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Big four lead Latin American economic surge

In Colombia, a country previously more famous for its drug problems than its economic growth, there have been huge leaps forward. More recently, increasing investment in infrastructure has led to the country becoming an oil power in the region.

Oil production was roughly 250,000 barrels per day five years ago. Today, it is closer to 800,000 with officials setting a goal of a million within a couple of years.

Mexico, meanwhile, is witnessing growth predominantly from a secular manufacturing shift from China, according to Mike Simpson, head of Latin American equities for Baring Asset Management.

He adds: “Structural reforms under new president Enrique Pena Nieto could lead to a GDP growth spurt if enacted. These potential reforms entail making the labour market more flexible, expanding the tax base and privatising parts of PEMEX [Petróleos Mexicanos state-owned petroleum company].”

Brazil has been the backbone of the region’s growth. An increase in domestic consumption, widespread infrastructure investment and extraction of the country’s untapped natural resources has led to an explosion of growth.

Dr Slim Feriani, chief executive of Advanced Emerging Capital, explains: “Brazil has gone from a basket case to one of the five largest economies in the world with $2.5 trillion in GDP and holding one of the biggest ‘cushions’ of foreign exchange reserves, exceeding $350 billion.”

Chile, meanwhile, has been leading the growth in the region’s middle classes. Its well educated population, together with a solid regulatory framework, has made the country very attractive to businesses.  In addition, strong fiscal discipline and a current account surplus show well thought out monetary policy.

Middle class on the march

A rise in domestic consumption is tipped to power through any economic wobbles elsewhere in developed markets as wages increase in real terms and the middle class grows.  Add to this the fact that income distribution is also growing and the pattern is clear.

Figures released by Euromonitor in a recent report show that low-income households across the Latin American region, which earn less than US $5,000 a year, are expected to fall from over 35 per cent of the population in 2000 to 16 per cent by 2015.

This, in turn, could be great news for the UK, as the region’s population seeks Western consumer goods for the up-and-coming middle classes.

Rhian Chilcott, international director at the CBI, says: “Its rapidly growing middle class means consumers and businesses across the region are fast developing a taste for the sorts of quality goods and services that the UK can provide. These range from luxury and designer items to the energy sector, construction services and digital downloads.”

However, more recently, there has been concern from some quarters that the growth which has aided this demographic change may somehow disappear, stopping the trend in its tracks.

Not so, says Brian Coulton, emerging markets strategist at Legal & General Investment Management.

“From a near-term perspective there is a danger of overdoing the negativity,” he says. “Brazil’s recent slowdown has more to do with the lagged effects of domestic policy tightening through 2010 and early-2011 than the global downturn.

“As policy has shifted to full-blown growth support mode since August 2011, this should boost growth in the second half of 2012. Historically, interest rate cuts have lifted consumer demand with a lag of around a year and the consumer debt burden does not look onerous enough to scupper this relationship.”