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German Business Bullish on LatAm

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German business confidence in Latin America has returned. And German firms are not unduly worried about the rising populism.

BY PETER RÖSLER

For the last 2-3 years Latin America has attracted a lot more attention than usual from the German business community. The reasons for this are obvious: more growth and less volatility in the region.

In 2007 Latin America achieved an impressive economic growth rate of 5.6 percent. Thus the combined gross do­mestic product (GDP) of $3 billion equals the levels of Germany or China. Once again favorable external conditions had contributed to a continuing eco­nomic boom in the region. But also domestic demand had experienced a strong growth, amounting to 7.7 percent. Together with an expected growth rate of more than 5 percent in the present year, at the end of 2008 Latin America will have grown by around 34 percent in only 5 years.

Exports out of Latin America in­creased by 12.3 percent to $753.7 billion in 2007. This was due to the con­tinuously high worldwide demand for Latin American raw materials and ag­ricultural produce as well as to the in­creasing quality of the region’s agribus­iness and industrial products. A part of these industrial export goods were manufactured by German daughter companies. But also genuine Brazilian companies, as the world's third-largest airplane manufacturer Embraer, contributed to the boost of Latin American industrial exports. At the same time, imports into Latin America grew by 18 percent to $680 billion. This strong import growth gives evidence of the recovery of the domestic economies.

Because of this economic boom phase Latin America has not only become more resistant to external distortions. The internal volatility of the economies has decreased at the same time, partly in spite of complicated domestic policy conditions. Even though most governments of the region have become more socially responsible and to a certain extent left-leaning, only five Latin America governments reject free market economy and globalization. Four of these countries belong to the poorest in the region. Therefore the five of them participate with a mere 8 percent in the combined GDP of Latin America.

INCOME DISPARITY

The region’s key problem remains the huge income disparity. Latin America has the top position in this respect. Most of the recently elected governments actively contribute to solving this problem. The traditional elites in power up to a few years ago had utterly failed to tackle key issues such as income disparity, poverty and democratic participation of the vast majority of the population. Today these failures are the greatest threat to internal peace. At the same time, they constitute the breeding ground for all types of populism. So a substitution of the traditional elites was – and in some cases still is - inevitable and promises an improvement of general conditions. This is the reason why German companies are not unduly worried about the left-leaning tendencies of most of the present Latin American governments.

Latin America has ceased to be the Cinderella of the world. Its wealth of natural and energy resources and agricultural potential plays an increasingly important role for the region’s position within the world economy. To the same extent, the number of large Latin American corporations acting on the world stage is growing. This is also true for Latin American foreign investments. An early end to the strong Asian demand for Latin American goods is not foreseeable yet. This is a solid foundation for a long-term strategic cooperation. The prices for Latin American export products will remain on a high level. Rising salaries, growing private investment and expanding credit volumes strengthen the region’s domestic economic activity. Latin America’s boom phase can therefore last for quite a number of years if an unexpectedly strong recession of the world economy can be avoided.

MORE THAN TRADE

Because of all these reasons, the attractiveness of Latin America as a trade and investment partner continues to grow also for German companies. However, German-Latin American economic relations are often judged by the very small participation of trade with the region: It accounts for only 2.5 percent of total German foreign trade. In spite of that, in 2007 German exports into the region increased by 6 percent to $30 billion and imports from there by 16 percent to $32 billion. Therefore Latin America remains an attractive trading partner for German companies. Main export goods are machines, vehicles, car components, electro-technical equipment, pharmaceutical and chemical products, optical and measuring devices, plastics, metal and steel products.

But there is no doubt that today Latin America is a lot more important for German companies as an industrial base rather than a simple trading partner. German exports into the region correspond to only a quarter of the value of German industrial production in the region. In Brazil, German companies produce 10 percent of the industrial GDP of the country. In other words, the total value of the production of goods and services by German daughter companies in the region quadruplicates the value of German exports into the region. Thus German exports account for only a fifth of German-Latin American economic relations.

With stocks of more than $71 billion, German investors take third place in Latin America behind the United States and Spain due to, among other factors, a high reinvestment level. The most striking example of a fresh investment is the huge new ThyssenKrupp steel mill near Rio de Janeiro, Brazil. But normally investment inflows like these account for only a small part of German FDI in Latin America. Most of the companies with production activities in the region finance their investments mainly from their local cash-flow.

GERMAN FDI: BRAZIL TOP

By far the largest part of all German FDI in Latin America went to Brazil and Mexico. Brazil participates with about 37 percent and Mexico with 28 percent These two countries lead the ranking by a large margin. Argentina follows with 4.3 percent, Trinidad & Tobago with 3.3 percent, Chile with 2.8 percent, and Colombia with 1.4 percent. Most German direct investment in Latin America is to be found in the industrial sector. Traditionally, German FDI activities in Latin America concentrate on car manufacturing, the chemical and pharmaceutical sectors, electrical engineering and machine building. On the whole, manufacturing accounts for more nearly 90 percent of all German FDI stocks in Latin America. In this sector German companies occupy the second place after U.S. companies. As a region, Latin America is responsible for about 3-5 percent of the global turnover of large German companies.

There is also some German investment in infrastructure, agriculture, tourism, mining (including oil and gas production) and the financial sector. Large German building companies have increased activities among other countries in Brazil, Chile and Panama. Further activities in non-traditional sectors are to be expected. Apart from the examples already mentioned, today the following branches are especially attractive for German companies: renewable energies, biofuel, medical technology, structural and civil engineering, cosmetics, equipment for the energy sector, software development, insurance activities, mining supplies, environmental technology, safety engineering, food processing, as well as quality management and control.

Altogether, the confidence of the German business community into Latin America has returned. And there is also a well-founded hope that this time growth will be sustained. This is the reason why for the first time after nearly 20 years we can see new Latin American investment and trading projects also of small and medium-sized German companies hitherto not active in the region.

Peter Rösler is Manager of the Lateinamerika Verein (formerly Ibero-Amerika Verein), the German Business Association for Latin America. He wrote this column for Latin Business Chronicle.

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