Capital Flow to Latin America Slowing

Long-term investment by foreign companies in Latin America plummeted 21% last year and is likely to slide 10% or more this year because of the global slowdown and worries over the region’s economic health, according to a new report.

In its annual investment survey, the United Nations Economic Commission for Latin America and the Caribbean, or ECLAC, found a waning of the mega-deals that highlighted 1999. That’s because privatization of state energy, telecom and banking monopolies largely has run its course. Also, foreigners are nervous about shaky economies in Argentina and Brazil.

Overall, the year was a downer, with the region attracting $74.1 billion worth of investments in 2000, down from $93.5 billion the previous year. The flow could slow to as little as $65 billion this year, said ECLAC economist Alvaro Calderon.

Even so, the report reflects the degree to which national economies have become codependent. Foreign investment in Latin America averaged just $2 billion a year in the early ‘90s, a fraction of what it is today.

Foreign investment continues to increase for some countries--notably Mexico, where the investment rose to $13 billion last year, an increase of $1.2 billion over 1999.

Elsewhere, analysts said the decline stemmed in part from fears that an Argentine devaluation or debt default could ripple through neighboring economies, although that likelihood may have declined this week after Argentina and the International Monetary Fund worked out a bailout deal. The investments quantified include those directed toward manufacturing, service and retail assets, but not portfolio assets such as stocks and bonds.

Still, last year’s deals included major Latin American expansions and acquisitions by U.S. firms, including retailer Wal-Mart Stores Inc. of Bentonville, Ark., power generator AES Corp. of Arlington, Va., and telecommunications firm BellSouth Corp. of Atlanta, each of which has aggressive Latin American investment strategies.

AES is now the largest electricity generator in the world, aided by aggressive expansion in Latin countries including Chile and Brazil. Wal-Mart opened 192 stores, more than one-third of its total 565 Latin American stores since 1997.

“The Southern Cone [of South America] represents one of the top five investment opportunities in the world. We are experiencing great results in Brazil, Puerto Rico and Mexico,” AES spokeswoman Maria Rodriguez said Thursday. “We are committed to the market in the long term.”

BellSouth has bought or built wireless telephone franchises in 11 Latin American countries, placing an enormous bet on the growth prospects of wireless service over traditional land-line operations, which it has left to other companies.

Mexico, which posted a modest gain in 2000, is expected to nearly double its foreign fortune this year--to $25.5 billion. About half of that will come from Citigroup’s $12.5-billion purchase of the parent of Banamex.

But overall, said Renato Grandmont, a Latin American strategist at Deutsche Bank in New York, the outlook is uncertain enough that companies are postponing Latin America investment plans.

“Even though a lot of these guys have 30-year time horizons, the perception of risk has gone up,” he said.

Seen as a percentage of foreign investment around the world, which in 2000 totaled $1.1 trillion, the amounts that flowed to Latin America were relatively small. The United States and Germany, for example, each received about $250 billion from foreign investors. But Calderon noted that Latin America and Asia received 95% of all funds directed at emerging or developing economies.

Last year’s figures are bound to pale in comparison with those of the preceding two years, when foreign companies, led by Spanish banks and telecom and energy firms, were on a buying binge. Repsol spent $15.2 billion buying YPF, the Argentine national oil company. Telefonica of Spain bought privatized national phone companies in Chile, Argentina, Peru and Brazil.

After a wave of acquisitions, just one Spanish bank, Banco Santander Central Hispano, now owns 10% of all Latin American banking assets, Calderon said. BSCH was in one of the year’s biggest banking deals last November, paying $3.6 billion for a controlling interest in Banespa of Sao Paulo, Brazil.

William Cline, an economist with the Institute of International Finance in Washington, said Citibank may have been encouraged to buy the Banamex parent at top dollar by reports that the Spaniards’ purchase of South American banks has proved extremely profitable.

The trend is less for foreign companies to buy entire entities, as was the case in the 1990s, than to merge with or take a “participating” stake in existing operations as a bet on Latin American economic growth, Calderon said.

The IIF’s Cline said lower investment levels this year are due mainly to a decline in privatization of formerly state-owned businesses and also to a slowdown in regional growth as the spillover from Argentina is felt.

How soon will the climate improve?

“It will depend on how quickly the U.S. and European economies get upturns,” Cline said. “If you can get global recovery and avert an Argentine breakdown, then the chances are good to return to somewhat higher investment flows, but not to the really high levels of the late 1990s.”

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Foreign Investment in Latin America

Investment generally dipped from 1999 to 2000 amid economic trouble in Argentina and Brazil, although a few countries, including Mexico, saw gains.

In billions of dollars:

Source: U.N. Economic Commission for Latin America and the Caribbean