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Home  |  Articles  |  Europe and America Latina: Two-way Cooperation and Investments
 

Europe and America Latina: Two-way Cooperation and Investments

Some conclusions of the V Conference of Latin America and the Caribbean development banking institutions and Europe banking institutions, carried out in Madrid, Spain, on November 11 and 12, 2013.

  • The global economy is accelerating after a major crisis, and what is observed is a change in composition with a smaller gradual contribution from emerging economies and the opposite from developed economies. The interesting point is not growth patterns or trends, but what is explaining this growth. In the past, these levers were: the strong growth in emerging markets, driven by the export sector; the expansionary monetary policies framework; the geopolitical tensions that drove the prices of oil and raw materials, and introduced volatility in asset markets; and the high oil and commodity prices.
  • In the cycle that is beginning, growth levers will be very different: 1) slower growth in emerging economies, but different, so it is expected to see quantitative and qualitative changes. The growth of an incipient formerly non-existent middle class will generate large variations in patterns and flows of investment and trade in the next century, 2) monetary policy framework is completely different, it is going towards a contractionary setting, of global interest rates standardization; (3) the resumption of negotiations on Iran’s nuclear program; and, 4) the possibility of having a more stable oil price derived from a lower structural demand coming from the slower growth of emerging economies, but above all from a positive supply shock, that is the century’s great revolution, shale oil and shale gas started in the USA and in which LAC will take part with important reserves.

TRADE, INVESTMENT IN LAC-EUROPE RELATIONSHIP

  • LAC needs a transformation to diversify its production and trade. To do so, LAC benefits from the strengthening of its relationship with Europe, as the EU is still the main foreign investor in the region. In 2010, it represented €385.000 billion in foreign direct investment (FDI), which is 43% of FDI in LAC. However, the construction of new factories has fallen drastically from Europe to LAC, almost in half in recent years. This finding is worrisome because the relationship between LAC and Europe needs to be promoted and strengthened. Europe needs LAC, and vice versa.
  • Europe has invested in LAC especially in infrastructure, financial markets, telecommunications, and energy. In the future this investment is expected in sectors, such as agro-food industry, insurance, biotechnology and other sectors with added value. Finally, there is also a need for more investment in Europe, and for reversing the trends. Here the role of national development banks in cooperation with multilateral banks should play a key role in promoting, not only bilateral FDI in both directions, but in particular the promotion of SMEs. Development banking is, therefore, an excellent partner for any public or private organizations interested in doing business and promote development of both regions. Now that LAC presents several opportunities of investment, cooperation and joint action between the two regions, development banking becomes challenge and a great opportunity to boost business and trade relations between companies in the two regions.

COOPERATION BETWEEN EUROPEAN AND LAC FDI

  • The operations of the European Investment Bank (EIB) in LAC until 2006 were to support EU presence through long-term loans and guarantees with political risk for their subsidiaries, EU/LAC joint ventures, and technology transfer from EU to LAC. As from 2007 support to environmental sustainability was added, and in 2011 to economic and social infrastructure, and to the private sector. Since 2007, the EIB has signed or approved operations in LAC for €3.882 million, working in several ways: in cooperation with national development banks (e.g., BNDES and Bancomext); in cooperation with regional development banks (e.g., BCIE and CAF); in cooperation with commercial banks in the EU; and, with direct loans to projects for more than €50 million. In turn, Spanish ICO has accumulated a €4.462 million active risk, where Brazil and Mexico were most benefitted, and to a lesser extent Chile, Ecuador, Colombia and Cuba.
  • The Swedish Export Credit Corporation (SEK) has intensified its efforts in providing financing to LAC financial institutions for projects of mutual interest. This type of collaboration will increase and is expected to expand contacts with LAC financial institutions. Even more considering that the needs for investment for infrastructure financing are enormous in the two regions. Therefore, it is especially important for development banks to work together, as well as with commercial banks. SEK emphasizes the need to ensure that investment are conducted in accordance with international guidelines and rules when it comes to corporate social responsibility or sustainable businesses, and to show that development banks are against immoral behavior and they will not participate in projects with implicit corrupt behaviors.
  • The Group Cassa Depositi e Prestiti (CDP) is an Italian development bank, leader in financing local and public administration entities. CDP is the owner of 75% of Simest that provides support for the development of Italian companies’ abroad through financial instruments; it promotes Italian companies’ international activities through minority shareholdings in investments; searching for business opportunities abroad and providing economic and financial assistance. It has supported 829 Italian companies, with $6.3 trillion committed by Simest, mainly in Brazil, Uruguay, Cuba and Mexico.
  • For the Agence Française de Développement (AFD), the issue of environmental sustainability should be considered in the context of economic and social development challenges in LAC, including economic sustainability, competitiveness and social inclusion in a scenario marked by middle class growth. This, in the institutional context of local governments growing importance as stakeholders in public investment, who should be involved in the fight against climate change. AFD policy on this issue is based on the fact that 50% of financing must have co-benefits in terms of climate change. In LAC, AFD has involved financing with Minas Gerais Development Bank, Brazil, with Findeter, Colombia, and the Space Program of Climate Change, Mexico.
  • In Spain, despite the financial system reforms, difficulties for financing companies persist, credit continues to fall, during 2013 was 6.5% and the difficulties hit especially SMEs. Therefore, they introduced several initiatives and here ICO has also played an important role. ICO’s mediation lines were made more attractive, reversing their decreasing trend in use and already exceed €10 billion; they signed a Collaboration Agreement with the German KfW to take advantage of the better conditions of access to capital markets and channel that lower cost to SMEs.

MULTILATINAS INNOVATION AND BOOM

  • The crisis has not prevented LAC to jump on the train of innovation, as some cases in Chile, Brazil, Colombia and Peru have demonstrated. 
  • In this new decade, we also witness a technological boom in LAC; “multilatinas” technological companies are on the rise. This is driving a change in technological trends / innovation towards emerging countries, including LAC. Emerging markets innovation is on the rise, and in this game Europe is losing leadership while emerging countries are taking on.

INFRASTRUCTURE FINANCING

  • Restrictions of banking and public sectors for resources allocation in infrastructure force to develop incentives for investors. In Mexico, in line with long-term financing strategies to support competitiveness, Bancomex participates in innovative financing schemes such as: real state trusts or development capital certificates, instruments assigned to finance one or more projects of long-term productive sectors aimed at investment societies of the retirement savings system. In 2013-2018, Mexico expects to invest US $314,660 million in infrastructure.
  • Infrastructure gap in Peru during 2012 grew by 384% compared to 2001. The deficit is estimated at more than $80 billion. Most of that gap is found in the electricity sector (37%), due to the growth in energy demand, followed by the transport sector (road networks, ports, airports and railways with 24%) and telecommunications (broadband networks) with 22%. This is a sector where Corporación Financiera de Desarrollo (Cofide) has entered strongly using trusts in project financing structuring.
 
 
 
     
 
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