose Ugarte, the Argentine trio of Techpreneurs who met me today represent the new breed of young, ambitious and global-visioned Argentines, who have started Tech Tango with Indian IT.

The reason for our meeting today is their India connection. They have become part of the Indian IT company Cellent ( www.cellent.com ) which specialises in software for mobile phones, a growth area in technology and business. This combination of mobiles and India is a formidable one.. In december 2007, the number of new mobile subscriptions was 8 million...highest growth in the world..It has been averaging over six million per month.

The techpreneur trio have independent experience in technology and IT business and their last company was called as " Net people", before its absorption by the Indian company. They are going to contribute not only to the Argentine and Latin American business of Cellent but also to development of new technologies including in collaboration with Indian Institute of Technology, Mumbai. They have a team of six people but have plans to expand including in Uruguay. The Trio figure prominently in the" team of cellent" -http://www.cellent.com/Content/Lang/en/Section/5/SP/About_US_Team/2007/03.htm

The trio were in Mumbai recently and have come back inspired and enriched after their exposure to the new Indian technology development and work culture. They say they found it easier to interact, collaborate and connect with Indian mind and heart. Their eyes shine when they talk about India and IT.

The Trio impressed me with their drive, energy and enthusiasm. They reconfirm my optimism about the future of Argentina. They reminded me of the thousands of the new generation of young Indians with a new mindset, who have transformed India and raised its global profile.

Cellent is the fifth Indian IT company to establish operations in Argentina after TCS, First Source, Crisil/Irevna and Cognizant. These companies employ 700 young Argentines connecting them to the global growth story of Indian IT. It is a win-win for both.

Damas y Cabelleros... welcome to the new show of
TechTango between the new India and the new Argentina.