From policymakers and ratings agencies to entities like the World Economic Forum, the consensus is building that this will be “Latin America’s Decade.”
Despite a long history of boom and busts, Latin America is increasingly looking like one of the world’s shining stars.
“Our region is growing in global strategic importance while remaining a region of diverse opportunities and challenges,” said Marisol Argueta de Barillas, senior director and head of Latin America for the World Economic Forum.
There is a growing consensus that the coming years will be “Latin America’s decade.”
“Strong economic growth, coupled with ambitious goals to build on recent successes is just one example as to why Latin America is poised to see its best decade yet,” Susan Segal, president and CEO of the Americas Society/Council of the Americas, writes in a column in this issue.
Behind that optimism is sustained economic growth in recent years, a surprising ability to withstand the worst of the recent global crisis (in sharp contrast to past crises), political stability (in most countries) and a positive economic and political outlook.
Except for the crisis year of 2009, Latin America’s GDP has grown at higher rates than the world average of the past seven years. From 2011 through 2015, the International Monetary Fund (IMF) estimates that Latin America’s economies will grow an average of 4 percent annually. That compares with an estimated 2.7 percent in the United States and 2.1 percent in the EU during the same five-year period.
“There is a greater consensus on fundamental policies,” said Joydeep Mukherji, senior director of Latin American Sovereign Ratings at Standard & Poor’s, during a webcast entitled Will 2011 Be The Dawn of The Latin American Decade? “That’s positive for us [as] we’d like to see consistent policies, not sharp turns.”
A combination of better fiscal policies, flexible monetary policies and lower levels of external debt have given Latin America a greater isolation from outside shocks, according to Mukherji.
Meanwhile, the region now boasts five investment-grade countries. Over the past three years, Brazil, Peru and Panama joined Mexico and Chile in receiving the coveted rating, which helps reduce financing costs and helps attract investors.
Another key factor behind Latin America’s performance during the crisis was sustained, high demand from China for natural resources from countries like Brazil, Chile, Peru and Argentina.
That helped offset falling demand from traditional markets like the United States and Europe. In fact, Asia is now Latin America’s second-largest trade partner ahead of the European Union, according to Latin Business Chronicle. In several countries, including Brazil, China managed to pass the United States as the top export market. Last year, Brazil’s exports to China reached $30.8 billion (up 46 percent) compared with $19.5 billion to the United States (an increase of 23 percent), according to Brazil’s Ministry of Commerce.
Strong demand from the Chinese is expected to continue. China’s GDP will likely expand by an average 9.5 percent over the next five years, according to IMF.
The recent sustained economic growth and large inflows of private local and foreign investments, in turn, have helped reduce Latin America’s chronically high poverty rates from 48 percent in 1990 to 32 percent last year, according to the United Nations Economic Commission for Latin America and the Caribbean.
Yet the reduction in poverty rates has been in large part fueled by government programs. “Countries such as Peru, Mexico, Chile and Colombia continue to usher in more of its citizens into the middle class and into the formal sector because of these programs, in turn fueling demand for goods and services providing for even more economic growth,” Segal said.
Another major factor behind the poverty reduction has been the reduction of inflation, argues Lisa Schineller, director of Latin America sovereign ratings and Latin America economist at Standard & Poor’s. The lower and stable rates compared to the past have helped bring more people into the formal economy, she said during the webcast with Mukherji.
However, not all is rosy. Latin America still faces major challenges, including poor infrastructure, high levels of crime and corruption and a weak education system.
Insufficient infrastructure drives up transaction and transportation costs, and that impairs competitiveness, according to Juan Cento, president of FedEx Express Latin America. Although Latin America benefits from its proximity to the United States, that edge is quickly eroded by an insufficient network of roads, ports, railways and airports, according to the Organization for Economic Co-operation and Development.
A 10 percent reduction in freight costs in nine Latin American nations would allow exports to the United States to soar 39 percent on average, while transportation costs on Latin America’s imports would fall about 20 percent if the region improved its port efficiency to U.S. levels, according to a report from the Inter-American Development Bank. Meanwhile, despite increased infrastructure spending in Latin America, the region still lags spending in Asia, experts point out.
Latin America lacks a unified infrastructure strategy, said Anand Hemnani, the Sao Paulo-based senior vice president and chief investment officer at CG/LA Infrastructure. “We need to interlink our economies,” he said. “We need to enhance our transport infrastructure, water, energy generation and logistics.”
Also needed is enhanced city-level infrastructure, including urban rail systems. Last, but not least, Latin American governments need a long-term vision, such as that of Chile, Hemnani said.
While the region overall fairs poorly, there are big differences from country to country. When it comes to transport infrastructure, Chile and Panama rank best, while countries like Brazil and Colombia are among the bottom seven countries, according to the Latin Infrastructure Index from Latin Business Chronicle.
Then there’s the security issue. “The most important current short-term challenges faced by most of the countries in the region are related to insecurity, drug trafficking and organized crime,” Argueta said.
Crime costs companies and governments billions of dollars each year. With weak law enforcement in most countries in Latin America, many private companies have to invest significantly in private security. Insecurity is also affecting the talent pool, as many of the best and brightest Latin Americans emigrate to safer countries in North America or Europe.
According to an executive survey from the World Economic Forum, El Salvador ranks as the worst country in Latin America in terms of costs related to organized crime and shares the last place with Guatemala when it comes to cost of crime and violence. In terms of the impact of organized crime on business, El Salvador ranks last among 133 nations worldwide; it ranks as the second-worst worldwide (along with Guatemala) in terms of the costs to businesses of crime and violence. Only South Africa is worse, the WEF survey shows.
Multinational executives also face danger. According to the Latin Security Index from FTI Consulting Ibero America and Latin Business Chronicle, Haiti and Venezuela are the most dangerous countries in the region, while Costa Rica, Chile and Uruguay are the safest. FTI analyzes crime statistics and polls its client base of Fortune 500 companies on security incidents among their people and assets and incorporates those results into the ranking.
Venezuela is suffering from Latin America’s highest level of brain drain and is also one of the worst worldwide, according to a Latin Business Chronicle analysis of an executive opinion survey from the World Economic Forum. The survey asked executives in 139 countries to what degree their country retained and attracted talented people, on a scale of 1 to 7. The highest score, 7, would indicate that there are many opportunities for talented people within the country. A score of 1 would indicate that the best and brightest leave to pursue opportunities in other countries.
Venezuela received a score of 2.1. Only seven countries in the world got a lower score, signifying that the brain drain in Venezuela is worse than in countries like Bulgaria, Macedonia and Algeria.
Corruption is another persistent challenge. According to Transparency International, the Germany-based watchdog, Latin America has made little progress when it comes to corruption. Its average score has gone from 3.4 in 2006 to 3.5 last year, according to a Latin Trade analysis of Transparency International data.
Education is another major challenge facing companies in Latin America. Overall, the region suffers from weak public education from primary to university level. As a result, many companies have to invest billions of dollars in additional training.
The scarcity of well-skilled labor and low productivity in Brazil, for example, limits the country’s potential growth, according to Michael McKenzie, the São Paulo-based managing director of treasury and securities services at J.P. Morgan.
About the Author: Joachim Bamrud is the executive editor of the Latin Trade Group and a former editor-in-chief of Latin Business Chronicle and Latin Trade magazine.