Nearshore Americas

Don’t Believe the Hype: Latin America is Not Melting Down

Read the news from Latin America lately? Doesn’t matter where you turn, it’s the same old story: the region – via corruption, violence and authoritarianism – is descending into a new level of Hell. 

Latin America’s two biggest economies, Mexico and Brazil, have figured prominently in this narrative. Major news outlets have fretted about Mexican president Andrés Manuel López Obrador (known to most simply as “AMLO”) and his left-leaning populism, while also pillaging the authoritarian, right-of-center rule of Brazil’s president, Jair Bolsonaro.

Mid-tier countries haven’t escaped the spotlight. Argentina’s economy was in decline – then COVID-19 hit. Peru’s approach to the pandemic has been a disaster. Street battles over tax reform are tearing Colombia apart. Chile’s “economic miracle” is under pressure. And Venezuela, of course, is stumbling from one crisis to the next.

Then there are the smaller players in Central America. Guatemala is thoroughly corrupt. Honduras is run by drug cartels. El Salvador’s president is a vain, power-mad authoritarian.  Nicaragua is chasing Venezuela down the toilet. Panama is rife with money laundering.

Or so the stories go. But that’s not the whole truth. In fact, there are reasons to be optimistic that the region is on a strong footing, and will come out of the pandemic even stronger.

Latin America’s Giants: Actions Speak Louder than Words

First up: Mexico. AMLO has promised to transform his nation into a modern state by providing support for the poor and tackling corruption. However, his disdain for political institutions and the judiciary have made many in the business community nervous, with some even warning that Mexico could “become another Venezuela”. 

Foreign direct investment into Mexico increased to US$11.8 billion during the first quarter of 2021 – a record high

However, actions speak louder than words. The business community may be sweating bullets in public, but in private it’s been doing deals. Foreign direct investment into Mexico increased to US$11.8 billion during the first quarter of 2021 – a record high that was boosted by the U.S.-Mexico-Canada Agreement (USMCA). This was an agreement that AMLO, the great socialist, had little difficulty with.

And on the eve of Mexico’s mid-term elections, as the international press was wringing its hands, SoftBank announced that it was putting US$150 Million into GBM, a Mexico City-based investment platform. 

Doing deals like that in the context of record-breaking investment – most of it in manufacturing and services – should be in the headlines, but it isn’t. 

The story with Brazil is little different. Decio Nascimento, Chief Investment Officer at Norbury Partners, recently wrote in Forbes that Brazil’s foreign investment-friendly policies could make it “the country of the present.” Brazil’s growth has returned to pre-pandemic levels, and the country’s nominal budget account recorded a surplus in April, with the currency strengthening on the back of upbeat domestic growth numbers.

Brazil generates 83% of its electricity from renewable energy

Brazil generates 83% of its electricity from renewable energy. It also has massive oil and gas reserves. Recent investments in these areas have been significant. In January 2021, U.S-based New Fortress Energy announced it was buying Hygo Energy Transition and Golar LNG for US$5 billion. And in June, Equinor and Partners announced it was putting a whopping US$8 billion into Brazil’s Bacalhau oil field.

Manufacturing in Brazil is also breathing new life: in May, Brazil’s manufacturing sector accelerated at the fastest rate in three months, lifting employment. New export orders were the highest in 2021, helped by stronger regional demand.

Major Markets Booming

And what of other important players in Latin America, like Argentina, Chile, Colombia, and Peru?

In 2020 Argentina restructured all its foreign currency debt, significantly improving the maturity profile for the next eight years. As a sign of renewed confidence, in January 2021, U.S-based Accenture acquired Wolox, an Argentinean software development company, as part of the global consultancy’s three-year, US$3 billion investment plan.

Doing deals like that in the context of record-breaking investment – most of it in manufacturing and services – should be in the headlines, but it isn’t.

Meanwhile, Chile is making waves as world leader in green energy, with Bloomberg’s Climatescope pegging the South American country as the world’s most attractive place for investment in renewables. Chile also has a coherent and ambitious post-pandemic recovery plan, including US$5.2 billion in investment in construction projects in 2021. And deals keep happening, as exemplified by EVO Payments acquisition of Chile’s Pago Fácil, a digital commerce payment platform. Oh, and Chile also just made a major move toward a new constitution that will consolidate its commitment to civic participation, justice, and gender equality.

Good news from Colombia, which has recently experienced street protests after a tax hike, has also been largely ignored by the global press. For example, legislation has been approved for Medellin to be the first District of Science, Technology and Innovation in Colombia. As well, innovative financial technology companies like ADDI continue to grow and attract investment. There is also significant activity to address social inequity, with the World Bank Board recently committing US$136.7 million to invest in low-income housing.

In Peru, investment is now at or above pre-pandemic levels

Peru, like many nations in Latin America, has been hit hard by the pandemic – but it has also shown remarkable resilience. After taking a dive in the second quarter of 2020, investment is now at or above pre-pandemic levels. The country’s strengths are the same as always: a general trade balance surplus thanks to solid exports; an independent central bank supporting prudent macroeconomic policies; membership in the Pacific Alliance; and a commitment to open trade policy.

Central America on Biden’s Radar

During the Cold War, the United States supported brutal military dictatorships in Guatemala, Honduras, Nicaragua, El Salvador, and Panama. In the 90s and beyond, these Central American countries began to liberalize – both economically and politically. 

However, during the past four years of the Trump administration, it could be argued that the United States allowed things to regress.

Now, there’s a new sheriff in town, with the Biden administration embarking on a long-term approach for reducing migration that includes a hard press on Central American countries to address corruption, authoritarianism, insecurity, an economic development. 

The United States is pledging US$310 million in humanitarian aid, and US$4 billion to boost development and reduce migration from Central America and Mexico

It is no accident that Vice-President Harris made her first international trip to Guatemala. The country has been put on notice: attacks on civil society, collusion with criminal organizations, and indifference – or active participation – with corrupt officials will now be getting some serious pushback from the State Department.  

With this stick comes a carrot. The United States is pledging US$310 million in humanitarian aid, and US$4 billion to boost development and reduce migration from Central America and Mexico. Harris has also issued a “call to action” for US companies to invest in Guatemala, Honduras and El Salvador.

There have already been some political successes. On the eve of Harris’s arrival in Guatemala City, that country’s attorney general announced the extradition on money laundering charges of Luis Enrique Martinelli, the son of former Panamanian president Ricardo Martinelli. Back in the US, Harris also hosted Gloria Porras, a Guatemalan judge focussed on anti-corruption initiatives.

In the long run, this approach will be good for business. That said, business is already pretty good. FocusEconomics Consensus Forecast expects Guatemala’s economy to grow 3.4% in 2021. For 2022, the forecast is for growth of 3.5%.

Honduras is also doing well economically. You would think that the pandemic and hurricanes Eta and Iota would have knocked it flat, but in fact Standard & Poor’s has confirmed Honduras credit rating at BB- with a stable outlook. This is the highest historical rating achieved for Honduras since 2017. 

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As for El Salvador, in 2019 investment in the country reached US$9.98 billion, and in 2020 – despite the pandemic – it actually grew to US$10.03 billion. The country’s leader, Nayib Bukele, has courted controversy, most recently by pulling out of an anti-corruption accord with the Organization of American States (OAS). However, he has also come up with innovative policies, such as his proposal that El Salvador accept Bitcoin as legal tender – the first nation in the world to do so, potentially making El Salvador “the world capital of the bitcoin ecosystem.”

Panama is also moving forward, with President Laurentino Cortizo recently announcing a US$1 billion investment in a natural gas plant. Panama’s solid financial sector is doing well, with estimated growth of 4% in 2021, and inflation controlled at 1.5% in 2020. The currency is also stable, at par with the US$.

Costa Rica, long a beacon of stability in Central America, announced in June that it had officially joined the Organization for Economic Co-operation and Development (OECD)

And Costa Rica, long a beacon of stability in Central America, announced in June that it had officially joined the Organization for Economic Co-operation and Development (OECD). As the first country on the isthmus to join the OECD, Costa Rica will now be abiding by international standards that promote government transparency and efficiency, while also improving competitiveness, attracting investment, and increasing production and employment.

The only significant stain on the region is Nicaragua, where the political situation remains bleak: President Daniel Ortega appears to be determined to consolidate one-party rule. Nonetheless, the country’s investment agency, PRONicaragua, remains active, with its policies still in place. From this perspective, Nicaragua maintains its appeal. 

Bottom line? While social injustice, corruption, and political unrest are realities in some parts of Latin America, they are by no means the whole story. By and large, the region is stable, with growing economies that are benefitting from direct foreign investment. 

And that’s good news.

Tim Wilson

Tim has been a contributing analyst to Nearshore Americas since 2012. He is a former Research Analyst with IDC in Toronto and has over 20 years’ experience as a technology and business journalist, including extensive reporting from Latin America. A graduate of McGill University in Montreal, he has received numerous accolades for his writing, including a CBC Literary and a National Magazine award. He divides his time between Canada and Mexico. When not chasing down stories, he is busy writing the Detective Sánchez series of crime novels.

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