The recent performance of South America in terms of economic growth and political and institutional stability has attracted interest among investors in the region, due to its promising business climate.

The strengthening of the major economies of South America, and particularly the development of the primary cities of the region, represent significant opportunities for potential investors.

To place this in perspective, there follows some of the indicators that reflect the investment climate in South America.

After a sharp economic slowdown in 2009 due to the global economic crisis, South America showed clear signs of recovery in 2010, fuelled by an increase in consumption and investment, as a result of the implementation of stimulative policies, inventory accumulation, higher commodity prices, positive terms of trade and favorable external financing conditions.

However the pillars of this growth differed among the various countries. Unlike those whose economies were more integrated to the financial markets of South America (those with lower spreads and higher credit ratings such as Brazil, Chile , Colombia, Peru and Uruguay), the rest of the region experienced restrictive external financing conditions, so this growth was mostly based on a favorable balance of trade.

The counter-cyclical policies adopted by some countries in the region, as well as the increasing relative weight of China in South American trade relations were some of the factors that contributed to the fast recovery of the economies in the region.

The year 2011 saw growth for the region, although at more moderate levels than in 2010, in line with the global downturn and the toughening of policies.

The expansion of more financially integrated raw- material exporting countries was led by a strong private domestic demand and underpinned by favorable raw material prices, very convenient financing conditions, and the outcomes of accommodative macroeconomic policies implemented in the past.

In addition, most less financially integrated raw-material exporting economies experienced vigorous growth in 2011 (Argentina, Bolivia, Ecuador, Paraguay, Venezuela), mainly as a result of the high prices of raw materials and of expansionary policies. In some cases (Argentina, Bolivia, Paraguay), Brazil's dynamic demand also played a key role. The high international food prices, strong domestic demand, and supply restrictions were all instrumental in pushing up inflation rates (which in most of these countries reached double digits).

Argentina (8.9%) led the group in terms of economic growth in 2011, followed by Ecuador (7.8%), Peru (6.9%), Colombia (5.9%), Chile (5.9%), Uruguay (5.7%), Bolivia (5.1%), Venezuela (4.2%), Paraguay (3.8%), and Brazil (2.7%). Ecuador, Venezuela, Colombia, and Bolivia bettered their 2010 performance, while the expansion of the other countries in the group was lower. On the other hand, Paraguay and Brazil were the worst performers as far as increasing their growth rates.

South America's better macroeconomic fundamentals combined with increased liquidity and uncertainty in capital markets in developed countries, along with historically low interest rates have all stimulated capital flows across several countries in the region. These flows and the rise in commodity prices (due to an increase in global demand) have contributed to an appreciation in nominal and real exchange rates in several countries in the region, particularly in those adopting an inflation- targeting scheme and a floating exchange rate system.


With regard to inflation rates, the year 2011 showed the effects of slight overheating in most of the countries in question. There are favorable prospects in that respect for 2012 onward, especially in Peru, Chile, and Colombia. On the other hand, while Brazil and Uruguay will achieve lower levels, inflation will continue to be a major concern on the government's economic policy agenda. Finally, inflation rates in Argentina and Venezuela will remain high and hovering above double digits.

The global economic scenario in 2012 looks less rosy. Growth in developed countries has slowed down. International financial markets are still under pressure as doubts prevail about the health of advanced economies. The greatest risk lies in the evolution of the European financial crisis. The progress made so far toward an all-round solution to the current European fiscal and banking crisis has not yet appeased the financial markets. There is also uncertainty concerning the United States as it has failed to produce a long-term fiscal policy plan that may support growth in the short term and guarantee sustainability in the long run.

As far as the European crisis is kept under control, South America's growth will very likely continue to improve, although at more moderate levels than in 2010-2011. Even if European financial problems do not get worse, the deterioration of global risk has already started to affect South America. If risks increase, the region will not be immune. One of the reasons is that bank branches in the euro-zone hold 25 percent of total bank assets of Latin American countries, and many of those banks are implementing more conservative credit policies to strengthen their balance sheets.

If the European financial crisis grew worse, the impact on the financial stability of euro-zone bank branches in South America would be much more severe. Despite the fact that these banks have taken care to finance most of their operations in Latin America with deposits held by domestic residents and in local currency, a greater demand for US dollars is likely to occur, either due to a lower supply from their head offices or to a cut-off in external credit lines. This demand could lead to a reduction in the availability of credit in South American countries, which would hinder confidence and private investment. Furthermore, if European financial problems spread to other countries, raw material prices would fall, thus negatively affecting growth and stability.

The positive thing about this is that many South American countries enjoy a sound macroeconomic and financial situation thanks to the implementation of adequate policies following the 2008 crisis.

In most countries, banks have a solid financial position, monetary policy frameworks are credible, the levels of international reserves are appropriate, and public finances are robust. The major challenge lies in keeping these conditions in a highly uncertain scenario.

On the other hand, the stronger trade ties established with China by the regional economies, which were key to their recovery, have made them more sensitive to a potential slowdown in China's growth, especially on account of its potential impact on raw material prices and hence on the fiscal accounts of many South American countries.

Full report:

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