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Brazil and Mexico remain risky but offer growth opportunities

Brazil, Mexico remain risky but offer growth opportunities

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As a region, Latin America over the past several years has seen steady economic growth, but a slowdown is looming. A mix of political and financial uncertainty is clouding the outlook for the region’s two largest economies, Brazil and Mexico.

 

2018 may be a pivotal year for both countries, following elections that will reshape their governments and potentially their fiscal policy. Mexico elected its first leftist candidate in many decades, Andres Manuel Lopez Obrador, amid rising frustration with the political establishment. Brazil’s presidential election in October features a diverse field of candidates and appears to be a referendum on who is best suited to fight corruption and lead the nation out of a prolonged recession. Brazil has suffered from a series of high-profile corruption cases, led by Operaçao Lava Jato, or Operation Car Wash, a bribery scandal that spanned 12 countries, generated billions of dollars in fines and implicated hundreds of individuals and Brazilian political leaders.

 

Many questions remain unanswered: Will Brazil and Mexico continue on the path to reform and business-friendly policies? Can Brazil succeed in reducing high crime rates and fettering the rampant corruption that has tarnished multinational corporations and scores of politicians? How will Brazil tackle its fiscal constraints? How will each country balance domestic challenges with their need to attract foreign investment and trade? Lopez Obrador, known popularly by his initials, AMLO, has opposed privatization of Mexico’s energy sector and may reverse his predecessor’s policies. Will this extend to other industries and deter investors?

 

Since 2016, Latin America has been one of the world’s bright spots in regional economic growth and more market-friendly policies. But growth between now and 2022 appears to be scant, according to an analysis by the Eurasia Group. Much of this stems from uncertainty arising from the elections in Brazil and Mexico.

Mexico and Brazil remain risky but offer growth opportunities

For 2018, the International Monetary Fund forecasts the region’s GDP will grow by 2%, below the world average of 3.9% and well below the 6.5% projection for emerging Asian economies.

 

Opportunities amid risks

 

Despite the projected slowdown, opportunities continue throughout Latin America, including Brazil and Mexico. Opportunistic investors looking at Brazil, for example, see the country has a big upside. Although foreign direct investment flowing into Brazil has slowed somewhat, it remains robust, with more than 50% of investments into industry and energy and gas. During the first half of 2018, Mexico attracted $17. 8 billion in foreign direct investment, up 14% from the year-earlier period. The investments came mainly in manufacturing and financial services.

 

Brazil and Mexico have their challenges, but there are ample reasons for businesses to continue operating there. To take advantage of growth opportunities, businesses need to understand and manage the risks they find in the region.

 

Strengths of Brazil and Mexico

Brazil

Mexico

Vast natural resources

Variety of natural resources

Large middle class

Low labor costs

Strategic location in Latin America

Strategic location in Latin America

Diverse economy connected to international exchanges

Participates in multiple international trade and development groups

Strong export sectors, including agriculture, beef, poultry and aeronautics

Robust export sectors, including automotive and industrial; privatization ongoing in transportation and energy sectors

 

 

AXA XL is committed to helping our customers manage the risks they face, and we have been operating in Latin America for many years. For more information on how partnering with AXA XL enables businesses to grow and thrive, please visit www.axaxl.com.

 

About the Authors

Pablo Crain is Country Manager of Mexico at AXA XL. He can be reached at pablo.crain@axaxl.com

Renato Rodrigues is Country Manager of Brazil at AXA XL. He can be reached at renato.rodrigues@axaxl.com

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AXA XL is the P&C and specialty risk division of AXA.