The South American new deal

Just several months ago, experts predicted that Latin America could escape from the world recession and would manage to maintain a constant rhythm of growth in 2009. With the exception of Ecuador and Salvador where economies are dollarised, the armour-plating of Latin American banking systems has allowed the subcontinent’s stock exchanges to ward off any risk of contagion by North American assets.
Nevertheless, the first symptoms of economic slowing down began to manifest themselves in the third quarter of 2008 with a drop in exports and a fall in foreign investments. According to ECLAC  (Economic Commission for Latin America and the Caribbean) based in the United Nations, exports have undergone a drop ranging from 9 to 30 % depending on the country, since the start of 2009. Moreover, the fall in prices for raw materials and petrol has significantly cut income deriving from the extraction of wealth from the continental underground.
The economic and social crisis afflicting Western countries also has an indirect impact on Latin American economies via the diminishing of remisas, money sent by
emigrants to their families remaining in the home country. According to the IDB, the Inter-American Development Bank, these sums represented almost 70 billion dollars (52 billion euros) in 2008, in other words, an important share of the GDP of certain countries in the region.
In Mexico, the government foresees for 2009 a drop in remisas to the order of 2.5 billion dollars, or 1.8 billion euros. Added to this is a quickening depreciation of the Mexican peso, which exceeded 30 % from the second quarter of 2008 onwards. After undergoing sustained growth of more than 5 % over a six-year period, the subcontinent’s economy is in the process of slowing down. The World Bank has moreover scaled down its estimates for the zone’s countries in 2009, from 3.9 % to 0.3 %. According to the estimates of the International Monetary Fund, only Chile and Peru will meet with positive growth this year, with respectively + 0.1 % and + 3.5 %.

Natural resources to the rescue
Despite these signs of fragility, Latin America is continuing to attract foreign investment. According to Alicia Bárcena, Executive Secretary of CEPAL, “foreign
direct investment underwent, in 2008, an 8 % rise in certain countries, especially those with significant mining wealth, headed by Peru, Chile, Bolivia and Brazil.” Backing the project is the Canadian group Barrick Gold Corporation which is investing the sum of 3 billion dollars, in other words 2.2 billion euros, in the exploitation of silver and gold mines. 14,500 jobs will be created to carry out the development works, foreseen for until 2012. Once the mine can be exploited, the site will employ 7,000 workers, according to the project’s Argentine heads.
Meanwhile, in Peru, the discovery of black gold sources in the north of the country has pushed the Franco-British group Perenco to invest 2 billion dollars, or else 1.5 billion euros, in petrol infrastructure projects.
As the new fad amongst investors due to the prospects raised by electric cars, lithium is the latest object of desire on the subcontinent. The French industrial group Bolloré recently planned to invest 1.2 billion dollars, or else 881 million euros, in the Uyuni salt desert, to the south-west of Bolivia, where a considerable source of this soft precious metal has been detected. The Korean group LG and the Japanese Mitsubishi and Sumitomo are also in the running to obtain a mining licence, boding for a possible rise in stakes.
Taking advantage of their energy and agricultural riches to attract investors,
Latin American countries are also endeavouring to negotiate new partnerships with “emerged countries” such as China, India and Singapore. The Middle Kingdom recently became Brazil’s top trade partner, outranking the United States. Petrol exports towards China made a surprising 230 % leap in April this year.
Peru, which mainly exports copper, zinc, iron and lead to China, saw its sales explode by 19.7 % in March this year. Why this activity? The Asian giant is buying massively whilst prices for raw materials are at their lowest and building up large stocks. But beyond the simple “raw materials for dollars” agreement, Latin American governments would like to see Beijing invest in key development sectors. Chinese authorities, for their part, say that they are interested in the opportunities offered by the aeronautics, pharmaceu-tical and IT sectors in Latin America.

A new dynamic
According to a majority of experts, with a young population, a rapidly growing middle class and considerable public reserves, Latin American countries offer a growth potential capable of limiting the effects of the crisis. The proof is that the large multinationals present on the subcontinent are continuing to see their profits take off.
For Spanish companies undergoing difficulties on home territory, Latin America has become a refuge market – an unlikely phenomenon just a few months ago. The Endesa group has seen its turnover climb by 142 % in the first quarter of 2009, thanks to an increase in trans-Atlantic sales. Over the same period, Telefonica, the Spanish telecommunications giant, has compensated for losses suffered in Spain (- 4.2 %) by its Latin American results (+ 4.8 %).
In this context, the only fear that persists is that of an increase in unemployment, a direct consequence of the drop in exports and industrial production. CEPAL estimates that 2009 will bring a consequential rise to the unemployment rates of countries throughout the zone: figures should increase from 7.6 % to 9 % in the region. To confine these rises, each government is launching its own stimulus and economic support plan. In all, 60 billion dollars, or 44 billion euros, have already been released to support employment and modernise infrastructures all over the subcontinent.
Tagging behind in terms of equipment, Latin American countries are conscious that the lack of competitiveness of their companies largely depends on this lag. In transport and telecommunications, an infrastructure revolution is underway. To finance these major works that are promising job creators, certain are calling on the IDB and the World Bank, but the trend towards regional financial integration and a wariness of Washington banking institutions are pushing numerous  political leaders to encourage Latin solidarity mechanisms, such as Banco del Sur. Tax reforms to attract foreign investors, renegotiations of trade partnerships, infrastructure works, job safeguarding and regional integration are challenges to meet for political leaders in the region.
These economic challenges are compounded by a political challenge. The subcontinent’s electoral agenda foresees 17 elections, including 13 presidential elections between 2009 and 2011. In the columns of the Spanish daily El País, Luis Alberto Moreno, President of the IDB, recently declared that “the worst to fear for Latin America would be a rise of populism and protectionism”. It’s now up to the people to cast the dice.