Economic Boom Continuing

Peter Rösler, Deputy General Manager des Lateinamerika Vereins in Hamburg, über die Entwicklung der Wirtschaft in Lateinamerika

The rapidly growing economies in Asia have, along with domestic business activity, become the growth driver for Latin America and their demand has caused export prices to rise sharply. Nearly everything Asia needs for further growth can be supplied for long periods by Latin America.

In 2007 Latin America achieved an impressive economic growth of 6.5 percent. Thus the combined gross domestic product (GDP) of three billion USD achieved by the region equals the levels of Germany or China. Once again favourable external conditions had contributed to a continuing economic boom in the region. But also domestic demand had experienced a strong growth, amounting to 7.7 percent. All countries reported a growth of their GDP. The official unemployment rate went down to eight percent and the poverty rate to 35 percent. Inflation stayed low at below six percent. The governments’ debt levels decreased strongly. Latin America managed once again to reduce its exposure to foreign debt.

Goods exports out of Latin America increased by 12.3 percent to 753.7 billion USD in 2007. This was due to the continuously high worldwide demand for Latin American raw materials and agricultural produce as well as to the increasing quality of the region’s agribusiness and industrial products. Export prices for Latin American raw materials rose by 17.8 percent. Goods imports into Latin America grew by 18 percent to 680 billion USD. This strong import growth is evidence of the recovering domestic economy. The strengthening of the domestic currency contributed in some countries to the increasing imports. Stronger dynamics of the imports led to a slight reduction of the trade surplus in Latin America.

The UN Conference on Trade and Development (UNCTAD) has pointed out that Latin America had the strongest growth in foreign direct investments in 2007 with 50.2 percent. Following are East and Central Europe (without European Union) with 40.8 percent, the industrialised countries with 16.8 percent, Asia (without Japan) with 6.6 percent and Africa with 0.1 percent. Boasting a plus of 99.3 percent, Brazil had the second strongest increase worldwide, trailing only behind the Netherlands. In contrast the flow of foreign direct investment into China had gone down by 3.1 percent.

Altogether Latin America received a total foreign direct investment of 125.8 billion USD last year, that is a 42 billion USD increase year-on-year. The top ranks were taken by Brazil with 37.4 billion USD and Mexico with 36.7 billion USD. Chile attracted foreign direct investment in the amount of 5.3 billion USD which is the same level as India. Colombia and Peru performed respectable within Latin America with 8.2 billion USD and six billion USD respectively. Argentina had to cope with a 39.6 percent decrease of foreign direct investment flows to 2.9 billion USD. According to the Comisión Económica para América Latina y el Caribe (CEPAL), Venezuela was the only country with a negative direct investment balance: A total of 3.2 billion USD was pulled out of the country.

After going through a four-year economic boom phase Latin America has not only become more resistant to external distortions, the internal volatility of the economies has decreased at the same time, partly in spite of complicated domestic policy conditions. Latin America’s wealth of natural and energy resources and agricultural potential plays an increasingly important role for the region’s position within the world economy. To the same extent the number of large Latin American corporations acting on the world stage grows. This is also true for Latin American foreign investments. Brazilian companies alone have in the meantime invested more than 100 billion USD beyond their borders. And different than in the past the strong growth of imports into Latin America are not financed by borrowing but by increasing exports.

In spite of the economic boom the region is still marked by grave structural problems. This includes an inappropriate education, training and innovation level, an underdeveloped infrastructure, a huge informal sector, high import barriers in some countries and legal insecurity. Some countries in the region still depend on one or a few export products. The region’s key problem remains the huge income disparity. Latin America has the top position in this respect.

German Investors Take Third Place in Latin America

An early farewell to the strong Asian demand for Latin American goods is not foreseeable yet. This is a solid foundation for a long-term strategic cooperation. The prices for Latin American export products will remain on a high level. Rising salaries, growing private investment and expanding credit volumes strengthen the region’s domestic economic activity. Latin America’s boom phase can therefore last for a number of years more if an unexpectedly strong recession of the world economy can be avoided. On the one hand the high growth anticipated for 2008 is a good basis for progress in overcoming urgent structural problems. On the other hand the attractiveness of Latin America as a trade and investment partner will continue to increase also for German companies. With more than 60 billion USD German investors take third place in Latin America behind the US and Spain today due to, among other factors, a high reinvestment level. / localglobal


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