An Assessment of Latin America for 2013-2016

July 5, 2013. Over the last decade, the Brazilian economy has grown a remarkable four fold and created over 75 million new middle class consumers, solidifying its place in the prestigious club of BRIC nations. But such heady growth has sparked high inflation and government overspending as Brazil prepares to play host to the world’s greatest sporting events. Now investors have begun to hedge their bets in Latin America by diversifying into Mexico and second-tier markets such as Colombia, Peru and Chile.

Over the next few years, the burden of regional growth will not rest disproportionately on the shoulders of an appreciating Brazilian Real as it has for a decade. Good governance, rising incomes, and still favorable external factors all underpin a solid 4% regional 5-year growth forecast for Latin America led by its investment grade economies; Brazil, Mexico, Colombia, Peru, Chile, Uruguay and Panama.

Where do the prospects lie? What are the risks? Here we have several M-Brain (formerly GIA) experts on Latin America share their insights with us.


Natan Rodeguero VP, Intelligence Services, M-Brain (formerly GIA) Brazil

The Brazilian federal government announced investments of US$ 190 billion until 2015 in private concessions for the transportation segment, including airports, ports, and roads. With that, new opportunities arise in these and other segments, as those are considered strong operational bottlenecks to the country’s overall competitiveness. Added to that are lower interest rates, an induced devaluation of the Real, taxation of imports to protect the internal market, and lower energy tariffs. The scenario in Brazil appears to be set for growth. Supporting this growth is also the expected re-election of Ms. Dilma Rousseff, indicating a continuity of the political and economic policies in place so far. From manufacturing to services, communication to agriculture, opportunities are certain to become more visible in Brazil in the next three to four years.

However, increasing inflation (above 5% since 2010), slower credit growth, a weaker demand from China, and negative investor reactions towards the citizen protests could prevent, or at least slow down growth for 2013, currently expected at 2.7% per annum. Foreign investments, still to recover from 4% decrease in 2012, a deficit in the trade balance in the first quarter of 2013, and the long-awaited fiscal reform, are also important pillars on which the success of the Brazilian future depends. The issue is that the announced changes and measures have a longer maturity term, and although Brazilian companies strongly support such measures, they actually expect a quicker turnaround of the current situation, with a quicker implementation of new policies by the federal government.

Argentina, Colombia

John Price MD, Americas Market Intelligence, Miami


Argentina managed to grow at more than 6% per year over the last decade in spite of considerable political and legal risks to investors. Much of the growth is attributed to rising resource prices, especially those of food and minerals, both of which Argentina successfully exports. A policy of currency intervention by Nestor Kirchner (2003-2007) helped keep the Argentine Peso artificially low while Brazil’s Real rapidly appreciated. The labor cost gap helped Argentine manufacturers thrive as they grew their Mercosur exports by over 10% per year during that period. Argentina’s decision to dishonor its foreign debt obligations lifted a great burden off the nation’s finances. The few hold-out investors who refused to take Argentina’s 15 cents on the dollar bond swap offer have stubbornly prevented Argentina from accessing international bond markets. That has hurt investment levels in Argentina but also limited government largesse, a recently resurging problem in other parts of Latin America.

Mid-term elections in October, 2013 will shrink, if not take away Cristina Kirchner’s congressional majority. For the next two years until Presidential elections return, Kirchner may be a lame duck, given her inability to change the constitution (via plebiscite or the supreme court) in order to run again. A weaker Kirchner administration will be welcome to many investors but could ironically hurt growth until a new political order takes shape in 2016. In the meantime, the agricultural, mining and manufacturing export industries will be stymied by currency controls that slow the import of vital technologies and components but should none-the-less continue to grow thanks to strong global demand.

Argentina has been a profitable market for many international suppliers because Argentine customers tend to spend heavily and save little in a high inflation (25%) economy. Ferocious import growth began to deplete international reserves in 2012 and led to the implementation of currency controls in 2013. Today, Argentina operates under two parallel exchange rates, an official rate where dollars are in tight supply and a 60% depreciated informal rate where dollars are more accessible but at huge costs to the importer. Unwinding this perverse currency policy will bring on a politically painful devaluation, not likely to occur before the mid-term elections (October, 2013).

For those brave enough to invest inside Argentina, navigating the regulatory and legal risks is no easy feat given the highly politicized nature of both the courts and regulators. The Kirchners, now in power more than a decade, govern through a cabal of friends and allies, many of whom originate from Santa Cruz, the Kirchner’s home state. Successful investors learn quickly to ally with the powerful inner circle from the southern state. However doing so without engaging in corrupt practices is challenging. Federal elections in 2015 are likely to bring into power a new President and new political alliances. Many investors will sit on the sidelines until the new political landscape is defined in early 2016.


President Juan Manuel Santos, who came to office in 2010, is possibly the most experienced politician leading any country in the Americas today with 25 years of public service in many of Colombia’s most important posts. His government is emblematic of Colombia’s stable and moderate political legacy, the only country in Latin America never to default on its debt obligations, and a political system dominated by centrist parties. Santos has accelerated Colombia’s commitment to economic reform. According to Doing Business In, the World Bank’s Colombia is the most reform minding economy in the Americas over the last ten years.

Where Santos has taken a bold gamble with his political legacy is the decision to negotiate with the Fuerzas Armadas Revolucionarias de Colombia (FARC). Whereas previous administrations have failed in reaching a peace agreement, the Santos administration believes that conditions favor an accord this time round. By early June, 2013, the peace talks had succeeded in one of five key areas, putting the negotiations officially behind schedule but none-the-less moving forward. Realistically, an accord must be reached by the end of 2013 before campaigning begins ahead of 2014 elections. The risks are high but the prospect of lasting peace would be a boon to Colombia’s economic growth and an historic achievement for Santos.

A safer and more business friendly environment has attracted new waves of international investors to Colombia. FDI levels are expected to reach $11.7bn in 2013 or more than 3% of GDP, one of the highest rates in the Americas. More than half of foreign investment is focused on hydrocarbons, mining, and infrastructure as the potential of Colombia’s vast natural resources begins to be realized. The Colombian government offers some of the most compelling terms in Latin America to infrastructure investors, guaranteeing, for example, revenue floors to toll road operators. A construction boom is underway in Colombia as tens of thousands of overseas upper middle class Colombians repatriate their monies and themselves to the country. Consumption growth, suppressed for a decade, is now soaring, with retail sales expected to grow at 6.6% in 2013.

President Santos’ decision to negotiate with the FARC remains a gamble. Should the negotiations with the FARC fail, Mr. Santos would hand a political and moral victory to former President Álvaro Uribe, who opposes any talk of peace with the FARC until the guerrillas are much further weakened. Constitutionally barred from seeking the highest office again, Uribe will instead jockey to position his preferred candidate to lead his party. The risk is that failed negotiations and a more hardline President in power post 2014 elections could reignite violence, taking Colombia backwards, not forwards. With c. 8,000 armed militants, the FARC remains a potent threat. They are thought to control over 60% of Colombia’s reduced but still active cocaine production and trade, earning them over $1 billion per year. Armed and well financed, the FARC retains control of large rural pockets of Colombia where an estimated five million people live.

Colombia’s rising dependence on a limited base of commodities industries is also a concern, sometimes referred to as Dutch disease. High resource prices and waves of inbound portfolio investment have inflated the price of the Colombian Peso, hurting the competitiveness of Colombia’s manufacturing and agricultural sectors. As import tariffs fall, those industries are struggling to compete. To the government’s credit, the pace of reforms in Colombia is faster than any country in the region but it is still too early to tell if inefficient mid-size manufacturers and small scale Colombian farmers can adjust their practices fast enough to survive the nation’s aggressive embrace of globalization. If large employers like agriculture and manufacturing cannot compete, then political pressure could quickly build to reverse or slow Colombia’s reform agenda.

Mexico, Chile, Peru

Guillaume Corpart MD, Americas Market Intelligence


Mexico has turned a corner since Enrique Peña Nieto won the presidency in July 2012. Backed by the PRI political machine, the new President has changed the narrative of Mexico from one of stagnating politics and cartel violence to a modern state propelled by reform and economic growth. Peña Nieto has an ambitious reform agenda and a popular mandate to implement it. The PRI wisely negotiated a political pact with the two leading opposition parties to improve the likelihood of legislative success. So far, the new administration has passed reform bills in the areas of education, labor, safety and security. Next up is telecoms reform, which promises to increase competition in an oligopolistic industry dominated by Carlos Slim, the world’s 2nd wealthiest man. The real prize, however, would be energy and fiscal reforms, which are essential to raise annual GDP growth from historic ceilings of 3-4% to potential levels of 5-6%.

The fate of these traditionally elusive structural reforms has the potential of turning Mr. Peña Nieto into either a peerless master of Mexican politics or a premature lame-duck president. High as the stakes are, there are no signs that he intends to halt his reform drive. Having governed Mexico for seven of the last eight decades, the PRI leadership has the political moxy to negotiate the sorts of back room deals that facilitate tough legislative agendas.

With the backdrop of a supportive political environment, Mexican manufacturing, the most competitive in Latin America, has benefited from an expanding US market as well as renewed domestic consumption. The rejuvenated investment climate in Mexico will help reverse a recent decline in FDI levels. Mexico’s surprisingly productive labor pool has helped entice assemblers back from China in electronics, white goods, clothing and IT segments. Mexico’s proximity to suppliers and customers in the US has helped it foster world class automotive and aerospace assembly industries.

That Mexico does not have a stronger foreign investment climate boils down to a few factors. Mexico still has a tarnished image among international investors after years of violence fuelled by the government’s war on drug cartels. While this is slowly changing, skepticism remains as to the government’s ability to curb the cartels and reign in the violence and corruption that has affected many states, especially in the north of the country. The President could lose political momentum as his reform agenda takes on areas most vulnerable to the opposition of powerful interests and political populism. Despite notable achievements in the first few months of his administration, failure to pass the energy or fiscal reforms would be a significant political setback, given elevated voter and investor expectations. Failure to modernize Pemex, the national oil company and bring in foreign investment to the oil and gas production sector will result in the accelerated decline of the nation’s most important industry that contributes over 30% of the federal tax revenue. Without reform, Mexico will become a net energy importer by 2025.


Chile will go to the polls in November 2013 to elect a President and congress. The lasting popularity of former president Michelle Bachelet (2006-2010) makes her a clear favorite to win the presidency.

Regardless of the outcome, Chile will retain its sound macroeconomic fundamentals and high inflows of FDI thanks to the country’s rare (for Latin America) and unwavering commitment to uphold the law and the objectivity of its institutions. More than any country in Latin America, Chile has been able to sustain a consistent business climate while changing political power from one party and leader to another.

Chile is poised to be the first Latin American country to graduate from an emerging market to a developed one. Rising incomes are also changing voter expectations. Whereas a majority of Chileans once supported pro-business ideology at the expense of social spending, today voters think differently. That helps explain how President Sebastián Piñera, though praised for his economic track record, will likely lose his re-election bid to the left of center Bachelet who is campaigning on better and cheaper public education, improved public health and stronger environmental enforcement.

Chile’s GDP is projected to grow 4.8% on average between 2013-2017, fuelled by private consumption, the fruits of very low interest rates, a strong currency and rising incomes. Chile continues to rely heavily on copper to fuel its exports but has also fostered formidable non-traditional industries like software development, financial services, engineering, and retailing. Chilean companies invest outside of their country at a much higher rate than any regional peers, inspiring the term Multi-Latinas. Chile’s trade and investment flows are increasingly tied to Asia, the result of policy decisions over a decade ago to begin trade discussions with Japan, Korea, Singapore and China, Malaysia, Thailand, Australia and New Zealand, all of whom have bi-lateral agreements with Chile today.

The alliance of Ms. Bachelet’s coalition (Concertación de Partidos por la Democracia) with the far-left Partido Comunista could move policy making uncomfortably to the left if their anticipated victory is by a narrow margin. Such a prospect tends to worry the conservative thinking business elite of Chile, though bothers foreign investors less so. A Bachelet government will continue to be fiscally prudent. An expectedly stronger embracement of tough environmental standards could strike fear into Chile’s largest industry, mining. The Pascua Lama mining project was recently halted via injunction. The miner is obliged to redesign its project, thereby installing stronger environmental safeguards, a ruling that effectively puts the mine on hold for 18 months. Such aggressive enforcement marks a precedent in Chile and reflects shifting voter priorities.

Chile’s currency remains vulnerable to copper prices, given that the metal provides close to 50% of export revenue. In 2008 when the financial crisis took hold, volumes of capital left Santiago’s equity and bond markets and copper prices plummeted. Within days, the Chilean Peso dropped 25% in value before coming back a year later.


Along with Colombia, Peru has been the most aggressive reformer in Latin America over the last decade. It has steadily climbed the ranks of the World Bank’s Doing Business In report, reaching 43rd (out of c. 200 countries) in 2013, 2nd highest in Latin America, just behind Chile (ranked 37th). In spite of some turbulent politics that have seen the country governed over two decades by four unique Presidents and parties ranging from an authoritative conservative (Fujimori) to a left wing former Lieutenant Colonel (Humala), Peru has been consistently prudent with its fiscal and monetary policies, and unwavering in its pursuit of bilateral agreements with its largest trade partners.

Perhaps most importantly, Peru has been blessed by high natural resource prices. Over the last decade, exports have climbed 444% and FDI has leapt 507%, primarily on the back of the mining industry. The influx of foreign currency has helped Peru maintain one of Latin America’s most stable currencies, and recapitalize its banking industry. Personal and small business credit has grown at over 20% per year since 2007, helping ignite a consumption boom. As an open economy, Peru has attracted suppliers from around the globe, but most dramatically from Asia. Retailing, banking, IT, telecom and automotive sectors have all enjoyed strong growth. Retail sales grew 195% from 2003 to 2012. The mining sector has also provided the demand and finances (via royalties) to underwrite an ambitious national plan to modernize Peru’s moribund infrastructure.

For decades, even centuries, Peru’s political Achilles heel has been the wealth divide between a prosperous Lima and coastal plain and the impoverished Sierra and Selva regions, located respectfully in the valleys and to the east of the Andean cordillera. In these two regions live close to 50% of Peruvians. In spite of envious natural resources, eastern and central Peru are poor due to a lack of infrastructure, poor governance and ineffective social spending. When mining investments reach the Sierra, as close to $40 billion will from 2010-2015, the positive economic impact is limited by the lack of skilled labor in the region and the fact that a good deal of the royalties paid by miners to the national government fail to trickle down to local communities.

Left behind in a booming economy, Sierra and Selva residents have grown increasingly frustrated, venting their anger at both mining companies with road blockages and at the polls where they tend to vote for the most radical candidates. In spite of well-intended efforts by the Alain Garcia and Ollanta Humala administrations to better connect and develop the Sierra and Selva regions, publically funded projects have too often been riddled by corruption and delay. Until Peru is able to fulfill the promises made to nearly half its residents, long term political and business environments are at risk.

Six Largest Latin American Economies 2012

2012 Brazil Mexico Argentina Colombia Chile Peru
195 115 41 48 17 30
(US$, bn
at PPP)
2,359 2,060 745 499 321 326
GDP per
(US$ at
12,120 17,910 18,036 10,353 18,450 10,604
GDP growth rate 1.0% 4.0% 2.0% 3.8% 5.4% 6.2%
Inflation (av.) 5.4% 4.1% 10.0% 3.2% 3.0% 3.7%
Number of Households(2011) 59m 26m 11m 12m 5m 8m
Personal Disposable
(pc, US$)
7,469 6,348 4,320 5,537 8,885 2,851
Ease of
(World Bank, ranking)
126 53 113 42 39 41
Global Competitiveness Index
(WEF, ranking 2012-13)
48 53 94 69 33 61

Source: M-Brain (formerly GIA) Member, Americas Market Intelligence

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