In Miami, in December 1994, the 34 leaders of the western hemisphere agreed to the establishment of a Free Trade Area of the Americas (FTAA) by the year 2005. Once created, the FTAA will offer a market of more than 800 million potential consumers with a combined gross national income (GNI) of some $12 trillion (all currency in U.S. dollars except where noted). It is also envisioned that greater hemispheric economic integration will bring about the freer movement of labour, capital, and goods and services from Anchorage to Tierra del Fuego. This secure and increased market access will lead to greater commercial possibilities and benefits for Canadian producers, exporters, lenders and consumers.
In this article, I will identify and assess some of the major challenges and opportunities facing most countries in the Latin America and Caribbean (LAC) region in the coming decade and beyond, and discuss their implications for Canada.
MACROECONOMIC INSTABILITY
The LAC region experienced unimpressive economic growth rates during the last two decades or so. For example, according to the International Monetary Fund, the LAC economy grew by an average annual real rate of 2.3 percent during the 1983-1992 period, 4.1 percent in 1993, 1.7 percent in 1995, 5.3 percent in 1997, and 0.2 percent in 1999. The same data also show that the LAC economy is expected to grow by 4.4 percent in 2002 compared to 3.7 percent from the year before. It is generally held that growth rates above 6 percent are required to decrease unemployment, support income gains and reduce poverty. Economic performance will continue to vary widely throughout the region.
In 1999, according to the latest World Bank data, Argentina, Brazil and Mexico accounted for over three-quarters (76.3 percent) of the region’s GNI. Brazil, at almost 39 percent ($730 billion), was by far the region’s largest and most important economy, followed by Mexico ($429 billion or about 23 percent) and Argentina ($276 billion or about 15 percent). The region’s smaller economies accounted for the balance (some $445 billion or 23.7 percent), with Colombia, Venezuela, Chile and Peru accounting for over two-thirds of this.
Due to the size and scale of the Brazilian economy, the region’s economic well-being will continue to be influenced in large part by current and future macroeconomic conditions in that country, and to a lesser extent in Mexico and Argentina. The slowdown in the U.S. and global economy, continued economic and financial weakness in Japan, a weaker euro, depressed non-fuel commodity prices, rising protectionist sentiments, higher global interest rates, exchange-rate volatility and greater foreign-debt servicing burdens will also continue to influence the region’s economic growth and social development.
Despite decades of structural reforms and stabilization programs, the benefits of economic development have not been evenly distributed between and within LAC countries. The latest data from the World Bank show that annual per capita incomes differed widely across the region in 1999, ranging from $410 in Nicaragua to $990 in Bolivia, $2,130 in Peru, $4,350 in Brazil, $4,440 in Mexico, $7,550 in Argentina and $8,600 in Barbados. Narrowing gaps in regional per capita incomes will continue to be slow and prolonged given the size of the problem, the different stages of economic and industrial development among LAC countries, ongoing differences in economic growth and increased population pressures.
With its abundant natural resource base and cheap pool of labour, the LAC region will remain a major exporter of raw materials and semi-processed goods, including oil, copper, farm products, tropical fruits and coffee. The region will also continue to be one of the world’s major destinations for tourists. On the other hand, the region will remain a major importer of technically sophisticated, capital-intensive manufactured products. The creation of the FTAA by 2005 will further intensify the region’s historical concentration of commodity production and export.
The LAC region’s heavy dependence on commodity exports, especially such non-fuel commodities as copper, oil and farm products, makes it very susceptible to sluggish or declining commodity prices. Wild swings in commodity prices may contribute to lower foreign exchange earnings, decreasing government revenues and swelling current-account deficits. This, in conjunction with generally unfavourable economic conditions, could further weaken the ability and willingness of cash-strapped, heavily indebted LAC debtors to fully service their foreign debt obligations as contracted.
The region’s foreign debt level reached $776 billion in 1999. Collectively, Brazil ($245 billion), Mexico ($167 billion) and Argentina ($148 billion) accounted for over 72 percent (or almost $560 billion) of the region’s total foreign debt. As foreign debts accumulate and debt-servicing burdens rise, future government spending on the region’s large and growing education, health-care and pension obligations, as well as the massive bank recapitalization efforts, will be constrained. Relations between the region’s heavily indebted countries and major international creditors could become rockier, clouding prospects for a speedy recovery.
In late December 2000, Argentina received a $40-billion, IMF-led bailout package, which prevented it from defaulting on its maturing foreign debt obligations. It is interesting to note that similar massive multibillion-dollar IMF-led rescue packages were also arranged for Brazil ($41.5 billion) in 1999 and for Mexico ($50 billion) in 1995. Since almost two-thirds (64.1 percent) of Argentina’s foreign debt is denominated in U.S. dollars, a stronger U.S. dollar and higher interest rates would increase Argentina’s debt as a share of GNI, raising the likelihood of default. A devaluation of the Argentine currency will end the swapping of the peso on a one-for-one basis with the greenback, thereby boosting debt-servicing costs given Argentina’s large share of foreign debt denominated in the U.S. dollar. Hikes in U.S. interest rates will also contribute to higher debt-servicing costs, meaning that there will be fewer dollars left over for other competitive uses.
Countries can be delisted if the FATF determines that anti-money laundering efforts have improved. For instance, four countries, including the Bahamas, the Cayman Islands and Panama, were recently delisted by the FATF due to substantial improvements in their anti-money laundering systems. The widespread adoption of international money laundering standards could reduce the number of money laundering havens over time, decreasing the possibilities for criminals to hide their ill-gotten wealth in the LAC region and elsewhere. This does not augur well for the future economic prospects and development ambitions of the region’s onshore and offshore financial centres.
IMPLICATIONS FOR CANADA
In 2000, Canadian exports to countries in the LAC region reached over $6.1 billion (almost 1.5 percent of the total) compared to some $5.5 billion (1.6 percent of the total) over the previous year (all currency in this section in Canadian dollars). Within the region, Mexico, at over $2 billion (33.3 percent), and Brazil, at almost $1.1 billion (17.4 percent), accounted for over one-half of Canadian export sales to the LAC region in 2000, while the rest (49.3 percent) went to other LAC countries.
At the same time, Canadian imports from LAC countries totalled over $18.3 billion (5.1 percent of the total) in 2000, compared to $14.7 billion (4.6 percent of the total) in 1999. Collectively, Mexico ($12.1 billion) and Brazil ($1.5 billion) represented almost three-quarters (74.1 percent) of Canadian imports from the LAC region in 2000, with Mexico accounting for around 65.9 percent and Brazil for some 8.2 percent of total imports from the LAC region. The remainder of Canadian imports were from the other LAC countries.
The current economic downturn in the LAC region, together with worsening budget and financing difficulties and growing foreign debt servicing costs, suggests that LAC demand for Canadian exports will remain depressed over the next two years or so. Continued trade tensions and disputes between Canada and the LAC region over export subsidy programs, subsidization of agriculture and aerospace, and health-related restrictions on food imports (foot-and-mouth disease) could remain major impediments to future bilateral economic expansion and increased co-operation, especially with Brazil—the region’s economic powerhouse.
Cash-strapped, heavily-indebted LAC customers can be expected to increasingly request better pricing, financing, low-cost loans and credits, and loan-repayment packages as a quid pro quo for winning or keeping export sales contracts, especially given the growing budget and financing constraints and foreign exchange pressures. As such requests for financial support rise, it will further squeeze already slim profit margins for Canadian exporters and lenders. The spread of non-debt-creating methods, such as offsets and barter, might increase as many LAC sovereigns and companies accelerate efforts to decrease foreign debt accumulation, boost international currency holdings and decrease import costs.
Despite trade-diversification efforts, the low degree of complementarity suggests that it will be very difficult for Canadian exporters to achieve greater product and market inroads in the LAC region in the years ahead. As well, geographic proximity, common language and ongoing structural adjustment under the Canada-U.S. Free Trade Agreement and the North American Free Trade Agreement suggest that Canadian firms will continue to target market niches in the United States. The establishment of the FTAA will only contribute to greater specialization in the production and export of those commodities in which Canada, the LAC region and the U.S. have the highest productivity.
Preliminary data from Statistics Canada show that the cumulative Canadian direct investment in the LAC region totalled over $52.2 billion (17.3 percent of the total) in 2000 compared to over $48.3 billion in 1999, up almost 8.1 percent. Of this total, over $19.6 billion, or around 37.5 percent, was invested in Barbados; it was followed by investments in Bermuda ($6.3 billion), Chile ($5.5 billion), the Bahamas ($5.2 billion), Brazil ($4.7 billion), Argentina ($3.6 billion) and Mexico ($3.2 billion). The rest was invested in other LAC countries, including Colombia ($791 million), Venezuela ($325 million), Panama ($246 million) and the Netherlands Antilles ($119 million).
If the current political, economic, financial and social uncertainties persist, Canadian investors’ appetite for risk-taking in the LAC region may wane. That could result in the cancellation, reduction or postponement of future investments in LAC countries. They may also sell off or downsize their current investment positions to reduce their exposures to potentially high financial losses. The current work by the OECD and other international institutions to eradicate harmful tax practices and tax havens, increase fair-tax competition, bolster transparency and eliminate corrupt practices may change the future composition and direction of Canadian direct investment, especially in Caribbean countries.
The region’s high criminal activity and security risks suggest that Canadian investors will need to allocate more resources to improved safety and security systems to safeguard their employees and physical assets. In the current fiscal climate, this will put extra strains on already tight corporate budgets, increasing the costs and risks of doing business in the region. That could reduce the relative long-run competitiveness of many LAC countries as business locations.
Meanwhile, according to the same data, cumulative LAC direct investment in Canada totalled over $1.1 billion (0.38 percent of the total) in 2000 compared to some $1.06 billion in 1999, up roughly 3.9 percent. In 2000, the Netherlands Antilles was the largest LAC investor in Canada ($392 million), while Brazil, at $364 million, was in second spot. This was followed by the Bahamas ($146 million), Mexico ($132 million), Panama ($92 million) and the Cayman Islands ($41 million).
Recent Bank of Canada data reveal that Canadian chartered banks’ exposure in the LAC region reached over $44.6 billion in 2000 relative to some $39.4 billion from the previous year. This figure represented almost 9.6 percent of the banks’ total international exposure. The banks’ exposure to the Cayman Islands, at almost $7.4 billion, accounted for about 16.5 percent of their total exposure in the region. Canadian chartered banks also had large financial exposures to the Bahamas ($5.9 billion), Chile ($4.8 billion), Argentina ($4.6 billion), Mexico ($3.8 billion), Brazil ($2.2 billion), Trinidad and Tobago ($1.7 billion), Barbados ($1.7 billion), and Bermuda ($1.5 billion). Panama, Venezuela and Peru also figured prominently.
The high-tech stock meltdown, the slowing U.S. economy, record U.S. corporate debt default rates and bankruptcies, continuing economic and financial uncertainty in emerging economies, the sagging Japanese economy and the weaker euro suggest that Canadian banks will be tightening their lending criteria and increasing their loan-loss provisions. The current global economic slowdown also indicates that already cash-strapped, heavily indebted LAC borrowers and debtors might become increasingly reluctant to pay off their foreign loans in full and on a timely basis. This suggests that exposure to greater collection and payment problems is likely, triggering even higher provisioning. International credit rating agencies could downgrade banks’ credit ratings, leading to higher borrowing costs and reduced profitability.
Canadian chartered banks could face increased supervision of their international activities by the Office of the Superintendent of Financial Institutions—the government regulator. As commercial loans for LAC borrowers dry up, there will likely be growing requests for officially supported loans, insurance and guarantee programs.
Data from the Export Development Corporation show that its global exposure reached over $43.9 billion in 2000, with the LAC region accounting for more than 11.9 percent, or over $5.2 billion of the total. Within the LAC region, the EDC’s exposure to Brazil totalled nearly $1.6 billion (3.7 percent of the total), followed by nearly $1.6 billion (3.6 percent of the total) for Mexico, around $1.3 billion (2.9 percent of the total) for Peru and $769 million (1.8 percent of the total) for Venezuela. Commercial and aid credits extended by the Canadian Wheat Board, the Canadian Commercial Corporation and the Canadian International Development Agency to LAC borrowers and recipients might also experience collection and payment problems if macroeconomic conditions deteriorate further, and if LAC companies experience declining operating profits or worsening cash-flow difficulties.
The LAC region’s still weak legal and regulatory regimes and its evolving economic policy will remain major sources of uncertainty for Canadian exporters, investors and lenders. Resolution of business disputes or settlement of outstanding payments can run for years and be very costly. Consequently, careful monitoring of LAC exposures may be warranted.
In 2000, some 400,100 LAC tourists (some two percent of the total) visited Canada, up over eight percent from the year before. Mexico, at 142,600 tourists (or almost 35.6 percent of the total), was Canada’s largest source of tourists from the LAC region in 2000, up nearly 12.3 percent from 1999. The West Indies supplied the next largest number of tourists (61,500) to Canada, followed by Brazil (51,400) and Guyana (26,300). Argentina, Trinidad and Tobago and Bermuda supplied, respectively, 21,200 tourists, 21,100 tourists and 20,600 tourists to Canada. In terms of revenues generated from LAC tourists, Canada’s tourism industry earned roughly $539 million or almost 4.3 percent of the total in 2000, up some 19.7 percent over the previous year.
The worsening economic and financial problems in Brazil, the export slowdown in Mexico, the persistent recession in Argentina, weaker regional currencies and the slowing U.S. economy suggest that growth in the number of LAC tourists visiting Canada might slow in the next two to five years. Lower-valued LAC currencies, especially the Brazilian real, the Argentine peso and Chilean peso, will also reduce the buying power of LAC tourists abroad, leading to adjustments in the direction and pattern of LAC outbound travel. Cash-strapped, heavily indebted LAC travellers are more likely to choose cheaper and closer tourist destinations at the expense of long-haul choices like Canada.
According to the latest data from Statistics Canada, the proportion of Canada’s total population in 1996 comprising people originating from the LAC region was over 1.9 percent (553,225 people), with 279,405 people of Caribbean and Bermudan origins and 273,820 people of Central and South American origins. The same data also show that the immigrants to Canada from the LAC region reached 13,886 people (some eight percent of total immigrants) during the 1998-1999 period. To minimize the risk of importing highly infectious and communicable diseases into Canada from LAC countries with a high prevalence of HIV/AIDS and tuberculosis, greater surveillance might be necessary. With macroeconomic instability accelerating, the issue of illegal migrants from the LAC region to Canada might grow in importance.
As crime and corruption rise, Canadian firms doing business in the LAC region will become more vulnerable to increased demands for bribes, kickbacks and commissions. Canada enacted a new statute in early 1999 that makes it illegal for Canadian companies to bribe foreign officials to gain or maintain business. If found guilty of breaking this law, Canadian offenders may face serious criminal and monetary sanctions, including imprisonment, fines and seizure of proceeds. The security of Canadian assets and employees could also be put at increased risk of fraud, theft, kidnapping and even murder. This means that significant additional costs, including insurance premiums and extra security staff, will need to be borne to safeguard employees and facilities, leading to higher operating costs and lower profit margins. As a member of many international financial institutions and forums, including the IMF, the World Bank and the InterAmerican Development Bank, Canada might come under greater pressure to increase aid budgets, boost contributions or provide more debt relief in coming years.
