By David Drake
(Note: This article is the second in a series on Global Trends in Family Offices Investments.)
According to the 2014 UNCTAD World Investment Report, total foreign direct investment (FDI) into Latin America and the Caribbean grew by 6% in 2013 to $182 billion, excluding offshore financial centers. There was a 64% increase in Central America and the Caribbean to $49 billion, and a 6% decline to $133 billion in South America. With offshore financial centers included, the total FDI figure for 2013 was $292 billion.
In earlier years, FDI growth was predominantly driven by South America. However, flows in 2013 declined after strong growth for three consecutive years. Brazil showed a slight decrease of 2%, where increased flows to the primary sector and industries such as motor vehicles and electronics were more than offset by reduced flows to overall manufacturing and services. FDI into Chile declined by 29% to $20 billion and Argentina by 25% to $9 billion because of lower investments in mining. Investment in Peru also fell by 17% to $10 billion because of declining prices of principal exports such as gold and copper. In contrast, flows to Colombia increased 8% to $17 billion because of cross-border M&A activities in banking and electricity generation. Flows to Venezuela increased by 119% to $7 billion, primarily in the energy sector.
The future outlook
New opportunities for investors in the energy sector, such as shale gas in Venezuela and policy reforms in Mexico should encourage further FDI. Multinational car manufacturers are pursuing new investment plans in Brazil from the likes of Chery (China) and Hyundai, in addition to Volkswagen, Toyota, and Renault. Mexico will also see further investments from Chrysler, Nissan, Mazda, and Honda. Mexican manufacturers are focused on exports with high import content, whereas Brazilian manufacturers are focusing on the domestic market.
2014 could be a big year
Because of countries such as Brazil, Chile, and Mexico in particular, 2014 has the potential to become the biggest year ever for Latin America. The region should see growth rates of 3.6% for 2014 and 4.1% for 2015. Mexico is benefiting from a sluggish economic recovery in the United States, which accounts for almost 80% of its exports. The Mexican government estimates FDI in the energy sector will grow by 50% to $10 billion by 2018, creating 500,000 jobs. Chile is also making impressive strides in economic growth, with growth of 5.5%, and has managed its economy (particularly mining) so well that its S&P bond rating puts it on par with Japan and China. Brazil continues to be in the limelight after hosting the 2014 World Cup in soccer and is scheduled to host the 2016 Olympics. The Brazilian Sports Ministry expects GDP to grow by over $70 billion as a result of the World Cup. Brazil is expected to be the fifth-largest economy in the world by the time it hosts the 2016 Olympics.
Latin America countries have also invested in one another. The largest outside investor in Ecuador is Uruguay and a substantial part of investment in El Salvador comes from Panama. Mexico has been among the four largest investors in countries such as Brazil and Ecuador, even though the bulk of FDI in Latin America continues to originate in Europe and the United States.
In Venezuela, government intervention in the economy is likely to grow in 2014. As the opposition strengthens, President Nicolás Maduro is likely to undertake more populist initiatives such as the imposition of price controls in most sectors and a cap on profits. Businesses which cannot operate profitably in a hostile business environment are unlikely to make further investments and rampant inflation is likely. The mining sector in Peru which took in a record FDI in 2013 looks less appealing in 2014. Social conflict has increased because of local opposition to large mining projects. The decrease in the price of metals may result in new projects being put on hold. Some projects are going forward but investment in the sector is unlikely to grow.
In Colombia, the peace talks between the FARC guerrillas and the government may present the best opportunities yet to end the 50-year armed conflict. The end of the conflict would considerably improve internal security although organised crime and drug trafficking will remain problematic. A peace agreement would hold the promise of increased investment in energy and mining. Paraguay’s pro-business government expects GDP growth of 13%, which would make it the fastest growing economy in Latin America. Increased oil exploration activity could make energy a focus area for investment.
Latin America still holds plenty of potential in 2014 for investors. Lower global commodity prices has not hurt the region because it allowed for a period of consolidation. However, a sharp decline could cause problems for those economies which are not strong enough to avoid a depression.
Note: This article originally appeared in the first issue of Family Offices Today.
Image: São Paulo, Brazil
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications,Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.