New data from the United Nations’ Economic Commission for Latin America and the Caribbean (ECLAC) shows that Foreign Direct Investment (FDI) in the region has basically stagnated this year. The same is true of trade between the region and the rest of the world – mainly because of lower commodity prices. Equally noteworthy is the fact that intra-regional trade has contracted by 5%-6%.
In a late October update to its annual regional FDI report (published in May), the ECLAC noted that net FDI to the region in the first six months of 2014 amounted to US$84.6bn, about 23% less than in H1 13. Much of the US$25.7bn drop in inflows could be accounted for by two transactions in Mexico: Anheuser Busch InBev’s US$13.2bn purchase of the local brewer Modelo in H1 13, and AT&T’s sale of its stake in América Móvil in H1 14. This meant that the figure for the first half of 2014 was always likely to be lower; in the event it was down by US$4.2bn.
As chart 1 shows, Argentina registered a net FDI outflow of US$55m in the first six months of 2014. However, this included a US$4.23bn outflow associated with Repsol’s divestment of Yacimientos Petrolíferos Fiscales (YPF).
| Chart 1: Foreign direct investment (FDI) flows (US$m) |
| Total 2013 |
|
H1 13 |
H1 14 |
Variation |
| 11,353 |
Argentina [3] |
5,878 |
-55 |
-5,933 |
| 2,030 |
Bolivia |
863 |
852 |
-11 |
| 63,996 |
Brazil [1] |
38,976 |
42,001 |
3,025 |
| 20,258 |
Chile [1] |
12,286 |
10,367 |
-1,919 |
| 16,199 |
Colombia |
7,698 |
8,452 |
754 |
| 2,714 |
Costa Rica |
1,358 |
1,075 |
-283 |
| 140 |
El Salvador |
76 |
25 |
-51 |
| 1,309 |
Guatemala |
693 |
713 |
20 |
| 1,060 |
Honduras |
537 |
542 |
5 |
| 39,172 |
Mexico [2] |
28,784 |
9,733 |
-19,051 |
| 4,654 |
Panama |
2,045 |
2,575 |
530 |
| 9,298 |
Peru |
5,729 |
4,680 |
-1,049 |
| 1,991 |
Dom. Republic |
982 |
1,175 |
193 |
| 2,754 |
Uruguay |
1,439 |
1,568 |
129 |
| 7,040 |
Venezuela |
3,790 |
1,761 |
-2,029 |
| 183,968 |
Total |
111,134 |
85,464 |
-25,670 |
|
1. Figures for first eight months of 2013 and 2014 2. H1 13 figure boosted by US$13,249mn purchase of Modelo by Anheuser-Busch InBev 2. H1 14 figure reduced by AT&T's sale of its stake in América Móvil for US$4,495mn 3. But for Repsol's sale of its YPF stake, the H1 14 figure would have been US$4,289mn
|
| Source: ECLAC |
Even excluding these deals, FDI in the region in the first half of 2014 still would have been about 4% lower than in the year-earlier period. Lower minerals prices contributed to falls of US$1.0bn and US$1.9bn in FDI flows to Peru and Chile respectively. However, the US$3.3bn purchase of Chile’s energy company CGE by Gas Natural of Spain should ensure that FDI in Chile actually rises for the year as a whole. The deteriorating economic environment in Venezuela is reflected in a US$2.0bn drop in inwards FDI, to US$2.2bn.
The absolute size of Brazil’s economy means that foreign corporations continue to see it as one they cannot ignore. Inwards FDI rose from almost US$39bn in H1 13 to US$42.0bn in H1 14. It may well be that FDI in Brazil in 2014 exceeds last year’s US$64bn. A rise of US$754m in FDI in Colombia in the first half means that, there too, the total for 2014 should match last year’s figure. Other significant increases in the first six months of 2014 took place in Uruguay (US$129m), the Dominican Republic (US$193m) and Panama (US$530m).
Trade flows with the rest of the world slow
The stagnation in regional FDI inflows has coincided with a small decline in trade in goods between the region and the rest of the world. According to ECLAC, exports contracted 0.3% in the first half of the year relative to H1 13. Imports contracted 0.6%. In spite of the respectable growth rates still being achieved by China and much of South East Asia, exports to Asia only managed growth of 1.6%. Exports to the US, meanwhile, grew by 2.6%. However, growth to Asia and the US was more than offset by a 0.5% drop in exports to the European Union (EU). Interestingly, imports from the EU also fell significantly; by 6.0%. This was due to a sharp drop in EU sales to Argentina (10.9%), Venezuela (21.7%) and Chile (20.6%). Against this, regional imports from the US and Asia rose by 2.7% and 1.8% respectively.
Lower commodity prices have been a challenge for many exporters. The 0.3% fall in exports from the region in H1 14 was the result of a 5.5% drop in prices, which offset a 5.2% rise in volumes shipped. The impact of lower prices appears to have been greatest in Argentina and Peru, whose total exports in the first half of the year contracted by 10.1% and 10.2% respectively. Lower commodity prices (and, possibly, discounting by suppliers of manufactured goods) had an impact on imports too. ECLAC’s data indicates that, across the region as a whole, import volumes rose by 2.2%, while prices dropped by 2.8%.
As chart 2 shows, Mexico’s exports increased by 4.2% in the first half of the year: this was due overwhelmingly to a 5.8% rise in exports to the US. Other countries posting good growth in exports during the first six months of 2014 included Nicaragua (8.2%), Ecuador (9.7%), Paraguay (9.2%) and Uruguay (8.2%).
| Chart 2: Year-on-year growth (%) in foreign trade in goods, H1 14 |
|
Exports |
Imports |
|
Intra-regional |
Total global |
Intra-regional |
Total global |
| Lat. America & Carib. |
-5.6 |
-0.3 |
-5.2 |
-0.6 |
| Argentina |
-16.1 |
-10.1 |
-18.8 |
-7.5 |
| Brazil |
-12.7 |
-3.4 |
-10.1 |
-3.8 |
| Venezuela |
-1.3 |
-0.9 |
20.8 |
-5.9 |
| Colombia |
-11.1 |
-4.4 |
-6.0 |
6.1 |
| Peru |
-2.8 |
-10.2 |
-5.6 |
-1.1 |
| Central America [1] |
4.8 |
1.7 |
-8.7 |
2.2 |
| CARICOM [2] |
8.8 |
-5.3 |
2.4 |
2.0 |
| Mexico |
-6.6 |
4.2 |
2.0 |
3.2 |
| Chile |
-1.3 |
0.1 |
-8.4 |
-8.8 |
|
1. Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua, Panama 2. Antigua & Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St Kitts & Nevis, St Lucia, St Vincent & Grenadines, Suriname, Trinidad & Tobago
|
| Source: ECLAC |
Import trends by country were quite varied. The sluggish growth (or worse) in Argentina, Brazil, Chile and Venezuela led to a fall of imports of between 6% and 9% in H1 14. Conversely, Colombia’s imports rose by 6.1%, while Mexico’s grew by 3.2%. In both cases, the growth was driven by higher demand from the US and Asia.
Trade within the region also declines
However, a standout feature of the first half of the year was the contraction in trade within Latin America and the Caribbean. Reported exports to other regional markets dropped by 5.6%, while imports fell by 5.2%, according to ECLAC. Given the general improvement in the ease of doing business in the region (as we discuss elsewhere in this edition), the fall in intra-regional trade is mainly attributable to the weakness of the larger economies. The double-digit fall in Argentina and Brazil’s intra-regional exports and imports, for instance, is a reflection of the (near)-recession conditions in both countries.
Brazil’s problems also explain much of the 11.1% fall in exports from Colombia to the rest of the region. Elsewhere, Chile’s imports from the region fell 8.4%, and Peru’s 5.6%, indicative of the slippage in commodity prices and also the fall in FDI in those countries.
Looking forward, ECLAC expects regional export growth to accelerate to 1.9% year-on-year in the second half of the year, giving overall annual growth of 0.8% for calendar 2014, as chart 3 shows. Most of this will be driven by increased export sales to the US from its main regional suppliers. By far the most important of these is Mexico. ECLAC expects Mexico’s export growth to rise to 5.8% year-on-year in the second half, up from 4.2% in the first. Other beneficiaries are Central America and the Dominican Republic. By contrast, ECLAC expects exports from Chile to grow slowly.
| Chart 3: Year-on-year growth rates (%) for foreign trade in goods: ECLAC's projections |
|
Exports |
Imports |
|
2013 |
H1 14 |
H2 14 |
2014 |
2013 |
H1 14 |
H2 14 |
H2 14 |
| Latin America & Caribbean |
-0.4 |
-0.3 |
1.9 |
0.8 |
2.6 |
-0.6 |
-0.6 |
-0.6 |
| Mercosur [1] |
-1.4 |
-3.6 |
-0.9 |
-2.3 |
3.9 |
-4.5 |
-2.6 |
-3.6 |
| Andean Community [2] |
-3.0 |
-2.6 |
-0.5 |
-1.5 |
3.2 |
2.6 |
0.3 |
1.4 |
| Central America [3] |
-0.6 |
1.7 |
6.2 |
3.9 |
1.9 |
2.2 |
3.6 |
2.9 |
| CARICOM [4] |
-10.3 |
-5.3 |
-3.2 |
-4.3 |
-2.1 |
2.0 |
-5.1 |
-1.6 |
| Mexico |
2.5 |
4.2 |
5.8 |
5.0 |
2.8 |
3.2 |
1.5 |
2.3 |
| Chile |
-1.6 |
0.1 |
1.4 |
0.8 |
-1.2 |
-8.8 |
-5.3 |
-7.0 |
| Cuba |
-2.3 |
6.9 |
2.0 |
4.3 |
-0.3 |
-3.3 |
12.3 |
4.4 |
| Dom. Rep. |
6.4 |
2.3 |
4.1 |
3.1 |
-7.1 |
3.7 |
-4.6 |
-0.6 |
|
1. Argentina, Brazil, Paraguay, Uruguay, Venezuela 2. Bolivia, Colombia, Ecuador, Peru 3. Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua, Panama 4. Antigua & Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St Kitts & Nevis, St Lucia, St Vincent & Grenadines, Suriname, Trinidad & Tobago
|
| Source: ECLAC |
ECLAC is far less optimistic about the prospects for exports from other countries. In the Southern Common Market (Mercosur), exports from Argentina and Brazil are expected to decline by 0.3% and 2.7% respectively in the second half. Having contracted by 0.9% year-on-year in the first half, ECLAC expects Venezuela’s exports to shrink by 0.8% in the second. And in the Andean Community, Peru’s exports are expected to contract by a sharp 10.9% in the second half, marginally more than in the first six months of the year.
Regional imports are expected to continue contracting at an annual rate of 0.6% overall through the second half. This is due to falls in Argentina (5.8%), Brazil (2.6%), Chile (5.3%) and Peru (3.6%). Imports are expected to grow on a year-on-year basis in Colombia (1.9%) and Ecuador (2.3%), as well as in much of Central America. ECLAC expects Venezuelan imports to rise by 0.7% in the second half, having contracted by 5.9% in the first. However, given the well documented problems in Venezuela’s economy, imports may in fact continue to contract through the second half as well. As we note in the box, Cuba appears to be something of an exception.
In summary, latest regional FDI and trade data are fairly uninspiring. The decline in inwards FDI in the first half of this year needs to be considered in the context of ECLAC’s expectations that, globally, FDI will grow by 10% overall in 2014. The fall in commodity prices has had an impact on both imports and exports. The general weakness of Brazil and Argentina has also been a challenge. More worrying, though, is the decline in intra-regional trade. Regional integration has been a key aspect of the rapid growth of the Asia-Pacific over the last 30 years. Notwithstanding the continued political rhetoric in support of regional integration in Latin America, it does not seem that much progress has been made in 2014.
Cuba – A new trade and investment hotspot?
ECLAC projects that Cuba will increase its imports by 12.3% in the second half of 2014. This would be consistent with substantial growth in domestic demand and investment which, however, does not seem to be the case at the moment. The Cuban government is looking to boost annual inwards FDI to US$2bn year in a bid to stimulate economic growth, in part through the new Special Development Zone at the newly upgraded port of Mariel (ZEDM). Official delegations from the UK, Chile and Uruguay, among many others, were in attendance at the recent (early November) 32nd Havana Fair to discuss trade and investment opportunities, where Cuba’s minister for foreign trade, Rodrigo Malmierca Díaz, announced a list of 246 potential projects requiring an estimated US$8.6bn in investment. The director-general of the ZEDM office, Ana Teresa Igarza, suggested that the government would shortly green-light the first investment projects in the ZEDM; in sectors including biotechnology, construction, food-processing, light industry, logistics and renewable energy. But despite the optimistic official tone, these projects will not be delivered immediately.
Nonetheless, there are tentative signs that Cuba’s access to foreign markets and capital is likely to improve. One is the fact that the country is hosting the Colombian peace talks in Havana. Cuba is one of just four countries on the US State Department’s list of state sponsors of terrorism (the others being Iran, Sudan and Syria). Cuba’s long inclusion on the list has been due mainly to its links with the Fuerzas Armadas Revolucionarias de Colombia (Farc), Colombia’s main left-wing insurgent group. However, even the State Department’s 2013 overview of state sponsors of terrorism notes the role of the Cuban government as the host of the peace negotiations between the Colombian government and Farc. The overview also observed (repeating past observations) that ties between the Cuban government and the Basque separatist group Euskadi Ta Askatasuna (ETA) have become more distant.
On 24 October 2014, the Financial Action Task Force (FATF) noted that Cuba (along with Argentina, Ethiopia, Tajikistan and Turkey) would no longer be subject to the FATF’s ongoing global anti-money-laundering and anti-terrorist finance (AML/CMT) compliance process. The FATF noted that Cuba had established a legal and regulatory framework which addresses the deficiencies identified by the FATF in early 2013. This too is notable, as the US State Department has used Cuba’s inclusion on the FATF list as justification for leaving the country on its list of states that sponsor terrorism. The FATF change could facilitate flows of funds to Cuba, particularly if the US finally removed it from said list.