For much of the 20th century, Latin American economies showed little growth and weak demand, particularly when compared against other booming global markets. In recent years, however, changing economic policies, globalization, energy discoveries and myriad other factors have given rise to budding economies boasting robust exports and wealthier middle classes.
During the most recent global financial crisis, many Latin American markets weathered the economic storm better than other regions in the world. While the International Monetary Fund lowered its 2011 economic growth forecast for Latin America citing slower demand given tighter macroeconomic policies and weaker global growth, Latin America and Caribbean economies, driven by commodity producers, should expand 4.5 percent this year.
Brazil – one of the famed BRIC countries – has the sixth largest economy in the world, with a GDP of more than $2.2 trillion, but other Latin America countries are also showing growing demand and exports. By this, Latin America is one of the most promising regions for air cargo. At the Air Cargo 2012 Conference on March 19, American presented the top five trends driving growth and opportunity in Latin America.
Trend One: Political Stability
Political stability in Latin America is growing. Many people in the region live under an elected, civilian government, which encourages foreign investment and fosters economic growth. Colombia, Chile, and Peru enjoy relatively stable democracies favoring foreign capital and investment. In 2011, Standard & Poor’s upgraded Argentina’s credit rating to a “B” and classified the country as “stable.” And the economic powerhouse, Brazil, which also has a stable political environment, has one of the fastest growing markets in the world, poised to grow stronger with the World Cup in 2014 and the Olympic Games in 2016.
Not all Latin American countries have found the same levels of political stability. Bolivia, Ecuador and Venezuela can be unstable, with problems found in absent infrastructure and poor rule of the law. Yet, the overall trend for the region is one of increasing stability and opening markets. The kind of statist, populist solutions that probably cost Latin America decades of economic growth in the 20th century are viewed today largely with suspicion, even in the countries where they still hold sway.
In many places, things that once held business back, such as monetary instability and shortages of even the most basic items, are becoming things of the past.
Trend Two: Economic Institutions Strengthening
Trade and investment regimes have been liberalized, foreign direct investment has increased and new export markets have come on stream. The region now attracts around 7% of global foreign direct investment and accounts for 6% of global exports. These positive signs are evidence the region’s economic institutions are growing stronger.
Collaborative efforts, such as the Latin American Reserve Fund (FLAR), consisting of Bolivia, Colombia, Costa Rica, Ecuador, Peru, Uruguay, and Venezuela, offers loans or loan guarantees, improves investment conditions in international reserves, and helps harmonize exchange rate, monetary, and financial policies of member countries. There has also been a growth in banking throughout Latin America, driven by a growing middle class, growth in deposits and credit, and greater banking efficiency.
Brazilian banks lead the pack, holding the top five spots on The Banker’s list of best Latin American banks. Colombian and Peruvian capital markets are developing quickly and (relatively) mature markets, such as Chile, continue to have high growth rates. Yet, persistent inflation in Brazil (which reached a seven-year high of 6.5% in 2011 but has eased in the first months of 2012) is limiting tax incentives and stimulus measures for industries struggling through the global economic downturn, leading economic officials to project only about 3% growth for the next few years.
Further, while Latin American and Caribbean banking systems are strengthening, the IMF emphasizes the importance of monitoring financial sector vulnerabilities and strengthening financial sector supervision to contain excessive leverage and avoid boom-bust credit cycles. An IMF report said capital controls can provide temporary relief to strong portfolio investment inflows into commodity-exporting countries.
Trend Three: Growth of the Middle Class
Latin American countries hold rapidly growing middle classes, driven in part by the commodities boom in the last decade. With 56 million households joining the middle class over the last decade, totaling 51% of the major Latin American economies in 2011, up from 41% in 2001, consumers enjoy greater buying power and discretionary spending. This is creating a demand for goods and industries that rely on air cargo to move their products throughout the world.
Part of the growth in the middle classes can be attributed to demographics – the working age population is now greater than the population of those not able to work, offering families increased income. Access to consumer credit is also fueling a new consumerism, driving demand for technology and myriad consumer products at levels never before seen in the region. The strengthening financial institutions support this. With Latin American banks focusing on products for the consumer market and lending strategies for the retail segment, emerging middle classes now show a greater demand for consumer goods – and the means to pay for it.
Trend Four: Intra-regional Development
Since 1959, the Inter-American Development Bank (IDB) has been the largest source of development financing for Latin America and the Caribbean. While the bank is owned by 48 states (including some European nations and the United States), only 26 countries are able to receive loans, all of which are in Latin America. Tariffs in the region have fallen from 40% in the 1980s to only 10% in 2008. Progress in trade facilitation measures has been slow, due in part to not enough funding opportunities and political deadlocks. Nevertheless, with a market of over 550 million people, most of whom speak two closely related languages and share a common cultural history, free-trade agreements through regional trade unions like MERCOSUR and CAFTA are making an impact.
One challenge in fostering intra-regional development is infrastructure spending, which lags behind other middle income countries, such as China. The absence of updated infrastructure hinders productivity and competitiveness of Latin American companies, which slows economic growth overall. A World Bank Economist on Latin America and the Caribbean infrastructure said the region “has now fallen behind for electricity, roads and fixed telephone lines, with only cellular telephony and access to safe water and sanitation facilities performing comparatively well.”
This, however, could change in coming years given the Initiative for the Integration of the Regional Infrastructure of South America (IIRSA), first launched in 2000. The IIRSA, backed by the Corporación Andina de Fomento, the River Plate Basin Financial Development Fund (Fonplata) and the IDB, is a plan to join Latin American economies via transportation, energy, and telecommunications infrastructure development. Integrating regional infrastructure will foster trade and more closely link Latin American countries.
Trend Five: Globalization and International Trade Policies
No longer mired in economic stagnation, Latin America has strengthened its connections with the global economy. Several countries also have free-trade agreements with the United States and European Union, giving them more access to hundreds of millions of potential customers. Growth in China in particular is opening new markets. In 2009, China replaced the United States as Brazil’s largest trading partner, and while a recent downgrade in China’s expected growth has upset some markets in Latin America, the trend of greater interaction with international markets is boosting Latin American exports and its economies.
In October 2011, President Obama signed Free Trade Agreements (FTAs) with Panama, Colombia and South Korea. The Latin American agreements will stimulate economic growth in the region, as well as in the United States. The Colombia and Panama FTAs create a nearly uninterrupted free trade zone from Canada to Chile. From a cargo perspective, opening doors and facilitating trade in a wide variety of countries is a good thing – good for forwarders, carriers and their operations. As an example, between 1985 and 2008, for countries with which the United States holds FTAs, trade grew on average 25.6 percent in the first three years after the FTA was signed.
How American Can Help
American has serviced customers in nearly every country in Latin America for almost 25 years. Yet, we see this as just the beginning. These economies are growing fast and poised to grow stronger. The new FTAs mean more trade is on the way, and for shippers, forwarders and carriers, this is an opportunity to reach new markets and develop new business.
While new economic realities and the FTAs make international commerce much easier and more lucrative, operating in Latin America requires expertise in working with customs agencies and understanding the culture of commerce and regulation. This is gained through decades of experience, and it is critical to prosperity in these growing markets. Partnerships between shippers and logistics providers will advance new opportunities and help navigate the pitfalls in this developing region.