Economic outlook: Latin American investment magnets

Latin American GDP growth is on track to grow +4.5% in 2011 on top of a very strong +5.8% growth performance in 2010. Although growth still looks strong, there are a variety of internal and external reasons for the deceleration. Outside the region weak demand from the Eurozone and a minor slowdown in China and India are having an effect on Latin American exports. Within the region restrictive monetary policies, enacted throughout Latin America to tackle inflation, will also impact on growth.

On the plus side, the US economy will grow more rapidly than previously expected in 2011, which will have a positive influence on some regional economies, although most of the benefits will be felt in Mexico and Central America.

The threat of higher inflation suggests that monetary policy will continue to tighten in the second half of 2011. Central banks in Brazil, Chile, Colombia, and Peru have increased their interest rates, while other measures to reduce liquidity such as increasing banks' reserve requirements have been put in place in Peru and Brazil. The Central Bank of Brazil has explicitly said it prefers lower increments in rates but for more prolonged periods, which clearly suggests continuing rate hikes.

The good news for this resource-rich region is that commodity prices are rising again, boosting export income for many Latin American companies. Oil exporters such as Mexico, Colombia, Venezuela, and Ecuador have profited from higher oil prices, while Brazil, Chile, and Peru have gained due to rises in the metals markets. The market for agricultural commodities meanwhile has given a boost to Brazil and Argentina.

Opportunities and risks

A major factor in the near and medium term expansion of the region will be investment. There are many projects in the pipeline, many of them in infrastructure, residential construction and in the energy and mining sectors. Countries with particularly bright outlooks are Brazil, Colombia, Peru, Chile, Uruguay and Panama.

Even so, there are risks to the region in the short and medium terms, mostly related to the world economy such as further problems in southern Europe, particularly because of close ties between Latin America and Spain, and the possibility of a slowdown in China.

Even apart from risk scenarios, macroeconomic mismanagement in Venezuela, Ecuador, Bolivia, and Argentina will hold growth for these nations below the regional average.

Brazil is the dominant construction market, and for all the focus on the World Cup and Olympic Games, the National Development Bank of Brazil projects that 62% of investments in the next three years will be in the oil and gas industry. Still, preparation for the upcoming World Cup and Olympic Games, combined with the booming oil sector has driven infrastructure to account for nearly 55% of Brazil's construction spending, up from 50% in 2005.

By 2020 infrastructure spending will grow to US$ 141 billion and will account for 60% of total construction spending. Even with this activity, concerns remain that the country's infrastructure is inadequate for the expected influx of travellers for these events and improvements will not be ready in time for the World Cup. In an effort to spur private investment, the government is considering selling shares in Infraero, the government owned operator of the nation's airports.

The outlook for construction spending in Brazil is robust. In the run-up to the 2016 Olympic Games construction spending will grow more than +10% per year with the non-residential segments enjoying growth in the +12% range. Even after the excitement of the games has subsided, the market will remain healthy, with construction spending growing +7% per year, buoyed by the energy sector.

Argentina saw exceptionally strong construction growth in 2010, but new developments are occurring at a more measured pace. More investments in infrastructure, particularly in energy generation would improve the country's capacity to grow at fast rates without risks of blackouts or energy rationing. Fortunately, the private sector has been bullish on Argentina in recent years, with major advances in plant and equipment. However, on the public side, fiscal balances are back in negative territory, and the government lacks the financing resources to cover an increasing public deficit.

Colombia posted moderate growth in 2010, but is expected to generate strong economic growth rates in the medium and long terms. The administration of Juan Manuel Santos continues with the Productive Transformation Program, a joint initiative of public, private, and academic sectors launched in 2008 to promote growth and competitiveness in higher-value added sectors to reduce the country's excessive reliance on commodities.

President Santos' economic policies concentrate on infrastructure, agriculture, mining, housing construction, and technological innovation, what he calls the five locomotives of the Colombian economy. To deliver on such promises, the government has to secure the continuous inflow of foreign direct investment (FDI) and convince investors to join the effort, not only in mining and oil as in the recent past, but other sectors as well to help in job creation, a major structural weakness of the Colombian economy.

Peru will see sustained strong growth, albeit at a slower pace than in 2010. Business sentiment remains upbeat, and investment will remain the engine of growth. Fiscal stimulus remains in place and is also pushing strong economic and construction growth.

A large number of projects in the mining and energy sectors, coupled with a dynamic construction sector (and a recovery in manufacturing), will support sustained robust growth. FDI inflows will continue with an estimated US$ 6.2 billion in 2011, slowing to US$ 5.3 billion in 2012.

FDI will be one of the major drivers of growth, as many projects in the mining and energy sectors are resumed. The government is expected to tap international capital markets to finance social and economics projects as well as to roll over debt. The government expects to issue external debt up to USD1.1 billion in 2011.

Taken together, Latin America is very much open for business for construction companies and offers strong growth potentials with less risk than has historically plagued the region.