LATIN AMERICA STRATEGIC PEST ANALYSIS 2013

LATIN AMERICA STRATEGIC P.E.S.T ANALYSIS - 2013 -

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LATIN AMERICA

STRATEGIC P.E.S.T ANALYSIS

2013

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LATAM STRATEGIC PEST ANALYSIS

Even if the economic outlook for Latin America shows a relatively positive picture for the

coming year 2013 it is important to know that the General Regional Economic Forecast

was trimmed from 4.2% to a 3.9%, by the FMI.



An assessment of spillover risks showed that Latin America would be one of the regions

to be hardest-hit from a sharper-than-expected slowdown in China. The region could

also suffer more than others if the United States fails to avoid the 'fiscal cliff', a

tightening in fiscal policy in 2013.

Looking to specifics, Brazil will lead the region domestic demand and growth was seen

picking up to 4% in 2013. Mexico's outlook was trimmed slightly to 3.5% in 2013. Peru

was expected to grow the fastest, at 5.8% in 2013. (Except Paraguay 11%). Chile and

Colombia are both forecasted to grow 4.4% in 2013. Venezuela and Argentina are

particularly at risk of upside pressure on inflation, although this remained above the mid-

point of the target range in many countries.

Latin American small and medium-sized enterprises (SMEs) can become catalysts for

productivity growth. The heterogeneity of these SMEs has to be considered, since

different firms have very different development needs and potential.

While the region is vast and heterogeneous as a whole, four main key challenges that

affect each country differently can be highlighted:

Weak institutions with high costs associated and lack of physical security

Poor development of infrastructure

Inefficient allocation of production and human resources; and, increasingly

Lack in innovation vis-à-vis more developed, but also emerging, economies

Addressing these challenges in the next decade will be crucial to ensure the economic

and social progress of the following countries that lead the region:



i. Mexico has one of the highest improvements in the region. The country’s efforts to

boost competition and its regulatory improvements that facilitate entrepreneurial

dynamism are contributing to an improvement of the business environment. This

development, coupled with the country’s traditional competitive strengths such as its

large internal market size, fairly good transport infrastructure, macroeconomic

policies, and strong levels of technological adoption have led Mexico to improve its

competitive edge. Adopting and implementing policies to boost ICT, energy, and

retailing, along with additional reforms to render the labour market more efficient are

still needed to increase the efficiency of the Mexican economy. The current overall

poor quality of the educational system, insufficient company spending in R&D, and

limited innovation capacity can jeopardize the future ability of the country to compete

internationally in higher value-added sectors.

ii. Panama has remained relatively stable in most competitiveness drivers. Overall, it

benefits from important strengths in its efficient financial market, solid transport

infrastructures, and very good technological adoption, especially through FDI.

Panama struggles with rigidities in its labour market, low levels of public trust of

politicians, insufficient judicial independence, and favouritism in the decisions of

government officials a situation that has deteriorated in the past years.

iii. Venezuela continues to fall because of quality of the country’s public institutions.

This dismal showing, coupled with severe weaknesses in its markets efficiency and

deterioration in the macroeconomic stability have led the country to feature at the

bottom of the region and among the least competitive countries in the world. Despite

being at the forefront in its tertiary education enrolment rate, the overall quality of the

educational system is weak. This, added to a lack of sophisticated businesses and

poor innovation potential, critically constrain the competitiveness performance of the

country.



iv. Costa Rica, is suffering of the macroeconomic imbalances seen in its high budget

deficit and inflation and a scarcity of financial resources for the private sector. With

fairly nice forecasts of around 4.5% GDP growth rates for the coming years, the

country still depicts a strong overall position in the region thanks to its friendly trade

policies, with low tariffs, few constraints on FDI, and its strong educational system.

Costa Rica presents strong levels of technological adoption with many companies in

high-tech industries, as well as solid business sophistication and innovation. All

these factors can generate significant benefits.

v. Colombia experiences an improvement based on its competitive strengths clustered

around a stable macroeconomic environment; an improving educational system with

a high level of enrolment and a large domestic market. On the other hand, despite

the sustained efforts of the government to improve social pacification and eradicate

organized crime, security concerns remain very high on the list of factors dragging

down its competitive potential. In addition, improved regulation to foster domestic

competition and facilitate a more efficient allocation of resources, as well as further

investments to improve the transport infrastructure, are needed.

vi. Peru improved its macroeconomic stability and strengthened its competitive edge

thanks to a better control of inflation, a reduction of the government deficit, coupled

with a friendlier environment for entrepreneurship. The country still faces a number

of important challenges to solve as a weak public institutional environment, an

educational system in need of higher quality, and the very low level of innovation.

The impressive economic outlook for the next years, with GDP growth rates forecast

of 6% in 2012 thanks to high mineral prices, provides a good opportunity to

undertake the necessary investments and reforms to address its pending

competitive limitations.



vii. Chile: remains the most competitive economy in the region. Early measures to open

and liberalize its markets by introducing high levels of domestic and foreign

competition, a relatively flexible labour market, and one of the most sophisticated

and efficient financial markets have also helped the country to maintain its long-term

growth prospects in the past decades. As Chile moves quickly toward higher levels

of rent and the next stage of development, companies with low investment in R&D

and a weak capacity for innovation act in an innovation environment characterized

by relatively low-quality scientific research institutions and weak university-industry

collaboration in R&D.

viii. Brazil benefits from several competitive strengths, including one of the world’s

largest internal markets and a sophisticated business environment. Moreover, the

country has one of the most efficient financial markets and one of the highest rates

of technological adoption and innovation in the region. On a less positive note, Brazil

still suffers from weaknesses that hinder its capacity to fulfil its tremendous

competitive potential. The lagging qualities of its overall infrastructure despite its

Growth Acceleration Programme (PAC), its macroeconomic imbalances, the poor

overall quality of its educational system, the rigidities in its labour market, and

insufficient progress to boost competition are areas of increasing concern.

ix. Uruguay leverages its traditional competitiveness strengths thanks to its transparent

and well-functioning public institutions, its high rates of education enrolment and its

stable policies that encourage FDI. However, despite this progress, inflationary

pressures and the reduction of the national savings could bring significant

macroeconomic distress if not properly tackled. Moreover, as Uruguay keeps

growing and moves steadily toward a higher stage of development, policies to

increase domestic competition that would incentivize higher business-sector

investment in R&D and innovation capacity will become increasingly important.



x. Argentina is getting more and more unstable. The extraordinary competitive

potential of the country that benefits from a large domestic market size and a

population that has a high level of education remains unfulfilled because of both a

lack of trust in its institutions and the large inefficiencies in its allocation of goods, as

well as labour and financial resources. Excessive red tape that benefits the

expansion of the informal economy and high barriers to trade bring a lack of

confidence in the financial system. The progressive deterioration of the country’s

macroeconomic stability and a two-digit inflation rate, casts additional worrisome

uncertainties about the sustainability of its economic growth. Unless these

weaknesses are addressed, this situation could lead the economy back into the

erratic fluctuations of the past, characterized by high expansionary periods followed

by deep recessions.

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LATIN AMERICA STRATEGIC PEST ANALYSIS 2013