Stable growth prospects for Latin America, but at a low level

In its latest forecasts, the International Monetary Fund is cautiously optimistic about the region’s economies. The country with the highest growth worldwide is located here.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

“Steady but slow” is the title of the International Monetary Fund’s latest “World Economic Outlook”.

This also describes the situation in Latin America: It will grow by two percent this year. That is less than in 2023 (2.3 percent). Next year, however, the economy in the region will grow by 2.5 percent, according to economists from Washington.

This means that Latin America is growing more slowly than the global economy as a whole this year (3.2 percent) and significantly less than the emerging markets as a whole (4.2 percent). Nevertheless, the forecast is positive for Latin America. With the exception of Argentina, all countries in the region are growing at the same rate.

The IMF’s forecast for Brazil this year is better than recently prognosed, with growth expected to reach 2.2 percent in 2024 instead of 1.7 percent. The forecasts for Peru (2.5 percent), Colombia (1.1 percent) and Uruguay (3.7 percent) have also improved. Chile is also expected to grow by two percent, significantly more than last year (0.2 percent).

Venezuela could lead growth in Latin America this year with four percent. It is followed by Paraguay (3.8 percent), Brazil, Chile, Bolivia (1.6 percent) and Ecuador (1 percent).

The IMF expects growth of 3.9 percent for Central America (2023: 4.2 percent). The economies in the Caribbean will pick up to 9.7 percent this year. This is mainly due to Guyana, which is likely to be the country with the highest growth rate in the world with an increase of 34 percent compared to 2023. Oil production has led to rapid growth there.

The outlook for Mexico has deteriorated: Latin America’s second-largest economy will grow by 2.4 percent – down from 3.2 percent in 2023. For next year, the fund has even lowered the outlook for Mexico to just 1.4 percent – despite the stable growth forecasts for the USA, Mexico’s most important trading partner. However, consumption in Mexico has been falling since the beginning of the year, investments are stagnating and exports are also shrinking.

Argentina has just begun a painful reform process under President Javier Milei. Fund economists expect a recession of 2.8 percent this year. Inflation could fall to 150 percent by the end of the year – but this is still extremely high.

The weak performance of Argentina, Latin America’s third-largest economy, is weighing on the economic outlook for the entire region. Brazil’s industrial exports to Argentina fell by almost 30 percent in the first two months of this year (compared to the same period last year).

Economic developments in the USA and China, the region’s largest economic partners, will be decisive for Latin America’s economies in the coming months. With weak growth of 0.8%, the EU zone will have little impact on the region.

High inflation and the Fed’s slower decline in interest rates have already led to a strengthening of the dollar. In Latin America, local currencies have been significantly weaker against the US currency for several days. This will increase inflation and foreign debt in the region.

As an exporter of raw materials and energy, developments in China are particularly crucial for South America. The signals from there are contradictory. The IMF expects growth of five percent, although this could fall to 4.6 percent next year.

Onshoring works in Latin America, but not as expected

Hopes for the positive effects of nearshoring in the region were high, but the reality so far has been different. Hardly any Western companies are relocating here, but China’s industry is seizing the opportunity.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Two years ago, a forecast by the Inter-American Development Bank (IDB) electrified governments and investors in Latin America. The IDB’s experts expected that Latin America could export an additional 78 billion dollars worth of goods and services per year in the medium term, an increase of around 6 percent.

The reason for this is the onshoring of Western companies in Latin America. Companies from industrialized countries are trying to locate their suppliers closer to them. For various reasons: Environmental concerns, the Covid pandemic, the trade disputes between the USA and China and Russia’s war in Ukraine would accelerate this trend – and lead to an investment boom in Latin America.

So far, Mexico in particular seems to be benefiting from this growing integration into the value chains. Proximity to the US, the North American free trade agreement USMCA and the Biden administration’s multi-billion dollar subsidy program (IRA) have increased investment in Mexico’s industry. For the first time in 2023, Mexico was once again the largest exporter to the USA – ahead of China.

However, if we look at the development of foreign direct investment in Mexico in a historical comparison, the resettlement effect is disappointing: Mexico has stabilized its foreign investment at pre-pandemic levels – nothing more. The share of Latin America’s second-largest economy in global direct investment remains below 3%.

The result is even weaker in Brazil, where foreign investment shrank by 18% last year. In Chile, Colombia, Peru and Argentina, political uncertainties have curbed investor interest. South America attracts less than 3 percent of global direct investment.

In the Far East, however, things look very different: Western corporations are no longer setting up their new companies in China, but in the surrounding countries such as Vietnam, Singapore and Indonesia. The onshoring effects are clearly noticeable there. Southeast Asia now accounts for more than 10 percent of global foreign direct investment.

There are various reasons why Latin America is not very attractive to companies from Europe or the USA: the difficult business environment in the region, the lack of qualified workers or the poor infrastructure are among them.

But the most important thing is the low level of integration in Latin America. The markets in Latin America are still barely integrated. Only 15 percent of foreign trade is conducted between the countries. In the Far East, the figure is almost two thirds.

Companies are reluctant to set up their production facilities in countries that are not integrated in the region. This also applies to large markets such as Brazil or Mexico: for high-tech producers or manufacturers of high-quality consumer goods, these are also too small to justify high investments.

Companies from western industrialized countries are therefore hesitant to invest in Latin America. In the case of European companies, this is also due to the crisis in their home markets. US companies also prefer to concentrate on the booming North American market.

To this end, China’s industry is making strategic use of onshoring in Latin America. In Brazil, as in Mexico, Chinese companies are investing in green hydrogen, sustainable power generation, e-mobility, consumer companies and joint research and development.

The influx of Chinese investors in Mexico began as early as 2018, when former President Donald Trump increased import tariffs on Chinese products. Mexico has now become an important bridgehead for Chinese companies exporting to the USA. In Brazil, Chinese companies want to supply the local market, but also South America in the medium term.

It looks as if onshoring could work in Latin America in the medium term – but with different players than expected.

Will Milei live up to the high expectations?

Many people in Argentina hope that the president’s reform program will be successful. He has also become a new beacon of hope for the German economy and politics.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

At the moment, German delegations are making their way to Buenos Aires: last week alone, two Bundestag committees, representatives of the Ministry of Economics Affairs and the Bundesbank came to Argentina. Further groups of visitors are set to follow.

The interest of German politics and business in Argentina is new. Argentina is traditionally an important partner country for Germany in Latin America. Nevertheless, it has not been the focus of German public attention for a long time due to its ongoing economic and political crisis.

That is currently changing. This is mainly due to Javier Milei, who has been ruling the country as president for around three months. Milei, a political career changer, has triggered a cultural change in Argentina’s politics and society with his rapid rise from a surprisingly elected MP three years ago to his election victory last November.

This is due to his radical reform program, which he is implementing exactly as announced during the election campaign. His aim is to reduce the chronic budget deficit and prevent the state from continuing to finance itself with the printing press. Argentina should finally become a country with a stable currency.

Despite the radical cuts and the associated social impositions, the majority of the population continues to place its hopes in the 53-year-old economist. This is astonishing, as poverty has risen sharply. The government has cut state services – for schools, energy, transportation – and subsidies or no longer adjusts them to inflation. This means that people have less and less purchasing power.

At the same time, Milei continues to pursue a confrontational course against established politics, the “caste”, as he calls it. They are responsible for Argentina’s century-long decline. This criticism continues to make him popular among his supporters.

However, it makes it more difficult to achieve the political consensus that the government will need at some point in order to put together a sustainable reform package. This is because the costs of the adjustment are currently being borne primarily by the poor, pensioners and all recipients of state benefits.

The government is now trying to find a consensus with the governors in order to come closer to a compromise in Congress. But with his constant provocations towards politicians, Milei is threatening to overstep the mark. Understanding for his aggressive tirades is also waning among the population when something doesn’t suit him.

His strategy is risky: the government hopes that inflation will continue to fall. The current recession could then be replaced by initial growth in the second half of the year.

A survey conducted by the industrial association Union Industrial Argentina in February shows the change in sentiment compared to the previous year: back then, entrepreneurs saw the future of the economy as bleak. Now the outlook has brightened considerably for half of the members.

However, it will be crucial that the majority of the population remains convinced that Milei is on the right track – only then will the president have a chance of continuing his radical reform course.

Opera_Buenos_Aires — © Pixabay/TravelCoffeeBook

China launches a new investment approach in South America

Brazil is becoming the blueprint for expansion, with China’s companies increasingly buying into the value chains of industry as well as into research and development in the region. In doing so, they are competing with Western corporations in particular.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Several foreign companies have withdrawn from Salvador, a metropolis of three million inhabitants in north-eastern Brazil, in recent years: Ford closed its largest factory in South America there three years ago. Siemens Energy and General Electric also stopped their wind turbine production last year.

In contrast, companies from China are just taking off there: BYD, the world’s leading manufacturer of electric vehicles, has taken over the former Ford factory. The group will build electric cars and trucks there this year. Lithium processing and battery production are also planned. BYD has also launched research collaborations at several technical universities in Brazil.

At the same time, Chinese turbine manufacturer Goldwind wants to build wind turbines at the former GE plant. Future orders have been secured: CGN Brazil Energy, also from China, wants to produce green hydrogen in a 14 gigawatt wind farm in the interior of the country.

A consortium of three Chinese construction companies has won the tender for a 12-kilometer-long bridge over the bay off Salvador. Test drilling is currently taking place. Construction should begin by the end of the year. Financing is being provided by CAF (“Andean Bank”), one of the most important Western development banks in Latin America, among others.

“China is officially talking about a ‘new’ infrastructure policy for Latin America,” observes Margaret Myers, head of the Asia and Latin America program at the Inter-American Dialogue, an influential Washington think tank. Brazil looks like a blueprint that should apply to the whole of South America in future.

China’s energy and raw material security is no longer the focus of investment in Latin America, as it has been for the last 20 years. “The focus is on innovation-related sectors,” says Myers. However, this means that Western companies in Latin America are facing competition: “China’s investments in Latin America and the Caribbean are increasing in sectors that many G7 countries have prioritized themselves,” says Myers.

Just like Germany: for the past year, the German government and industry have been on the offensive in South America to secure access to markets and important raw materials. Up to now, German government and business representatives have always tempted by the pledge of joint research and development and technology transfer. This sets them apart – at least in their own perception – from other interested parties in Latin America.

But now China’s corporations are also investing in green hydrogen, sustainable power generation, e-mobility and joint research and development.

The speed with which China is occupying traditionally strong positions in German industry in Brazil can be seen in the automotive sector: not only BYD, but also GWM are building factories in Brazil. “Great Wall Motors” took over the factory that Mercedes inaugurated in São Paulo’s interior in 2016 and closed shortly afterwards. Demand for electric vehicles has exploded in Brazil. Showrooms for Chinese e-vehicles are opening all over the country.

Chinese expansion into the industrial value chains in South America is likely to continue. For Marcos Caramuru, Brazil’s former ambassador in Beijing, China’s companies would want to secure access to large consumer markets such as Brazil in view of the increasing geopolitical tensions. This is because it is foreseeable that the US and European markets will continue to close.

How the elections in El Salvador could influence politics in Latin America

Nayib Bukele was re-elected President of El Salvador with a record result. His hard-line policy against crime and the rule of law is likely to be emulated in the region.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

As expected, the incumbent Nayib Bukele won a clear landslide victory in the elections in El Salvador: 58 of the 60 seats in Congress will belong to his “New Ideas” party. Over 80 percent of voters are likely to have voted for him.

The official result is still pending. This did not stop Bukele, the “coolest dictator in the world” in his own words, from celebrating his victory.

With a popularity rating of between 80 and 90 percent, the 42-year-old Bukele is by far the most popular president in Latin America. Almost all incumbents in the region can only dream of this. This makes it all the more likely that Bukele’s political strategy will find imitators in Latin America.

With his ultra-repressive anti-crime policy, Bukele was able to turn what was once the most dangerous country into the safest in the region in just two years.

Bukele had almost 100,000 suspected gang members arrested. With around 1100 prisoners per 100,000 inhabitants, El Salvador is now the country with the most prisoners in the world. Around seven percent of all 14 to 29-year-old men are in prison – most of them without a court sentence. Human rights organizations such as Human Rights Watch and Western governments are protesting against the state’s arbitrariness.

However, the population supports his policies – including people whose family members are affected by the state’s arbitrary actions. The flow of refugees from El Salvador to the USA has decreased.

This could make Bukule’s policy a blueprint for other governments in Latin America: Because in all countries, the population is suffering from violence and increasing public insecurity.

At the moment, the recently inaugurated President Daniel Noboa in Ecuador seems to want to apply the Bukele repression policy against organized crime and the exploding violence. Argentinian President Javier Milei has also promised a tough stance against crime.

In the upcoming elections in Latin America, candidates with such “mano-duro” programs will certainly become an alternative for voters. Governments in almost all countries are reacting helplessly and without a plan to the growing crime rate.

As a result, politics in Latin America is likely to become more authoritarian. This is because Bukele has largely undermined the rule of law since he appointed henchmen to the judiciary. The electoral judges raised no objection to his re-election, which was not provided for in the constitution. He first intimidated the legislature and with the elections, El Salvador has now become a one-party system. Bukele can now legally do as he pleases.

Experience in Latin America shows that an executive that is unrestricted by the separation of powers almost always leads to authoritarian regimes. Venezuela and Nicaragua are the most obvious examples of this.

El_Salvador_Palacio_Nacional — © Unsplash/Mauricio Cuellar

Outlook 2024: Can Latin America leave its long stagnation behind?

The chances of this happening are good and the prospects are positive, as global interest in Latin America is growing. The region benefits from being stable in a world of increasing crises. At the same time, its importance as a supplier of energy, food and raw materials is growing. However, political risks remain.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

The growth prospects for Latin America remain stable. Almost all economies will grow this year, albeit at a low level. In Chile, Peru and Uruguay, the economy will pick up compared to the previous year, according to the forecast by investment bank JP Morgan. In Brazil, Ecuador and Mexico, the pace of growth will slow compared to 2023.

Nevertheless, such forecasts should be treated with caution at present: This is because the forecasts for Latin America vary widely. For example, the Institute for International Finance is forecasting growth of 2.6 percent for Latin America this year. Oxford Economics expects the six largest economies in Latin America to grow by just 0.7 percent.

Last year, for example, most investment banks had estimated growth in Brazil to be significantly lower than it actually was: instead of stagnating, the country grew by three percent.

Latin America experiences a charm offensive from Europe

A positive factor for Latin America’s economy is that inflation is falling in almost all countries – with the notorious exceptions of Argentina and Venezuela. This means that interest rates will fall in most countries and investments will tend to increase.

Increasing interest in the region could provide a structural growth boost for Latin America in the medium term.

Last year, Europe made intensive efforts to engage with Latin America. European heads of state and delegations were constantly visiting. For the first time in eight years, an EU-Latin America summit took place, as did German-Brazilian government consultations a few weeks ago. The EU signed a modernized agreement with Chile and is about to sign one with Mexico. It has been a long time since governments in Europe have been so clearly committed to concluding the agreement with Mercosur – so far without result.

Europe is thus responding to the growing strategic importance of Latin America – albeit later than China and the USA, which have long been intensifying their relations with the region. The wealthy Middle Eastern states are also becoming important investors and trading partners for Latin America. India and other Asian countries also want to expand their relations.

Latin America is as big as the USA and China combined with only a third of the people

One reason for the increased interest is that Latin America not only produces large quantities of agricultural products, energy and metals, but also generates surpluses because it consumes little itself. For comparison: Latin America has an area roughly the size of China and the USA combined. However, at 650 million people, only around a third of the population of the two superpowers live there.

Latin America will continue to expand its leading position in individual raw materials and energy markets worldwide: It already has a leading position in individual products. Almost half of the global lithium reserves are located in South America. In addition to Chile and Argentina, Brazil, Mexico and Ecuador are also expanding production. Peru and Chile supply 40 percent of global copper demand.

15 percent of the world’s oil and gas reserves are located on the continent. Brazil and Guyana, and possibly soon Argentina, are massively increasing their exports.

Latin America’s farmers supply almost half of the agricultural products traded on the world market for food production. The importance of the region’s agriculture for global food security will continue to grow.

In addition to decoupling and reshoring, the region could benefit from powershoring

But there is also another, new reason for Latin America’s increased appeal: the region benefits from being stable in an unstable, crisis-ridden world. There is a threat of new tensions between individual countries in Latin America. However, the region has not experienced war for 100 years. It is also far removed from the current and potential trouble spots in Europe, the Middle East and the Far East.

This makes Latin America more attractive for companies that want to relocate their production chains to safer regions. The keywords are decoupling and reshoring. Mexico and Central America are already benefiting from this trend. US companies are no longer investing in China, but are building their new factories closer to their home markets.

The trend towards global corporations relocating plants to Latin America is only just beginning. It is likely to increase. This is also due to the continent’s sustainable energy matrix: Nowhere else in the world is an average of 60 percent of electricity generated from renewable energy sources – and sustainability continues to increase. Electricity in countries such as Uruguay, Paraguay and Costa Rica is generated almost exclusively from sustainable sources. For industrial companies that want to improve their emissions balance, this is also an attractive factor when deciding on a location. The keyword here is powershoring. Especially as Latin America also has the prerequisites to be a global leader in the production of green hydrogen.

Governments must seize the opportunity

The Financial Times just described the historic opportunity for the continent like this: Latin America has its best chance for a generation. Region’s unique advantages offer an extraordinary opportunity — if its governments can step up.

Currently, the biggest risks in Latin America are China, overburdened politics and organized crime.

China has become the most important sales market for Latin America’s exporters and the largest investor in many countries. The sluggish growth in the Far East is not yet reflected in the countries’ trade balances. However, shortfalls could be imminent. It also remains to be seen how China’s investments will develop. Should a conflict arise between Beijing and Taiwan, Latin American companies could have problems selling their products to the Far East.

The democracies in the region proved to be resilient in the last election cycle. However, the elected governments are finding it difficult to implement their programs and thus the voters’ mandate: Social protests as well as divided and thus paralyzed parliaments are hampering the executives in Chile, Peru, Colombia – and possibly soon in other South American countries such as Argentina.

This year, the only elections scheduled in the major economies of the twin continent are in Mexico in June. Companies there are hoping that the successor to President Andres Manuel Lopez Obrador will implement a more investor-friendly policy. After all, the prospects for Mexico are good from a business perspective.

The authoritarian regimes in Venezuela, Cuba and Nicaragua fare worse when it comes to crisis management: Latin America is experiencing a historic emigration from these countries in particular.

Organized crime is an additional burden. Drug gangs are increasingly challenging the states. It is becoming more difficult to curb their power. The costs to society are rising as insecurity increases. Although only around eight percent of the world’s population lives in Latin America, a third of the world’s murders take place there.

The experts at Latam Investor summarize the advantages of Latin America in a nutshell: Latin America is more peaceful than Eastern Europe, less corrupt than Africa and more democratic than Asia.

2023 – the year geopolitics came to South America

The region is increasingly being drawn into the disputes of the world powers and local conflicts are threatening to become geopolitically charged.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

At the beginning of this year, the dominant view in South American politics was that the major geopolitical disputes had little influence here. Ukraine-Russia, China-USA – all of this was taking place so far away that these conflicts could hardly have any impact in the region. On the contrary, there was a faint hope that South America could be the winner of the crisis.

The world suddenly needed more raw materials and energy from there. This applied to food and oil as well as ores such as lithium or copper. South America seemed to be the region that could fill in for shortfalls and changes on the global market: For the threatened harvests in Ukraine, the Russian oil subject to sanctions and for the technologies needed for the energy transition, which required raw materials.

What’s more, there were even hopes in South America that the economies of these countries could benefit from new investments by foreign companies. Keyword: friend- or nearshoring. This means that multinationals around the world could withdraw their factories from China and relocate them to other regions.

But things turned out differently: there is still no sign of nearshoring in South America – it may be different in Mexico or Central America. But the multinationals are actually holding back on investments here.

The region did indeed benefit at times from rising prices for agricultural products, energy and industrial raw materials, but the effect has since fizzled out.

However, the idea that global tensions would only reach South America in a filtered form proved to be wrong.

One example of this was the inauguration of President Javier Milei in Buenos Aires. An unusual scene occurred there: Hungarian President Victor Orbán and Volodymyr Zelenskyy from Ukraine suddenly found themselves face to face and engaged in an intense dispute. It had little to do with Argentina or South America.

Conflicts are also simmering in their own neighborhood, as is now the case between Venezuela and Guyana. These regional disputes threaten to become geopolitically charged.

Because in the Caribbean, the USA is on Guyana’s side and Russia is supporting Venezuela. Putin has armed the Caribbean country militarily. China is also pulling strings in the background, as it has close political and economic ties with both countries. Venezuelan ruler Maduro seems to have taken Putin’s approach to Ukraine as a blueprint.

Now everyone is looking to Brazil as a regional power: can President Luiz Inácio Lula da Silva resolve the conflict on his doorstep? Brazil is facing its biggest foreign policy problem for years. President Lula rightly says: “What we really don’t need in our region is a war.”

In fact, it has long been an advantage of South America that there are hardly any regional conflicts. Although public safety is low due to the high crime rate, there have been no wars between nations for a long time, apart from the brief conflict between Peru and Ecuador almost 30 years ago.

This is currently changing: it seems as if geopolitics has suddenly come to South America. The region is increasingly being drawn into the conflicts of the major powers and is no longer the distant continent in global politics as it used to be.

Are the EU and Mercosur in the final sprint towards an agreement?

It is likely to be the last attempt to save the treaty between the EU and South America. Brazilian President Luiz Inácio Lula da Silva in particular is working hard to achieve a result. Will the EU go along?

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Brazilian President Lula had not traveled abroad for two months following his hip operation. But now he has started a furious tour which – with a little luck and skill – could end with a crowning finale. Hopes are high in Brazil that, following his state visits to Dubai and Berlin, Lula will be able to announce the agreement on the world’s largest free trade zone with the other South American presidents at the Mercosur meeting in Rio de Janeiro on December 7.

The timing of Lula’s agenda is perfect: in Dubai, Lula will appear at the climate conference as a global climate protector. The presidents of the USA and China are not attending. This should give the Brazilian president more attention. With 2,400 participants, the Brazilian delegation is the largest at the conference.

Lula will announce there that since he took office in January of this year, deforestation in the Amazon region has fallen by almost 50 percent by October. This is a great success – and will take the wind out of the sails of opponents of the Mercosur agreement in the EU. In Dubai, Lula also wants to meet with EU Commission President Ursula von der Leyen in order to remove the last obstacles to the agreement.

Lula will then appear in Berlin from December 4 for the German-Brazilian government consultations with his most important ministers. Two dozen bilateral agreements are to be signed.

Brazil is the only country in North and South America with which Germany holds intergovernmental consultations. The first – and last – time they took place was in 2015. Berlin wants to intensify cooperation again with the Lula government. Lula will also discuss future cooperation between the EU and Mercosur with the Federal Chancellor.

The agreement could then be announced at the Mercosur summit in Rio de Janeiro on December 7. It is important to note that Argentina’s designated foreign minister has just declared in Brasília that the government under President Javier Milei, which will take office on December 10, supports the EU-Mercosur agreement.

Now or never – the chances of the agreement being negotiated and concluded next year are slim.

Paraguay’s head of state Santiago Peña Palacios has already announced that Mercosur will not continue to negotiate with the EU under his presidency, which will begin in Rio. Uruguay’s President Luis Alberto Lacalle Pou declared last week during his state visit to Beijing that he wanted to negotiate a bilateral agreement with China and Mercosur. The argument: the EU is not making progress.

Mercosur diplomats have already made provisions in case the agreement with the EU fails at the last minute: Bolivia is to be accepted as a full member of Mercosur in Rio. At the same time, the South American economic community will conclude a free trade agreement with Singapore.

The summit could therefore be celebrated as a success – even without an agreement with the EU.

Latin America is becoming more important as an oil supplier for the global market

Within Latin America, the ratios between oil producers are shifting: Guyana, Brazil and Argentina will increase their production by 2030. Ecuador, Mexico and Colombia, on the other hand, will lose importance – as will Venezuela.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Latin America has the second largest oil and gas reserves in the world after the Middle East. However, the majority of the around eight million barrels per day (bpd) produced by these countries are consumed in the region.

But that could change – if you look at the forecasts of the International Energy Agency (IEA). According to these forecasts, Latin America’s oil production will grow to between ten and eleven million bpd by 2030 – depending on whether or not the countries comply with the climate emissions pledged under the Paris Agreement. This means that a quarter of the world’s growing oil production will come from Latin America.

The balance within the region is shifting – as it has in recent years. Brazil currently produces around 35% of the oil in Latin America. Mexico follows with 25 percent. Colombia, Venezuela and Argentina each contribute less than ten percent to regional production.

However, traditional oil-producing countries such as Mexico, Colombia and Ecuador will continue to reduce their oil production. In Colombia and Ecuador, the governments do not want to issue any new production licenses for climate policy reasons. In Ecuador, the population has just rejected oil production in the rainforest in a referendum. In Colombia, President Gustavo Petro wants to reduce oil and gas production.

In Mexico, on the other hand, President Andrés Manuel López Obrador is firmly committed to oil production rather than renewable energies. However, the state-owned company Pemex is the most indebted oil company in the world and is not in a position to develop the deep-sea deposits in the Caribbean.

Brazil, on the other hand, has concentrated fully on developing the so-called Pré-Sal deposits following the discovery of deep-sea deposits off Rio de Janeiro in 2007. The state-owned company Petrobras and private oil companies have increased production from 40,000 barrels to 2.2 million bpd. Brazil is now the number 8 oil-producing country in the world.

Further large deposits are suspected in the north of Brazil, near the mouth of the Amazon. A political tug-of-war is currently taking place in Brazil between environmentalists and the oil industry as to whether these deposits should be developed or not.

The oil industry is confident that large oil reserves exist north of the equator. Not far from there, the oil company Exxon discovered the world’s largest new oil reserves in Guyana in 2015. Production in the Caribbean is expanding rapidly. By 2030, production off the coast of Guyana can be increased from the current 300,000 bpd to 1.2 million bpd.

Argentina could be the third country in Latin America to increase its production by 2030. Traditional oil reserves are drying up there. However, the country has huge shale oil reserves that private companies want to develop.

While Brazil and Guyana could each produce an additional one million bpd by 2030, the IEA estimates the increase for Argentina at half a million bpd. Oil production in Brazil and Guyana also releases significantly less carbon dioxide than the global average.

By contrast, the once most important oil country in the region, OPEC founding member Venezuela, will not be able to significantly increase its production in the foreseeable future, the energy agency expects.

There, the corrupt management of the state oil company and the lack of investment are preventing the country from regaining its former leading role as a South American oil power: The state-owned company produced three million barrels 25 years ago, when President Hugo Chávez came to power and used the company to further his political goals. Production has still not recovered from this. Venezuela currently still produces around 700,000 bpd.

The outlook for Argentina’s economy is better than it has been for a long time

The country could benefit more than almost any other from the changes in geopolitics and the energy transition. But this requires a clear reform course.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

The outcome of the election in Argentina is completely open: If Sergio Massa, the incumbent economy minister of the left-wing Peronist government, and the right-wing libertarian candidate Javier Milei run in the run-off elections on November 19, it is hard to say today who will govern the country for the next four years.

For the Economist magazine, the candidates who qualified in the first round of voting are the worst alternatives for Argentina, the worst of all possible outcomes. Because – according to the Economist – neither candidate seems capable of solving Argentina’s problems.

In view of the justified pessimism, it is easy to overlook the fact that the prospects for Argentina’s economy have rarely been as good as they are at present: the changes in geopolitics, the growing demand for agricultural products and metals for the energy transition, rising prices for oil and gas, which Argentina has in large quantities – these are all reasons why the prospects for Argentina’s economy could brighten at present.

In detail:

The first 500 km section of the gas pipeline from the Vaca Muerta oil and shale gas reservoir has just been inaugurated. Argentina is thus on its way to becoming self-sufficient in fossil fuels. Given the high prices for liquid gas, this is important for the balance of trade.

Farmers are facing a good harvest of soy, maize and wheat – after this year’s disastrous drought. The Buenos Aires Grain Exchange is expecting a 138% increase in the soybean harvest. For maize, it could be 62 percent more. This normalization of agricultural exports will also be important for the inflow of dollars to Argentina.

Investments in the mining industry are continuing. Lithium and copper concessions are particularly sought after by foreign companies. Companies from China, Australia, Canada and South Korea are leading the way.

Foreign direct investment in Argentina has tripled from USD 4.7 billion (2020) to USD 15.1 billion – despite the country’s severe crisis. A fifth of the investment comes from mining and oil companies.

Argentina’s start-ups are also among the most successful in Latin America: online trading platforms such as MercadoLibre and OLX have been around for some time. Buenos Aires offers a creative environment for digital companies. The founders are forced to think beyond the national market.

Conclusion: The next government will get some tailwind from the economy. Hopefully it will take the opportunity to implement the necessary reforms.

Caminito, Buenos Aires, Argentinien — © Pixabay/Brigitte Werner

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