What are the prospects for FDI in Latin America this year and beyond? Five experts share their insights.
BY LATIN AMERICA ADVISOR
Latin America and the Caribbean received a record $105.9 billion in foreign direct investment (FDI) last year, up from $72.9 billion in 2006, the United Nations' Economic Commission on Latin America and the Caribbean, or ECLAC, said last week. What are the prospects for FDI in the region for this year and beyond? What will be the key factors affecting FDI flows?
Arturo Porzecanski, Professor of International Finance at American University: The ECLAC report includes other interesting trends that didn't make it to their headline, but which help put the quoted, eye-catching figures in their proper context. First, the numbers cited are for gross FDI inflows and thus exclude FDI outflows, which have become increasingly significant, as many Latin American corporations have become multinationals (notably, the likes of Vale and Cemex), and as many of the region's institutional investors have diversified their holdings by investing abroad. On such a net basis, FDI into Latin America net of outflows has been averaging a more modest $40-70 billion per annum. Second, when compared to other regions of the world, Latin America still lags behind. The Asian and Eastern European regions have been able to attract—and retain—much more FDI and other equity investment flows, such that Latin America only leads Africa and the Middle East. Third, it is sad to see that some countries in the region, such as Bolivia, Ecuador, and especially Venezuela, have done a good job of scaring FDI away and of spurring capital flight. Fourth, though large, well-managed countries such as Brazil, Chile, Colombia, Peru, and Mexico are attracting most of the FDI, some of the smallest countries have been able to capture investment inflows that, in relative terms (say, compared to GDP), are very significant—the likes of Costa Rica, the Dominican Republic, Honduras, and Uruguay.
Alfredo Coutino, Senior Economist for Latin America at Moody's Economy.com: Latin America has become one of the most attractive emerging markets not only because of its recent steady expansion, but also because of its improved macroeconomic situation and remarkable progress in structural change. The ongoing commodity boom has also reinforced the region's economic fundamentals and strengthened its potential capacity to grow. Three main factors are behind Latin America's attractiveness to foreign investors. The first is the better macroeconomic situation, reflected in a five-year expansion without imbalances. The region has been performing at or above the equilibrium: fiscal imbalances have been structurally corrected, increasing surpluses are being reported for trade balances, and external debt ratios have been remarkably reduced. The second factor is the strength of the domestic market, in which fixed investment has been one of the most dynamic components of the economy's absorption, together with strong household consumption propelled by an improvement in workers' conditions. And the third is the advance of structural reforms, in which the region continues to open itself to free market policies. All these factors have reinforced the region's potential capacity, but also reduced its external vulnerability, which is well appreciated by foreign investors. In addition, the region is expected to remain as one of the most attractive markets this year, thanks to its high probability of decoupling from the US recessionary cycle. This is possible because of the region's healthy macroeconomic situation, which is allowing local governments to use their savings to implement countercyclical measures to mitigate the negative effects of the US downturn. Therefore, Latin America will continue to attract foreign investment this year.
Graciana del Castillo, Adjunct Professor of Economics at Columbia University: The 2007 surge in FDI to Latin America is welcome, but should not lead to complacency. It is due to a large extent to the rise in the price of natural resources; to economic growth, particularly in Brazil; to a more investor-friendly oil framework in Colombia; and to DR-CAFTA. A more careful analysis, however, shows that the region is receiving only 7 percent of world flows, a slight fall from last year. At its peak in the 1970s, and again in the 1990s, Latin America's share of total global FDI reached 17 percent and averaged 11 percent in 2000-2005. The region is losing market share vis-a-vis other emerging markets, with its share roughly halving from 40-50 percent in the 1970s. Another concern is that FDI flows into production of natural resources for export do not create high employment, much needed in a region where roughly 50 percent of workers operate informally. Prospects for 2008 depend on efforts by governments to increase growth and improve the business climate in their economies. Prospects in Brazil are good. Mining, hydrocarbon, and food producers will also do well, but flows to the northern countries may fall as exports and tourism are affected by the US crisis. The challenge for the region is both to become more competitive and recuperate market share and to attract FDI flows that create employment and other economic links.
Arturo Galindo, international consultant and a former advisor to the Banking and Financial Institutions Association of Colombia (Asobancaria): I believe that the trend in FDI flows should continue into the near future. Despite the fact the FDI in the oil sector has been concentrated in Colombia, there is strong potential for increasing investment in this sector in other countries as well as in biofuels, given oil prices. FDI in other manufacturing sectors has also been increasing, and there is no reason to expect this trend to subside. I think that there are two crucial factors that can affect FDI to the region in the near future: the behavior of the US economy and the geopolitics of the region. With respect to the former, up to now the US slowdown has not affected FDI, but given that the severity of the slowdown is still uncertain, so are any possible consequences. A possible consequence of a deep recession is a slowdown in FDI flows. Nonetheless, most analysts are expecting a quick rebound. In this context, FDI could remain unaltered. The second factor is geopolitics. From my perspective, some countries are adopting very strong leftist positions, or alternatively positions either strongly in favor of or positions that do not condemn terrorist groups. It could be the case that in the future firms in countries like the US could face difficulties dealing with firms in countries that support these illegal groups. This could also have an impact on FDI.
John Mein, President of Consentes Institution Building in Sao Paulo: FDI in Latin America increased as the worldwide volume of FDI increased. Although the overall numbers for FDI in Latin America have risen, they are the result of increased investments in very few of the countries in the region. The issue for the future is whether these countries will continue to be attractive for FDI. The differences in strategies and policies of the countries in the region reinforce the argument that it should not be seen as one monolithic bloc, except as a figure of speech. On the one hand, there are countries like Brazil, Mexico, Chile, and Peru, which as a result of effective macroeconomic policies have obtained investment grade and have become the preferred destination for foreign direct investment. On the other extreme, there are countries whose leadership has chosen populist policies and an aggressive stance with regard to international investments, like Venezuela and Bolivia, and have nationalized companies owned by international companies. A third group of countries, exemplified by Argentina, have chosen policies which although not expressly hostile to FDI have led to uncertainties as to inflation and the predictability of the regulatory environment. The countries in the first group should continue to have an environment that is business-friendly, with major investment projects in the pipeline in mining, energy, agribusiness, and infrastructure, and most importantly with reliable, predictable, and sound macroeconomic policies. Because of increases in investments in these countries, it is possible that Latin America will continue to maintain, and maybe increase, its participation in world FDI flows over the next few years.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.