Foreign direct investment (FDI) flows to Latin America and the Caribbean (LAC) contracted for the third year in a row in 2017.
FDI amounted to US$162bn, down 3.6% from 2016 and 20% less than in 2014, according to a report from the UN Economic Commission for Latin America and the Caribbean (Eclac).
FDI evolution in LAC has been fairly heterogeneous, with major economies by-and-large seeing downturns (except for Argentina) and agglomerations of smaller nations (Central America and Caribbean) seeing solid FDI gains.
The report, Foreign Direct Investment in Latin America and the Caribbean (available here), cited growing trade tensions and protectionism in the world as key contributing factors to the decline in FDI.
As opposed to 2016 when FDI inflows decreased in the majority of the region's countries, last year saw increases in most nations and the downturn was concentrated in Brazil (-9.7%), Chile (-48.1%) and Mexico (-8.8%).
FDI to LAC was equivalent to 3.1% of the region's GDP last year, a similar level to that recorded annually since 2000.
The report said that certain trends that had already emerged in the global economic landscape became more established. In particular, announcements of potential restrictions on trade and pressures to relocate production to developed countries were confirmed. At the same time, China has taken steps to restrict outflows of FDI in order to align these flows with its strategic plans.
Adding to these factors, said Eclac, is the expansion of digital technologies, whose international expansion requires smaller investments in tangible assets. Firms in these areas are heavily concentrated in the US and China, which reduces the need for cross-border M&A.
"The combination of these factors goes some way to explaining the drop in global FDI in 2017, even amid stronger global economic growth (3.2%), abundant international liquidity, high corporate returns and optimism in the financial markets," the report reads.
The following table details FDI inflows in 2016 and 2017 for LAC:
Eclac comments on 2017 FDI in selected countries and sub-regions:
FDI recovered from the sharp decline recorded in 2016, with inflows jumping 253% to US$11.517bn. As a result, investment inflows to Argentina returned to the average levels recorded in the early part of the 2010-decade. The rise was attributable to a larger volume of reinvested earnings - which, owing to regulatory changes, had fallen substantially in 2016 - and to the increase in intercompany loans, while equity capital inflows declined.
After recovering in 2016, FDI inflows fell 9.7% to US$70.685bn. Equity capital inflows rose on the back of stronger M&A activity, whereas the downside was attributable to the decline in reinvested earnings and intercompany loans.
Due to a significant drop last year in FDI into the hydrocarbon and metals sectors, Brazil was unable to regain the levels it had recorded at the beginning of the decade: in 2010-2014 inward FDI was at an annual average of US$88.6bn, whereas in 2015-2017 the figure stood at US$74.6bn.
FDI flows fell for the third consecutive year, standing at US$6.419bn, similar to 1993 levels when measured as a percentage of GDP (2.3%). The prolonged drop in investment levels can be linked to the weak performance of the economy between 2011 and 2016, as well as to excess capacity built up during the last commodity price boom, and the decline in the price of copper.
The trend partially reversed in 2017, however, as the economy improved and prices for oil and metals picked up.
CenAm & Caribbean
In Central America, FDI rose for the eighth consecutive year, with a notable jump in Panama, where it reached US$6.066bn. The rise in consumption generated an increase in investments in services, new projects were carried out in renewable energies and the competitiveness of export manufacturing also led to higher inflows.
In the Caribbean, FDI inflows were up 22% to US$6.074bn. Over half of the total went to the Dominican Republic. The Caribbean countries have in general seen a considerable rise in investment in the tourism sector, and also in natural resources in the case of Guyana and Jamaica.
FDI inflows reached US$13.924bn, up 0.5% compared to 2016 and close to those recorded between 2011 and 2014. Reinvested earnings increased significantly, especially in the fourth quarter, reflecting the increase in the price of oil, as well as the overall improvement of the economy in the second half of the year.
Despite the uncertainty generated by the renegotiation of the North American Free Trade Agreement, transnational corporations continued to invest heavily in Mexico, which was the second largest FDI recipient in the region (with 19.5% of total inflows), which points to the country's high level of integration with global value chains in North America.
FDI amounted last year to US$31.726bn, down 8.8% from 2016, but nonetheless higher than the average of the past 10 years (US$29.640bn). The decline in 2017 was attributable to the drop in intercompany loans, which was greater than the rise in equity capital and reinvested earnings.
Manufacturing continued to be the sector that attracts most FDI, although inflows to the sector declined and its share fell from 58.2% of the total in 2016 to 45.3% in 2017.
FDI in Peru remained largely flat compared with the previous year, totaling US$6.769bn, and is still far from the inflows recorded a few years ago. There was a noteworthy increase in reinvested earnings in 2017, which accounted for 81% of total inward FDI.