Investments fall in Latin America, but Asia emerges as an alternative

Forecasts point to a drop in FDI in Latin America, but Asian investments could be an alternative.

This year has been uncertainty in foreign investment for Latin America. Macroeconomic data point to an economic slowdown due to a contraction in global markets that will also affect emerging economies.

A reduction in foreign investment is a danger for the region, as indicated by the Economic Commission for Latin America and the Caribbean (ECLAC), an organization that estimates growth of just 1.7%, data that contrast with the 3.5% growth that the International Monetary Fund forecasts for the rest of the world.

The annual report of the United Nations Agency for Trade and Development (UNCTAD) confirmed a drop in foreign investment in Latin America and the Caribbean. Foreign direct investment (FDI) fell by 6% in 2018, with a total of $147B. The organism foresees that this trend will continue in the current year.

Brazil and Colombia have been the Latin American countries that have suffered most from this fall in investment.

In Brazil, analysts attributed the drop of investments to the country’s unfortunate economic situation and a reduction in acquisitions and mergers, which in 2017 reached an unprecedented level. The decrease in investment was 9%, receiving a total of $61B in FDI.

In Colombia, this fall in FDI was more abrupt, reaching 20%. This data contrasts with the growth of Colombian cities such as Bogotá, where foreign investment increased by 37% compared to 2017, and Colombia’s growth prospects, where forecasts predict that Colombia’s GDP will be above the regional average.

In the rest of the region, FDI has been constant, except for Ecuador where it has doubled thanks to investments in the mining sector.

In Mexico, confidence in foreign direct investment has fallen. Estimates from the Bank of Mexico (Banxico) foresee that the FDI reach 25 billion dollars, three billion less than the forecast for 2018. Also, the current government disappeared ProMexico, the office responsible for the promotion of foreign investment. Despite this scenario, the government reported the growth of foreign investment in the country during the first quarter of 2019 of 6.94% over last year.

Faced with the possibility of a fall in foreign investment, the private sector of Mexico announced on June 15 that it would invest $32B in the country, representing an increase of one billion dollars. The announcement aims to create a climate of confidence in Mexico, given the possibility of an economic slowdown, the threat of an economic war with the United States and the uncertainty that the new government policies still generate.

Conflict United States-China, a factor against

Latin America became a collateral victim of the economic war between the United States and China. These two countries are the largest investors in the region, and the economic conflict generates uncertainty.

The tax reform of the United States has also affected investments in Latin America, by giving preference to economic activity within the country.

While US investment is on the downside, Asian countries are increasingly interested in the region, with China as the undisputed leader of this trend.

Trade with China went from 12 billion dollars in 2000 to 306 billion dollars in 2018. China’s loans also surpassed financial assistance from international organizations such as the World Bank and the Inter-American Development Bank. China has prioritized financing for energy projects and resource extraction. Latin American countries have seen attractive to be part of the New Silk Road as a way to diversify their business opportunities and not depend so much on trade and investment with Europe and the United States.

The approach with China has worried the North American authorities. Mike Pompeo called the Chinese presence “predatory” for focusing more on extractivist investments, unlike US investments in the region that are more focused on manufacturing and technology.

Other Asian countries interested in Latin America

Chinese investment is substantial in the region, but trade and investment from other Asian nations have increased in recent years and are likely to maintain this upward trend.

India has shown interest in investing in Latin America in recent years. India’s trade with the region has been much more discreet compared to China, so it has not attracted the attention of analysts. However, it represents more than 50 billion dollars.

Latin America exports raw materials to India. 72% of Latin American exports to India come from extractive activities. Mexico, Brazil, and Venezuela represent the main trading partners of the Asian country.

Anurag Srivastava, operations director of the Indian conglomerate Aditya Birla Group in LatAm, considers that Latin America “is a strategic market, and we approach the region with a long-term perspective.” For the executive, the devaluation of Latin American currencies and the low price of goods represent advantages for investment.

Another Asian country that stands out as a partner in Latin America is Japan. Of the total of Japanese exports, Latin America only represents 4%, while Japan also represents only 4% of Latin American exports. However, Japan’s investment in the region stands out above all in the technology sector.

The investments of large groups such as Softbank show the Japanese confidence in the region. World Bank executive Barbara Kotschwar describes Japan as “a gentle giant” for the LatAm, playing an important role in Latin American trade and investment without always promoting itself.

As in other cases, Japanese imports in Latin America have been mainly raw materials. However, Japan has recently diversified its imports, including medical equipment.

Latin American trade with South Korea has increased significantly as with other Asian countries, too. In 2016, this came to represent 41 billion dollars in 2016, and since 1990 has increased by 14%. The commercial relationship with South Korea maintains similarities with other regions of Asia; however, there are some notable differences. For example, exports from Latin America to South Korea are more diversified and include manufactured products.

South Korea has benefited from free trade agreements with several Central American nations, as well as deals with Peru, Chile, and Colombia.

One of the sectors that are most interesting for Korea, as President Moon Jae-in mentioned in the Forum for East Asia-Latin America Cooperation (FEALAC), are those related to the fourth industrial revolution such as artificial intelligence, big data, 3D printers and the Internet of Things.

Mexico and Brazil are the most attractive countries for Korean investment.

Mexico has a unique appeal for Korean investments: it not only has a large domestic market, but it also represents a tech-hub for manufacturing and a platform for exports to the United States.

The doors of European and North American investments seem to close in the region. However, for Latin America, Asian investment opens up as a window of new opportunities.