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.
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.
Correspondent for Handelsblatt, Wirtschaftswoche and Neue Zürcher Zeitung in Latin America
Sunday Brief N°8
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