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Countries like Argentina and Venezuela will be most impacted by the global slowdown, experts say. Here Argentine capital Buenos Aires. (Photo: Galio)
Monday, November 17, 2014

Latin America Investments 2015: Decreasing Flows

Latin America should expect decreased capital investment in 2015, experts predict.


Inter-American Dialogue

The U.S. Federal Reserve confirmed in late October that it would end its latest round of quantitative easing at the same time that lower commodity prices and slower growth in Europe and China are also creating challenges for some Latin American economies. What is the outlook for investment in the region next year in light of the changing external environment? Which countries are best positioned to weather the changes, and which countries are most vulnerable?

Alfredo Coutiño, director for Latin America at Moody's Analytics: Latin America will face a double challenge in 2015: reviving economic growth and dealing with the end of easy monetary conditions in the world. In the first case, the region has been immersed in a prolonged deceleration since 2011, thus making urgent for governments to reverse this downward trend in order to alleviate the increasing social effervescence. This implies to stop playing with transitory--and in some cases abusive--policy stimulus and focus more on a structural solution for a structural weakness. In the second case, the era of easy and cheap money will start to arrive at its end in 2015, which will imply tighter conditions and more expensive financial costs. Reviving growth entails strengthening the fundamental sources of permanent growth, mainly investment and technological change, which requires not only deregulation but also reforms in key sectors. These actions will allow some countries to become more attractive to foreign direct investment. However, the key is not just to approve reforms but rather make reforms sufficiently deep to produce significant changes and openness. In this regard, countries better positioned as attraction poles for FDI will be those already embarked in structural reforms, such as Colombia, Peru, Chile and Mexico. On the other hand, the global monetary reversal, which will start in the United States in 2015, will generate financial volatility and consequently capital flight from emerging markets. In both cases, the nations more affected will be Argentina, Venezuela and countries with low political capacity and willingness to implement reforms. Hence, prospects for capital flows in Latin America will be determined by these two components: some inflows of FDI attracted to reformist countries and outflows of speculative capital. In the end, given the reduction of global liquidity, Latin America should not expect increasing capital investment, but rather decreasing flows in 2015.

Lisa M. Schineller, managing director of Latin American sovereign ratings at Standard & Poor's:
 Both the current slowdown and outlook for moderate growth in Latin America reflect only in part the less favorable external conditions--slower trend growth in China, lower commodity prices and prospects for volatility in global capital markets stemming from gradual normalization of monetary policy in the United States. They also reflect domestic policies, which are key in differentiating the underlying economic fundamentals and the ability to weather these changes. Standard & Poor's Sovereign Ratings reflect these fundamentals. In many instances, there has been significant progress over the past decade in terms of policymaking and sounder fundamentals as evidenced by important upgrades into the investment-grade category: Brazil (despite a downgrade earlier this year), Peru, Colombia, Panama and Uruguay--joining Chile and Mexico. Today, over 80 percent of the region's GDP is in the investment-grade category, compared with about one-third in 2002. However, it's still the case that the majority of our ratings in Latin America are in the speculative-grade category; Argentina is in selective default, and Venezuela's rating in the 'CCC' category highlights its high risk of default. The region is better placed, on balance, to confront a less-favorable global context when looking at overall government debt levels, given that much of the debt of governments in the investment-grade category are in local currency, and external debt indicators remain much stronger than a decade ago. However, it's also the case that, except for Mexico most recently, the boom years of rising commodity prices and easy money generated complacency and a stall in reform efforts to raise growth, investment and productivity--even in some of the investment-grade countries, particularly Brazil. This in turn dampens the region's trend growth outlook. Yes, credits in the investment-grade category are better able to weather these global shocks than are speculative-grade credits given more predictable policymaking, better institutions and fundamentals. However, their growth prospects may not be that dissimilar from some weaker, speculative credits absent reform -- a reminder of the middle-income trap.

Alberto J. Bernal-León, head of research and partner at Bulltick Capital Markets: I must admit that the virulence of the adjustment that has taken place in the past couple of weeks in the price of commodities has caught me by surprise (too much, too fast). The more than 20 percent correction that we have seen in the price of oil since the end of June is clearly a negative development for most countries in Latin America, because the terms of trade of those countries will be negatively affected by the latest commodity price performance. Therefore, it is logical to expect that unless the price of oil recovers soon, the willingness of capitalists to invest in new supply will fall. Lower levels of investment are clearly a negative growth development for energy-rich countries such as Mexico, Brazil, Argentina and Colombia. I do not include Venezuela in this discussion, because Venezuela is a case by itself--since no meaningful capital will go to Venezuela to search for new supply, even if the price of oil recovers. The 'good' part of this story is that lower terms of trade also mean that floating currencies weaken, and this effect should help to make non-traditional exports of the region much more competitive going forward. Despite the respite that exports of manufactured goods will experience in the forthcoming quarters following weaker foreign exchange rates, I expect the negative developments to outweigh the possible positive developments. Hence, the most probable outcome is that the region will once again grow below potential, one that we calculate stands at about 3.5 percent year-on-year, in 2015.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
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