German foreign direct investment (FDI) is increasingly located in emerging markets. Improved macro-economic conditions and a superior growth outlook have been the main reasons for that.
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Latin America holds a relatively stable share of close to 5% in the outward stock of German investment, equivalent to some EUR 42 bn. However, the deterioration in growth prospects in some Latin American countries might have negative consequences for German FDI in the region, according to Deutsche Bank.
German investment in Latin America is mainly oriented to the manufacturing sector. German FDI is relatively concentrated on Brazil, Mexico and Argentina, which account for three-quarters of the stock.
Investments are mostly located in the manufacturing sectors in these countries, especially in the automotive sector (one-third of the stock). Production for the local market is high up on the list of German investment motives, albeit in part prompted by import barriers and concerns about currency risk.
Latin American countries need to upgrade their business environment in order to remain an attractive destination for German (and other) investors. Reforms that tackle red tape and corruption, increase legal security and facilitate international trade are key.
The German FDI stock in Latin America peaked in 2012 at EUR 45 bn, declining to EUR 42 bn in 2013 (latest data point). But the reduction was due to valuation changes (stock market valuations or currency movements).
Latin America’s share in the total German outward FDI stock was 4.6% (chart 3). In the 1990s, Latin America had played a much more significant role in German investment abroad.
Its share was as high as 7.4% of the total in 1994, but declined substantially after much of the region was engulfed in economic crisis at the turn of the century. Later, EU enlargement and China’s rise prevented the share from bouncing back to earlier levels. China’s share in the total German outward FDI stock surpassed that of Latin America in 2013 for the first time.
Latin America has lost some of its shine as its economies have slowed, or even contracted, after a decade of strong commodity-driven real GDP growth. The sharp fall in commodity prices, exacerbated by idiosyncratic problems, will likely push the region’s growth to an annual average of around 2% over 2016-2020.
The slowdown and rebalancing of Chinese growth, and the anticipation of an interest rate hike in the US, have been headwinds to Latin American growth, too. ■