Latin America: Room for growth

17 Pages·2016·0.48 MB·English

Latin America: Room for growth
A report by The Economist Intelligence Unit
Sponsored by
Latin America: Room for growth
Contents
About this research 2
Executive summary 3
Chapter 1: Latin America: An economic review 4
Chapter 2: Infrastructure development 7
Chapter 3: Economic diversification through services 10
Addendum: Opportunities for businesses in the UAE 13
1 © The Economist Intelligence Unit Limited 2016
Latin America: Room for growth
About this
research
Latin America: Room for growth is an Economist Intelligence l Daniel Melhem, president, Gulf Latin America Leaders
Unit (EIU) report, commissioned by Dubai Chamber. The report Council
discusses the current economic and political climate in Latin
l Claudia Pompa, former research officer, Overseas
America and explores sectors that present opportunities for
Development Institute
economic growth—particularly trade-related infrastructure
and the services sector. The findings are based on desk research l Dr Pablo Sanguinetti, chief economist, Development Bank
and interviews with experts in the topic. of Latin America (CAF)
l Paul Wander, independent economic consultant
The EIU would like to thank the following experts (listed
alphabetically) for their insights:
The EIU bears sole responsibility for the content of this
l Enrique Abud Dip, head, ProMéxico, UAE report. The findings and views expressed in the report do not
necessarily reflect the views of the sponsor. Kate Parker was
l Roberto Dunn, executive director, Conscorico Nobis
the author of the report and Melanie Noronha was the editor.
2 © The Economist Intelligence Unit Limited 2016
Latin America: Room for growth
Executive
summary
For the most part, Latin America has overcome Plans are under way for infrastructure projects
its reputation as a region dogged by debt crises, across Latin America, but securing project finance
hyperinflation and political instability, a reputation remains a top concern. Brazil, Mexico, Colombia
that has long discouraged foreign investment. and Peru are investing in improving roads, railways,
Although political and economic volatility is still seaports and airports. While these projects previously
present in the region, these factors are now more relied on government investment, renewed fiscal
the exception than the rule. And while some constraints mean that in future they will need foreign
macroeconomic weaknesses persist, the region is and private investors. Governments are taking steps
today more stable than in previous decades amid to make the business environment more attractive for
more market-oriented economic policies. This report these investors and are renewing efforts to develop
explores two elements of Latin America’s economic public-private partnerships.
growth strategy—infrastructure development and an
expansion of the services sector—that will be vital to Economic diversification can be achieved through
strengthen the region’s economies. an expansion of the services sector, with a focus
on value-added services (for manufacturing and
These are the key findings of the report: port operations), tourism and banking. Mexico,
Panama and Costa Rica, in particular, have developed
Robust economic growth strategies for Latin knowledge-intensive services clustered around
America, following the end of the commodity production centres. Tourism, although saturated in
supercycle, require the development of trade- much of the Caribbean and developed in Mexico and
related infrastructure and economic diversification Costa Rica, remains largely underdeveloped in the
through an expansion of the services sector. An rest of the region. Demand for better services from a
analysis of the key drivers of GDP growth reveals that more assertive and expanding middle class presents
government and private consumption in the region opportunities to develop domestic services such as
is weak, while exports have contributed significantly banking, healthcare and leisure.
to growth. To build on this, the development of port
infrastructure and the supporting road and rail
network will be vital. A rising middle class is creating
demand that will support an expansion of the services
sector.
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Latin America: Room for growth
1
Latin America: An economic review
Reforms overs the past two decades have However, recent economic performance has been
reduced fiscal vulnerabilities, cut inflation and disappointing. GDP growth slowed from 5.9%
led to greater macroeconomic stability in Latin in 2010 to 0.1% in 2015. Prospects for 2016 are
America. Domestic conditions have stabilised, gloomy, with the World Bank forecasting a 1.3%
with a lower incidence of boom-and-bust cycles contraction—the first back-to-back decline since
and debt defaults than in previous decades. the region’s 1982-83 debt crisis. The Economist
In the 2000s many Latin American economies Intelligence Unit (EIU) forecasts a less marked
experienced rapid GDP growth on the back of downturn of 0.6%, but this still represents the
high commodity prices. This helped the region world’s worst performance by region.
build up a cushion of foreign-exchange reserves,
amounting to US$818bn in 2015. The ongoing recession in Brazil, by far the
Figure 1
Real GDP growth rates by region, 2012-2020
(%) North America Europe Asia & Australasia
Latin America Middle East & North Africa Sub-Saharan Africa
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
2012 2013 2014 2015 2016(e) 2017(f) 2018(f) 2019(f) 2020(f)
(e) = Estimate. (f) = Forecast.
Source: EIU global outlook September 12th 2016.
4 © The Economist Intelligence Unit Limited 2016
Latin America: Room for growth
The Brexit effect?
Following the “Brexit” referendum in the United from US$9.9bn to US$9.4bn, but trade in
Kingdom and the ensuing analysis of its impact both directions is still minimal, accounting
around the world, investors are curious about for roughly 2% and 1% of British and Latin
the effect it will have on Latin America. The American total exports respectively.
Economist Intelligence Unit’s assessment is that On the positive side, Brexit may lead to stronger
the UK’s decision to leave the European Union trade ties between Britain and Latin America
is unlikely to have an immediate and significant as the former attempts to replace markets
impact on the region, given the limited direct potentially lost in the EU following its exit.
trade and investment links between the UK The short-term impact has been felt on the
and Latin America. UK-Latin American trade in currencies. Since the Brexit vote, an increase in
goods and services has advanced moderately perceived global risk has increased exchange-
in recent years, with exports from the UK to rate volatility for many of the region’s
Latin America rising from US$8.6bn in 2010 to currencies, particularly those with large
US$9.8bn in 2014. Exports from Latin America external vulnerabilities.
to the UK fell slightly during the same period,
region’s largest economy, acts as a drag on Mexican economy, which is more closely tied to
the regional average. The Brazilian economy the economic fortunes of the US, is experiencing
experienced a contraction of 3.8% in 2015, slower growth.
and the EIU forecasts another contraction of
3% in 2016. This is by no means the only factor Lower export earnings have also led to a
behind the region’s disappointing growth. Weak widening of current-account deficits. Fiscal
prices for oil and other commodities have hit deficits have been on the rise in recent years, and
large commodity exporters hard, with lower we do not expect any of the major Latin American
export revenue hampering growth in Venezuela, economies to be able to balance their budgets,
Colombia, Ecuador, Chile and Argentina. Even the despite efforts by many governments to curb
Figure 2
Breakdown of real GDP growth by region, 2015
(%)
External balance Fixed investment Government consumption Private consumption
4 4
3 3
2 2
1 1
0 0
-1 -1
-2 -2
Latin America MENA EU Asia
Source: IMF, World Bank and national statistics agencies.
5 © The Economist Intelligence Unit Limited 2016
Latin America: Room for growth
spending. Inflation has also edged up in many of persistent high unemployment in many
countries, reflecting local-currency depreciation countries, slowing credit growth, moderate wage
(which raises import costs and therefore usually increases and low levels of consumer confidence.
pushes up local prices). Government consumption was held back by the
continued fiscal reliance on commodity prices
Meanwhile, a strong El Niño has disrupted many to finance government spending and public
of the region’s agricultural sectors. Argentina, investment. The external balance (the value
Chile, Paraguay and Uruguay were hit by severe of exports less imports) was the strongest
flooding, while others, such as Central America, component of overall growth, reinforcing the
Colombia and Venezuela, were affected by extent to which Latin America is reliant on
drought. exports to underpin GDP growth. By contrast,
fixed investment represented a significant drag
Drivers of growth
on growth. As a share of GDP, foreign direct
With external conditions less than favourable, investment came in at 3.3% in 2015, barely
governments in the region have to turn to changed from levels registered in the late 1990s.
structural reform to spur economic growth. This
will reinforce competitiveness fundamentals— This analysis points to two key strategies. The
namely improving market efficiency; investing first is infrastructure development to improve
in infrastructure, innovation and education; and internal transport links and facilitate trade,
supporting the expansion of key sectors. On what capitalising on the importance of exports as a
should the governments in the region focus? component of GDP growth. As raising government
consumption will prove challenging in the current
Breaking down the key drivers of growth fiscal climate, the second strategy deals with
and comparing Latin America’s performance encouraging private consumption by expanding
with other regions will help identify essential the offerings of the services sector. The next
components. The contribution of private sections of this report examine both strategies.
consumption to growth was low, a reflection
6 © The Economist Intelligence Unit Limited 2016
Latin America: Room for growth
2
Infrastructure development
Infrastructure investment in Latin America
Table 1: Quality of overall
plummeted in the 1990s as governments
infrastructure ranking, 2015-16
tightened their belts in the aftermath of the debt
(out of 140 countries)
crisis and the “década perdida” (lost decade) of
Panama 40
the eighties. With both domestic and external
Ecuador 45
conditions improving in the 2000s, investment
in infrastructure staged a partial recovery. Chile 48
That growth was interrupted once again by the Trinidad & Tobago 56
2008-09 global financial crisis. Governments Mexico 65
were forced to cut spending, and private El Salvador 69
investors scaled back in the face of tighter credit Guatemala 70
conditions. Jamaica 73
Uruguay 87
Currently, infrastructure is a relatively weak spot
Honduras 88
for most countries in the region. In the World
Guyana 94
Economic Forum’s Global Competitiveness Index
Dominican Republic 100
2015-2016 only two countries (Panama and
Costa Rica 103
Ecuador) are in the top third of the 140 countries
Bolivia 105
surveyed for quality of overall infrastructure. The
Nicaragua 108
majority of Latin American countries are in the
Colombia 110
bottom third. The Latin American Association
Peru 112
of Ports and Terminals, which ranks the region’s
Argentina 122
ports taking into consideration other factors
Brazil 123
such as planned investment and supporting road
Venezuela 130
infrastructure, says that many governments are
Paraguay 131
behind in terms of internal transport and port
Haiti 139
connectivity.
Source: World Economic Forum, Global Competitiveness
1 http://latinports.org/en/ Analysis by the Comisión Económica Para Index 2015-2016.
opportunities-the-port- América Latina y el Caribe (CEPAL, a UN regional
investment) suggests that Latin America has long
logistics-development-
commission to foster economic co-operation and
latin-america/ underinvested in infrastructure. It advocates
7 © The Economist Intelligence Unit Limited 2016
Latin America: Room for growth
a medium-term investment of 6.2% of GDP per investment amounting to R30bn (US$9.1bn).
year to meet the needs of both private-sector In Colombia, the administration of Juan Manuel
firms and consumers, compared with rates of Santos is moving ahead with Plan 4G—a Ps50trn
less than 3% in recent years. The Inter-American (US$17bn) road concession programme focused
Development Bank (IDB) is somewhat more on links between the main cities and the
circumspect, suggesting annual investment of country’s Pacific and Atlantic ports. The goal is
5% of GDP to close the infrastructure gap.2 to facilitate foreign trade by reducing transport
times. This forms part of a wider 2015-30 Master
Infrastructure development brings with it a Plan that envisages annual investment of
number of benefits: it boosts productivity, US$10.4bn aimed at boosting exports. The plan
improves the availability and quality of public includes over 12,500 km of road projects and
services, and reduces transport costs. Roberto over 1,600 km of new railway and river transport
Dunn, executive director of Consorcio Nobis, an projects, as well as airport expansion and port
Ecuadorian conglomerate spanning agribusiness, development plans.
tourism, health, trade and real estate, points
to the potential benefits for Ecuadorian trade: In Peru, several major projects are already under
“[Improving transport infrastructure] will way, including the construction of a second line
shorten transit times. Right now, the transit of the Lima Metro, while others (including a third
times are almost twice [what they should be] and fourth metro line, a rail network linking Lima
because ships have to go to intermediate ports and nearby cities and a second runway at Lima’s
such as Buenaventura or Panama, or even Callao. international airport) are likely to progress in the
[The new port in Posorja] will cut transiting times near term. In Mexico, budget cuts have scaled
dramatically.” back the government’s original infrastructure
spending plans from 6% to 4% of GDP, but
Standard & Poor’s, a rating agency, estimates a significant number of large infrastructure
that infrastructure spending of 1% of GDP would projects are still going ahead, including work to
increase the size of the economy by 2.5% in upgrade the quality of ports and airports.
Brazil, 1.8% in Argentina and 1.3% in Mexico
after three years.3 The case for infrastructure Chile stands apart in the region for its robust
development, particularly when geared towards infrastructure, which in large part reflects a
trade, is obvious. successful concession system that was launched
in the early 1990s, according to Paul Wander, an
economic consultant and Chile specialist. Further
Project plans
2 https://publications.
development is likely: despite cutbacks in public
iadb.org/bitstream/ Across Latin America, efforts to facilitate trade
spending in 2016-17, funding for new transport
handle/11319/7315/ through infrastructure development have begun.
Infrastructure%20 Most governments are focusing on upgrading infrastructure is continuing. New underground
Financing.%20Definitivo. railway lines are being built in the capital,
port infrastructure to remove logistical
pdf?sequence=1 Santiago, and a new deep-water port in central
bottlenecks arising from relatively shallow ports
Chile is in the pipeline. Three regional airports
and inadequate equipment and inadequate
3 https://publications. are likely to be upgraded, and a new terminal at
facilities to accommodate large “post-Panamax”
iadb.org/bitstream/ Santiago airport is also in the works.
supertankers.
handle/11319/7315/
Infrastructure%20
Financing.%20Definitivo. In mid-September the Brazilian president, Michel Money matters
pdf?sequence=1 (http:// Temer, launched a plan for the completion of 34 Although investing in infrastructure poses
www.standardandpoors. infrastructure projects by 2017-18, including challenges that differ from country to country,
com/en_US/web/ the construction of four regional airports as well the principal concern is securing project finance.
guest/article/-/view/
as roads, railways and power plants, with public The IDB explains that although much attention
sourceId/8990810)
8 © The Economist Intelligence Unit Limited 2016
Latin America: Room for growth
has been devoted to the infrastructure deficit in foreign currency) is used to finance most private-
Latin America, less attention has been paid to sector infrastructure projects. This mostly
how this will be financed.4 comprises over-the-counter transactions (taking
place directly between two parties, without the
The investment push for large infrastructure supervision of a stock exchange).
projects has so far required heavy involvement
from governments, multilateral institutions or There are other initiatives to encourage private-
development banks. But Latin America’s weak sector investments. In Peru, the “public works for
fiscal position means that governments will taxes” scheme allows private companies to invest
have to actively court foreign investment to part of their tax payments in infrastructure.
a greater extent than before. Although some Originally designed for transport infrastructure,
countries passed private-public partnership it has been expanded to cover schools, clinics and
(PPP) legislation during the 1990s, in line with water and sanitation infrastructure. In Colombia,
efforts to liberalise their economies and privatise a new investment fund unveiled earlier in 2016
key sectors, more are now introducing reforms will facilitate joint ventures with the private
in this area or improving current legislation. sector and also act as a guarantor, enabling
Peru has an ambitious PPP programme in the private investors to access cheaper and longer-
pipeline, and the Argentinian Congress is term financing.
currently debating a much-needed PPP law that
will provide greater security to prospective
Other roadblocks
investors. For infrastructure projects in Brazil,
While the mountainous terrain across the
Mr Temer has changed some of the regulations
Patagonia and Andes region makes road building
governing concessions to increase their
a challenging affair, opposition from local
attractiveness to foreign investors. Not only will
communities is another major concern for foreign
more public money be available, but investors
investors. Traditionally, this has been a particular
will be given more time to conduct feasibility
problem in the Andean subregion (especially
studies, regulatory agencies will take more of a
Bolivia and Peru), but it has also affected
back seat, and previous difficulties in securing
projects in a wide range of countries across the
environmental licenses should be ironed out.
region, including Mexico, Brazil, Panama and
Ecuador. Mineral extraction projects tend to be
Long-term infrastructure finance in local
more of a target than physical infrastructure
currency is an ideal solution for foreign investors,
projects, particularly if the local population
since external capital is more difficult to secure
benefits from a better road network, but unrest
(particularly in countries deemed high-risk).
nevertheless poses a risk, especially if planned
However, few Latin American countries have
routes cut through the territories of indigenous
a sufficiently developed banking sector and
communities.
capital market to extend this scale of local credit
to foreign firms. As a result, external debt (in
4 https://publications.
iadb.org/bitstream/
handle/11319/7315/
Infrastructure%20
Financing.%20Definitivo.
pdf?sequence=1
9 © The Economist Intelligence Unit Limited 2016