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By Jason Simpkins
Concerns about the U.S. economic slowdown are starting to blunt some of the optimism surrounding Latin American economies. And while some of the more-timid investors are already retreating from the region, the actual panic some are experiencing is premature, as Latin American economies are demonstrating a much stronger ter resilience than they've been given credit for.
A report from the International Monetary Fund, released Friday, noted that "the region's banking systems have so far remained largely immune to the financial stresses in the United States," but financial conditions are "beginning to show some signs of tightening." Ultimately, the IMF expects the turmoil in the United States to start catching up with Latin America.
U.S. economic growth is expected to fall to 0.5% this year and be just 0.6% in 2009. The IMF sees growth in Latin America slowing as a result. After regional growth hit 5.6% last year (2007), the IMF thinks growth will fall to 4.4% this year and 3.6% in 2009.
History supports the IMF's position. An economic slowdown – or worse, a recession in the United States – was once the death knell for Latin American economies, which rely heavily on America as a market for their exports. When the United States, the leading importer of Latin American goods, struggled through a recession in 2002, six of Latin America's most prominent currencies dropped by 20% or more.
But the story for 2008 has been very different.
Brazil's currency, the real, hit a nine-year high Friday, climbing 0.3% to 1.6577 per dollar, Bloomberg News reported. Earlier, the currency touched 1.6530, its strongest showing since May 1999. The real has gained about 23% over the past 12 months, the best performance among the 16 most-frequently traded currencies tracked by Bloomberg.
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The Colombian peso has jumped more than 17% over the last 12 months, reaching 1,792 versus the dollar. It's now trading at its highest level since July 1999, as foreign investment has rushed into the Andean country. Colombia's economy expanded 7.5% in 2007, the fastest pace since 1978. Foreign direct investment (FDI) rose 40% last year, reaching $9.03 billion. In the year through March 19, it had increased 25% to $2.16 billion, according to the central bank.
"I would be very critical of the IMF," said Money Morning Contributing Editor Horacio R. Marquez, an emerging-markets specialist and Argentine native. "The IMF said growth in China was going to slow down in response to the U.S. and you saw its first quarter."
China's economy expanded by 10.6% in the first quarter of 2008, despite complications stemming from the U.S. credit crunch, the Chinese New Year, and the worst ice storm the country had seen in decades.
Marquez also pointed out that Latin American economies have been bolstered by huge trade surpluses – a lingering result of the commodities boom. Countries like Chile, Brazil, and even Mexico are sitting on huge caches of foreign reserves that will offer substantial support should conditions in the U.S. continue to deteriorate.
Emerging markets have an estimated total of $4.1 trillion in central bank reserves, The Wall Street Journal reported. That includes a cushion of $185 billion in Brazil, $49 billion in Argentina and $80 billion in Mexico.
"This time, we have something of a vaccine when the U.S. sneezes," said Claudio X. Gonzalez, chairman of Kimberly-Clark de Mexico SA.
Mexico's economy expanded by an unexpected 3.8% in the fourth quarter, as U.S. growth slowed to a paltry 0.6%.
"This is going to be the first time in many years in which Mexico is going to move in the opposite direction as the U.S. business cycle," Alfredo Coutino, senior economist for Latin America at Moody's Economy.com (MCO), told Bloomberg in an interview.
Latin America's New Best Friend
Even as Latin America's trade with the United States slows down, China has been quick to grab the baton and pick up the import-export slack with the Latin American region.
Trade between China and Latin America surpassed $100 billion last year, a milestone the Chinese government didn't expect to reach until 2010. Commerce between the two regions totaled $102.6 billion in 2007, a 46% increase from 2006, according to Chinese government data.
Brazil sent 6.7% of its goods to China last year, double the level of 2001. Chile, Peru and Argentina exported to China twice what they imported from their Asian trade partner. Mexico exported $3.2 billion worth of goods to China last year.
Speaking to bankers in Acapulco last month, Mexican President Felipe Calderon touted last year's increase in his country's exports to non-U.S. markets: Goods sent to the Middle East increased 48%, while goods shipped to Europe jumped 30% and those to Asia rose 25%.
The United States now absorbs less than 20% of the exports coming out of Brazil, Argentina, Chile and Peru.
Brazil President Luiz Inacio Lula da Silva predicted that his country's economy would grow at least 5% annually through 2010.
"People are buying more and exports are growing because we don't depend on the United States, and Europe alone," he said. "Now we're exporting to many more countries around the world, and this leaves us calm in the face of an American crisis."
The government of Brazil recently made plans to establish a permanent commercial center in the United Arab Emirates to promote investment between the regions. The U.A.E. is home to the Abu Dhabi Investment Authority, or ADIA, a sovereign wealth fund with an estimated $875 billion in assets. Brazil is the world's sixth-largest economy and home to an internal market of approximately 190 million consumers.
The new center will serve as a permanent exhibition of products from Brazil and Latin America, and tap developing investment and marketing opportunities between the regions.
It will also enhance Arab-Brazilian relations through the presence of future Gulf investments in Brazil, Ahmed Yassine, president of the Trade Exterior Chamber of Brazilian-Arabian Gulf and North Africa, told the Emirates News Agency. Yassine led a delegation of Brazilian businessmen on a tour of the region.
"An estimated 20 million people of Arab origin live in Latin America and 7 million of them are in Brazil," Yassine said.
In 2007, Gulf countries imported $4.6 billion in goods from Brazil, an increase of 4.8% from 2006.
The amount of the region's debt denominated in foreign currencies fell to 24.7% of gross domestic product in 2007, down from 44.1% in 2002, according to the International Monetary Fund.
Hot Investment Opportunities
Marquez, also a contributor to the Money Map Report, says there are a number of profit plays to be made throughout Latin America.
According to Marquez, investors should focus on Latin America's wealth of commodities [which are in demand in nearly every world market], and companies that will profit from the region's growing middle class.
Here are just a few of his suggestions:
- Petroleo Brasilero SA (PBR): Latin America's appetite for energy is nothing short of ravenous. As of now, three-fourths of the country's electricity comes from hydroelectric power. That figure will be higher in 2012, when the region's largest hydroelectric project, the Santo Antonio Dam, will begin producing electricity. Santo Antonio is the first of three Amazon River dams the government hopes will decrease Brazil's need for fossil fuels. Until then, however, Brazil's state-controlled oil-and-gas company, Petroleo Brasilero SA will continue to meet the demand.
- Southern Copper Corp. (PCU): South America is stuffed with metals. And with commodity prices soaring, this is a good market to be in. This Phoenix, Ariz.-based mining giant heavily taps South America's rich copper mines. Though based in the United States, this company has all of its mining, refining and smelting operations in Mexico and Peru. With this stock, however, investors are subject to the volatility of the U.S. market, which doesn't look very promising in the first half of this year.
- The iShares Standard & Poor's Latin America 40 Index (ILF)/ iShares MSCI Brazil Index Fund (EWZ): Investors who are wary of investing directly in foreign companies have a few exchange-traded funds (ETFs) to choose from. The iShares Standard & Poor's Latin America 40 Index – which tracks highly liquid securities in Mexico, Brazil, Argentina and Chile – ended 2007 with a 44% gain. There's also the iShares MSCI Brazil Index Fund, a capitalization-weighted index that aims to capture 85% of the total market capitalization in Brazil. It invests in a sample of securities and is reviewed quarterly. Last year, it gained a healthy 72%.
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