There has been a lot of buzz in the market lately about the prospect for growth and stability in Latin America. Will Latin America emerge from Fed tapering unscathed?How will Brazilian Real rates, Mexican Peso rates, and Peruvian Nuevo Sol react to stronger growth in the US?How will slowing Chinese GDP growth affect economic prospects for the region? I hear and consider these questions constantly in the context of the asset management business in Latin America – and I wonder if perhaps we have taken to considering too short a timeframe to really see progress take hold.
The Latin America we know today has been more than 30 years in the making. Economic reforms encouraging trade liberalization and private sector investment helped Latin America claim a seat in the global financial ecosystem after the crises of the 1990s. Just like in the 90s, Latin America today is at a crossroads, with diverging economies attracting both positive and negative attention from the global community.
Mexico, the host for this year’s World Economic Forum on Latin America, has taken much of the spotlight in the past three years. Reforms that encompass everything from increasing political transparency to formalizing the workforce to improving education have been important to strengthen investor confidence in the country. A detailed National Infrastructure Plan and historic constitutional energy reform have drawn even greater interest – the National Infrastructure Plan estimates $220 billion of private investment into Mexico through 2018.
The reforms in Mexico are part of a broader trend in the region. We are seeing fundamental change taking hold in many markets, including Brazil, Chile, Peru and Colombia. In Colombia, the Asociacion Publica Privada (APP) framework is proving successful in drawing investment into public infrastructure projects. Brazil has also announced a clear desire to work in closer-sync with international investors interested in supplementing infrastructure funding by the public sector.
Infrastructure investment, frequently stemming from private international sources, can offer an avenue for economic growth through increased efficiency and local employment, while at the same time suits portfolio allocation by long-term international investors such as pension funds and sovereign wealth funds. It is for this reason that infrastructure will be a focus topic at the World Economic Forum on Latin America this week.
As experience in Mexico has shown, reforms do not come neatly packaged. Rather, they can and should be built on a strong macroeconomic framework. Reforms aimed at improving fiscal and monetary health are important to demonstrate prudence and management prowess, and are virtually prerequisites for attracting international investment into private markets.
For the countries in Latin America that have entered into a period of long-term macroeconomic stability, a different type of reform will be needed to draw positive international headlines. Creating a more conducive environment for infrastructure investment, through strengthening legal frameworks and combating corruption, will undoubtedly help to differentiate the outperformers at this cross-roads facing Latin America today.
When I consider the questions I frequently come across, I often advise my interrogators (and myself) to be patient. Change is underway in Latin America, and the most persistent markets will undoubtedly amass the greatest benefit. As Paulo Coelho once wrote, patience is important – “it makes us pay attention”.
This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.