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Doing Business in Latin America’s growing economies?

These comments are part of a report done by a person involved in researching investment opportunities in Latin America. I can’t put the whole report up for confidentially reasons but needless to say it is very positive.

“The Latin American market has undergone a paradigm shift and has decisively come out of its boom and bust cycles and political and economic instability, barring a few exceptions. It is now set on a more sustainable course of stability and growth.

Latin America is a large market of 20 countries, 560 million people.

The Mercosur is becoming a global powerhouse in agriculture with its large production and surplus for exports, vast fertile land area, advanced technologies and best practices.

The economies of the region have become more stable with strong macroeconomic fundamentals, single digit inflation, lower external debt and predictable exchange

The economies of the region have withstood the shock of global crisis with only moderate adverse impact because of the resilience of the economies and better regulatory, monetary and fiscal policies rates.

The Chinese trade with Latin America has exploded.

Argentina is the major source of edible oil and it is followed by Brazil and Paraguay. Wheat is occasionally exported from Argentina while sugar is sourced from Brazil, whenever there is shortfall in India. In 2009, whilst India imported about a billions of dollars worth of sugar from Brazil. There is scope to source pulses, ethanol and biodiesel from Brazil, Argentina, Uruguay and Paraguay.

Apart from Argentina and Brazil ( Brazil’s rules are more flexible ) there is no restriction on acquisition of land by foreigners. Foreign companies and individuals already own millions of hectares in the region. There is no political or social sensitivity to large farm holdings by foreigners, unlike in Africa and Australia.  The land can be bought on commercial basis from the private sector.

There is no need to bring in labour, experts, technology or machinery since South America has an agribusiness ecosystem like the IT ecosystem in India – export-oriented with competent human resources and service providers that allow investors to focus on output and returns.

South America is becoming a player in the global petroleum market. Brazil has discovered large new reserves of oil and is set to become a significant exporter. Venezuela is already the Saudi Arabia of the region with its reserves of over 200 billion barrels. Mexico, Ecuador and Argentina also export crude oil. Colombia and Peru also have sizeable oil reserves and are under-explored.

In the non-conventional energy sector, Brazil has emerged as a global pioneer and leader in fuel ethanol and more countries in the region are following their lead. Argentina is the leading exporter of biodiesel produced from soya.

Many projects are coming up in the arid areas of Brazil, Argentina, and Paraguay as well as in Central America and Caribbean to grow jatropha for biodiesel.

Democracy has irreversibly replaced military dictatorship in the region. The political and economic agenda of the region is no longer top-down but bottoms-up. It is being driven by the bottom of the pyramid. The masses, with their new-found voting power elect those who promise to make a change in their lives, through Inclusive Development Agenda.

With this new political change, millions of Latin Americans have been pulled out from below the poverty line in the last decade. The Latin American society which has one of the world’s highest disparity in income has started bridging the gap.

The region apart from Argentina and Venezuela has tamed inflation decisively and has kept it in single digit in the last decade. The average rate of inflation of the region is below 5%. The currencies and exchange rates have become stable and predictable.

Gross public debt of the region as a percentage of GDP has been brought down to low levels. The governments have paid off their major external debts and there are no more¨ IMF-cases¨ in the region. Brazil and Argentina paid their debts to IMF ahead of schedule.

Brazil has become a creditor to IMF now! These days the governments have been successfully raising resources through issue of bonds in local currencies. The governments have become more prudent in fiscal and current account management.

Domestic saving rates in the region have started going up and there is a conscious determination to avoid reliance on external resources. Gross international reserves of the region has been steadily increased. Foreign Direct Investment has increased dramatically.

Five countries namely Chile, Mexico, Brazil, Peru, Uruguay and Panama have been upgraded in recent years to investment grade by the Sovereign Rating Agencies.

With this strong foundation of macroeconomic fundamentals, the regional GDP grew by an annual average of 5 percent in the period up to date. Due to the global crisis, the GDP contracted by 1.8% in 2009. The region is expected to grow by 5.2% in 2014 apart from Argentina and Venezuela which will need political change to again attract investments dollars.

The economies of the region have become more resilient and less vulnerable to external shocks. This was evident from the way in which the region withstood the global crisis with only moderate adverse impact. The region did not face any financial crisis following the global financial meltdown. There was not a single case of banks or financial institutions going bust in the region, unlike what happened in US and Europe. The governments are now better prepared to face external shocks.

This has been noted by IMF, World Bank and other international institutions who have praised the new discipline and prudence of policy makers in the region. The stability of the economies of individual countries has been reinforced by the regional integration through Mercosur, SICA, Trans-Pacific Partnership  and Andean Community.

Through these groups, barriers have been removed for free movement of goods, services, capital and people and there is growing intra regional trade and investment.

Latin America, with its 20 countries is a market of 5 trillion dollars of GDP, population of 550 million and per capita income of 10,300 US Dollars. To this, one must add the 40- million strong Hispanic community in USA which has more economic power than Argentina, the third largest market of Latin America.

Geoffrey W McRae

www.gatewaytosouthamerica.com

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