Business Competitiveness To Be Key For Discriminating Investors

BMI View: The World Economic Forum's recently-released Global Competitiveness Report reaffirms many of the key themes we have noted regarding the business environment in Latin America, including rising security risks in the narcotics trafficking corridors, the deteriorating climate for the private sector in political hotspots such as Venezuela , and the mixed outlook for other major countries in the region.

The World Economic Forum (WEF) , released the latest version of its Global Competitiveness Report early in September. The 2013-14 publication , which measures economic competitiveness across a wide range of metrics, broadly supports many of our own views which we have long highlighted in the region. These include the rising importan ce of security in the northern countries of Central America, the significant deterioration in competitiveness among countries with poor macroeconomic governance and populist administrations such as Venezuela, and the mixed outlook for several of the region's largest economies, including Brazil, Argentina, and Colombia.

In particular, we note that in the absence of high commodity prices and strong demand from for Latin American goods exports from China, economic competition is fast becoming the key criteria to determine economic outlook in the region. We believe that Mexico and Colombia, with their favourable business environments and substantial growth opportunities, are among the region's most attractive markets. Meanwhile, we reiterate our relatively less positive view on Brazil, which suffers from extensive government involvement and less accommodating approach to the private sector.

WEF Rankings Support BMI's Long-Held Views
Latin America - 2013-14 WEF Rankings (Y-Axis) Versus BMI Business Environment Ratings (X-Axis)

BMI View: The World Economic Forum's recently-released Global Competitiveness Report reaffirms many of the key themes we have noted regarding the business environment in Latin America, including rising security risks in the narcotics trafficking corridors, the deteriorating climate for the private sector in political hotspots such as Venezuela , and the mixed outlook for other major countries in the region.

The World Economic Forum (WEF) , released the latest version of its Global Competitiveness Report early in September. The 2013-14 publication , which measures economic competitiveness across a wide range of metrics, broadly supports many of our own views which we have long highlighted in the region. These include the rising importan ce of security in the northern countries of Central America, the significant deterioration in competitiveness among countries with poor macroeconomic governance and populist administrations such as Venezuela, and the mixed outlook for several of the region's largest economies, including Brazil, Argentina, and Colombia.

In particular, we note that in the absence of high commodity prices and strong demand from for Latin American goods exports from China, economic competition is fast becoming the key criteria to determine economic outlook in the region. We believe that Mexico and Colombia, with their favourable business environments and substantial growth opportunities, are among the region's most attractive markets. Meanwhile, we reiterate our relatively less positive view on Brazil, which suffers from extensive government involvement and less accommodating approach to the private sector.

T he overall WEF rankings for Latin America are strongly correlated with our own Business Environment Ratings , which incorporate the sub-categories of 'Institutions', 'Market Orientation', and ' Infrastructure ' . Both BMI and the WEF place Chile as the leader of the pack, with Venezuela and most of Central America near the bottom.

WEF Rankings Support BMI's Long-Held Views
Latin America - 2013-14 WEF Rankings (Y-Axis) Versus BMI Business Environment Ratings (X-Axis)

Institutional Importance To Remain At The Fore

On average, Latin American countries improved slightly relative to the rest of the world on the 'institutions' component of the Competitiveness Index, which ranks 148 countries in the report. On average, South American nation s ranked 99.1, compared to the 102.4 ranking in 2012-13 report. In Central America, the average ranking inched up from 100.6 to 98.1. In both regions, variations were substantial, however, with Chile ranking 28th on the high end of the spectrum, and Venezuela coming in very last place worldwide , at 148th.

Latin America's greatest weakness by far in terms of institutional strength is on the security front. In the 'business costs of crime' component of the WEF rankings, the regional average has fallen every year since the 2006-07 report (the earliest available), from 100.1 to 122.5 in the latest publication. Out of the 17 countries evaluated in the report, only Chile ranks within the top 100 countries in the world, coming in at 66.

In terms of security, the hardest-hit sub-region continues to be along the Central American transit routes for illicit drugs, a hotspot we have repeatedly highlighted in the past ( see 'Regional Integration Signals New Approach To Security', September 10). The 'northern triangle' of Honduras, El Salvador, and Guatemala rank lowest in the world for the 'organised crime' sub-component of the rankings (at 146th, 147th, and 148th place, respectively). For the first time since the rankings were compiled, Mexico has also fallen below 140 on this metric, coming in at 143rd. As the violent competition for greater control of the lucrative drug trade is expected to remain intense, we believe the security situation will remain precarious over the coming years. As traffickers are squeezed by authorities, this has the potential to spill over into other countries, including the Caribbean ( see 'Still Trouble In Paradise, Four Years On', September 19).

Crime And Violence Seriously Eroding Central America's Standing
Central America - Organised Crime WEF Rankings, Out Of 148

Similar trends are present in associated components of the rankings for these four countries, including the reliability of the police and trust in politicians. We believe that that drug trade and drug-related violence are increasingly taking centre stage in how current and potential investors perceive the region, and creating a major drag on private sector competitiveness.

Governments' ability to maintain a macroeconomic environment conducive to private sector growth is another key element of institutional strength. While inflation is not as high in Latin America as other developing regions, price growth in Venezuela and Argentina have been in double digits since mid-2012 (likely longer in Argentina's case, given the suspect nature of officially reported statistics). Brazil's inflation has also ticked up in recent months largely due to an uptick in the price of food following adverse weather conditions which have harmed local agricultural production, and global commodity prices have also seen prices rise in the smaller economies of the region highly exposed to international markets . This has also put downward pressure on exchange markets, with several countries' currencies experiencing significant depreciation in recent months.

However, from a competitiveness perspective these natural fluctuations are of much less concern than the price growth seen in Venezuela and Argentina, where loose monetary policy and humming printing presses have bee n behind the rise. In both cases, we expect inflation to rise even further, given the rapidly rising money supply and profligate spending of their respective administrations.

Macroeconomic Governance Key
Latin America - Regional Inflation, Rebased To Jan 2012, % chg y-o-y

Ideological Shifts May Give Investors Pause

Rampant government spending is part of a wider trend seen in some parts of Latin America, where some countries have in recent years taken a hard left turn in their political orientation. This is most notable in Venezuela, where the late Hugo Chávez advocated a 'socialism for the 21st century', including much greater government involvement in the economy and wider distribution of natural resource wealth.

While the efforts to reduce poverty and inequality are laudable, the heavy hand employed in the private sector, including public rebukes, mandates, quotas, restrictions on capital movement, and even nationalisations, have exacted a heavy toll on the Bolivarian Republic's business environment. While perhaps less extreme, a similarly hostile posture has also been adopted in other countries in the region, including Argentina, Bolivia ( see most recently 'Mining-Sector Expropriation Highlights Business Environment Risk', September 24), Nicaragua ( see 'Despite Improvements, Government Still Impeding Business', September 23) and Ecuador. Largely as a result of this approach to businesses, all of these countries fall in the bottom half of BMI's own 'Market Orientation' sub-category of our Business Environment Ratings.

There have been some modest attempts at walking back these initiatives (even in Venezuela), as it becomes increasingly clear they are fiscally unsustainable, but improvements have been marginal at best, owing to the substantial political interest in maintaining the government's largesse for as long as possible.

Although the populist rhetoric of Chávez (and more recently his successor Nicolás Maduro) often captures the headlines, onerous government regulation is not limited to the socialist fringe. Even businesses in Brazil, a regional economic powerhouse, must deal with entrenched government interests and burdensome bureaucracy. According to the WEF, it takes on average 144 days to start a business (up from 111 days in the 2006-07 report), second only to Venezuela in the region and ranking fifth from the bottom in the global rankings. We have long maintained that despite its large economy, abundant natural resources, and strong domestic consumer market, Brazil will continue to be constrained by high taxes, difficulty in legal compliance, and burdensome regulations ( see 'Infrastructure Improvement, But Serious Problems Remain', July 2 2012). Indeed, in Brazil scores just 47.0/100 in BMI's 'Market Orientation' sub-category, ranking a lowly 10 out of 17 nations.

Overbearing Socialist Policies Bad For Business
South America - Factors Affecting Market Orientation
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BMI's Latin America Business Environment Ratings
Overall Business Environment Rating Regional Ranking Infrastructure Regional Ranking Institutions Regional Ranking Market Orientation Regional Ranking
Source: BMI
Chile 64.0 1 53.4 5 68.1 1 70.3 1
Uruguay 59.8 2 63.5 1 66.2 2 49.7 8
Mexico 53.8 3 51.2 7 53.0 6 57.2 3
Brazil 53.7 4 60.9 2 53.3 5 47.0 10
Peru 53.5 5 49.3 8 50.2 8 60.8 2
Colombia 52.6 6 51.6 6 56.4 3 49.8 7
Costa Rica 52.1 7 55.1 4 51.1 7 50.0 6
Panama 51.6 8 48.6 9 54.2 4 51.9 5
Argentina 48.3 9 55.8 3 44.8 9 44.4 13
Paraguay 43.2 10 40.5 13 35.4 13 53.7 4
El Salvador 42.0 11 42.3 11 43.1 10 40.5 15
Guatemala 40.9 12 39.2 14 37.2 12 46.4 11
Nicaragua 40.3 13 34.5 16 38.0 11 48.5 9
Ecuador 38.4 14 46.7 10 31.1 16 37.3 16
Bolivia 37.5 15 38.2 15 32.6 14 41.6 14
Honduras 36.3 16 32.0 17 32.6 15 44.5 12
Venezuela 32.6 17 40.9 12 24.6 17 32.5 17

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This article is tagged to:
Sector: Country Risk
Geography: Latin America, Bolivia, Brazil, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, El Salvador, Venezuela
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