Published: January 01, 2000
Latin America is continuing its two-speed economic development with regional growth driven by the stronger economies of Peru, Colombia, Ecuador, Chile, Mexico and Brazil. Venezuela and Argentina are sorely lagging due to runaway inflation and being hampered by structural, political, and institutional problems caused by government intrusion into the marketplace. For companies investing in the region, all have opportunities – but choosing the countries that are most suitable for a company’s needs is an essential part of the process.
For the fast-growing economies of Latin America, overall prospects continue to be favourable. Brazil and Mexico represent 60% of Latin America’s GDP [1], and while Brazil’s GDP growth has slowed more than expected in 2013 and Mexico is doing only marginally better, the economies of Chile, Colombia and Peru grew at rates of 5.6%, 4% and 6.3% respectively in 2012.
In the region’s stronger economies, growth is driven by a number of factors. The main catalysts in Brazil continue to be infrastructure projects such as the 2014 World Cup, 2016 Olympics and anticipated investments in ports and transportation as well as continuing, though waning, consumer strength. In dollar terms, Brazil is also the region’s most important destination for foreign direct investment (FDI), particularly attracting Chinese investment in areas including energy and metals.
In Mexico, growth is likewise being driven by the influx of new FDI, most of which is focused on manufacturing [2]. Mexico’s growth is also a reflection of increasing labour costs in Asia, which are prompting some US companies to consider moving manufacturing operations closer to their consumer markets.
From a policy perspective, the US has recently ‘rediscovered’ Latin America and as such is pushing for stronger trade with the region. However, these trade ties face some headwinds in the form of the growing importance of south-to-south trade. In the first half of 2012, the value of Latin America’s exports to China grew by 8.8%, while exports to Asia-Pacific as a whole increased by 6.9%. In comparison, exports to the rest of the world rose by 3.5% in the same period. Brazil is the region’s largest exporter to Asia-Pacific, accounting for 39% of Latin America’s exports into the region and 44% of those destined for China. [3]
The Pacific Alliance bloc, formed in 2012, will have a significant bearing on the region’s trading links in the future. The current Alliance members—Chile, Colombia, Mexico, Costa Rica and Peru—account for 36% of Latin America’s total GDP and 55% of the region’s exports, thereby already eclipsing Brazil. [4]
In May 2013 the Pacific Alliance nations agreed to the elimination of 90% of all import tariffs among the member countries with the remaining 10% to be cut as soon as practical. The free-trade agreement allowing for customs tax free goods and services between the Alliance countries may now prompt companies to favour one of the Alliance countries when looking to make an investment into the region. With the value of the Mercosur customs union thus challenged both internally and now externally, investing in an Alliance country might be seen by some as the better option due to market size and soon-to-disappear customs taxes, with Mexico a likely winner due to its favourable geographic location and demographics.
While news headlines have focused on the major investments made by large multinationals into Latin America, interest in the region is by no means confined to the biggest corporations. A significant number of middle market companies with global market aspirations are looking to Latin America to drive their international growth, particularly with Europe still struggling to recover from its ongoing economic difficulties and a slowdown in China.
There is plenty to recommend Latin America to such companies. According to the United Nations Conference on Trade and Development (UNCTAD), Latin America is the region in which FDI showed the highest growth in 2012. Within the region, Chile saw the largest increase, though still lagging Brazil, the largest by value.
As well as offering relative proximity to the US or European headquarters of these companies, the region is also closer to those companies in terms of language and culture than many countries in Asia. For example, a company located in the southwest United States is likely to be culturally closer to Latin American countries than to China or Vietnam.
The combination of strong economic growth, cultural affinity and geographical proximity makes Latin America an attractive destination for corporations expanding internationally. But investing in Latin America is not without its obstacles. Countries of the region are diverse in terms of their tax and regulatory climates as well as in their differing bureaucratic requirements. When deciding in which country or countries to invest, companies therefore need to consider a number of different factors.
Many gravitate to Brazil only because of the size of its economy. However, the level of bureaucracy in the country can be challenging, even for domestic operations, and infrastructure may be found wanting. Some companies may decide that a more effective strategy when entering the region is to focus initially elsewhere and use experience gathered as a stepping-stone into a larger market, such as Brazil, at a later date.[[[PAGE]]]
After Brazil, companies tend to focus on Mexico because it is a relatively low-cost country with long-standing trade ties and geographic proximity to the US. Companies are increasingly considering developing their manufacturing operations within the country, or indeed moving some manufacturing operations from Asia to Mexico, in order to take advantage of these factors.
While investments in Brazil and Mexico tend to be broader based, investments in other countries tend to be focused with Peru concentrated in communications and mining (50%+ of FDI), Colombia in oil and mining (74%+) and record investment in Chile in mining and services (75%).
Once the choice of investment locale is made, the importance of working with a bank that understands the region’s local markets cannot be underestimated. For smaller companies entering these markets, choosing the right bank can be challenging. Companies need to identify a bank which is able to assist them in their domestic needs as well as provide the sophisticated trade finance tools and cash management reporting capabilities to which companies are accustomed in their home markets. Typically, corporations investing in these countries are also looking to maintain their operational efficiencies while minimising investment dollars needed through the generation of cash flow capital via the implementation of sophisticated supply chain solutions – primarily on a cross-border basis, but also increasingly on a national basis such as is already very common in Mexico and Brazil.
Companies may find that their local requirements can only be met by domestic banks within the region which are able to offer the full range of local products. While the majority of large international banks do not offer these local solutions, they are able, via strategic partnerships with local banks, to offer the best of both worlds – a locally delivered solution integrated into a global platform with ties to powerful reporting and management systems – while simplifying the global treasury perspective.
While the countries of Latin America vary considerably in their economic prospects and business conditions, the faster-growing markets offer companies some attractive opportunities to grow their businesses. For companies expanding into the region, choosing which country or countries to focus on is a crucial decision. New initiatives like the Pacific Alliance will play an important role in the decision making process, as of course, is choosing the right banking partner.
Notes
[1] The Economist Intelligence Unit Limited, “Latin America as an FDI hotspot — Opportunities and risks,” 2012
[2] The Economist Intelligence Unit Limited, “Latin America as an FDI hotspot — Opportunities and risks,” 2012
[3] Observatorio America Latino Asia Pacifico, "Statistical Bulletin Latin America — Asia Pacific," 2012
[4] "The Pacific Alliance: Market-friendly Integration" Latin Trade, May 30, 2013
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