After record inflows of foreign direct investment (FDI) in 2022, Latin America and the Caribbean (LAC) experienced a 9.9% decline in FDI inflows in the past year. Nonetheless, the region continues to maintain elevated inflows, accounting for 14% of global FDI flows compared to 11% during the 2010s. U.S. companies have been actively diversifying their operations away from China, making Latin America a key beneficiary.
The reduction in FDI in 2023 was most noticeable in the region’s largest economies, Brazil and Mexico, which saw drops of 14% and 23%, respectively. Argentina and Chile, on the other hand, experienced increased inflows. Central America and the Caribbean also saw notable growth, particularly in Costa Rica, Honduras, Guyana, and the Dominican Republic.
Country-Specific Declines:
- Brazil: FDI fell by 14% to $64.2 billion, due to significant drops in intercompany loans (48%) and equity (14%).
- Mexico: FDI decreased by 22.8% to $30.2 billion, largely due to a 72% decline in equity inflows, influenced by extraordinary FDI in 2022.
- Peru: FDI plummeted by 65% to $3.9 billion, representing 2.1% of the region’s total FDI.
Investors see an increase in political risk in the two largest economies in the region, Brazil and Mexico. The spending plans of Brazil’s president, Luiz Inácio Lula da Silva, are a concern as it means the country is unlikely to make its fiscal target. Furthermore, he challenges the independence of the central bank as he pressures further rate cuts to facilitate consumer spending. Despite the CB was elected as the best policy under the current CB president. With neighboring country Argentina making furor with policies to lower public spending, the zeitgeist is not benefitting Lula.
In Mexico, the current administration under the Maduro party is not making the most of the nearshoring opportunity. Seems to be taking it for granted and instead of showing itself as a friendshoring partner, keeps voicing anti-imperialist tendencies towards the US. Keep in an uncomfortable lingo hard to not worry about fumbling the ball on this slam dunk opportunity on economic progress.
Peru is a small market so a reduction in FDI can quickly move the needle. Little stability in politics recently made investors wary of deploying large amounts of capital. Also, the current administration is strengthening ties with China on infrastructure projects. This a situation the US vigilantly to see how it works out.
Country-Specific Increases:
- Argentina: FDI rose by 57% to $23.9 billion, driven by capital movement restrictions leading to higher intercompany loans and reinvested earnings.
- Chile: FDI increased by 19.2% to $21.7 billion.
- Colombia: FDI remained stable, accounting for 9% of the region’s total.
In 2023, Argentina faced a pivotal election year, with the potential for a new government to significantly alter the country’s course. The possibility of disruptor Javier Milei winning the elections attracted investors, especially as Argentina was already trading at low valuations.
Gabriel Boric’s election worried investors as leftist governments immediately remind investors of a potential Venezuela 2.0 scenario. Chile is more of a stable economy though and investors are starting to come back into the country. Furthermore, Chile is a main producer of rare metals necessary for the energy transition. Its mining sector is becoming more attractive as supply/demand is in its favor.
Gustavo Petro was a big worry for Colombians but seems unable to get his policies pushed through. Unlikely to be reelected but also lacks the power to really turn Colombia to a Venezuela 2.0 thus will stick in a limbo.
Caribbean Growth: The Caribbean saw a 27.6% increase in FDI, with Guyana’s inflows rising by 63.8% to $7.2 billion, driven by the oil sector, and the Dominican Republic’s inflows increasing by 7.1% to $4.4 billion.
The first thing that comes to mind for most people when thinking about the Dominican Republic is its pristine beaches. Renowned as a tropical paradise, the island is also increasingly becoming a hub for nearshoring and industrial growth. Investors are attracted to the political stability in the past decades and cheap labor.
Guyana is situated next to Venezuela, which has the largest oil reserves in the world. In 2015, offshore oil fields were discovered in Guyana, and commercial production began in 2019. This has sparked an oil rush in the country, leading to increased levels of FDI.
Origin of FDI in Latin America
The Eclac report provides valuable insights into foreign investment in Latin America, despite data limitations. While China has become the region's largest trading partner, the US remains the top investor, contributing 33% of FDI. However, US FDI inflows declined by 29.7% compared to 2022. Mexico (41%) and Brazil (33%) remained the primary destinations for US FDI, despite experiencing declines of 30% and 21% respectively. Only Colombia saw a 14% increase in US FDI, becoming the third-largest recipient in the region with 18% of total US investment.
European Union countries (excluding the Netherlands and Luxembourg) increased their share from 17% to 22%. Spain emerged as a key investor, accounting for 11% of total FDI and 52% of EU inflows, focusing on Brazil (38%), Mexico (35%), and Colombia (15%). The connection between Latin America and its former occupier remain strong.
Chinese and Hong Kong investments remained minimal, with China contributing just 0.4% of total FDI ($790 million). Brazil received about half of this investment, with Colombia, Mexico, and Ecuador sharing the remainder.
The report notes that investments from tax havens like Luxembourg and the Netherlands may be overrepresented. To provide a more accurate picture, the data combines national accounts with information on mergers, acquisitions, and announced investment projects.
Closing Remarks
The current drop in FDI for 2023 is no surprise taking into consideration that the previous year's record levels were measured. A similar pattern emerged in the region's venture capital industry, which saw peak investment in 2021 followed by a cooling of investor enthusiasm.
Nevertheless, FDI flows to Latin America remain robust compared to historical averages. The United States, the largest source of FDI, aims to reinforce its influence in the region. Government institutions emphasize the goal of transforming the Western Hemisphere into the world's most prosperous region. After a period of reduced engagement, the U.S. appears to be reasserting its presence in Latin America.
The European Union has also recognized the importance of strengthening ties with Latin America. Many minerals crucial for its energy transition goals are sourced from the region. Spain, leveraging its historical colonial connections, leads EU investments in Latin America and the Caribbean (LAC).
Despite being Latin America's largest trading partner, China's FDI flows to the region are not substantial. While Chinese FDI has decreased, investments have become more strategic. Previously focused on large infrastructure projects for the Belt and Road Initiative (BRI), Chinese investments now target telecommunications, fintech, and energy transition sectors.
