Dubai Chamber Study Highlights Sectors and Opportunities for GCC Investors in Latin America


gbf-2016Kuwait: The Dubai Chamber of Commerce and Industry commissioned The Economist’s Intelligence Unit (EIU) to conduct an economic study on the Latin American region ahead of the Global Business Forum on Latin America, taking place on November 9-10 at Atlantis, The Palm, Dubai.

Titled “Latin America: Room for Growth”, the new study explores the economic situation – as well as the socio-political conditions – in the Latin American region, looking into the key strategic sectors that present the most potential for growth, and taking into account the strategies implemented by governments around the region to overcome political and economic instabilities plaguing Latin America.

Economic Realities of Latin America

The study highlights the major threats faced by the region, as the Brazilian economy experienced a contraction of 3.8% in 2015 and is forecast it to contract another 3% in 2016. Weak prices for oil and other commodities have hit large commodity exporters hard, with lower export revenues hampering growth in Venezuela, Colombia, Ecuador, Chile and Argentina. Even the Mexican economy, which is more closely tied to the economic fortunes of the US, is seeing slower growth.

Inflation has also edged up in many countries, reflecting local-currency depreciation (which raises import costs and therefore usually raises local prices). Meanwhile, a strong El Niño disrupted much of the region’s agricultural sector. Argentina, Chile, Paraguay and Uruguay were hit by severe flooding, while others, such as Central America, Colombia and Venezuela, were affected by drought.

Private consumption was weak, a reflection of persistent high unemployment in many countries, slowing credit growth, moderate wage increases and low levels of consumer confidence. Weak government consumption is a reflection of the continued fiscal reliance on commodity prices to finance government spending and public investment. The external balance (the value of exports less imports) was the strongest component of overall growth, reinforcing the extent to which Latin America is reliant on exports to underpin GDP growth. By contrast, fixed investment represented a significant drag on growth.

Room for Growth and Investment Opportunities

The study explores measures implemented by the governments of the region to restructure their economies and increase their competitiveness. The report points to two key strategies. The first is infrastructure development to improve internal transport links and facilitate trade, capitalising on the importance of exports as a component of GDP growth.

The second strategy deals with encouraging private consumption by expanding the offerings of the services sector, as raising government consumption will prove challenging in this fiscal climate.

Reforms overs the past two decades have reduced fiscal vulnerabilities, cut inflation and engendered greater macroeconomic stability in Latin America. Domestic conditions have stabilised, with a lower incidence of boom-bust cycles and debt defaults than previous decades. This helped the region build up a cushion of foreign-exchange reserves, amounting to US$818bn in 2015. On the positive side, Brexit may lead to stronger trade ties between Britain and Latin America as the former attempts to replace markets potentially lost in the European Union following its exit.

Across Latin America, efforts to facilitate trade through infrastructure development have begun. Most governments are focusing on upgrading port infrastructure in order to remove logistical bottlenecks, arising from relatively shallow ports and inadequate equipment and facilities to accommodate large “post-Panamax” super tankers.

Brazil has 34 infrastructure projects in the pipeline by 2017-2018, with public investment amounting to R$30bn (US$9.1bn). Colombia, meanwhile, is moving ahead with ‘Plan 4G’—a Ps50trn (US$17bn) road concession programme focused on the links between the main cities and the country’s Pacific and Atlantic ports – part of a wider 2015-2030 ‘Master Plan’ that envisages annual investment of US$10.4bn aimed at boosting exports. The plan includes over 12,500kms of road projects, over 1,600kms of new railway, river transport projects, as well as airport expansions and port development.

In Peru, several major projects are already under way, including the construction of a second line of the Lima metro, while in Chile, new underground railway lines are being built in the capital, Santiago, and a new deep-water port is in the works in central Chile.

On a different note, Peru has an ambitious public-private partnerships (PPP) programme in the pipeline and the Argentinian Congress is in the midst of debating a much-needed PPP law, which will provide greater security to prospective investors. For infrastructure projects in Brazil, some of the regulations governing concessions have been changed in order to increase their attractiveness to foreign investors. Not only will more public money be available, but investors will be given more time to conduct feasibility studies, regulatory agencies will take more of a back-seat role and previous difficulties in securing environmental licenses should be ironed out.

There are other initiatives to encourage private-sector investments. In Peru the “public works for taxes” scheme allows private companies to invest part of their tax payments in infrastructure. Originally designed for transport infrastructure, it has been expanded to cover schools, clinics, and water and sanitation infrastructure. In Colombia, a new investment fund unveiled earlier in 2016 will facilitate joint ventures with the private sector and also act as a guarantor, enabling private investors to access cheaper and longer-term financing.

Tourism is another sector that many governments are seeking to develop. Tourism is already saturated in much of the Caribbean (it accounts for 41% of total exports in the Caribbean) and developed (if not saturated) in a few other countries including Mexico and Costa Rica. Recent local-currency depreciation makes many of them comparatively cheap holiday destinations, with the exception of “dollarised” economies such as Panama and Ecuador. Given that the tourism sector is often a large employer, contributing an estimated 8.3% of total employment in Latin America in 2014, there is greater incentive for governments to support growth of the sector. Concurrent improvements in road infrastructure will facilitate tourist travel as well as merchandise trade.

The Global Business Forum on Latin America is set to explore these promising sectors and statistics at length, as they constitute a real opportunity for Gulf Cooperation Council (GCC) countries to bolster their relations – chiefly, economic ties – with their Latin American counterparts. This, in turn, is poised to multiply the number of transactions between the two regions, as well as to drive further GCC investments in Latin America and, subsequently, improve the region’s economies. The Forum is a platform where the most prominent companies, entrepreneurs, and decision makers from both regions can meet to explore new avenues for cooperation and new agreements and deals to sign.