Mr Dietz, how can small and medium-sized IT companies score in Latin America?

The digital transformation is currently driving almost every industry in the world. The Blockchain, the Cloud, the Internet of Things and Artificial Intelligence are technologies that not only open doors to new business fields, but also offer enormous opportunities in terms of productivity-increase and process-improvement. There is great potential here, especially in the industrial sector: According to MarketsandMarkets, global sales powered by Industry 4.0 solutions will increase by an annual average of fifteen percent in the years preceding 2022. IT companies in Germany have long-since recognised this, and have already successfully implemented vanguard projects. This accumulated experience is an ideal starting point from which to support companies in Latin America. These have at times been dependent on the industrial and technological competence of nations with strong manufacturing industries. The challenge for German IT companies, in turn, is to think globally and to dare take the step across the ocean. Otherwise we will be ceding promising business opportunities to other countries, such as the USA. So let us take this advantage, and the cachet of “Made in Germany”, to Latin America!

LADW Vice Chairman Ulrich Dietz - GFT

Ulrich Dietz

Chairman of the Administrative Board of GFT Technologies SE and LADW Vice Chairman

Sunday Brief N°8

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It’s difficult to make political forecasts for Latin America at present. Which issues are economically topical?

Latin America is facing important elections: a new president will be elected in Colombia in May, in Mexico in July, and in Brazil in October. It is currently difficult to predict who will come to power. This exacerbates uncertainty in the region. Around sixty percent of Latin Americans live in these three countries. More than two thirds of the continent’s economic output is generated there.

Nonetheless, issues that will affect the economy and investors in Latin America in the near future can be identified.

Stable economic framework

All major economies on the continent will grow this year and next, albeit at only about three percent, i.e. less than the global economy as a whole. Agriculture, mining and consumption are the drivers of growth. Industry and investment are staggered but increasing. Inflation, current account balances and foreign exchange reserves are largely as desired. Only Brazil and Argentina are burdened by high budget deficits. In the short term, governments have two options to stimulate new growth despite their limited state resources; on the one hand, by means of increased integration amongst themselves, and on the other through infrastructural investment.

More pressure for integration

Despite numerous attempts over the last fifty years, Latin America is little integrated. Only seventeen percent of trade takes place within the region, which is why states are ill-equipped for negotiations on integration with other countries or regions. Brazil has long hindered cooperation in the region. This is tentatively beginning to change. Negotiations between the Mercosur economic community and the EU, Canada, and the Pacific Alliance of Latin America are progressing. But scepticism as to whether Latin America will join together is particularly marked in Mexico. In the past, Brazil has failed to adhere to agreed rules. Integration in Latin America might gain fresh impetus from the USA’s isolation policy.

Infrastructure as a driver of growth

One of the causes of poor integration is the infrastructure between the Atlantic and the Pacific. There is a lack of roads, electric connections, ports, and communication networks. Governments can swiftly stimulate the economy by investing in infrastructure. According to CEO of Siemens Joe Kaeser, speaking at the World Economic Forum on Latin America in São Paulo, financing is not the problem: capital for investment is available worldwide, it is the lack of planning that is the obstacle to investment. Given their empty coffers, governments are obliged to work with private investors by way of alternative to quickly create jobs and investment.

China’s growing influence

If Latin America itself does not improve its infrastructure itself, then China will take the initiative as an investor, as is already happening everywhere. According to Georgina Baker, Vice-President of the International Finance Corporation of the World Bank, China has a clear plan, high risk-tolerance, is very familiar with emerging markets and has almost unlimited capital.

Continued influx of foreign capital

Foreign capital influx has remained stable during the recession and political crises subsequent to 2013. This applies both to the states of the Pacific Alliance (Chile, Peru, Colombia and Mexico) and, most particularly, to Brazil. The cause is macro-stability, says Cândido Bracher, CEO of Itaú Unibanco: Brazil’s institutions are inefficient but they do function. In no other BRIC country is the confidence of foreign investors in property rights as high as it is in Brazil. This could change quickly, however, if investors were to receive the impression that Brazil were no longer in a position to solve its problems.

Missing leadership

Political disenchantment has increased in the light of major corruption scandals. If governments fail to integrate their populations, there will be “burning cars rather than self-driven ones,” warns Kaeser. What is currently lacking is a team of statesmen who can unite the continent and set a shared goal. Established politicians lack vision, according to Ngaire Woods of Oxford’s Blavatnik School of Government: an election platform offering voters budget cuts and pension reforms is insufficient. Which is why outsiders have a chance of taking power.

Growing consensus on reform

To ensure that growth does not remain cyclical, governments must introduce extensive micro-reforms. With a few exceptions such as Chile, this applies to all countries which, year by year, are falling ever further behind in terms of competitiveness. On the upside, consensus for reform is growing. For the first time, the protectionism that has been increasing over the last ten years is coming under pressure. There is broad discussion of how government funds can be used more efficiently, and, unprecedentedly, entrepreneurs now regard exports as essential for survival. Their weaker currencies help them to open up foreign markets.

Perspectives on Latin America with a particular view to the forthcoming landmark elections in Mexico and Brazil.

Alexander Busch

Correspondent for Handelsblatt, Wirtschaftswoche and Neue Zürcher Zeitung in Latin America

Sunday Brief N°8

This Sunday Brief is also available as PDF with column, voice and lead article.

A decisive 2018 awaits us in Latin America!

Pioneering negotiations are currently in full swing. In addition to a possible restructuring of NAFTA, the modernisation of the EU-Mexico Global Agreement and the Free Trade Agreement between the EU and Mercosur, now almost twenty years in the making, are hopefully both entering their final rounds. As to whether successfully or not will become apparent over the coming year. The political constellations for this strategic rapprochement between the two regions are currently very good. The politically favourable window of opportunity could, however, close again in mid-2018 as a result of the election campaign in Brazil.

The second largest economy in Latin America, Mexico, is also due for a tense 2018. Elections of head of state, as well as senators and deputies, are scheduled for July. And, as has been seen recently in various EU countries, their results are far from certain. But it is most particularly in Brazil that they are paramount. It is only recently that the severe and prolonged recession has been overcome and that growth forecasts could again be revised upwards. Once more, political stability remains a key prerequisite for the good economic situation. Colombia is also electing a new president and congress in May. Furthermore, Argentina will be attracting the world’s attention through its G20 presidency – the first ever to be held by a South American country.

So it is crucial and right that we, too, more closely pursue development in a country that is home to more than four thousand companies with a German background and an investment portfolio of just under fifty billion euros – and, of course, continue to venture forth in Latin America!

Foto von Andreas Renscher

Andreas Renschler

LADW Chairman and Member of the Group Board of Management Volkswagen AG

Sunday Brief N°7

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New momentum in cooperation with Brazil

At this year’s German-Brazilian Economic Meeting in Porto Alegre in mid-November, the two-thousand-plus participants demonstrated their strong interest in further extending cooperation. Local and global challenges, such as digitalisation, are to be tackled jointly.

“In the 4.0 era, reliable partnerships are more important and valuable than ever! Brazil and Germany are best served if they exploit digital potential together.” LADW Chairman Renschler opening the conference

Politicians and business representatives from both sides agreed in the Joint Commission meeting that the EU-Mercosur Free Trade Agreement negotiations must be swiftly and successfully concluded. Brazil’s aspired-to OECD membership also opens up new opportunities for the resumption of negotiations on the still-missing double taxation agreement. The next German-Brazilian Economic Meeting is to be held in Cologne from 24 to 26 June 2018. This highly successful format is organised annually by the BDI and its partner, CNI, and alternates between Brazil and Germany.

Strong interest in further extending cooperation for instance in the area of digitalisation is demonstrated at this year's German-Brazilian Economic Meeting in Porto Alegre in mid-November.

LADW Chairman Andreas Renschler at the opening of the German-Brazilian Economic Meeting in Porto Alegre in mid-November

Sunday Brief N°7

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Argentina is a beacon of hope for Latin America

Mauricio Macri’s ongoing success is an important signal for the upcoming elections in Latin America

It was no coincidence that the current World Trade Organization’s Ministerial Conference was held in Buenos Aires. The WTO, which has been hard pressed by the USA’s growing protectionism and stonewalling, wanted to send an unprecedented signal in South America; for the last two years, President Mauricio Macri has been implementing in Argentina almost precisely the policy that the WTO committed itself to at its foundation. Macri has ended his predecessor’s isolationism, state dirigisme, and my-country-first politics in his presidency. The chances of a sustainable recovery in Argentina are better than they have been in a considerable time.

Macri is being closely watched in the region. After all, decisive elections are due to be held in Latin America over the next twelve months. Two-thirds of Latin Americans are being called to the polls to elect new heads of state: in Chile just now, in Colombia in May next year, then in Mexico in July and in Brazil in October. It is therefore all the more important that a liberal-conservative president like Macri should show that market-economy reforms can not only bring growth and reduce poverty — they can even win elections.

In October, Macri’s government received a clear vote of confidence in congressional elections, which even surprised the government. Over fifty percent of Argentinians continue to support Macri. This is astonishing, because since taking office at the end of 2015, the son of one of the country’s richest entrepreneurs has swiftly streamlined the Argentinian economy towards a market-based course. The return to free markets and exchange rates, and the lifting of price freezes on public tariffs, did lead to a severe adjustment recession in 2016 and high inflation. The economy, however, is now gaining momentum. Private companies are beginning to invest, growth is up for the first time, Argentina’s GDP will increase by 2.8 percent this year. In 2018, the figure is set to rise to over 3 percent. The government has now introduced tax system and labour law reform packages into Congress. On the one hand, the tax burden on companies is to be gradually reduced — excessive corporate taxes are one of the main reasons for low investment in Argentina — on the other, labour law reform is intended to bring down the incidental wage costs that are the highest in Latin America.

The government wants to increase Argentina’s low productivity after decades of decline. The need for reform in both the state and the economic environment is enormous. Critics of the government point out that the government has hitherto “merely” corrected the errors of previous governments but no fundamental reforms have yet been achieved. Thus structural reforms are important in order to convince businesses, other countries, and, indeed, Argentinians themselves that the government is working unstintingly to modernise Argentina. A halt to reform would quickly entail economic stagnation. And the next crisis would be in sight. The victory in congressional elections has significantly reduced the risk of political stagnation.

The government intends to get the two reforms through Congress by March. The current economic recovery affords it a tailwind. Furthermore, the government is gaining ground by consistently involving such traditional opponents to reform plans as trade unions and opposition governors, which is increasing the acceptance of its projects. Generally, Argentinian presidents enforce laws by decree or a majority in Congress. This is admittedly effective in the short term, but creates legitimacy problems in the long run. Macri has repeatedly made it clear that he prefers the gradual implementation of reforms to the shock programmes typically favoured in Latin America.

The President’s ongoing popularity, just two years after his inauguration, is a source of relief for the economy. The scope for planning in business and politics has increased. There is a greater likelihood that Macri will be returned to office in the presidential elections in two years and that he will be able to govern for six. That would be a novelty in Argentinian history: never before has a president who wasn’t a Peronist been able to conclude his mandate.

For politicians throughout Latin America, it would be a clear sign that market-economy reforms can also guarantee political survival.

Argentina
© Pixabay, Adam Derewecki

Alexander Busch

Correspondent for Handelsblatt, Wirtschaftswoche and Neue Zürcher Zeitung in Latin America

Sunday Brief N°7

This Sunday Brief is also available in PDF formate with column, note and lead article.