Latin America Foreign Investment Outlook Grim
Andres Oppenheimer
A new United Nations report predicts a 40 percent drop in foreign investments in Latin America this year. I hope I'm wrong about this, but the fall in foreign funds may be even steeper.
The U.N. Economic Commission on Latin America and the Caribbean (ECLAC) report, released Wednesday, shows that foreign direct investment in the region rose by 13 percent in 2008, to a record $128 billion. The rise, as in the previous year, was largely due to a rise in world commodity prices, which fueled rapid economic growth in South America.
Among the study's specific findings:
-- While foreign direct investment grew by 24 percent in 2008 in South America, it declined by 5 percent in Mexico and Central America.
-- Mexico was particularly hard hit by the U.S. recession in the second half of the year, which paralyzed U.S. foreign investments and tourism, causing a 20 percent drop in foreign investments to that country. Trinidad and Tobago and the Dominican Republic, on the other hand, saw their foreign investments jump by 201 percent and 83 percent, respectively, thanks to outside investments in their banking, telecommunications and mining industries.
-- Eighty percent of foreign direct investment to South America went to just three countries: Brazil, Chile and Colombia. Brazil was by far the largest magnet for foreign investments in Latin America.
-- Overall, 61 percent of the world's foreign direct investment last year went to developed countries, while 21 percent went to Asia, 8 percent to Latin America, 6 percent to Eastern Europe and 4 percent to Africa.
-- Many of the foreign investments in Latin America resulted from commitments made before the start of the global crisis. For 2009, foreign investment in the region is likely to fall between 30 percent and 45 percent.
Asked how the U.N. research institution came to its foreign investment forecast for 2009, ECLAC director Alicia Bárcena told me in a telephone interview from Santiago, Chile, that it was based on official projections from Brazil, Mexico and Chile. "Brazil and Mexico set the trend in the region," she said.
Based on economic data for the first quarter of this year, both Brazil and Chile are expecting a 45 percent fall in their foreign investments in 2009, and Mexico a 31 percent drop, she said. ECLAC did not take into account political factors, such as speculation of possible instability in some countries, she added.
My opinion:
Barring an improvement in several countries' investment climate, politics may further depress foreign investments in the region this year, especially in countries that are perceived as not market-friendly.
First, the latest headlines about Venezuela's takeovers of Cargill and Techint plants, among other foreign investments, will increase fears among investors that other countries may follow similar steps as their economies weaken.
Second, the region's investment climate is lagging behind that in other parts of the world.
A world competitiveness ranking of 57 nations released last week by the IMD business school in Switzerland shows that while the United States, Hong Kong and Singapore occupy the first three places, Chile ranks 25th, Peru 37th, Brazil 40th, Mexico 46th, Colombia 51st, Argentina 55th and Venezuela 57th.
Third, there will be nearly a dozen presidential elections over the next two years in Latin America, and recent studies by the Organization of Economic Cooperation and Development show that investment in the region tends to fall significantly during election seasons because of fears that new governments will change the rules of the game.
The bottom line is that, at a time when the world pool of foreign investments is shrinking because of the economic crisis, investors will go to the safest countries.
So, just as several Latin American nations could afford free-spending populism during their recent commodity booms, they will have to become more business friendly and competitive to attract foreign investments now.
If they don't, ECLAC's projection of a 40 percent drop in foreign investment this year will look like wishful thinking.
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After Tuesday's vote in the Colombian Senate many well-placed Colombians tell me they are convinced that President Álvaro Uribe is serious about running in 2010.
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