Latin America finance: Coronavirus could have a platinum lining
There is a plausible recovery scenario that would enable Latin America to exit the crisis on a better path than it was on before.
Covid-19 has caused human suffering across the region – needlessly exacerbated by wilful incompetence and chronic underfunding of public health systems – and imposed a huge economic and fiscal burden that will be accumulated over the coming years.
However, it’s not too soon to start thinking about the post-Covid 19 world and how the expected structural shifts in the global economy could be a big opportunity for Latin America.
The immediate fallout from this crisis is likely to be an increase in political tensions, leading to trade wars, trade blocs and global economic fragmentation. It will be the reverse of globalization.
Global trade peaked in 2008 (at 60.9% of global GDP) and has been declining since. This pandemic will likely fuel that fall and increase the demand for regional and domestic supply chains.
Companies in North America will be under pressure to bring more productive capacity onshore. However, costs will remain a central driver of corporate strategy; the result is likely to be near-shoring, rather than bringing factories back from Asia to mainland US or Canada.
This is an opportunity Latin America needs to be looking at. Some policymakers already are.
Take this quote from Francisco Santos, Colombia’s ambassador to the US. Speaking to Reuters in April he said: “It’s going to be a fight between China and the US for economic supremacy, and in that new world, you’re going to see a big amount of near-shoring, and I think Latin America can be the big winner, and Colombia can play a huge role.
“In five years, the economy is going to look radically different than the one we have now.”
Latin America has many structural problems, but chief among them are a lack of private investment and a lack of skilled jobs. The commodity wave of the 2000s lifted nominal GDPs and wealth was generated at the top of the population pyramid.
Some countries tried to build processing capabilities to keep more of the value chain within domestic economies, but success was patchy – and even the best case studies witnessed only limited impact on their wider economies.
Idle oil tankers in Mexico. Latin America has an opportunity to remake its economy after the coronavirus crisis recedes
Law of attraction
There are many challenges to Latin America becoming North America’s production capacity, but they are surmountable.
First, policymakers need to develop policies that attract this FDI. This means radical thinking in terms of regulation, taxation and a challenging improvement in infrastructure to ensure the logistical frictions of travel north are minimized.
Updating digital infrastructure will also be a critical component in many countries’ project management plans. Energy will be important, too. Look at Paraguay’s huge renewable energy surplus.
Not all countries will be able to replicate such surplus low-cost green energy, but they will have other natural advantages. Countries can have similar goals without replicating each other’s strategies to achieve them.
Short-term thinking has triumphed too many times in the past – with the resultant failure to improve the living standards for large swathes of the region’s population
The value of the potential prize – hundreds of billions of dollars of foreign direct investment and perhaps millions of skilled jobs – means it is too important an opportunity to be left solely to politicians.
Bankers need to take up the mantle to bring Latin American governments and the private sector together.
It will make sense for some countries to focus on certain industries – clusters of companies in the same industries will create efficiencies and attract regional talent pools – and bankers with global sector knowledge should be at the table to ensure that plans are as comprehensive as possible.
North American companies will also look favourably on local sources of capital.
Again, bankers should be driving governments to encourage local institutional investors to participate in these national projects, and to promote liquidity of local capital markets.
Where possible, regional solutions would be advantageous – the Pacific Alliance has been tentatively moving down this route already.
However, it is likely that the difficulties in coordinating multilateral agreement in these areas would slow down what is an urgent need for reform. Just look at the increasing dysfunction of Mercosur.
Better to create a competitive environment where individual national governments respond to emerging best practice.
Finance reform brings us to the thorny issue of infrastructure. Given the size of the region’s needs, this will require private-sector finance, but if it is aligned with the FDI incentives – and ideally denominated in dollars and delivered in accordance with the highest environmental, social and governance standards – there should be sufficient capital.
International financial institutions should also be engaged to ensure their financing and, more importantly, their guarantees bring down the risks that prevent long-term capital.
Nor should longer-term issues such as education and healthcare systems be ignored just because there is no immediate payback.
The region’s demographic bonus has largely been squandered, but the opportunity to build a modern industrial base in Latin America is a multi-generational one.
Short-term thinking has triumphed too many times in the past – with the resultant failure to improve the living standards for large swathes of the region’s population.
None of this will be easy – especially with the woeful levels of political competency and leadership seen all to often.
It behoves Latin America’s finance industry to lead the way towards a better future. This is a once-in-a-lifetime opportunity for the region to radically transform its economy for the better.
It should at least try.