India´s trade with Latin America increased by an impressive 36 percent from 11 billion dollars in 2007 to 15 billion dollars in 2008. India´s exports to Latin America crossed 7 billion dollars in 2008, increasing by as much as 40 percent from the US$5 billion exports in 2007. Imports from Latin America in 2008 went up by 33 percent to US$8 billion.

In 1998, India´s trade with Latin America was just about one billion dollars. In ten years the trade has gone up by fifteen times. Creditable indeed. But the achievement looks less spectacular when compared to that of China. The Chinese trade with Latin America which was US$12.6 billion in 2000, has increased to US$140 billion in 2008.

The rate of increase of the trade of China with Latin America should open the eyes of the Indian business, which has started focusing on this region in the last few years. The Indian businessmen would obviously be anxious to know the Latin American economic situation and especially the impact of the global crisis on this region. They should be happy to know that the region has suffered only moderately. One would have expected the Latin American economies to come crashing down as a fall-out of the historical crisis in the United States and Europe. In the past, Latin America used to sneeze when the United States caught a cold. Not any longer. Not a single bank or financial institution went bust in the region while the United States and Europe faced collapse of companies and banks with turnover of more than that of the GDP of many of the Latin American countries.

None of the Latin American countries have gone to the IMF for rescue, even as some East European countries have done so. While Iceland, situated far from the epicenter (USA) of the financial earthquake collapsed and had to seek rescue from Russia, none of the Latin American countries, which are in the proximity of the earthquake zone have suffered serious damage. There has been no panic summit meetings or rescue packages or nationalization of banks in Latin America.

Growth in Latin America

The GDP growth of 4.6 percent in 2008 makes it as the sixth consecutive year of growth for the region, a record in the last forty years. From 2003 to 2007, the region grew by an annual average of 5 percent. The growth was combined with reduction in poverty, increase in employment and surplus of fiscal and external accounts in general.

In 2008,Uruguay had the highest GDP growth of 11.5 percent in Latin America. Peru was the number two with 9.4 percent followed by Panama with 9.2 percent. Brazil, the largest market of the region grew by 5.9 percent while Mexico the second largest market grew by 1.8 percent and Argentina the third largest market grew by 7 percent.

In 2009, GDP growth for the region is projected to decline to 1.9 percent, following the global crisis and slowdown of economies. The highest growth projected is 5 percent for Peru, followed by Panama at 4.5 percent and Uruguay 4 percent. The lowest growth predicted is 0.5 percent for Mexico. Brazil growth is forecast at 2.1 percent and that of Argentina 2.6 percent.

In 2009, the U.S. economy is projected to contract 0.7 percent and the Euro economy by 0.5 percent. The advanced economies will suffer recession in 2009. But in Latin America, the growth story is going to continue, but at a lesser pace.

Welcome to the New Latin America, which has withstood the external shock and surprised the stereotypes.

ECLAC (UN Economic Commission for Latin America and Caribbean), IMF, World Bank and independent external observers have lauded the new resilience of Latin American economies, which have become less vulnerable to external shocks, thanks to stronger economic fundamentals.

Changes in Market and Mindset

The governments and the companies of the region have learnt lessons from the past crises and are exercising more discipline and are better prepared to face external shocks. The policy makers have become more accountable and less adventuresome. ECLAC praises the notable improvements in macroeconomic and financial policies; reduced dependency on external capital inflows; major reduction of currency and rollover risks in the governments´ debt portfolios; deepening of local currency debt markets; substantial increase in foreign exchange reserves; flexible exchange rates as part of more robust and credible monetary policy frameworks; and a shift to external current account surpluses or significantly lower deficits.

The Latin American firms have become, on an average, substantially more insulated from currency risk. Over the past ten years, many firms have sharply cut their balance sheet exposure to a sudden devaluation by reducing the share of debt contracted in foreign currency. The average share of foreign-currency-denominated liabilities in Latin America dropped from 35 percent in 1998 to 17 percent in 2007. Also, many firms have built up considerable foreign exchange buffers, by hedging a higher share of their dollar liabilities with export revenues and assets denominated in foreign currency.

Inflation

Inflation for the region as a whole is projected to reach 8.5 percent in 2008, the highest rate in five years, resulting from strong domestic demand and rising world food and energy prices. But it is expected to decline to 6.6 percent in 2009, helped by softening international commodity prices, tighter monetary policies, and slowing demand growth. It will, however, remain at double-digit levels in some countries such as Bolivia, Paraguay, Venezuela, and Argentina.

It may be noted that Inflation is no longer a curse in the region. It has been decisively tamed and has been kept in single digit in the last ten years.

External Debt

External debt, which was another curse, has also become manageable. IMF has no more clients in the region. Brazil and Argentina paid off their entire debts to IMF in 2006, ahead of due dates. External debt as a proportion of GDP has halved from 42.2 percent in 2002 to 20.2 percent in 2007. The average share of foreign-currency-denominated liabilities in Latin America dropped from 35 percent in 1998 to 17 percent in 2007.

Exchange Rate

The major currencies of the region had been appreciating since 2002 when the dollar started falling. This trend has reversed after the current crisis and the central banks have intervened in the markets to arrest depreciation. But the currencies and exchange rates are by and large stable and predictable, unlike in the past.

Downside Risks

Of course, Latin America cannot escape the inevitable pain arising from the global financial crisis and economic slowdown. They will be affected by the decline in demand and price for their commodity exports and the reduced access to credit. Most analysts expect agricultural commodity prices to peak in 2008 and flatten or decrease slightly in the following years, although on average they will remain higher than during the decade prior to the boom. A prolonged slowdown in the United States will not only threaten the economies of Latin America and Caribbean economies directly through lower import demand and a decline in remittances, but also indirectly through its impact on Asian economies and trade.

Mexico and Central America will face greater impact of the crisis and the recession in the U.S. market since they are more dependent upon the United States for their exports and remittances by their expatriates.

Diversification of Exports

One of the reasons why the region has been affected less from the contagion from the west is the decline in the share of the United States and EU in Latin American trade. The U.S. share of the exports of Latin America and the Caribbean has fallen from 60 percent to just 42 percent between 2000 and 2007. Even the Mexican exports to the United States [have been] reduced from nearly 90 percent of the total in 2000 to 78 percent in 2007. According to Latin Business Chronicle, Latin America´s exports to the United States grew by 4.2 percent while their exports to China grew by 49.4 percent. The European Union too is losing share as a trading partner for the region. Imports from the European Union as a share of total Latin American and Caribbean imports declined from 20 percent in 1990 to approximately 14 percent in 2006. In the same period exports to the European Union declined from 25 percent to 13 percent. Intra regional exports accounted for 18 percent of the total exports of LAC while the exports to EU were just 13 percent.

The Latin American countries have been consciously diversifying their export markets. For example, 55 percent of Argentina’s exports went to Latin America and Asia while their exports to USA and European Union together accounted for only 27 percent. Latin America and Asia accounted for 43 percent of Brazil´s exports while USA and EU took 39 percent. Chile’s exports in 2007 to Asia Pacific were 36 percent while their exports to USA and EU combined were just 37 percent. Colombia exported more to the rest of Latin America (36 percent) than to USA (31 percent).

The reduction in dependence on the United States and Europe is happening not only in trade but also in investment. Historically, the United States has been the most important source of FDI in Latin America. In the 1990s, Spain came to be a big player acquiring Latin American banks, utilities, telecom companies and manufacturing units. The Spanish were the first movers during the wave of privatizations in the eighties and ninties. In the present decade, the share of intra-regional FDI in total FDI inflows in Latin America has doubled (from 5 to 10 percent) due to the emergence of a number of companies of Latin American origin from Brazil, Mexico and Chile.

Asian Attraction

While the shares of the United States and Europe are coming down, Asia is increasing its share of Latin American trade. According to ECLAC, the dynamic Asian region led by China will help offset some of the decline in export demand in the developed countries. Since 2001 more Latin American and Caribbean imports have originated in the Asia-Pacific region rather than in the European Union, and the share of Asia-Pacific imports is rising steadily. If the current trend continues, by 2010, as much as 30 percent of Latin American and Caribbean imports could come from the Asia-Pacific region.

Nearly 36 percent of Chile’s exports go to Asia- Pacific region; the figure for Dominica is 31 percent; for Cuba, 29 percent; Peru, 24 percent; Costa Rica, 24 percent; Brazil, 18 percent; Bahamas, 17 percent; Argentina, 16 percent; Uruguay, 12 percent; and Bolivia, 12 percent.

The Latin Americans do not expect increase in their exports in 2009 to the developed markets because of the recession, which is setting in the advanced economies. Their hope is on the emerging markets and especially Asia, which are going to grow.

The Latin Americans are frustrated with the protectionist trend in the United States and Europe (especially for agro commodities) even while the latter are clamouring for the opening of the Latin American markets for their exports and investment. More than these, they are disenchanted by the current dominant mood of doom and gloom, fear and paranoia in the west. They contrast this with the cheerful Indians and Chinese who are brimming with optimism and confidence. They are inspired by the Asian story of growth. They are encouraged by the large and growing markets of India and China, which offer increasing opportunities in the short and long term for their exports and business. The Chileans and Argentines dream of putting one glass of their wine in the hands of each of the 500 million middle class people in India and China!

All the reports on Latin America by ECLAC, IMF and global consultancies always have a chapter on China and India and highlight the growing importance of these two giants for Latin America. ECLAC advises the Latin American and Caribbean region’s authorities to redouble their efforts to identify and capitalize on new opportunities to enhance their countries’ potential complementarities with the Asia-Pacific region [and] to take full advantage of Asia’s trade and investment dynamic, Latin America and the Caribbean must, as a matter of urgency, reorient and realign its relations with the Asia-Pacific region in order to sustain its commodity exports while producing more value added and more technologically complex manufactures for that market.

Opportunity for India

There is a saying in Latin America, Rio revuelta, ganancia de pescador – means when the river is turbulent, the fisherman will gain. Simply put, every crisis is an opportunity. And the Indian businessmen should take advantage of the current situation of Latin America, which is looking towards Asia more seriously than ever.

Latin America and the Caribbean is a net exporter of fuels, metals and agricultural products and a major producer and exporter of commodities on a global scale. In 2006, the region produced 44 percent of the world’s soybeans and 13 percent of global maize output. Its share in the production of zinc, aluminium and copper is also sizeable, at 28 percent, 22 percent and 19 percent, respectively, of the world total. India needs to import edible oils, pulses, petroleum and minerals and metals to sustain its new growth trend and to cope with the ever-increasing consumption. Latin America is a region, which can satisfy some of the requirements of India. Already India has started importing copper, soy oil, and crude petroleum from Latin America and these will increase in the coming years.

This is a good time for the Indian companies to acquire assets (agricultural land, mines, oil fields, forestry, manufacturing units) and expand their business in the region, since at this time the risk-shy companies from United States and Europe are reducing their exposure and are relatively less active here.

In the past, Indian companies had a “barrier mindset,” considering distance and language as barriers for business with Latin America. Now the Indian IT companies consider these two factors as advantages and make use of them merrily. They have established software development centers, BPOs and KPOs in the region employing 8,000 young Latin Americans, as part of their new business model of providing 12 hours of service from Latin America (same time zone as the United States) and 12 hours from India. They also use the language skills of the Latin Americans in European languages such as Spanish, Portuguese and Italian to widen their market presence in Europe.

Welcome to the new paradigm of business with Latin America!

* R. Viswanathan is Ambassador of India to Argentina. Views expressed here are strictly personal and do not reflect those of the Government of India.