Looking Ahead to Opportunities in Latin America
As multinationals weigh post-pandemic investments and resiliency decisions, Latin American nations—particularly Mexico and Brazil—may warrant special attention. Here are five considerations to drive future decision-making.
In the first months of the pandemic, global foreign direct investment (FDI) and productivity suffered major shocks, impacting supply chains around the world. Among all global regions, Latin America was hit severely as Mexico and Brazil were already navigating recessionary conditions when the virus arrived.
A year later, investment in the region is stirring, notably in Brazil, which saw its FDI halved in 2020. That reflects progress for the region, despite continuing domestic, economic and policy challenges. But as multinational companies consider options for a more resilient, less China-centric future for their global operations, now might be the time to give Latin America a fresh look.
Mexico and Brazil are already providing a blueprint for how countries in the region can create opportunity for multinational companies in the post-pandemic world:
- Before COVID-19, Mexico’s trade relationship with the U.S., Canada and Europe had already positioned it as a supply chain option with proximity to major markets and access to 60% of the world’s GDP through its portfolio of Free Trade Agreements. Post-pandemic, access to South America’s developing markets may become even more attractive to multinationals looking to grow faster.
- Brazil’s relatively closed economic system provides a clear contrast to Mexico’s model, but with one important advantage—the chance to reach consumers in the world’s seventh-most populous country. For some companies, a “build for Brazil” strategy may work alone or within a broader Latin American footprint.
In considering opportunities within Mexico, Brazil or other countries throughout the region, here are five considerations to guide your decision-making:
1. Examine How the Pandemic is Driving Change.
It’s anticipated that widespread COVID-19 vaccination may not reach Latin America until late 2021, which could affect economic recovery at different rates throughout the region. The pandemic, however, is driving technology opportunities in Latin America as it is around the world. Brazil alone represented the seventh-highest internet penetration rate in the world pre-pandemic. The combination of pre-pandemic mobile adoption and digital acceleration in the last year may create more opportunities in Brazil, Mexico and throughout the region for digital natives and incumbents embarking on technology transformations.
2. Track Returning FDI Flows by Industry.
In short, follow the money. During 2020’s second quarter, global foreign direct investment levels were nearly halved by the pandemic. Now it’s time to watch where the money returns. As you investigate opportunities in Latin America, FDI data can provide valuable perspective on which industries are attracting funds in specific countries and why. In Mexico, where nearly 40 percent of private investment comes from the United States, manufacturing still dominates FDI, but financial services now ranks second. By the first quarter of 2021, Brazil began to see its FDI numbers recover, led by investors in the automotive sector, retail (not including autos) and food products.
3. Evaluate the Growing Service Sector.
For Brazilians, a longtime expectation of high interest rates once defined the offerings of the financial services industry. No more. Returns have fallen sharply during the nation’s ongoing recession, leaving savers and investors to look for new options. As policymakers work toward financial reforms in Brazil and elsewhere in the region, multinationals in financial services may find new opportunities. Similarly, severe strain on Latin America’s healthcare system during COVID-19 could signal new avenues for global investment for companies with a focus on modernizing health delivery in the developing world.
4. Monitor the Path of Currency Modernization.
The “blocked” Brazilian real is described as a non-convertible currency because it is used primarily for transactions within the country and not traded on foreign exchange markets due to government restrictions. (The Argentinian peso and Chilean peso are also non-convertible.) In 2019, Brazil’s central bank announced that it plans to make the real fully convertible within two to three years, a move that could reset opportunities within the country and the region. But companies may want to consider whether waiting is worthwhile as investment opportunities on the ground may justify creation of a single-country approach to doing business.
5. Weigh ESG’s Future Impact.
Environmental, social and governance (ESG) goals are a growing topic within Latin America and most significantly in Brazil. In mid-2020, a group of European multinational corporations made news by signaling their intention to divest government securities and stakes in Brazilian food companies unless national action was taken to protect the Amazon rainforest. As ESG goals evolve within multinational companies, the response from individual nations throughout Latin America could build—or restrict—future global investment.
From technology to trade, transformational change happening throughout the developed world is also having a significant impact in Latin America. Multinationals may want to consider—or reconsider— how finance, consumer markets and economic policy could potentially evolve in the region and offer new opportunities for resiliency and growth.