While the Latin America of today remains a divided continent in many ways, there is a clear new dynamic for investment and trade, and the opportunities are many, writes Eleanor Wragg.
For several years, it’s been possible to split Latin America neatly into two blocs: the Atlantic-facing countries, such as Mercosur members Brazil, Venezuela and Argentina, whose economies are characterised by greater state involvement, protectionism and a somewhat negative attitude to globalisation; and the Pacific-facing countries, including Chile and Mexico, who tend towards the other side of the economic coin, embracing free trade and the free market. Almost every country in the region can be placed into one or the other camp.
But is this set to change? Today, the end of the China-led commodities boom has led Brazil to look
at greater economic pragmatism to boost its prospects, while new centre-left Chilean President Michelle Bachelet is tipped to improve her country’s frosty relations with the region’s more left-wing governments. The newest Latin American trading pact, the Pacific Alliance, made up so far of Chile, Mexico, Colombia and Peru, and seen as a pragmatic alternative to the more political groupings, could even lure additional members from the other side of the continent. Adding to the mix is a raft of presidential elections in the region in 2014 and the Brazilian World Cup. Is a reshaping of the Latin American economic landscape on the cards, or will the two Latin Americas continue to diverge?
This year, the outlook looks broadly positive for the region. The IMF’s World Economic Outlook 2014 pegs Latin American growth at 3%, up from 2.6% last year, while in a research note, Moody’s director Alfredo Coutino recently said that 2014 would be the year it had the opportunity to start a new cycle of expansion, on the back of a better global environment and a wave of domestic structural reforms.
“There is lots of liquidity in the region,” says Antonio Alves, regional head of the Americas at IFC, who highlights Brazil, Chile, Colombia, Mexico and Peru as the most liquid. However, because of the high liquidity, banks are facing increasing competition in funding deals: “Funding pricing is really under pressure, so what’s happening, especially with the large transactions, is the borrower is splitting the deal among different players in order to get the best results, so as a result we’re seeing more syndicated loans.”
As Colombia embarks on an extensive infrastructure development programme, Peru’s mining sector recovers and Mexico’s manufacturing sector takes back ground lost to China, banks are increasingly upbeat about the opportunities in the region.
“The question is not where do we see opportunities, but rather where don’t we,” says Sandra Nolasco, head of global trade at BBVA. “We are seeing many opportunities related to capital goods, for example ECA financing either linked to project finance or not. Also big growth will continue to come from the typical transactional trade flows and supply chain finance.”
A region divided
However, there seems to be increasing differentiation within the region, with BBVA Research pegging the growth of the Pacific Alliance countries for this year and next at more than double that of the Mercosur economies of Argentina, Brazil, Paraguay, Uruguay and Venezuela.
“From our point of view we have in fact two Latin Americas and two outlooks,” explains Nolasco.
“You have the Atlantic-facing Latin America which we – at BBVA – expect to see growing by 1.5% in 2014 and 1.8% in 2015, which compares with the Pacific-facing countries where we expect growth in the area of 3.8% and 3.7% for 2014 and 2015 respectively.” This is in sharp contrast to just a few years ago, when the Mercosur countries’ growth outstripped the region’s average.
“Mercosur has been criticised lately as not being as effective as people thought it would be,” points out Corina Monaghan, head of North America crisis management at JLT Re, adding that the perception is that it is more of a political body than a trade body.
Others go further: “Mercosur, in my opinion, is history. I think it is totally discredited,” says Carlos Caicedo, Latin America senior principal analyst for IHS.
During the commodities boom, the Mercosur countries’ economies were goosed higher by the world’s voracious appetite for the iron ore, oil and other goods these countries have in abundance.
Riding the wave of high prices, major areas of trade reform were largely ignored. But this reliance on commodities made them vulnerable to price changes, and as the boom has ended, so their economies have slowed. With just four free trade agreements, with Peru, Egypt, Israel and the Palestinian Authority, (the trade deal with the European Union, on which talks began in 1999, still shows no signs of coming to fruition), the group is fast losing its footing.
“Higher tariffs and higher level of red tape are the main roadblocks for growth in Mercosur,” says Nolasco, who adds that the Pacific countries have done just the opposite: “Back in 2005 they established the basis of the direction they wanted to follow and they’ve clearly chosen free trade.”
Brazil look to the Pacific
Could it be time for Brazil to reconsider its place in Mercosur? “The next decision that Brazil needs to take is whether to go ahead with Uruguay and sign an agreement with the EU and drop Argentina,” says Caicedo. “Brazil is a global player. If they become trapped in a trading group of only four countries with special different import controls and import tariffs, it will upset their trading partners and be very counterproductive.”
Mercosur, rather than being a support for foreign policy and for trade policy is becoming an obstacle to Brazil, so is there a chance the Pacific Alliance might attract Brazil to its ranks? Economic co-operation and intra-regional trade makes sense to the Pacific Alliance. One example posited by analysts of how the countries can stitch together a supply chain would be Chilean winemakers teaming up with Mexican fertiliser producers, label makers from Peru and glass makers from Colombia to make cheaper, better bottles of wine.
“By taking advantage of economies of scale, the Pacific Alliance countries would be a mightier force in trading with large partners as opposed to individually,” says Monaghan, who points out that Brazil has now recognised that the idea of the pact is actually a very fine one: “I think they are looking to cosy up with the Pacific Alliance.”
“Brazil is concerned that the Pacific Alliance is going ahead and could be more successful. They don’t want to be left out of the race,” adds Caicedo. However, Brazil would struggle to sign trade agreements with the same ease as Chile or Colombia. “The problem for Brazil is it historically has sought to protect its national champions. Brazil obviously should liberalise its trade more but it also has to protect its industries and that is a big dilemma.” As a result, there’s little chance of Brazil becoming a full member of the Pacific Alliance, although it would be fair to say it may be more inclined to adopt some of the pact’s philosophies in order not to be left behind.
Newly-elected Chilean President Michelle Bachelet may be the key Brazil is looking for to move closer to its cousins on the Pacific coast. In her campaign manifesto, she reportedly said that while she “valued the efforts of the Pacific Alliance integration”, she wanted to avoid any moves that could be divisive to the region, and is expected to try and forge closer links with neighbouring Argentina as well as powerhouse Brazil.
“It would make sense for Chile’s Bachelet administration to partner more with Brazil in terms of business and trade,” says Monaghan. The question, however, will be around Mercosur, which is an agreement that has caused tension before between both countries: “Chile has historically leaned towards full trade liberalisation and has resisted being a full member of Mercosur for various reasons. However, now that Brazil and its members are evaluating the effectiveness of Mercosur while simultaneously acknowledging the positive aspects of the Pacific Alliance, the time is perhaps ripe for Chile and Brazil to join forces.”
LatAm goes to the polls
With two elections down already – the hotly-contested poll in El Salvador which ended in a controversial run-off and Costa Rica’s which saw the first third-party candidate in over 40 years – the region has another five on the cards this year in Panama, Colombia, Brazil, Bolivia and Uruguay. In a region where a change of administration can mean an about-turn in both political and economic ideology, this year doesn’t look to hold many surprises.
“We don’t see significant shifts like what happened back in 2006 or 2007 when you saw Correa, Morales and Fernandez, the leftist candidates winning,” says IHS’s Caicedo. He expects Brazil’s Rousseff to win in the second round, and also sees no change for Colombia: “The big surprise would be Santos losing, because it will affect the prospect of the peace process, especially if the winner is one of the candidates opposing the peace process or a candidate supported by former President Uribe.” He concludes that he doesn’t see major shifts in any particular country. “The other countries are relatively small countries which are unlikely to have any regional impact.”
There are some concerns, though, about the impact of the World Cup, held in June, on Brazil’s elections just a few months later: “If anything goes wrong, it will have a direct impact on the elections. The event is too close to the elections, it’s very sensitive, and the banks know that. We are going through a very important second semester where things can really change and because of that, some of the players are also adopting an approach of wait-and-see,” says the IFC’s Alves.
However, not everyone’s worried. JLT Re’s Monaghan takes a different view: “I feel that the World Cup will have little impact on Brazil’s election. The whole uprising in Brazil has been very much of a middle-class uprising because it’s been about Facebook and Twitter, but I think that Dilma and her party are seen by a massive part of the population as the party that basically did away with real poverty and misery in Brazil. People remember that and that is a massive percentage of the population. These social reforms that Lula started out with, and there are many, have enabled people to eat. There are no longer people in Brazil that starve. Don’t forget the massive population that Brazil has and what does the majority represent? Not the middle class. Not yet.”
Today, Latin American trade and investment is increasingly dominated by the ‘multilatinas’, homegrown Latin American multinational corporations who are crossing borders within their own backyard and could play a role in bringing the region together. From Colombian companies investing in Central America to Chilean companies taking over the South American retail industry and Brazilian companies dominating the construction sector in Colombia and Peru, there is a new drive for foreign investment among Latin American companies, something which hasn’t gone un-noticed by the banks: “We see an enormous increase in the intra-regional LatAm flows,” says Nolasco, who points out that this is just the beginning: “Currently, trade between the countries of the Pacific Alliance represents about 4% of the total and that is very small if you consider that 35% of the people in South America are in that region, so we think that the potential is huge.”
“There is a bit of paradox occurring at the moment in many parts of South America. While left-leaning governments appear to be the trend in certain countries, the middle class is emerging in most countries and the opportunities for foreign investment and trade are huge,” adds Monaghan. It’s not all plain-sailing, though. She warns of the large spectrum of political risks in the region, ranging from moderate to very high risk, which can impact the financial viability of foreign direct investment and trade, although this can in many cases be mitigated through political risk insurance.
“Twenty years ago, we only looked at how much investment Germany or the US or Spain was going to make in Latin America. This year the foreign direct investment flows now are as important coming from Chile into Colombia or from Brazil into Cuba,” concludes Caicedo.