November 1, 2014
‘Investment in LatAm high’
Latin America received an estimated US$184.92 billion in investment in 2013, an increase of five percent and a new record, the UN Economic Commission for Latin America and the Caribbean (ECLAC) revealed in a report this week, which also detailed a corresponding 33 percent drop in outward direct investment.
Outward investment originating in Chile and Mexico, the two largest Latin American sources of investment in the region, fell significantly in 2013, matching the volatility shown in the past.
The increase in foreign direct investment for the region was in large part attributed to Mexico, which reported a 117 percent year-on-year increase, much of it due to the purchase of the Grupo Modelo by beverage giant Anheuser-Busch InBev for US$13.25 billion. FDI is measured in nominal terms in the ECLAC report.
The ECLAC report, which also anticipated a “minor” drop in FDI for the region in 2014, also suggests that although FDI in 2013 was 5 percent greater than in 2012, the relative importance of investment as part of GDP has remained relatively flat for the region since 2011 as the economies have grown based on increased domestic demand and commodities exports. Caribbean countries, while not the largest recipients of FDI, have the highest figures for FDI as part of their GDP.
Argentina’s FDI inflows in 2013 totalled US$9.08 billion, down 25 percent compared to 2012. It also specifies that because of restrictions to the repatriation of profits, “in 2013, reinvested earnings accounted for 77 percent of total inflows, although their value dropped by 14 percent compared to 2012.” The reinvestment of earnings by foreign companies back into the Argentine economy has been one of the objectives behind limiting the profits that foreign companies can send to their headquarters.
In addition, FDI to Argentina is anticipated to grow strongly in the forthcoming years as tinternational oil companies are expected to increase investment to explore the promising Vaca Muerta shale gas and oil formation. Argentina’s settlement with Repsol and the deal struck with the Paris Club on Thursday are expected to generate long-term investments in what are some of the richest untapped unconventional hydrocarbon reserves in the world.
Good result in a tough year
There were record levels of FDI in 2013 even though 2013 was a difficult year for the region, as economic “growth slowed to 2.5 percent, and United Sates monetary policy sowed uncertainty in the markets, which lead to heavy depreciation in the region’s main currencies.”
The UN body also noted that the prices for natural resources, one of the region’s cash cows, also fell last year amid fears about the potential for a Chinese economic slowdown.
For example, Brazil reported a 2 percent decline in FDI, and Chile a 29-percent decrease, while Argentina saw a decline of 25 percent. The South American sub-region was calculated to have received US$11.9 billion less in FDI than in 2013 compared to 2012, which meant that it fell 8 percent.
Despite the decrease, FDI to Brazil dwarfed total inflows to Mexico, the region’s second-largest economy. According to the ECLAC, Brazil received US$64.05 billion in 2013, while Mexico, the region’s second-largest economy, was again the second-largest recipient of FDI, with US$38.27 billion. Argentina in 2013 had foreign investment inflows totaling US$9.08 billion, making it the fifth-largest recipient in the South American sub-region in 2013.
European countries constitute a major source of FDI for Brazil and South America in general, followed by the United States. The participation of Asian economies in the region’s FDI remained flat in 2013.
Despite the large importance given to FDI in economic analyses, ECLAC says there is still debate about the impact that FDI can have on economies.
“The impact of FDI depends to a great extent on the type of investment. Investments in technology-intensive sectors have more potential to contribute to development through knowledge transfer and local capacity-building. But FDI in high-tech manufacturing represents only a small proportion of the total and showed no change in 2013,” notes the report. Although figures for Argentina were not published, the report does suggest that in South America the natural resource sectors were the primary recipients of FDI and not technology-intensive sectors.
Correspondingly, the anticipated drop in next year’s investment figures should not have an impact on employment figures as analysis shows that no more than five percent of total employment in the region is attributable to foreign investment.
Outward direct investment
Although FDI is commonly associated with the inflow of capital from United States, European and Asian sources, ECLAC also addresses the increased importance of foreign investments coming from Latin American sources, known as outward FDI. While volatile, these have seen exponential growth since 1995 — when they were recorded to be at US$4 billion — and in 2013 outward FDI reached US$31.61 billion, down from US$47.19 billion.
The report seeks to explain that great variability in the outward FDI for Latin America is due to the fact that “large acquisitions and investment projects by a relatively small number of large companies from only a handful of countries.” As such, annual differences in their behaviour can have an oversized impact in regional trends.
For example, 2012 was a bumper year for Mexican and Chilean outward FDI at approximately US$22 billion for both countries. That outward FDI fell by more than 50 percent in Chile and only slightly less in Mexico, which was only partially compensated by massive jump in Colombian outward FDI.
In 2012 Colombian outward FDI had been negative, just like Brazil for the last three years. In the case of Brazil, the negative outflows means that Brazilian companies are borrowing capital from their affiliates located abroad.
Argentine outward FDI in 2013 was up on 2012, reaching US$1.2 billion from the US$1.05 recorded in 2012.