Much has happened in South America in 2016: we discuss three countries here where FDI flows are, or will be, in flux: Brazil, Venezuela, and Colombia
The last day of August saw President Rousseff impeached in Brazil, charged with breaking fiscal laws, by moving funds between government budgets. This has come during a severe recession in the country, which started nearly three years ago. The Petrobras scandal has been a contributory factor, while the Olympics and soccer World Cup have also placed a strain on heavily stretched government finances. These two sporting events do also have a positive FDI effect on the country, but it’s debatable whether that offsets the investment (see the August 2016 blog for more on this).
New President Temer has recently implemented austerity measures in order to address the country’s economic challenges, although they have been said burden the poorer members of society most. All of this means that Brazil will struggle to reach the level of inward FDI that it was 2-3 years ago, which ironically comes at a time when more states are becoming active in overseas investment promotion. Brazil had also been starting to emerge as a more important destination for outward FDI, alongside trade. Some US states in particular have been actively working to attract Brazilian companies. However, this sustained period of instability may see Brazil recede back towards becoming a minor outward FDI player.
While Brazil has its challenges, the economic situation in Venezuela has been making international headlines since 2013. Faced with hyperinflation, a lack of basic consumer goods, the demonetization of the largest banknote, and a President who has blocked legal moves to challenge his authority - FDI in the country has slumped. Despite the government’s concern about foreign actors causing the instability, it is nevertheless still actively seeking to attract overseas investment. However, despite the country’s oil reserves (an industry where Venezuela has actually restricted FDI), it is hard to make an argument as to why an investor would currently choose to make an investment in the country. The most likely route to stability will be for oil prices to move upwards again, but this is a limited strategy. For Venezuela to attract the FDI that could benefit a range of industries, much more will need to be done to create an attractive investment climate. Learning from the investment promotion success of other countries in the region could be a good start.
In contrast, the prospects for Colombia as a destination for FDI are far more encouraging. The country has made significant economic and political strides in the last few years anyway, and from personal experience they have a national and regional network of Investment Promotion Agencies that are among the best in South America. This year’s progress towards ending the civil war with the FARC, is likely to see a more fundamental boost to FDI, as a key consideration for investors is risk. While the agreement has stumbled through a referendum that led to a revision of terms, and there are some final steps to clear, Colombia can become an increasingly attractive international destination.