Foreign Direct Investment in Latin America falls significantly

Foreign Direct Investment in Latin America has had a dramatic decrease throughout the past year according to A.T. Kearney’s FDI Confidence Index 2017. The Index indicates that the region has had a 19% fall in investor confidence throughout 2016-17.

Latin America’s has experienced a lack of investor confidence during the year to January 2017. Due to poor global commodity prices, political unrest and economic mismanagement, the inflow of foreign direct investment has contracted to $135 billion annually. However, the report admits that Latin America has the largest share of Foreign Direct Investment (FDI) for an emerging market outside of Asia, ahead of both Eurasia and Africa. 

The A.T. Kearney Foreign Direct Investment Confidence Index is a global survey conducted annually by the consulting firm. The survey identifies a unique forward-looking analysis of the way market investors target countries for FDI. All respondents are business executives from companies with an annual revenue upwards of $500 million across 30 different countries. 

Mexico and Brazil represent Latin America on the FDI Index, sitting next to each other at 17th and 16th respectively. Whilst the countries are the only Latin countries to appear in the list’s top 20, both are experiencing a dip in investor confidence since 2014. Their fortunes diverged slightly this year with Mexico improving one place and Brazil falling back four.

Mexico & US relations

Although Mexico climbed one spot in 2017, the country has fallen to a total FDI of $26 billion, down 20 percent on the year to 2016. The country is predicted to have slowest growth in GDP since 2013 which is affecting the investor confidence. The picture painted for Mexico in the short term may not be great, but Mexico still favours particularly well in the industry sector amongst investors. This is however largely due to the country’s economic partnership with the US and to a lesser extent Canada. 

With US President Donald Trump’s move towards protectionist policy, threatening to build a wall along the boarder with Mexico and renegotiate NAFTA, investment from the country’s largest source of FDI may stall. The Mexican Government is taking steps to protect the nations economy in the worst case scenario by promoting pro-business policy aimed to boost private investment. As uncertainty shrouded Mexico’s future with the US after the election of Trump, the country is beginning to ease back into it’s pre-Trump position. 

Brazilian recession 

Brazil on the other hand has seen investor confidence shrink dramatically in the past few years. Between 2012 and 2014 the country appeared in the top 5 of A.T. Kearney’s Index. Now sitting at number 16 on the list, Brazil has felt the turbulence of it’s political environment and macroeconomic with foreign investment falling from $65 billion in 2015 to $50 billion in 2016. The extremely popular ex-Brazilian President Lula and his successors, Dilma Rousseff and Michel Temer have been caught up in multiple scandals involving both corruption and fraud. Each side are labelling the accusations politically motivated. 

The scenario has changed slightly with the shift away from successive socialistic governments to a more business accommodating agenda. However, the country still ranks towards the bottom of the World Bank’s 2017 Doing Business scale, coming in at 123rd. Outside of creating a stable political environment, the Brazilian Government has successfully taken measures to increase investment. For example, to strengthen fiscal sustainability the government has brought in social reform and promoted currency depreciation by lowering interest rates. Both are, according to the OECD “credible commitment to containing public expenditures will allow further monetary easing going forward, which should give rise to stronger investment.” Brazil fairs best in the the natural resources sector with oil and gas managing to retain interest from long-term investors. 

Attracting future FDI

Whilst both economies are experiencing turbulence due to a number of internal and external factors, they are a few identifiable areas in which the Latin America can improve to promote FDI.

Investors reservations for the future are measured in the 2017 Index asking what one find the most important factors in when making an investment. Transparency of government rates number 5 for investors which can be seen by looking at the top end of the Index overall. Governance and regulatory processes account for the three biggest factors suggesting that developing stronger institutions and streamlining tax efficiency are keys to successfully attracting FDI. In the infrastructure sense, the most important market factor that appeals to investors is technology and innovation capabilities. 

Investors are optimistic about the Americas as a whole and A.T. Kearney’s FDI Confidence Index 2017 suggests that countries that that focus on education in forward thinking information technology will be clear winners. “The future is in technology and innovation, and focusing on attracting FDI in those areas,” said Erik Peterson, Partner & Managing Director, Global Business Policy Council, A.T. Kearney. “Continuing to ensure consistent infrastructure investments are made over time is key to the long-term success.”