Shortly after withdrawing funds from the eurozone (which contributed to the weakening of the common Euro currency against the US Dollar, the British Pound and other major currencies), investors started withdrawing funds from Latin America. What are the major reasons for this massive flight of capital? How serious is it? What may be the consequences for the national economies of Brazil, Argentina, Chile, Peru and Mexico?
Bolivia Nationalizes Its Biggest Power Plant. Argentina Does The Same With YPF, Is Biggest oil Companies.
The nationalization of Bolivia’s biggest power plant and Argentina’s biggest oil company YPF caused a wave of concerns over the reliability of foreign investments in Latin American economies. The nationalization of Spanish companies - Red Electrica and Repsol – only intensified the concerns and added more questions without giving answers.
How reliable is investing in Latin America? Are Latin American economies really worth investing? What effect may it have on the US Dollar?
As you probably know, the US Dollar has a negative correlation with stock indexes (Down Jones, S&P 500 etc), stocks, commodities (oil, gold etc).
Eugene Olkhovsky, ’s leading expert in financial markets form Canada, explains that when you invest in the Brazilian economy you exchange the US Dollar (as the world’s major currency) for the Brazilian Real, thus investing it in one of the country’s economic sectors (banks, oil industry, stocks etc.) As a result, the Brazilian currency appreciates against the US dollar.
And vice versa, when foreign investors withdraw their capital, they exchange the Brazilian Real back for the US Dollar. In this case, the domestic currency depreciates versus the world’s major currency. The same holds true for any other country.
Investing In Latin America Is Risky. Flight of Capital Contributes To US Dollar Strengthening
After nationalizing Yacimientos Petroliferos Fiscales (YPF), Argentina’s biggest oil company, predicted considerable worsening of investment climate in the country and the entire region, attended by flight of capital.
The direct foreign investments in the economies of Latin America and Caribbean Basin reached the record-high level of $153 bn in 2011, which is 10% of the global investment flow.
The 1990s can be called the golden time for Latin America. This is when the direct foreign investments was record-high. The inflow growth was steady till 1999 when it reached the peak of $90 bn. South America accounted for 80% of the sum.
In 2001 the investment market of Latin America collapsed. The major political and financial crisis in Argentina and the situation in Venezuela busted the myth about the possibility of a Latin economic miracle within a couple of years. In 2003 the overall volume of foreign investments shrank by 50%.
However, the investment inflow in several countries like Brazil and Chile remained relatively stable as these economies kept showing tiny economic growth.
The central banks of LA5 are some of the strongest in the region. They look much stronger than the central bank of many other countries:
According to NordFX, several years later, Latin America regained investors’ love. In 2005, when Argentina and Venezuela almost came out of the crisis, foreign investors started coming back while the overall level of direct foreign investments reached $77 bn. In 2008 it was $90 bn. Brazil was the leader in terms of attracted investments. It was followed by the Caiman Islands, Columbia, Argentina, Peru, the Virgin Islands, Costa Rica and Panama.
At the same time, Latin American countries invested nearly $50 bn in foreign economies, which was a record as well.
However, the global economic crisis seen in 2009 couldn’t but affect the level of foreign investments. South American received only $38 bn while Central American got $ 25 bn.
The following chart represents the economic dynamics seen in the region over the last 3 decades:
The recovery period was painful. In summer 2010 several countries in the region started showing some economic progress. Within a year it initiated a new investment boom. In particular, the growth of direct foreign investment in Brazil was around 87% ($48 bn), in Peru – 17% ($15.095 bn), Uruguay - 29% ($1.627 bn), Argentina – 51% ($6.193 bn), Mexico – 17% ($17.726 bn), Honduras – 52%, Guatemala – 18%, Nicaragua – 17%.
Currency Outlook
The Brazilian Real
According to , USDBRL is forming a major upswing – wave C of wave level Daily2 inside wave C of level Weekly. It has already reached the psychological level located at 2.10. If the price breaks and consolidates above it, 2.20 will become the next major level of resistance. A trend reversal will become probable only after the price breaks below the MF pivot (as shown above).
The Mexican Peso
According to , USDMXN has overcome a major level of resistance, which located at 14,0412. The price is currently forming wave C of level Weekly, a major upswing. The closest major level of resistance is located at 14,3087, last year’s high. A trend reversal will become probable only after the price breaks below the MF pivot (as shown above).
Who Invests In Latin America? Which Industries Are Popular And Promising?
The following countries invest in Latin America:
USA (17%), Netherlands (13%), China (9%), Canada, Spain ,UK (4% each), Switzerland and Australia. The internal LA investments account for 10%.
The following economic sectors of South America are considered promising:
· mining sector (43%)
· service sector (30%)
· refining sector
· construction sector
· agriculture (mostly by China)
In Central America the situation is slightly different:
· manufacturing production (54%)
· service sector (41%)
· refining and mining sectors (5%)
What factors contribute to the investment growth in the region? According to Eugene Olkhovsky, ’s leading expert in financial markets from Canada, these are the following factors:
· high commodity prices ( oil, natural gas, coal)
· higher domestic demand and consumption
· economic growth
Is Latin America Worth Investing?
The region is rather heterogeneous. It is full of unstable and unpredictable political regimes. However, they are not widespread. Another thing is that even stable governments can sometimes make unexpected decisions like those in Argentina and Bolivia. These factors can result in investors’ prejudiced attitude towards the region in general.
So what is the bottom line? We should not treat all the LA countries alike. When it comes to investing, we should consider every single country separately. Don’t fall prey to the overall panic. When some country surprises, investors start panicking and fleeing the entire region even the promising economies that would stay promising for them but for the panic and the flight of capital. However, when it comes to investing in Latin America, investors should think twice and make a thorough and comprehensive analysis of the political and economic situation and prospects in the country they are going to invest in.
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
In your opinion, is Latin America worth investing?
