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The Escondida mine in Chile, the world's largest copper producer. (Photos: BHP Billiton)
Wednesday, June 12, 2013
Perspectives

Latin America: Resources, Costs Drives FDI


Natural resources and attractive labor costs help spur FDI in Latin America.

 

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Latin America and the Caribbean received a record $173.36 billion of foreign direct investment last year, a 6.7 percent increase from 2011, according to data released May 14 by the United Nations Economic Commission for Latin America and the Caribbean. What factors and global trends have been driving these investments? Which countries fared best, and worst, in attracting foreign investment, and why? Will FDI in 2013 and 2014 continue to gain steam?

 

Roberto Baquerizo, member of the Inter-American Dialogue and managing director at ProVentures: Indeed, Latin America was able to increase its share of FDI by 6 percent, even when worldwide FDI flows decreased globally by 13 percent for the year. The following factors could help explain the increased share in Latin American FDI: Labor and transportation costs weigh heavily on companies' decisions to invest abroad. Current Latin American labor costs compare very favorably with some Asian ones, and being geographically closer to developed markets implies lower transportation costs. For example, costs of production in Taiwan and Korea are much higher than in Latin America, and China's labor costs are also rising to the levels of those found in Mexico. The region's abundance of natural resources such as minerals, in addition to agriculture, have attracted large capital investments. By all indications, this trend will continue. A relatively new phenomenon is the expansion of multi-Latinas, the growing number of Latin American companies investing in other nations in the region. Chilean and Mexican companies have particularly expanded their presence into other areas. Brazil, Chile, Colombia, Mexico and Peru have benefitted greatly from the increased flows. While this is good news for the region, it is critically important to assess this new development against the background of falling capital flows to emerging countries. Data from the International Institute of Finance show that between 2002 and 2007, net private capital inflow to emerging markets increased from $100 billion to $970 billion, peaking at 6 percent of GDP. In sharp contrast, they only reached about $770 billion or 3.3 percent of GDP in the most recent report. Further, an analysis of FDI in relation to GDP for Latin America alone reveals that flows have decreased from more than 4.5 percent to 3 percent of GDP today. In other words, even though the region is faring much better than the past when compared to other parts of the world, total capital flows and FDI in relation to GDP are not back at levels seen in the past decade. This might be a very important warning sign of future trends."

 

Alfredo Coutiño, director for Latin America at Moody's Analytics: Latin America continues to be an attraction pole for foreign direct investment, not only as a result of its positive economic growth, but also because of the opening of strategic sectors to foreign investors. Despite the global risk aversion and financial turmoil, the region attracted more investments in 2012, with Southern Cone countries being the leaders and Mexico and Central America the laggards. Several factors are behind the region's attractiveness. Among them are still-profitable commodity prices, which have stimulated investments in those exporting sectors, and governments' deregulation and economic reform efforts, which have attracted investors to sectors traditionally reserved for the government, such as oil, mining and electricity. Another factor has been the region's need for modern infrastructure, which has triggered investment in construction. In addition, a rising Latin American middle class has improved the purchasing power in the region, with positive consequences on retail consumption. The vast discoveries of crude oil reserves have turned Brazil into the champion of FDI since 2007, when it displaced Mexico. Last year, even Chile and Colombia became a more attractive destination for FDI, leaving Mexico in the fourth position due to the largely lack of structural reforms. Investment grades received by Brazil, Peru and Colombia in recent years seem to be paying off in terms of FDI. Investment prospects look positive for the region as governments are expected to continue reforming their economies and strengthening their democracy, which are key factors for investors. In fact, Mexico is expected to regain some positions in the FDI ranking given the prospects for reforms in strategic sectors such as telecommunications, oil and banking. Latin America will continue to be a 'promising land' for investors as long as governments in the region continue to pursue the right course.

 

Luis Oganes, managing director and head of Latin America Research at JPMorgan Chase & Co. in New York: FDI figures for 2012 published last month by ECLAC certainly brought good headline news: despite the slowdown in global FDI flows, Latin America and the Caribbean managed to attract nearly 7 percent more gross inflows last year at $173.36 billion. Positively, these inflows--which by definition are more stable than portfolio flows--more than covered the current account deficits in the countries that registered external gaps last year. However, such headline numbers mask a lot of underlying trends that make any comparison across countries impossible without further data disaggregation. Indeed, ECLAC itself warns that reinvestment of profits by multinational companies now accounts for nearly half of the FDI registered in the region. This helps to explain, for example, why the ECLAC figures show that FDI into Argentina increased a whopping 27 percent to $12.5 billion in 2012 relative to 2011, which is a level similar to those of Mexico and Peru but that reflects the fact that multinationals have difficulty to obtain foreign exchange and are being forced to reinvest earnings. Excluding them, Argentina's net FDI reached only $4.6 billion last year. Perhaps a more accurate picture of FDI dynamics is provided by fDi Intelligence, a unit of The Financial Times, which tracks global 'greenfield' investment trends and only includes new investment projects and significant expansions of existing projects, and excludes equity or non-equity-based investments. Its latest report shows that in 2012 the number of FDI projects declined 16.38 percent globally and 19.97 percent in Latin America and the Caribbean, with Brazil maintaining its dominant position in the region, but Chile, Colombia and Mexico increasing their share of recorded FDI projects. With GDP growth expected to rebound modestly in Latin America in 2013, the hope is that FDI keeps up accordingly.

 

Lisa M. Schineller, director of Sovereign Ratings at Standard & Poor's in New York: Six economies in the region (Argentina, Brazil, Chile, Colombia, Mexico and Peru) accounted for 85 percent, or $149 billion, of FDI into Latin America and the Caribbean in 2012. At a record high overall for the group, the 4 percent increase last year was much below the 36 percent jump in 2011. In general, strong FDI inflows to Latin America reflect the combination of higher growth in emerging markets (and Latin America) vis-à-vis the advanced economies, the opportunities offered by expanding domestic markets as the middle class grows across the region, and a significant pipeline of commodity projects in South America. We expect this trend to broadly continue, though with risk of being at a somewhat more moderate pace as medium-term growth across the region moderates. For Chile, Colombia and Peru, FDI hit new record highs totaling $58 billion. More than half went to the oil, gas and mining sectors. Even if some of the projects in a significantly large pipeline don't materialize (such as in Peru), the outlook for FDI should remain solid. Signs of a secular correction in commodity demand and prices, however, would likely slow the pace of investment potentially even in committed projects. Brazil continues to lead the region in FDI inflows, though they declined slightly to $65 billion from the previous year's record high. FDI in oil and gas could trend higher as the government has several oil and gas bid rounds this year for the first time in more than five years. In contrast with near record high FDI elsewhere, FDI to Mexico has trended lower; even adjusting the $13 billion figure for last year for the Santander transaction of $4 billion that reduced inflows, FDI remains below the pre-global recession pace of $25-30 billion. However, the pipeline of announced investments in the auto sector coupled with the prospect of reform in the economy that includes opening some sectors should push up inflows over the next several years.
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Republished with permission from the Inter-American Dialogue's daily Latin America Advisor 

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