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The year 2022 was a vintage one for political turmoil in Latin America. Colombia elected a leftwing former guerrilla as president, Chile considered (and rejected) a radical new constitution, Peru’s president has been put in pre-trial detention after a failed attempt to seize extraordinary powers and Brazil’s far-right leader Jair Bolsonaro narrowly lost a bid for re-election.
It was also a record year for foreign direct investment. Investors committed $225bn to Latin America and the Caribbean in 2022, according to ECLAC, the UN’s economic agency for the region. That was 55 per cent more than the previous year and comfortably surpassed the previous peak a decade earlier. Part of the increase was a post-pandemic rebound but the number of future projects announced also rose, though more modestly.
There were other surprises. Despite alarm in Washington over growing Chinese interest in Latin America, Beijing and Hong Kong accounted for just 3 per cent of the money flowing into the region last year. That was far behind the US’s 38 per cent or the EU’s 29 per cent (though some Chinese investment could have been channelled via third countries).
Although Latin America has been much touted as a location for renewable energy investment, more foreign money was spent last year on fossil fuel projects in the region than on solar or wind, the first time this has happened for a decade.
Exxon’s drive to step up oil production from Guyana was a key reason. Brazil and Argentina are both boosting oil and gas production too. Most Latin American governments want to make the most of their fossil fuels before they become stranded assets and global oil companies are keen to diversify sources of supply because of the war in Ukraine.
Alejo Czerwonko, chief investment officer for Latin America at UBS Wealth Management, believes the investment boom in the region reflects a rapid redrawing of the global supply chain map. “Countries and companies are promoting resilience, security and safety over price and efficiency for the first time in over 30 years,” he says. “This is good for Latin America.”
The nearshoring winds are certainly blowing in Latin America’s direction, thanks to its proximity to the US and privileged trade access enjoyed by Mexico and Central America in particular.
But the politics have not gone away either. Mexico’s economy accounts for almost a quarter of Latin America and the Caribbean’s combined GDP and should be the prime destination for nearshoring, yet it managed to attract only 17 per cent of the total foreign investment in the region last year.
“We could have seen better performance [from Mexico] if it wasn’t for some of the micro issues,” says Ben Ramsey, head of emerging markets sovereign strategy at JPMorgan, in an oblique reference to President Andrés Manuel López Obrador’s policies.
These included abolishing Mexico’s investment promotion agency after taking office in 2018, reasserting state control over the energy industry and picking fights with some foreign companies based in the country. Ramsey believes, however, that Mexico’s numbers will improve as nearshoring gains more traction and investors look to the next election in 2024.
While Mexico underperformed, it was the opposite story in Brazil, the region’s biggest economy with just under a third of GDP. The South American giant outperformed the region, securing 41 per cent of all the foreign investment.
Brazil was so popular with investors that it became the world’s number five destination for foreign investment last year, behind the US, China, Hong Kong and Singapore, according to Unctad. Brazil is also the top developing economy for international renewable energy investment, according to Unctad, with $115bn in projects.
José Manuel Salazar-Xirinachs, the head of ECLAC, believes Latin America can compete effectively with Asia for foreign investment, although it needs to work harder.
“There aren’t really any secrets,” he says. “Beyond the flows to extractive industries . . . it’s very clear that the most successful countries in attracting more technologically sophisticated FDI have a combination of conditions including rule of law, good operational and logistical regimes, and above all high quality human resources.”
Can the region’s presidents deliver or will last year’s strong investment numbers prove to be a flash in the pan? “The opportunity is there but it takes two to tango,” said UBS’s Czerwonko. “Quite frankly, Latin American leaders are not doing a whole lot to get out there and promote their countries as attractive destinations for foreign investment.”