Latin America - Star of the future
By Scott Hazelton09 May 2012
Latin America is set to see economic growth of +3.4% in 2012 after an estimated +4.1% in 2011. The slowing global economy is driving the deceleration, hurting export demand, and to a lesser extent, commodity prices. Countries with strong macroeconomic fundamentals such as Brazil, Peru, Colombia and Chile will be best able to weather the slowdown with room to loosen monetary policy and launch stimulus spending.
Risks are declining, but concerns remain over US growth, a meltdown in the Euro-zone and a hard landing for China's economy. The probabilities are not high, but the uncertainty is not helpful for Latin America. The highest risk is for countries with interventionist policies and a heavy reliance on commodity exports - Argentina, Ecuador and Venezuela.
On the positive side, interest rates are likely to fall, which is good news for construction. The threat of inflation is diminishing as commodity prices stabilise, and this should see the the Central Bank of Brazil continue to cut interest rates in the first half of 2012. The central banks in Chile and Peru are also considering reversing their restrictive monetary policies and providing stimulus instead. Colombia is likely to be an exception, where more rate hikes are likely.
After the slowdown of 2012, this should lead to more robust growth next year. In Brazil for example, the +7.5% growth of 2010 will fall to just +2.7% this year. However strong domestic and foreign direct investment and both the 2014 World Cup and 2016 Olympics will help to restore growth to the +5% to +6% range.
The growth potential of Latin America is second only to Asia Pacific, with a rise of +6.1% forecast for this year. The news gets better with time, as over the next five years, Latin America will be the world construction growth leader at +7.1% as Asia Pacific growth falls back to +6.0%.
Within Latin America, Brazil dominates not just with size, but also growth. The confluence of the World Cup, Olympic Games, and massive energy related investments suggests growth near or over double digits for the next three years. As the impact of mega events passes, construction growth will slow, but the need to develop the country's potential will keep construction spending growth ahead of regional and global performance through 2020.
With a lull in business activity growth, infrastructure spending will provide the near term impetus to the construction industry. Latin American infrastructure investment is a long term undertaking, however, and the region will be the growth leader over the next five years with a compound growth of +8.8%. In contrast, the Middle East and Africa comes in second at +6.5% and Asia at +5.8% as Chinese activity slows.
Within Latin America, Brazil is the clear driving force with +14.0% growth expected over the next five years, much of that front loaded to accommodate the two sporting events.
But it is not just Brazil that is making infrastructure investments. The Chilean Supreme Court has rejected an appeal by environmental groups against the development of a massive hydroelectric complex in the south of the country. The HidroAysen project involves the construction of five hydroelectric plants with a combined generating capacity of 2.75 GW, which are needed to supply the region's growing and underserved power market. Meanwhile Argentina will invest US$ 540 million, combined with other funding sources, to extend the Buenos Aires underground to add six additional stations by 2015, granting another 100000 citizens access to the transportation network.
Brazil and Argentina are cooperating to jointly construct hydroelectric power plants. An international tender has been offered to build the Garabi and Panambi plants. The hydroelectric complex on the Uruguay River will generate over 2.2 GW of power, making it the most significant bi-national energy project in the 'Southern Cone' of South America since the completion of the Itaipu dam expansion.
While infrastructure is the leading growth element, residential activity is providing some impetus. Venezuela, for example, is aiming to build 500000 homes between 2011 and 2014 - 150000 in 2011, 200000 in 2012 and 150000 further starts in 2012, for completion in 2013 and 2014.
The Venezuelan Chamber of Construction says the national housing deficit is 2.4 million units and the Chavez administration has made this programme a key electoral pledge, although the political opposition claims poor progress has been made so far with 2011 goals not being met. In any event, social housing will be a key campaign issue and substantial building activity should be expected.
Overall Latin America offers strong potential, although 2012 will be a year when construction growth takes a breather. Still, major opportunities exist across the region for infrastructure and residential work. As the global economy recovers, and exports of commodities and manufactured goods accelerate, non-residential structural activity will add to the positive outlook.