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Tuesday, December 16, 2008
Perspectives

Investments During the Crisis

Latin America presents a good investment opportunity, especially for investors from the Middle East.
INVESTMENT STARS: Brazil, Colombia and Peru are gaining interest from investors, argues Ricardo Ernst. (Photo: Georgetown University)

BY RICARDO ERNST

The bad news you hear every day in the news with regard to the economic crisis presumes that there will be an outflow of capital in Latin America. However, even during a crisis there are investors looking for opportunities that fit their interests.

According to Venture Equity Latin America, Latin America has received a record amount of private capital investment and venture capital coming in mostly from the Middle East. For example, the region received a total of $7.4 billion dollar of private capital last year, a significant increase from the $4.2 billion received the previous year.

LOW DEBT

So, what's behind this interest in Latin America? It turns out that private equity groups in the Middle East, with high liquidity from oil revenues, are interested in the region for its features that allow investments compatible with Sharia laws, that is according to Islamic laws of the Koran. These groups prefer to invest in companies with little debt as they exist in the region, preferring to focus their investments in infrastructure, natural resources and energy alternatives, as their laws forbid them to invest in banks, alcohol and weapons.

Latin America, particularly Brazil, is attracting more investment capital because they have demonstrated a strong macroeconomic performance with reasonable tax policies. One of the reasons why Brazil has received so much private capital has been the ease with which companies list on the stock exchange thanks to the improvements in its capital market. This contrasts with what happens in Mexico, where companies have to compete with a small group of conglomerates and where the costs of intermediation for listing are higher.

COLOMBIA AND PERU

Many groups of investors already see Colombia as a potential recipient of more capital after the removal of capital controls and it receives a higher ranking of investment, something that is expected to happen in 2009. The same goes for Peru, which relaxed the rules for pension fund investment and received a higher ranking of investment this year, resulting in a large amount of private capital in the mining sector.

There is no doubt that investors who see Latin America as a producer of raw materials, and therefore as potential business related to biodiesel, ethanol and agriculture, will invest heavily in the region. But it is essential to stress the fundamentals and macroeconomic competitiveness allowing these investments.

Dr. Ricardo Ernst is deputy dean of the McDonough School of Business at Georgetown University and co-director of Global Logistics Research Program. He is also editor-in-chief of Globalization, Competitiveness and Governability. This column is based on his commentary on CNN en Español.

 

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