Is Bolivia facing a phase of political instability?

The country has the largest lithium reserves in the world. However, Western companies have not yet been able to get their hands on them. Companies from China and Russia are further ahead. Now Bolivia could become part of the BRICS.

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

 

Bolivia was long regarded as a country of chronic military coups. Since 1950, the military has been involved in 23 coups. However, for almost twenty years, the armed forces of the Andean country had largely withdrawn from politics. With the alleged coup attempt last week, they have re-emerged as a political player.

The reason for this is the political vacuum that has prevailed in Bolivia for around two years. President Luis Arce and multiple former President Evo Morales are engaged in a bitter power struggle. Both are long-time companions: Arce was Minister of Economy and Finance under President Morales from 2006 to 2019.

Now both want to run for president again in the elections next August. For Morales, it would be the third time that the constitution prohibits him from doing so. As president, he had already had the legal restrictions on re-election changed in his favor several times, allowing him to rule for 13 years.

But in 2019, Morales failed in his attempt to be re-elected. The elections were said to have been rigged. The population protested. Violent clashes broke out. The military called on Morales to leave the country. Morales fled into exile. Morales and his Movimento al Socialismo (MAS) party regard the removal from office at the time as a coup.

However, after the election of his successor Arce, Morales returned to Bolivia and announced that he would run again in 2025. President Acre, in turn, argues that only he can run as a legitimate candidate.

Since then, the dispute between the former companions has increasingly damaged Bolivia – both politically and economically.

Morales succeeds in blocking the government in Congress with his strong base in the MAS. As a result, President Arce cannot sign any loan agreements with development banks and have them ratified by Congress. The country is running out of dollars. Once important sources of foreign currency and taxes such as the natural gas industry are producing less and less. For years, less and less has been invested in production.

Russia and China want to profit from the unstable situation. Companies from both countries signed concession agreements with the state-owned Bolivian lithium company last year. The companies want to invest around 1.5 billion dollars in Bolivia.

The investment is strategically important for Russia: it would be Moscow’s only potential source of lithium worldwide. China, on the other hand, has already invested in numerous South American deposits and lithium production in Argentina, Chile and Brazil.

China and Russia now also want to strengthen Bolivia’s political ties: Both states will work to ensure that Bolivia becomes a new member of the BRICS in South America, i.e. the China-dominated association of states in the “Global South”, it was reported. Bolivia is already part of the Chinese Belt and Road Initiative.

Argentina under President Milei has rejected the offer of BRICS membership. Bolivia would be the replacement candidate. It is becoming apparent that China and Russia will use the political crisis in Bolivia to expand their presence there.

Bolivia_salar-de-uyuni
© Pixabay/Xavier Turpain

Mexico faces an uncertain future with Claudia Sheinbaum

The future president of Mexico and her party will have more power than most presidents before her. The financial markets are reacting nervously to this abundance of power. German companies continue to bet on the country.

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

 

The elections in Mexico were by far the most important political event in Latin America this year – and that also applies to the German economy. On the one hand, it is about the region’s largest economy after Brazil, with which trade – unlike with most Latin American countries – is growing strongly every year.

Secondly, Mexico has become an increasingly important location for German companies in Latin America in recent years. The reason for this is that Mexico’s inclusion in the USMCA free trade agreement with the USA and Canada gives companies access to the world’s largest domestic market. At over 800 billion US dollars, foreign trade between Mexico and the USA is the largest in the world. Mexico has overtaken China as the most important supplier for the US market.

According to surveys conducted by the German-Mexican Chamber of Foreign Trade, more than half of its member companies rate their economic situation as good. Three quarters want to increase their investments in the next twelve months or keep them at the same level.

This makes it all the more crucial to see how Mexico will develop over the next six years under Sheinbaum. But forecasts are difficult.

On the one hand, Sheinbaum, a physicist, has hardly come up with any ideas of her own so far. She repeatedly emphasizes that she wants to continue the policies of her predecessor and political mentor Andrés Manuel López Obrador (AMLO). One reason for this is electoral tactics: The incumbent President Amlo is still hugely successful just a few months before the end of his term in office. More than half of the Mexican electorate backs the left-wing populist.

This also explains why his left-wing nationalist “National Renewal Movement” (Morena) was able to both prevail with its candidate Sheinbaum and win an overwhelming victory in the parallel parliamentary elections.

Together with its alliance partners, the party will in future have a two-thirds majority in Congress, which will allow the ruling party to make constitutional changes practically single-handedly and without consensus with other political forces. In addition, Morena will in future control 24 of the 31 federal states. For many decades, only the Institutional Revolutionary Party (PRI) had such a concentration of power. It seems as if Morena is taking over the legacy of the PRI.

The election result means that Sheinbaum now has a free hand to govern. The question is whether she will follow the course of her predecessor López Obrador.

In his six years in power, he has proven to be a left-wing populist who cares little for democratic controls and the judiciary as long as he is convinced that his policies will benefit the people (and his popularity). Until now, the judiciary, Congress and the media have always been able to slow him down in his quest for executive concentration of power. But that is now a thing of the past.

Amlo attempted to disempower numerous independent institutions. He sought a judicial reform that provided for a plebiscite on the appointment of the highest judges. He tried to limit the influence of the electoral court. Sheinbaum and the Morena party would now have free rein to implement these reforms.

The financial markets reacted correspondingly negatively to the outcome of the election: the dollar gained 7% against the peso at times. The stock market slumped, but recovered again. Mexico’s country risk, as measured by the interest rate premiums demanded by bond investors, has risen significantly.

Investors fear that the Morena party could expand state control over the economy and increase the budget deficit through an unchecked government spending policy. Lopez Obrador already wanted the economy to be increasingly controlled by the state: with state projects worth billions in infrastructure and the energy sector, he ensured that private investors were left behind. Under him, the military has become an important player in the economy.

European investors are also bothered by the fact that López Obrador has completely reversed the previously painstakingly negotiated shift towards emission-free power generation. Amlo’s energy policy focused primarily on coal and oil.

This is also one of the reasons why the agreement already concluded between the EU and Mexico will not be ratified in Europe. Foreign companies in particular are hoping that Sheinbaum will revise Amlo’s economic and location policy, which is not very climate-friendly. Sheinbaum has researched climate policy as a scientist in Mexico and the USA. She is considered a renowned environmental expert.

With Sheinbaum, Mexico could once again play a greater role in the world. Amlo was not interested in foreign policy apart from relations with the USA. During his time in office, Mexico hardly appeared in international bodies, although Mexico’s economic and political weight in the world has increased. With 130 million inhabitants, Mexico is now the 14th largest economy in the world, ahead of Spain.

Mexico is likely to face a decisive dispute with the USA in terms of foreign trade and as a business location: Associations and the government there are bothered by the fact that Chinese companies in particular are trying to circumvent the USA’s increasing isolationist policy towards Beijing by producing in Mexico. The USMCA agreement is to be subject to a joint review in two years’ time. European companies will also be keeping a close eye on the outcome of the renegotiations.

In her first speech as president-elect, Sheinbaum set a clear economic tone. She defended the autonomy of the central bank and budgetary discipline. She said she wanted to promote investment in renewable energies. All of this would be a departure from Amlo’s policy.

In Latin America, there are numerous examples of how elected presidents quickly stepped out of the shadow of their politically like-minded predecessors and continued their policies in a completely different way than expected.

Mexico City
© Unsplash/Luis Dominguez

There are still many democracies in Latin America, but their quality is declining

After Europe and North America, Latin America remains the region with the highest density of democracy in the world. However, the lack of security is the main reason why authoritarian governments are tolerated.

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

 

For the past eight years, democracies in Latin America have been steadily declining in quality. Last year, the region fell the most among the continents in the Economist Intelligence Unit’s (EIU) Democracy Index. Democratic deficits increased in two thirds of the 24 countries surveyed by the institute.

Nevertheless, Latin America remains the third continent with the highest number of democracies after North America and Europe. The experts explain this contradiction by the fact that Latin America and the Caribbean have good electoral procedures, a high level of political participation and the most civil liberties in a global comparison – but the worst rating for political culture and the functionality of governments.

The Central American states of El Salvador, Guatemala, Nicaragua and Haiti experienced the greatest setbacks. Today, nine percent of the 240 million people in the region live in dictatorships. In addition to Cuba, Venezuela and Nicaragua, the EIU experts also include the Caribbean state of Haiti. Nicaragua and Venezuela now rank at the same level of democracy as Russia.

Only around one percent of people in Latin America live in developed democracies. These are the citizens of Costa Rica and Uruguay. Chile, which the EIU also rated as a complete democracy for a long time, has descended into a “flawed democracy”. The EIU blames this primarily on the growing influence of unelected experts in the democratic process.

More than half (54%) of Latin American citizens live in flawed democracies. These include populous countries such as Brazil, Argentina and Colombia. The EIU classifies Mexico as a “hybrid democracy”, where democracy also contains authoritarian elements.

Democratic elements have only increased in three countries – albeit at a low level: in Paraguay, the Dominican Republic and Venezuela, the key figures have improved.

Uruguay is once again the frontrunner in the region and ranks 14th in the global index, roughly on a par with Australia or Japan. Costa Rica (17) ranks ahead of Austria and well ahead of Spain or France.

The EIU sees the growing security problems in the region as the greatest threat to democracies in Latin America. The populations in the countries are increasingly tolerating authoritarian governments, which are reacting to the lack of security by dismantling basic rights. One example of this is El Salvador’s President Nayib Bukele, who is in the process of transforming his country into a dictatorship – and is supported by around 80 percent of the population. In Ecuador, President Daniel Noboa is about to follow the same path.

EIU fears that this trend could intensify in Latin America: three of the ten most dangerous countries in the world are in the region. These are Mexico, Brazil and Colombia. Six out of ten countries in which the population considers the lack of security to be the biggest problem are in Latin America.

One advantage in Latin America is that there are no wars between states. “So far” writes EIU, referring to the threatened occupation of large parts of Guyana by Venezuela.

The problem is that election campaigns are becoming increasingly violent, as recently in Ecuador and currently in Mexico.

Uruguay
© Unsplash/Nigel SB Photography

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.

growth
© Pixabay/eko pramono

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.

Cancun Mexico
© Pixabay/Andrzej

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.

Dragon
© Fotolia/Jürgen Effner

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.

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© Pixabay/Manfred Richter

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.

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