This briefing has been written by Oxford Analytica, which provides global strategic analysis to government and the corporate, financial and legal sectors
On May 5, the UN Economic Commission for Latin America and the Caribbean (ECLAC) issued a report on foreign direct investment (FDI). According to ECLAC, FDI in the region dropped by 41.8% in 2009, down from its record level in 2008, but will rebound strongly this year, helped by the impact of higher commodity prices on investment in natural resources.
ECLAC estimates that, in 2009, global FDI fell by 39% to $1,040 billion and the share of Latin America and the Caribbean (LAC) in these flows held steady at 8%. FDI in LAC in 2009, although well below its peak in 2007 and 2008, remained above its level in 2006 ($74.8 billion) and, according to ECLAC, was the fifth-highest ever (and the third for a year without privatisations). As a result, ECLAC anticipates that FDI in LAC should show a strong recovery this year, expanding by 40-50% and once again topping $100 billion.
International crisis impact
Some of the causes of last year’s drop in FDI were common to most LAC countries and, indeed, other regions of the world. They included the international credit squeeze and the sharp drop in commodity prices. However, the impact of these factors varied significantly between LAC countries.
At $25.9 billion, FDI in Brazil accounted for 33.8% of foreign investment in the region in 2009, but was down by 42.4% on 2008. This reflected a sharp drop in investment in natural resources, which represented 13.1% of total FDI, compared with 29.2% in 2008, a contraction in the Brazilian economy (-0.2%) and a sharp reduction in investments targeting the domestic market.
In contrast to Brazil, Colombia saw an increase of 9.8% in FDI in natural resources (though total FDI dropped by 31.9% to $7.2 billion). This increase was driven mainly by new investments in coal, which maintained a momentum that ECLAC attributes to the attraction of the country’s still largely unexplored resources.
At 16.3%, the drop in FDI in Chile was the smallest in the region outside Caribbean financial centres. This was largely the result of the acquisition of control of the D&S supermarket chain by US-based Wal-Mart in early 2009. At approximately $2 billion, it accounted for nearly one-sixth of total FDI, cushioning the country against a 57.7% drop in investment in natural resources in response to the collapse of the price of copper, its main export, in late 2008 (though this has since shown a sustained recovery).
FDI in Argentina fell by 49.6% to $4.9 billion. Figures by sector are not available for this country, but ECLAC points to a sharp drop in manufacturing investment in line with the country’s economic deceleration and lower exports.
For the first time, Mexico dropped into third place in LAC as a recipient of FDI, falling behind Chile. Its 50.7% drop to $11.4 billion was largely a result of the recession in the United States, which is its largest investor and most important export market. The US economy similarly affected Central America, where FDI dropped by 32.8% to $5 billion.
Sources of FDI
America remained LAC’s largest foreign investor in 2009, accounting for 37% of the total inflow. However, the amount fell sharply, dropping to $4.9 billion in Brazil, down from seven billion in 2008, for example. The US was followed by Spain (9% of the total inflow), which is a particularly important investor in LAC’s financial services and telecommunications sectors. As a result, this country’s fiscal difficulties are identified as an important risk factor for the anticipated rebound of FDI in the region.
In 2009, Chinese companies made significant investments in LAC in sectors that included iron mining in Brazil and Peru and the hydrocarbons industries of Argentina and Trinidad and Tobago, but, according to official figures, continued to make only a very small contribution to total FDI in the region. However, Chinese FDI tends to be channelled through companies registered in other countries, making it difficult to monitor.
Resilient outbound FDI
In 2009, outward FDI by LAC companies fell by 68.5% to $11.4 billion. This sharp drop was due exclusively to the fact that, after investing $20.5 billion abroad in 2008, Brazilian companies repatriated assets for $10.1 billion in 2009 in loan repayments from subsidiaries abroad or borrowing through these subsidiaries. They also continued to make new investments, including acquisitions by the Vale mining company in Argentina and Colombia, by the Petrobras oil company in Chile and by the Itau and Bradesco banks in Portugal.
Similarly, the region’s other main overseas investors - Chile, Colombia, Mexico and Venezuela - either increased or, maintained their level of outbound investment.
Chile emerged as LAC’s largest overseas investor in 2009, despite a 0.06% drop in its outflow to just under $8 billion. As well as the energy, water and retail sectors in which Chile has long been important in other South American countries, this included acquisitions in Brazil and Uruguay by Arauco and Empresas CMPC, the country’s two main forestry companies.
Overseas investments by Mexican companies reached $7.6 billion in 2009, representing an increase from just $1.2 billion in 2008 (though this, in turn, represented an 86.0% drop on 2007).
However, though an increasing number of LAC companies are eyeing opportunities in the United States, targeting principally the Hispanic market, most outbound FDI continues to go to other countries within the region. As a result, they are, after the United States, the region’s second-largest ‘foreign’ investor.
Depending on the recovery of the international economy from last year’s recession, LAC is likely to see a strong resurgence of inbound FDI this year. However, investor interest continues to focus on the region’s natural resources, rather than sectors that could contribute more to its long-term development, while, in the case of outbound FDI, the region’s companies face the pending challenge of diversifying risk by expanding beyond its boundaries.
|Inbound FDI in LAC (US dollars, billions)
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