Q&A on Latin America's business outlook in 2007.
BY CHRONICLE STAFF
Latin Business Chronicle: How do you view the business outlook for Latin America in 2007?
Jose Antonio Rios, international president and chief administrative officer, Global Crossing, USA: In general, Latin America has experienced positive improvement in the past few years, therefore, the business outlook for 2007 is optimistic. Although there are some factors that could present challenges, the trend followed by most markets in improving trade conditions and increase access to credit demonstrate that the region business community is maturing, which poses opportunities for growth. Particularly important is to maintain continued investments in improving the technology infrastructure so the region has the competitive edge it needs in today’s global economy.
Peter Cardinal, executive vice president for Latin America, Scotiabank: I view the business outlook quite positively, particularly in the countries in which we operate. In Mexico, there is still lot's of room for growth of the financial sector, by growing down-market in small and micro lending, a continuing commitment to the housing market. The financial sector in Mexico has outpaced growth in the economy by expanding the penetration of the population which remains underrepresented in the formal economy, and we see this trend continuing. We are also optimistic for the other countries in Latin America. Peru continues to advance, the political and economic outlook is stable and the economy will continue to be propelled by the mining, energy and maritime sectors. Our experience to date since consolidating our position in 2006 with the merging of Banco Wiese Sudameris and Banco Sud Americano into Scotiabank Peru has been very positive and we expect the growth to outpace the overall growth in the economy. Chile likewise has a strong economy and stable politics. Although our franchise is relatively small, we hope to grow through expanding our branch network, all the while being vigilant for acquisitions or complementary businesses. Therefore to answer your question, we are quite optimistic for the region.
Rui da Costa, managing director for Latin America and Caribbean, HP: In 2007 it will be another good year. I think from an economic perspective, Latin America will continue to have an average of between 3 and 5 percent GDP growth. The IT market in Latin America in general grows [twice as much as] GDP, so we're looking at between 7 and 10 percent growth. So we are very optimistic. Some countries with changes in government that might create temporary adjustments, but nothing that will have a major impact overall.
Peter Rösler, deputy general manager, Ibero-Amerika Verein, Germany: My business outlook for Latin America in 2007 is definitely optimistic. I expect a growth rate between 4 and 5 percent. Business opportunities for German companies will likewise be very good. Why? Even countries marked by state interventionist policies offer good business [opportunities] because of high export revenues for oil and other products. Latin America as a whole profits from high commodity prices as a result of rising demand, above all in Asia. The economies show a steady performance even in countries with acute political tensions on the domestic front. This used to be quite different in the past when political instability very often brought about deep economic crisis. One could even say that today Latin America's economies are disconnected from internal political developments. And also, in the last two-three years, German FDI increased by roughly a quarter, so stocks are now at a historical record level of approximately US$60 billions.
Beatrice Rangel, managing director and president, AMLA Consulting: It largely depends on where in Latin America. If we look at Central America, Chile, Colombia, Peru and Brazil the outlook is quite positive. They will continue to feel the growth-inducing influence of trade and even in the event that the commodities markets experience some deflation, these countries have other growth-promoting engines such as inputs to the growing ethnic gastronomy in the US in the case of Central America; ethanol in the case of Brazil. Another country that inspires moderate optimism is Mexico. To be sure, the Calderon Administration seems acutely aware of the need to deepen reforms and to build a constituency among lower-income segments of the population. One cannot frankly be optimistic about Bolivia and Venezuela, as these nations seem to be reverting to mono production and are failing to use he energy-related windfall revenues to enhance productivity and find better ways to link to the international market. With respect to Argentina, the Damocles [sword] hangs low now, as failure to invest in energy and to create a trustworthy legal framework for foreign investors to substitute for local capital, will [sooner] or later prove to be crippling for the economy.
Stephen Wong, regional director for the Americas, Hong Kong Trade Development Council: Insofar as Latin trade with Asia and in particular with China/Hong Kong, I am quite optimistic and foresee that two-way trade will continue to grow. This is due a variety of reasons: (1) the conclusion of free trade agreement in certain Latin countries (e.g. China/Chile) and we are seeing more trade visitors from Latin America visiting China/Hong Kong and that will facilitate bi-lateral trade. (2) Liberalization of trade in Latin America: Latin countries are keen to forge closer ties with China/Hong Kong and vice-versa, and this is reflected in the growing investments between the two sides. (3) The increase in the role played by Hong Kong in facilitating the process as described in 1 and 2 above. The cooperation will not be limited to the trade in merchandise but also will extend to the trade in services as well.
Latin Business Chronicle: What are the key challenges facing business in Latin America in 2007?
Rios: Political uncertainty will remain a key challenge for doing business in Latin America next year. Other issues that can impact the ability to do business in certain markets are institutional weakness, slow and bureaucratic court systems, high and complex tax systems and high public debt. However, it is important to mention that these issues are not reflected across the region, and the majority of the countries have created a positive environment to conduct business.
Cardinal: In the countries in which we operate, we see the main challenges, not so much in the political climate, but more in the global and U.S. economies. Chile and Peru are heavily resource-based economies, so commodity prices play a major role. Although we do anticipate some softening of the heavy run-up in commodities which occurred in 2006, this should not materially affect the economies nor some of the investments planned for these sectors.
Wong: The major barriers in Latin America are still the import barriers in the form of high import tariffs and other import regulations. Trade flow could be further enhanced if these restrictions are removed.
Rangel: The greatest challenges will emerge from two strategic sectors: telecomms and minerals. In the former, one can hear the grass growing. Technology has evolved in favor of wireless solution carriers and against incumbents. With most telecom markets in the region approaching saturation ( defined as every one who can afford ICT is already served) market expansion can only come through extension of services to medium-low and low-income segments as well as rural areas. But alas!! These market segments can ill afford the price tag. Wireless solution carriers with Wi-Fi based technology platforms have a cost structure that can make communications and connectivity affordable for them. With the recent approval of WiMax standards one can see a shake-up in the sector by late 2007. With respect to mineral extraction, most foreign investors in Latin America are beginning to realize that it is not good enough to fulfill all government regulations to access a mineral concession. Two decades of democracy in the region have given rise to a participatory mentality among Latin Americans. This has triggered an explosion of NGOs that follow closely diverse issues such as human rights; global warming; child labor; etc. Rural towns across Latin America are increasingly environmentally sensitive. Thus foreign investors would need to secure their support before they can initiate operations. Should they only deal with the central government one might see multiple reenactments of the Camisea project conundrum in Peru.
Rösler: One of the key challenges for all of Latin America is strengthening legal certainty, especially as far as private sector activities are concerned, as legal uncertainty [continues] at a high level in many Latin American countries. State interventionist policies in some countries tend to worsen conditions, especially in the following sectors: public utilities, oil and gas as well as mining. So in these countries there will hardly be any FDI in these sectors. But this [does] obviously not refer to trade that will keep on growing. Another problem is the continuous devaluation of the US dollar against many Latin American currencies. This makes life difficult also for foreign companies with manufacturing activities in these countries. And last, but not least, one must not forget that state intervention often aims at improving income distribution. As we all know, Latin America is the world’s region with the most unjust income distribution. So the other key challenge is to improve overall living conditions and reduce poverty. Poverty is the enemy of political stability; it makes populism thrive.
Latin Business Chronicle: What will be the key benefits for business in Latin America in 2007?
Da Costa: From a macro perspective, a lot of stability in terms of different government elections. Normally the first year of a government is positive change in general. Second, countries with strong exports will do well, especially [with] China and India continuing to drive a lot of demand.
Cardinal: The Latin economies are characterized by emerging financial markets and this has attracted considerable foreign investment not only by Scotiabank but also by other large global and international institutions. The regulatory environment is more rigorous, forcing all players to play by the same rules and strengthening the sector, so we don't foresee the potential economic meltdowns which have occurred in some of these countries in the past. An expanding financial sector is positive for these countries as it will provide access to a larger percentage of the population to banking services, and in so doing allow these people to be more economically active as for example in growing micro and small business, purchasing of cars and houses, all of which augurs well for these developing economies.
Wong: The Latin economies are quite stable and the leadership in several Latin countries are seen to be practizing "free and fair trade" and this is progressing slowing and smoothly.
Rios: The key benefit for business in the region is opportunity. With new reforms and a more mature business community, there are great opportunities to expand. Doing business in most Latin American countries has become easier. Regulatory reforms in some countries have proven to reduce time, cost and hassle for businesses to comply with legal and administrative requirements. Mexico, Peru and Guatemala are among the top reformers that have simplified business regulations, strengthened property right, eased tax burdens, increased access to credit, reduced cost of exporting and importing. Mexico has strengthened investor protection with a new securities law that increases scrutiny of insider dealings and cut time to start a business. A recent IMF regional economic outlook report forecasts 4.75 percent economic growth for the region in 2006. Latin America has had a resurgence of private investment, declining interest rates and rapid increase in bank credit. Overall, inflation has remained subdued.
Rangel: The benefits include CAFTA and the great leap forward of Central America and the DR; the determination of the Calderon Administration to tackle the need for second-generation reforms; the current tilt towards stability in oil prices; and the clear-cut emergence of centrist governments in the region.
Rösler: The key benefits for business in Latin America will be growing export revenues and domestic consumption, an industrial sector strengthened by 2006 and 2007 imports of machines and industrial equipment, growing private investment, more balanced national finances, higher public expenditures and investments, huge foreign currency reserves accrued recently, decreasing interest and inflation rates, and lower foreign debt burdens. All this will combine to create additional business opportunities and increase the attractiveness of the region for its foreign business partners. I am, however, rather doubtful about the prospects of further FTAs between Latin America on the one side and the European Union or the US on the other side because of recent election results in the US and the growing inflexibility of the enlarged EU.
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