Savvy companies are rethinking their investment priorities in Latin America:
Multinationals are re-prioritizing their investments in Latin America as the region is battered by a confluence of external headwinds and the effects of years of economic mismanagement in some of the region’s largest markets. Among Frontier Strategy Group’s clients in Latin America, 23 percent are considering adjusting their priority markets in the region, while 31 percent have already made adjustments.
However, there are still a sizable number of companies who have yet to recognize that Latin America has entered into a new era where growth is likely to be substantially lower than what the region saw during the last decade.
Latin America is facing a new normal:
Latin America’s economies are in turmoil due to the withdrawal of three key external factors which drove the region’s economies over the past decade:
- Chinese demand for Latin American exports, in particular the iron and copper ore produced by Brazil, Chile and Peru, has led to a substantial reduction in export volumes across the region.
- Commodity price declines, especially the fall in oil prices, have led to a dramatic reduction in foreign direct investment across the region. Meanwhile, many Latin American governments who depend on commodity royalties to compensate for anemic tax revenues are struggling to sustain fiscal outlays as the value of exports collapses.
- Cheap money in the form of foreign credit and portfolio investment hid chronic current account imbalances in many regional economies in recent years. That ‘hot money’ has begun to withdraw from the region as expectations for a Federal Reserve rate hike have grown, exposing the region to painful currency volatility and ultimately higher domestic interest rates.
New winners and losers are emerging:
With the region facing external headwinds that are likely to persist for the foreseeable future, Latin America is seeing its economic center of gravity shift away from Brazil and the MERCOSUR markets toward Mexico and the Pacific Alliance.
Investors should examine the structural vulnerability of individual economies, as well as the policy flexibility of governments, when assessing where they should place subsequent bets within Latin America. Within these categories, it is important to consider the following specific factors:
- Commodity import dependence: Countries with net positive commodity export balances are more likely to suffer from lower commodity prices, while countries with net-negative commodity import balances are more likely to benefit as raw material and energy costs decline.
- Exchange rate regime: Countries with more flexible exchange rate regimes are better able to shift external demand toward the domestic market through currency depreciation in times of economic stress.
- Monetary policy: Countries with lower inflation rates and lower levels of dollar-denominated corporate debt are better able to cut interest rates to stimulate economic growth.
- Fiscal policy: Countries with more sustainable primary fiscal balances are better able to stimulate growth through increased government spending.
A holistic assessment of these factors indicates clear winners and losers among Latin America’s major markets over the next 3 to 5 years, with Mexico and Colombia supplanting Brazil as one of the top investment destinations for most multinationals.