Latin America economy: FDI remains on upward trend in 2013

According to a report released by the UN Economic Commission for Latin America and the Caribbean (ECLAC) on May 29th, foreign direct investment (FDI) flows to Latin America in 2013 reached a new historical high of US$184.9bn. This is welcome news, given weakening growth rates and softening commodity prices, and is testament to the continued attractiveness of the region’s expanding domestic markets and copious natural resources.

However, the outlook is not all positive. Growth in FDI inflows is slowing, the region’s share of global FDI remains relatively low, and there is still a long way to go for the region to diversify away from services and natural resources.

FDI flows to Latin America have been increasing steadily since 2003, with the exception of 2006 and 2009, boosted by booming domestic demand (crucial for market-seeking investment) and high prices for commodities exports. In 2013 FDI to the region continued on an upward trend. However, growth of 5% was weaker than the global average increase (11%) and not enough to increase Latin America’s share of global FDI, which remained stable at 13%. The region’s performance contrasted even less favourably with that of the transition economies (up by 45%) and of the EU (up by 38%, with FDI recovering strongly after a 56% fall in 2012).

The context

Despite reaching historical highs in nominal terms in the past few years, FDI to Latin America as a percentage of regional GDP has remained stable, at around 3%, a much lower level than the 4.5% registered at the turn of the century, when privatisation programmes and liberalisation efforts were in full swing in most countries of the region. Moreover, had it not been for a single huge transaction (the US$13.5bn purchase of Mexico’s Grupo Modelo beer maker by Belgium’s Anheuser-Busch InBev), FDI to the region would have decreased from 2012. The backdrop for FDI to Latin America has become increasingly complicated in the past two years: weak external conditions (with the EU mired in an uncertain recovery and China decelerating) and lower commodities prices, coupled with competitiveness shortcomings at home, have resulted in the region growing at a fairly disappointing 2.9% annual average in 2012-13. Regional growth will also remain subdued this year, at 2.4%, amid still-challenging external and domestic conditions. Prices of export commodities, particularly copper and gold, declined in 2013 for the second consecutive year, although they remained high by historical comparison. Private consumption in the region remained steady, supporting the growing attractiveness of domestic consumer markets for investment in mass consumption services (including telecommunications, retail commerce and financial services among others). This mixed outlook supports our forecast that FDI will drop marginally in 2014 (to US$163.7bn) then pick up again, amid more sustained global and domestic growth, and improving business environments in the region, to reach an all-time high of US$207.9bn by the end of the forecast period. Of particular note is the opening of the telecommunications and energy sector in Mexico, which has the potential to boost investment in the region.

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