Latin giants set to surprise doubters

As the world is gripped by economic crisis, Latin America could be a long-term haven for investors who can benefit from favourable exchange rates, writes Joe McGrath


With analysts’ forecasts for South America’s economic expansion being trimmed back in recent weeks, some have begun to ask whether the much anticipated boom has fizzled out.

The Brazilian Central Bank is facing increased pressure from overseas as demand for the country’s commodity and industrial exports have slowed, coupled with an ill-timed downturn in the credit cycle.

Brazil’s GDP had expanded 0.8 per cent year-on-year for the first quarter of 2012. In the Central Bank, economists are now predicting economic growth of around 1.9 per cent for the full year, down from 2.7 per cent last year.

However, the Central Bank is not without tools to resolve the situation and bearish analysts may yet be surprised by what happens next.

Samir Patel, director of Hermes Emerging Markets, says that with a benign inflationary outlook, the Central Bank still has a variety of options, such as slashing interest rates which could have a significant effect.

Brazil can look forward to much needed investment as it prepares for the 2014 World Cup and the 2016 Olympics

He explains: “In addition, the past decade’s lack of investment has had one very positive effect: unlike at the end of the last century, Brazil is no longer dangerously indebted. Debt to GDP is comparatively low at 30 per cent and the country enjoys a positive net external balance.

“Brazil can look forward to much needed investment as it prepares for the 2014 World Cup and the 2016 Olympics, estimated at $20 billion or 2 per cent of GDP.”

While the outlook may have been revised, and the revision would mean the weakest growth in Brazil since 2009, that may not tell the full story. The country still benefits from a favourable demographic profile with the continued emergence of the middle-class consumer, making the longer-term picture more complicated.

Nancy Curtin, chief investment officer at Close Brothers Asset Management, says: “Underpinned by the currently positive political backdrop and policymakers’ weakening of the Brazilian real, Brazil should offer a better environment, both for private-sector investment and to Brazil’s non-commodity industry. Even if Brazil disappoints in the short term, for the long-term investor, the attraction remains.”

However, for those focused on what will happen next in the short term, there is likely to be something of a bumpy ride.

For while the past decade saw the country consolidate its role as an agricultural superpower and achieve success through the discovery of oil reserves in the Atlantic, allowing it to pay down its IMF debts, the next ten years will be more difficult.

Mark Wainwright, managing director of Natural Resources at Turner & Townsend, says it is important to remember that Brazil is not immune to the world economic crisis.

“Brazil’s growth has gone off the boil this year. Ironically, this may slow down domestic investment, yet attract more capital from overseas,” he says.

“The Brazilian real, once widely seen as overvalued, has lost a quarter of its value against the US dollar since last summer, dramatically increasing the country’s appeal to foreigners.”

TRADING BENEFITS

Brazil: Export time has been cut by four days after a merger of the manifest reporting system, merchante (for imports) and siscomex (for exports), into a new and unique system, siscomex carga. The number of inspections has been reduced, speeding up the customs process, and Brazil has also upgraded its electronic data interchange (EDI) system, reducing import delays.

Colombia: Better banking services and the implementation of e-payments and co-ordinated inspections in customs have reduced import and export times.

Uruguay: The country has implemented electronic data interchange and improved its banking system, reducing the time to export by five days.

Source: World Bank, Doing Business 2012, Latin America