Is it worth investing in Latin America?

August 10, 2023

The most important source of economic activity in the coming decades will be the low carbon economy. In the end, we will have to practically reinvent in green bases almost everything that we produce and consume and how we consume. This spectacular transformation comes from necessity and not from choice, but we are too far behind and we are racing against time to avoid an environmental catastrophe. In short, we will have to find the means to accelerate the transition to this new generation of green products and services, something that will require different production conditions than the omes we have today. For this, it will be necessary a lot of green energy, a lot of water and a lot of minerals from the low carbon economy.

Latin America and the Caribbean (LAC) is the region best positioned to support the planet in this mission, since several countries already have fairly green energy matrixes, they have many of the largest twelve water reserves and many of the largest mineral reserves of the new economy, such as lithium, nickel, copper, graphite, rare lands and high-grade iron ore. The region still has other conditions of great global interest, such as the largest tropical forest, several two most important biomes, the richest biodiversity and enormous potential to seize large global markets for carbon credits and bioeconomy.

But the atractives of the region do not stop there. LAC has a young population, many new investments in renewable energy, an immense and growing role in global food supply, a rich ecosystem of entrepreneurial capital and powershoring to meet the growing needs of companies to green up production. Not being involved in wars and other geopolitical issues and having good trade relations with the United States, Europe and Asia, companies operating in LAC are not subject to the same regimes of interventions, controls, prohibitions, discrimination and protectionism, factors that have caused uncertainties and instabilities for businesses in other regions.

LAC is also repositioning itself on economic policy issues. As an example, consider inflation and monetary policy, which today is a prudential reference and not anymore a policy mistake. Independent central banks and decisive actions are subject to inflation and, even with changes in political orientation in elections, the new rulers have preserved sensible economic policies.

Thus, it would not be an exaggeration to consider that the LAC economy is already relatively better positioned in the global economy and, not by chance, several of its currencies have strengthened. It is true that the improvement in the situation of some countries in the region results, in part, from factors outside the control of local governments, such as the war in Ukraine and the lifting of post-pandemic restrictions in China, which will increase the demand for food and mineral products.

But the region's unique green supply structure combined with changes in the demand structure as a result of environmental commitments, new regulations, changes in consumer preferences, greater corporate social responsibility and new technologies and business models is shaping a benign development path that, very likely, will raise the relative prices of several of the region's commodities and boost GDP growth over the next few decades, with potentially profound impacts on trade terms and balances of payments.

These characteristics place LAC in a privileged position to participate in the world economy from the new Global Value Chains (NCGV), which have resilience and sustainability or are their only driver, and are not only focused on efficiency. The powershoring and other comparative and competitive advantages will place the region in a central position in the NCGV, especially in energy-intensive sectors and in intensive sectors like water, bioeconomy, critical minerals, grains and proteins.

Companies and markets of the region are also another attraction for investors. Even though many companies pursue lower-leverage policies than their counterparts, have relatively more prudent balances, present lower historical default rates, and have enormous potential for domestic and regional growth, risk agencies limit, often unfairly, risk ratings. But this condition of undervaluation has aroused attention and more and more investors consider countries of the region as especially attractive sites for M&A strategies.

Even though many conditions conspire in favor of the region, success is not guaranteed. To convert all this immense potential into concrete results, it will be necessary to embrace sustainable and sustained growth as pillars of economic policy, implement consistent and coherent policies, establish and strengthen institutional and regulatory frameworks, increase legal predictability, train and train human capital, invest in R&D, increase investments in infrastructure and digital technologies and find safe and cheap sources of long-term financing.

Some economies of LAC should grow in the next few years more than experts expected. Brazil, which is the largest regional economy, is carrying out important economic reforms that should provide even greater support for the growth of the country and the region. The capital markets and the stock market have shown results and the risk classification and the cost of capital has improved.

Last year, Brazil received US$ 92 billion in Foreign Direct Investment (FDI), becoming the fifth destination of investment in the world; Mexico also came out better in the photo, all of this despite the global inflows of FDI will be down compared to 2021. Indeed, global CEOs and fund managers are looking at LAC with growing optimism and expect FDI to break new records for the next few years. The oil and gas sector may have an important role to play in the transition, framing our environmental frameworks and commitments and financing the above agenda. In the end, the region cannot afford to give up this enormous domestic source of financing.

It seems that LAC is especially well-positioned to overcome its historic challenges –poverty and inequality-, helping the planet to face many of its two biggest challenges and generate good results for investors. Thus, it is almost inevitable to think that the success of LAC will be the success of all of us.

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Jorge Arbache
Jorge Arbache

Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-