Investing in Latin America -- Know where to look

February 21, 2007

According to Rodrigo de Rato, Managing Director of the IMF, the economy of Latin America is healthy, although there are areas of concern. Economic growth in 2006 was an average 5%, stabilizing at 4% for 2007, while inflation will decline to 5%.

The reasons for this growth are two-fold. The external conditions include global demand for Latin America’s commodities, thanks to growth with the region’s trading partners. Even more encouraging, however, are the internally-generated good fiscal policies that most Latin American countries have generated. These include strong central banks that have proven their ability to lower inflation, creating investor confidence and an increase in FDI. This lowered inflation risk also allows a flexible exchange rate system, which helps these emerging markets to absorb economic shocks.

The challenges in Latin America remains the disparity between high and low income populations. This has led to the election of populist leaders in Bolivia, Venezuela, Ecuador and Nicaragua.

However, de Rato argues that the broadening of democracy itself in Latin America will eventually be good for the region’s economy. Elected governments have the legitimacy mandated by the people who voted for them to enact economic reforms. This legitimacy supports the reforms despite opposition from the small interest groups that may feel the pain. An example would be Brazil’s need to reduce taxes by decreasing the numbers of government workers.

What investing in Latin America means:
A sound investment climate in any country, including Latin America, should include the following elements:

• An independent central bank that is allowed to adjust interest rates to control inflation, despite the country’s fiscal policies.
• Free trade agreements that reduce tariffs, allowing a competitive trade environment.
• Privatization of key industries, rather than government owership which confuses economics with politics.
• Countries with these policies will have a better economy, hence better companies with which to invest, over the long term than countries that try to control their economies with a strong dictatorship-type government.

Action steps:
Make sure your emerging markets funds include Latin American countries, especially Brazil and Chile. Don’t let the headlines about Venezuela, Bolivia and Nicaragua scare you away from the potential gains for your personal finances.

Source: " The Way Forward for Reform in Latin America” by Rodrigo de Rato, Managing Director of the IMF; The Columbia Business School Latin American Business Association 9th Annual Conference “Investing in Latin America: Challenges and Opportunities," February 16, 2007.