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• Despite diversification the US still holds the lead

  LatinNews 15 April 2014 Hits: 1052

  For all the talk about the extent to which Latin America has been diversifying its sources of investment, the US is still the main provider of foreign direct investment (FDI) and it looks likely to retain this position — though it may, as a result of its monetary policy, become an important contributory factor to an expected global reduction of investment flows.

  In 2012, the last year for which there are full statistics, all FDI flowing into Latin America rose to a total of US$174.5bn, or 5.7% more than in the previous year. According to the UN’s Economic Commission for Latin America and the Caribbean (Cepal) in 2012 the US was the source of an estimated 24% of that inflow, up from an average 22% in 2007-11. The top five nominal sources of FDI accounted jointly for 50% of the total inflow, and the US accounted for just under half of that share.

  This is an incomplete picture because, as Cepal notes, in a substantial share of the incoming FDI, the actual source country cannot be identified. Of the amount of the FDI nominally from the Netherlands (11% of the total inflow) a fair portion is believed to come from companies based elsewhere. In other cases the FDI appears as coming from the Cayman Islands, the British Virgin Islands or Luxembourg. Cepal attributes this to ‘the growing practice of transnational companies to channel their investments through third-country affiliates’. In this light the US share could be greater than what direct reporting suggests. Also, some of the recipient countries either do not report incoming FDI or do so partially or late, which makes it particularly difficult, says Cepal, to estimate the inflow of FDI from China (a country often cited as elbowing its way into the region), ‘since it is mostly channelled through third countries and in 2012 was concentrated in those [countries] that did not report data, such as Peru and Venezuela.’

  US figures show the US’s direct investment stock in Latin America at the end of FY 2012 totalling US$869bn or 19.5% of its world total. Within Latin America, four countries accounted for 27% of US direct investment: Mexico (11.6%), Brazil (9.1%), Chile (4.6%) and Venezuela (1.7%).

  It is not fully clear in what sectors the investment had been made. Figures for those four countries plus Bermuda and the British Caribbean show 25.4% of the total going to banking and finance, 44% to holding companies and 10.8% to manufacturing — but these figures are incomplete because the US Department of Commerce suppressed some data to avoid disclosing holdings in individual companies (in Brazil, Chile and Venezuela). They also fail to reveal the amount invested in agriculture and agribusiness, which is important in South America.

  Latin America: main sources of FDI
  %
  Sources	2007-11	2012*
  US	22	24
  Netherlands	10	11
  Canada	5	6
  Spain	10	5
  Japan	4	4
  Latin America	9	14
  Other	40	36
  *Preliminary figures & estimates at end-April 2013.
  Source: YaleGlobal, on data from Cepal.

   

  US direct investment in LAC 2007-12
  US$m*
  	2007	2008	2009	2010	2011	2012
  Colombia	9,049	10,596	7,137	6,758	13,438	15,823
  Brazil	3,744	5,007	1,963	5,348	5,572	13,509
  Peru	5, 491	6,924	6,431	8,455	8,233	12,240
  Chile	3,726	2,272	991	819	1,915	4,376
  Uruguay	1,329	2,106	1,529	2,289	2,505	2,710
  Venezuela	1,505	1,741	-2,169	1,849	3,778	3,216
  Argentina	724	2,158	1,035	1,334	2,193	..
  Bolivia	366	513	423	643	859	1,060
  Ecuador	194	1,058	306	163	641	587
  Guyana	152	179	164	198	247	294
  Paraguay	202	209	95	228	215	273
  Suriname	-247	-231	-93	-248	70	70
  México	31,380	27,853	16,561	21,372	21,504	13,431
  Panama	1,777	2,402	1,259	2,363	2,755	3,020
  Costa Rica	1,896	2,078	1,347	1,466	2,157	2,265
  Guatemala	745	754	600	806	1,026	1,207
  Honduras	928	1,006	509	969	1,014	1,059
  Nicaragua	382	626	434	508	968	810
  El Salvador	1,551	903	366	117	385	516
  Dom. Rep.	1,667	2,870	2,165	1,896	2,275	3,610
  Trinidad	830	2,801	709	549	1,831	2,527
  Barbados	476	464	247	290	532	..
  Bahamas	887	1 032	753	960	971	465
  Jamaica	866	1 437	541	228	218	381
  Haití	75	30	38	150	181	179
  St Vincent	121	159	111	97	86	126
  St Kitts-N	141	184	136	119	112	101
  St Lucia	277	166	152	127	116	113
  *By subregion, ranked by inflow in last recorded year.
  Source: Cepal.

   

  US direct investment positions
  End-2012, in US$bn
  	All	Manufacturing	Banking	Finance	Holding companies
  Total	4,453.3	637.1	119.7	775.6	1,949.0
  Latin America	869.3	93.6	5.9	215.0	386.0
  -Mexico	101.0	35.6	1.2	15.6	25.0
  -Brazil	79.4	29.6	*	14.7	11.3
  -Chile	39.9	4.6	*	5.7	*
  -Venezuela	15.0	8.2	*	1.8	*
  -Bermuda	304.5	2.2	0.2	61.0	217.7
  -UK Caribbean	219.9	0.2	-2.3	92.4	98.5
  * Data suppressed by US Department of Commerce to avoid disclosing data of individual companies.
  Source: Data from Jeffrey H Lowe, Survey of Current Business, September 2013, cit Congressional Research Service (CRS)

  It is worth noting that, when compared with the average for the previous five years, the inflow from other Latin American countries increased by 5 percentage points. Apart from the rise in FDI from the US (2 percentage points), increases were recorded by Canada (1 point) and the Netherlands (1 point). Japan’s share remained steady at 4% of the total.

  Though FDI trends between 2011 and 2012 were uneven from one country to the next, in all but eight countries the flow from the US increased. Those that recorded falls were two of the bigger economies (Mexico by -37.5% and Venezuela by -15%), two in the middle-range (Ecuador by -8.4% and Nicaragua by -63%, and four smaller economies in the Caribbean: The Bahamas (-52%), Grenada (-26.7%), St Kitts & Nevis (-9.8%) and St Lucia (-2.6%).

  Possible squeeze ahead

  The World Bank in its Global Economic Prospects 2014 (GEP) notes that though the economies of Latin America and the Caribbean will benefit from the continuing improvement of the US economy, they will be particularly sensitive to the withdrawal of ‘quantitative easing’ or ‘accommodative monetary policy’ heralded by the US Federal Reserve in January.

  With this, it says, long-term interest rates on US Treasuries are expected to rise further, leading investors to demand higher interest rates on developing-country debts: ‘Increased capital costs will slow debt flows to devel­oping countries, including to the Latin American and Caribbean region, which has been one of the largest beneficiaries of the increased capital flows to devel­oping countries observed in recent years.’

  Total net capital flows to the region declined by 5.1% in 2013; the Bank expects them to shrink by about 3.7% in 2014. This forecast is based on the assumption that in the US the incremental withdrawal of quantitative easing, and its effect on long-term interest rate, will follow ‘a relatively gradual trajectory in line with improving economic conditions in the United States’.

  However, it warns, ‘if markets react sharply to the continued tapering, then capital flows to developing countries could decrease by as much as 80 percent, destabilising current account balances, leading to disorderly depre­ciations of regional currencies, and quite possibly, increasing imported inflation. These outcomes would compel local governments to tighten monetary policies and further reduce growth prospects. Latin America will not be immune to such developments, particularly because it is one of the developing regions that has ben­efited the most from higher capital flows arising from loose monetary policies in high-income countries.’

  A strong hint of this came in the second half of 2013 when equity issues fell by about 50% in response to jitters in global financial markets and currencies in the region depreciated by up to 13%. Most at risk of large adjustments in the scenario of a ‘disorderly taper­ing process’, says the bank, will be the countries with high current account and fiscal deficits, as investors tend to discriminate against those with poor economic fundamentals.

  Another potential indirect threat comes from beyond the hemisphere. If, as expected, commodity prices continue to fall, says the Bank, ‘given China’s importance in global commodity markets (particularly in metal markets) a sharper-than-expected slowdown in China is likely to affect regional commodity exporters thereby eroding export and gov­ernment revenues, and potentially aggravating current account imbalances.’