Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
The most relevant economic activity in the coming decades will be the low-carbon economy. Indeed, we will have to reinvent—on a green foundation—virtually every single thing we produce and consume and how we consume it. This transformation stems from necessity rather than choice, but we are too far behind schedule and running against the clock to avoid an environmental catastrophe. Ultimately, we will need to find the tools to accelerate the transition to this new creation of green products and services, which will require different production conditions. This will require a great deal of green energy, plenty of water, and a lot of minerals from the low-carbon economy.
Latin America and the Caribbean (LAC) is best positioned to assist the planet in this mission, as several countries already boast quite green energy matrices, have the twelve largest water reserves, and many of the largest mineral reserves of the new economy, including lithium, nickel, copper, graphite, rare earths, and high-content iron minerals. The region also offers other globally relevant conditions, including the largest tropical forest, the two most important biomes on the planet, the richest biodiversity, and tremendous potential to leverage the large global markets for carbon credits and the bioeconomy.
But the region's appeal does not stop there. LAC has a young population, a fair amount of new investments in renewable energy, an immense—and growing—role in the global food supply, a rich ecosystem of entrepreneurial capital, and potential to meet the growing needs of businesses for a greener production. Not being involved in wars and other geopolitical issues, and boasting good trade relations with the United States, Europe, and Asia, companies operating in Latin America and the Caribbean (LAC) are not exposed to the same types of interventions, controls, bans, discrimination, and protectionism, which have given rise to uncertainties and instabilities for corporations in other regions.
LAC is also repositioning itself on economic policy issues. Consider, for instance, inflation and monetary policy, which is regarded today as a prudent benchmark and no longer a policy mistake. Independent central banks and decisive actions are exposed to inflation, and even with changes in political direction in elections, new leaders have retained sensible economic policies.
Thus, it would be no exaggeration to claim that the LAC economy is now relatively better positioned in the global economy; not by chance, many of its currencies have strengthened. It is true that the improved situation in some countries in the region is due—in part—to factors beyond the reach of local governments, such as the war in Ukraine and the lifting of post-pandemic restrictions in China, which will boost the demand for food and minerals.
But the region's unique green supply structure, coupled with changes in demand structure as a result of environmental commitments, new regulations, changes in consumer preferences, greater corporate responsibility, and new technologies and business models, are paving a positive development path that will likely raise the relative prices of several commodities in the region and drive GDP growth over the next few decades, with potentially profound impacts on trade terms and balance of payments.
These characteristics place LAC in a privileged position to participate in the global economy through the new Global Value Chains (GVCs), driven solely by resilience and sustainability, and not merely focused on efficiency. Powershoring and other comparative and competitive advantages will place the region at a core position in the new GVCs, especially in energy-intensive sectors, water, bioeconomy, critical minerals, grains, and proteins.
Businesses and markets in the region are also appealing for investors. Although many corporations follow lower leverage policies than their counterparts, they have relatively more prudent balances, boast lower historical default rates, and have tremendous national and regional growth potential, risk rating agencies often unfairly limit their risk ratings. But this has attracted more and more investors, who consider the countries of the region as especially appealing sites for M&A strategies.
While many conditions are favorable for LAC, success is by no means guaranteed. Translating all this immense potential into concrete results will require embracing sustainable and sustained growth as pillars of economic policy, implementing sound, consistent policies, establishing and strengthening institutional and regulatory frameworks, improving legal predictability, training human capital, investing in R&D, scaling up investment in infrastructure and digital technologies, and finding secure and cheap sources of long-term financing.
Some economies in LAC should grow in the coming years more than experts have expected. Brasil, the largest regional economy, is implementing major economic reforms that should provide even greater support for the nation's and the region's growth. Capital markets and the stock exchange have reflected these results and have improved the risk rating and the cost of capital.
Last year, Brazil received USD 92 billion in Foreign Direct Investment (FDI), becoming thus the fifth largest investment destination in the world; Mexico performed positively, despite the fact that global FDI inflows will be lower compared to 2021. In fact, CEOs and global fund managers look at LAC with growing optimism and expect FDI to reach new highs over the next few years. The oil and gas sector can play a pivotal role in the transition, setting up our environmental frameworks and commitments, and financing the previous agenda. Ultimately, the region cannot afford to forego this enormous internal source of financing.
Seemingly, LAC is in a particularly good position to overcome its historical challenges—poverty and inequality—while helping the planet address many of its major challenges and deliver strong results for investors. Thus, it seems inevitable to think that the success of LAC will be the success of us all.
