LATIN AMERICA STRATEGIC P.E.S.

T ANALYSIS - 2013 -

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LATIN AMERICA STRATEGIC P.E.S.T 2013 ANALYSIS

HDCG March 2013

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LATAM STRATEGIC PEST ANALYSIS Even if the economic outlook for Latin America shows a relatively positive picture for the coming year 2013 it is important to know that the General Regional Economic Forecast was trimmed from 4.2% to a 3.9%, by the FMI.

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An assessment of spillover risks showed that Latin America would be one of the regions to be hardest-hit from a sharper-than-expected slowdown in China. The region could also suffer more than others if the United States fails to avoid the 'fiscal cliff', a tightening in fiscal policy in 2013.

Looking to specifics, Brazil will lead the region domestic demand and growth was seen picking up to 4% in 2013. Mexico's outlook was trimmed slightly to 3.5% in 2013. Peru was expected to grow the fastest, at 5.8% in 2013. (Except Paraguay 11%). Chile and Colombia are both forecasted to grow 4.4% in 2013. Venezuela and Argentina are particularly at risk of upside pressure on inflation, although this remained above the midpoint of the target range in many countries.

Latin American small and medium-sized enterprises (SMEs) can become catalysts for productivity growth. The heterogeneity of these SMEs has to be considered, since different firms have very different development needs and potential.

While the region is vast and heterogeneous as a whole, four main key challenges that affect each country differently can be highlighted: Weak institutions with high costs associated and lack of physical security Poor development of infrastructure Inefficient allocation of production and human resources; and, increasingly Lack in innovation vis--vis more developed, but also emerging, economies

Addressing these challenges in the next decade will be crucial to ensure the economic and social progress of the following countries that lead the region:
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i.

Mexico has one of the highest improvements in the region. The countrys efforts to boost competition and its regulatory improvements that facilitate entrepreneurial dynamism are contributing to an improvement of the business environment. This development, coupled with the countrys traditional competitive strengths such as its large internal market size, fairly good transport infrastructure, macroeconomic policies, and strong levels of technological adoption have led Mexico to improve its competitive edge. Adopting and implementing policies to boost ICT, energy, and retailing, along with additional reforms to render the labour market more efficient are still needed to increase the efficiency of the Mexican economy. The current overall poor quality of the educational system, insufficient company spending in R&D, and limited innovation capacity can jeopardize the future ability of the country to compete internationally in higher value-added sectors.

ii.

Panama has remained relatively stable in most competitiveness drivers. Overall, it benefits from important strengths in its efficient financial market, solid transport infrastructures, and very good technological adoption, especially through FDI. Panama struggles with rigidities in its labour market, low levels of public trust of politicians, insufficient judicial independence, and favouritism in the decisions of government officials a situation that has deteriorated in the past years.

iii.

Venezuela continues to fall because of quality of the countrys public institutions. This dismal showing, coupled with severe weaknesses in its markets efficiency and deterioration in the macroeconomic stability have led the country to feature at the bottom of the region and among the least competitive countries in the world. Despite being at the forefront in its tertiary education enrolment rate, the overall quality of the educational system is weak. This, added to a lack of sophisticated businesses and poor innovation potential, critically constrain the competitiveness performance of the country.

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iv.

Costa Rica, is suffering of the macroeconomic imbalances seen in its high budget deficit and inflation and a scarcity of financial resources for the private sector. With fairly nice forecasts of around 4.5% GDP growth rates for the coming years, the country still depicts a strong overall position in the region thanks to its friendly trade policies, with low tariffs, few constraints on FDI, and its strong educational system. Costa Rica presents strong levels of technological adoption with many companies in high-tech industries, as well as solid business sophistication and innovation. All these factors can generate significant benefits.

v.

Colombia experiences an improvement based on its competitive strengths clustered around a stable macroeconomic environment; an improving educational system with a high level of enrolment and a large domestic market. On the other hand, despite the sustained efforts of the government to improve social pacification and eradicate organized crime, security concerns remain very high on the list of factors dragging down its competitive potential. In addition, improved regulation to foster domestic competition and facilitate a more efficient allocation of resources, as well as further investments to improve the transport infrastructure, are needed.

vi.

Peru improved its macroeconomic stability and strengthened its competitive edge thanks to a better control of inflation, a reduction of the government deficit, coupled with a friendlier environment for entrepreneurship. The country still faces a number of important challenges to solve as a weak public institutional environment, an educational system in need of higher quality, and the very low level of innovation. The impressive economic outlook for the next years, with GDP growth rates forecast of 6% in 2012 thanks to high mineral prices, provides a good opportunity to undertake the necessary investments and reforms to address its pending competitive limitations.

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vii.

Chile: remains the most competitive economy in the region. Early measures to open and liberalize its markets by introducing high levels of domestic and foreign competition, a relatively flexible labour market, and one of the most sophisticated and efficient financial markets have also helped the country to maintain its long-term growth prospects in the past decades. As Chile moves quickly toward higher levels of rent and the next stage of development, companies with low investment in R&D and a weak capacity for innovation act in an innovation environment characterized by relatively low-quality scientific research institutions and weak university-industry collaboration in R&D.

viii.

Brazil benefits from several competitive strengths, including one of the worlds largest internal markets and a sophisticated business environment. Moreover, the country has one of the most efficient financial markets and one of the highest rates of technological adoption and innovation in the region. On a less positive note, Brazil still suffers from weaknesses that hinder its capacity to fulfil its tremendous competitive potential. The lagging qualities of its overall infrastructure despite its Growth Acceleration Programme (PAC), its macroeconomic imbalances, the poor overall quality of its educational system, the rigidities in its labour market, and insufficient progress to boost competition are areas of increasing concern.

ix.

Uruguay leverages its traditional competitiveness strengths thanks to its transparent and well-functioning public institutions, its high rates of education enrolment and its stable policies that encourage FDI. However, despite this progress, inflationary pressures and the reduction of the national savings could bring significant macroeconomic distress if not properly tackled. Moreover, as Uruguay keeps growing and moves steadily toward a higher stage of development, policies to increase domestic competition that would incentivize higher business-sector investment in R&D and innovation capacity will become increasingly important.

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x.

Argentina is getting more and more unstable. The extraordinary competitive potential of the country that benefits from a large domestic market size and a population that has a high level of education remains unfulfilled because of both a lack of trust in its institutions and the large inefficiencies in its allocation of goods, as well as labour and financial resources. Excessive red tape that benefits the expansion of the informal economy and high barriers to trade bring a lack of confidence in the financial system. The progressive deterioration of the country s macroeconomic stability and a two-digit inflation rate, casts additional worrisome uncertainties about the sustainability of its economic growth. Unless these weaknesses are addressed, this situation could lead the economy back into the erratic fluctuations of the past, characterized by high expansionary periods followed by deep recessions.

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