Foreign Direct Investment in Latin America and the Caribbean 2015

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Foreign Direct Investment in Latin America and the Caribbean • 2015 Region grouping Table I.1 Global foreign direct investment inflows, variation and distribution by region, 2005-2014 a (Billions of dollars and percentages) 2005- 2009 Investment flows (billions of dollars) 2010 2011 2012 2013 2014 2005- 2009 Variation rate (percentages) 2010 2011 2012 2013 2014 2005- 2009 Investment flows (percentages) 2010 2011 2012 2013 2014 World 1 449 1 347 1 613 1 329 1 363 1 266 9 -7 20 -18 3 -7.1 100 100 100 100 100 100 Developed economies 917 703 880 590 594 511 8 -23 25 -33 1 -14.0 63 52 55 44 44 40 European Union 574 384 490 282 235 267 -2 -33 28 -42 -17 13.6 40 28 30 21 17 21 North America 259 226 263 213 302 139 24 -13 16 -19 42 -54.0 18 17 16 16 22 11 Transition economies 74 71 95 84 92 45 31 -4 34 -11 10 -51.1 5 5 6 6 7 4 Developing economies 470 590 653 655 676 710 10 26 11 0 3 5.1 32 44 40 49 50 56 Latin America and the Caribbean 99 132 172 183 190 159 8 33 31 6 4 -16.4 7 10 11 14 14 13 Africa 47 47 48 55 56 55 17 1 2 15 2 -1.8 3 3 3 4 4 4 Developing Asia 323 409 431 414 427 492 10 27 5 -4 3 15.2 22 30 27 31 31 39 Errors and omissions -12 -17 -15 0 1 0 - - - - - - -1 -1 -1 0 0 0 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of United Nations Conference on Trade and Development (UNCTAD), Global Investment Trends Monitor, No. 18 ((UNCTAD/WEB/DIAE/IA/2015/1), Geneva, 2015 and World Investment Report 2014 (UNCTAD/WIR/2014), Geneva, 2014. a In Global Investment Trends Monitor No. 18 (UNCTAD, 2015), UNCTAD introduced a methodological change by excluding data for the financial centres in the Caribbean and elsewhere, which has resulted in significant changes for global totals and regional distributions for past years. As fully revised data are not yet available, regional shares for past years have been corrected only for the inclusion of the Caribbean financial centres. Other updates implemented by UNCTAD for those years for which full data are not available have been aggregated in the errors and omissions category. B. Inward foreign direct investment in Latin America and the Caribbean 1. General trends FDI inflows reached US$ 158.803 billion in 2014, a 16.4% drop compared with 2013 and similar to the level recorded in 2011, in nominal terms. This is only the third drop in FDI inflows since 2003 and the previous two, in 2006 and 2009, were quickly turned around by large increases in the following year. FDI inflows grew from less than US$ 50 billion in 2003 to a peak of US$ 189.951 billion in 2013 (in nominal terms) on the back of high commodity prices, which boosted FDI in natural resources, and steady GDP growth across most of the region, which increased FDI in services and manufacturing for the domestic market. Prices of the region’s key export commodities started to decline in 2012 and economic growth slowed in 2013, but FDI inflows continued to reach new highs in those years, in part because of the extraordinarily large acquisition of the Mexican brewer Grupo Modelo by Anheuser-Busch InBev for US$ 13.249 billion in 2013. Excluding this single transaction, FDI inflows would have been flat in 2013. The decline in inward FDI is taking place in a context of relative financial stability and stable capital flows in Latin America and the Caribbean (ECLAC, 2014b). In 2014, risk premiums remained stable and capital inflows held firm on the back of increased other investment inflows (typically bank loans and deposits) (see figure I.3). For the past five years, portfolio investment and other investment have grown in importance and remained relatively stable. Over this period, FDI accounted for just 47% of cross-border capital inflows, compared with almost 70% during the preceding decade. Nevertheless, since portfolio inflows are concentrated in the largest economies, many smaller economies in the region rely more heavily on FDI for their capital needs. Chapter I 19
Economic Commission for Latin America and the Caribbean (ECLAC) Figure I.3 Latin America and the Caribbean: inward cross-border capital flows, 2000-2014 (Billions of dollars) 400 350 300 250 200 150 100 50 0 -50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Foreign direct investment Portfolio investment Other investment Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official sources as of 18 May 2015. In 2014, the dollar continued to appreciate against most other currencies. This trend was sparked by the United States Federal Reserve’s 2013 announcement of its intention to begin withdrawing quantitative easing, and it continued throughout 2014, accelerating towards the end of the year. The faster dollar appreciation was attributable to the falling oil price, which affected several economies in Latin America, as well as the United States’ improving economic performance and expectations of a hike in the interest rate set by the Federal Reserve. Not all currencies were affected in the same way, however. Of the major currencies in Latin America, the Argentine and Colombian pesos suffered the greatest depreciation with respect to the dollar in 2014, falling by 31% and 24%, respectively. The currencies of Brazil, Chile and Mexico depreciated by between 12% and 15% against the dollar, while remaining more or less stable against the euro. Peru is an exception since the sol depreciated only slightly (7%) against the dollar and appreciated by a similar amount against the euro. 3 The impact of such currency devaluations on FDI inflows is somewhat ambiguous. On the plus side, they can reduce the cost of investments, particularly greenfield investments, that are expressed in local currencies. Meanwhile, mergers and acquisitions, which are generally denoted in dollars, have become more expensive for European investors, but cheaper for investors from the United States. A third consideration is that devaluation tends to reduce the returns on market-seeking investments, whose profits are expressed in dollars, and increase returns on export-oriented investments. In short, the impact of currency fluctuations is uncertain and depends on several factors, including the type of investment, the origin of the investor and the specific local situation of the investment destination. Overall, in the short term, devaluations are most likely to have a marginal effect, as FDI investment decisions are typically driven by long-term considerations. The decline in inward FDI was concentrated in the largest economies. Of the region’s six largest economies, only Chile recorded increased FDI inflows, while in Colombia they remained stable. Brazil remains the largest recipient country in the region, having received US$ 62.495 billion in 2014, marginally less than in previous years. Mexico, the second largest economy in Latin America, was also the second largest FDI recipient. However, at US$ 22.568 billion, its recorded inflows fell short of the average for the previous decade, even in nominal terms. On the other hand, the two-year average of US$ 33.384 billion is the highest ever recorded. Chile received US$ 22.002 billion, more than in 2013, but still less than at its peak in 2012. At US$ 16.054 billion, inflows to Colombia were the same as for 2013. Peru recorded a drop in FDI inflows for the second year running. While flows of FDI to South America, as well as Mexico, ebbed in 2014, flows to Central America and the Caribbean were practically unchanged (see annex table I.A.1). 3 Before 2014, the Bolivarian Republic of Venezuela maintained an official fixed exchange rate of 6.3 bolívares to the dollar which was significantly out of step with the parallel market rate. In 2014, the government introduced two alternative exchange rates, which stood at 11.3 bolívares to the dollar and 50 bolívares to the dollar in November 2014. The use of different types of exchange rates is limited to specific groups of importers and investors (ECLAC, 2014a). Early in 2015, another regime was introduced with an exchange rate of 192 bolívares to the dollar. Chapter I 20
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Foreign Direct Investment in Latin America and the Caribbean 2015

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