Latam's Blue Economy Opportunity
While immigration dominates the conversation, a regional economic opportunity goes virtually unnoticed.
"Latin America is the largest, untapped climate market opportunity."
~Andres Baehr, Savia Ventures
The FLII Latin American Impact Investment conference occurred in February, and some articles and interviews highlighting the event popped up on ImpactAlpha.
In one interview, Andres Baehr of Savia Ventures (a climate VC firm based in Mexico City) discusses what they see as a vast untapped investing landscape across Latin America.
You can watch the interview here.
These articles, combined with others recently highlighting positive developments for emerging markets and Latin America in particular, sparked an interest in this region from a blue economy perspective.
+FLII feeds investor optimism and urgency about Latin America's future - ImpactAlpha
It doesn't take much to divert my attention to this region so dear to my heart. My family rang in the new year in Panama, and there's already been one surf mission to Nicaragua this year.
So here's a look at what's happening, starting from the top down.
Latin America's (Latest) Best Chance?
For all the very real and constant bad news on challenges related to drug gangs and immigration, the business press is actually very positive on emerging markets right now. I've written before about how economist and Chairman of the Rockefeller Foundation Ruchir Sharma is someone I closely follow when it comes to emerging market trends.
He recently argued in the Financial Times that reformist leaders voted in with a mandate from exhausted, frustrated people and armed with the classic Washington Consensus playbook are making rapid progress.
"Battered by high inflation, debt and deficits, their foreign exchange coffers were emptying when global interest rates rose sharply in 2022. As higher borrowing costs drove their debts deeper into distress, they had no choice but to change. Their leaders — who in Argentina, Kenya and Nigeria were newly elected with a mandate for reform — don't quite say so out loud, but their plans came straight from the pages of the old and much-maligned Washington consensus. Budget discipline and heeding market forces are the only policy choices that work when a nation runs out of money."
He goes on in the article to point out that Argentina,
"In January, the budget turned to surplus in a country that has run deficits for all but 10 of the years since 1900."
+The weakest links in the global economy are on the mend - FT
There has also been plenty of press about the shift right in Latin American politics. The region's lack of institutional strength is a worry and warrants being watched closely. But compare that to Africa, which has seen eight successful coups since 2020.
South America is not immune from strong-man politics. This is a topic that can be debated and analyzed much more granularly, but at a high level, democracies in Latin America are holding.
#Latam is On Trend
From the energy transition to agriculture, deglobalization to demographics, Latin America has an abundance of what we want right now.
"Latin America has two-thirds of world lithium reserves and about 40 per cent of its copper. It accounts for 45 per cent of global agrifood trade, according to the E.U., and its abundant stock of farmland and water could allow that to grow much further. It is home to the world's largest surviving rainforest, the Amazon, and its diverse geography includes some of the best locations on the planet to generate solar and wind power."
+Latin America has its best chance for a generation - FT
In the video above, Andres Baehr expands on this with his list of advantages of investing in Latam climate solutions, which include:
Resources
Attractive valuations
Carbon sinks
Nearshoring
He sees climate solutions formed in this ecosystem, finding customers in larger markets around the world.
"We see Latam as a starting point and an incubator. These climate solutions are borderless."
Not Your Padre's Peso
Regional generalizations are, by definition, just that. References to the "Global South" or entire continents ignore the differences among the countries and economies that make up those larger areas.
Within Latam, you have Brazil, which has 218 million people, and Uruguay, which has 3.5 million (and island states with far fewer). The GDP per capita ranges from over 60,000 for Guyana to around 7,500 for Nicaragua.
Mexico benefits from its proximity to the U.S. and inclusion in the United States-Mexico-Canada Agreement (USMCA), the follow up to NAFTA. Chile and Peru benefit from vast metal and mineral deposits. The world is wondering if Guyana will become the next Dubai. At the same time, Haiti continues its utter collapse towards becoming the next Somalia.
It will become more important to identify and understand the differences between markets in the region. In a recent research note titled "Not Your Padre's Peso," JP Morgan analysts predict:
"The peso has entered a new chapter that will likely be accompanied by lower for longer volatility and a decoupling from the risk profile of its peer currencies in Latin America,"
+Mexican peso hits 7-1/2 year high vs dollar, further gains eyed - Reuters
There are vast differences between the countries, so beware the generalizations. But when starting at the top, things look pretty good.
Latam countries are even being praised for their handling of inflation. In some cases, they are now moving to cut interest rates.
"Latin American central bankers' swift response to soaring inflation after the coronavirus pandemic has transformed their credibility as they emerge from the most serious wave of price pressures in decades. Their counterparts in advanced economies, meanwhile, were criticised for holding on for too long to the notion that the burst of inflation that followed the initial stages of the pandemic would prove shortlived.."
+Mexico becomes the latest major Latin American economy to cut rates - FT
Nearshoring Sustainable Supply Chains
Deglobalization is not a passing fad, for reasons both good and bad. The nearshoring trend is just beginning to play out. Despite massive investments already happening in close (to the U.S.) trading partners like Mexico, there is still room for growth.
As economic writer Noah Smith highlighted this week:
South America holds much of what we need to combat China's dominance of the energy transition. Companies looking to green their supply chains will benefit from manufacturing economies already powered by renewable resources.
"More than a quarter of primary energy in the region currently comes from renewables, twice the global average. From Costa Rica, where renewable energy sources account for 99% of its electricity matrix, to Brazil at 83%, countries small and large are increasingly powered by clean energy."
+How Latin America is leading the renewable energy space - IDBInvest
Just this week, yet another Outlaw Ocean Project expose has begun to rock the seafood supply chain. This time, it's shrimp from India. The difference now is that the stories are making the news immediately.
Latin America's Blue Economy
"The number of ocean-focused funds has quadrupled since 2018 and capital invested in the sector has more than quintupled from $700 million in 2021 to close to $4 billion in 2023, according to Kate Danaher, who manages S2G Ventures' $100 million Ocean and Seafood Fund."
~Kate Danaher, S2G Ventures Ocean and Seafood Fund
Blue Finance Early Adopters
Latam is already a big beneficiary of blue financing innovations. While the Seychelles pushed the first blue bond over the finish line in 2018, since then, Latin American countries have used the mechanism in various ways.
As I discussed in a previous article on the evolution of blue bonds,
In December 2022, the Central American Bank for Economic Integration (CABEI) published its blue bond taxonomy, clearly defining the types of projects eligible for the funds.
This taxonomy was based on the "Blue Bond Reference Paper Investments" and "Sustainable Ocean Principles" published by the U.N. Global Compact and signed off on by a respected third party, Sustainalytics.
Within a week of publishing the taxonomy, CABEI successfully issued its first blue bond, and the second followed within a month.
And the fiscal strength is spilling over into development banks.
"Latin America's biggest development bank plans to increase lending by about $112bn over the next decade, pushing up annual loans by almost half following an increase to its firepower and internal reforms."
+Latin American development bank to ramp up lending after reforms - FT
The U.S. Must Do Better
"With a combined gross domestic product of more than $6tn — bigger than India or Japan — they account for nearly one-fifth of all U.S. foreign trade. But in America, you would hardly know it. There is no talk of the region's capacity to power the world with alternative fuels, despite the fact that it houses about 60 per cent of identified global lithium reserves."
+There must be more to U.S. relations with Latin America than immigration - FT
Americans dominate travel to the region, making up almost half of all tourist visits, but trade has shifted towards China. According to McKinsey, in 2000 the U.S. was the main trading partner to every country in Central and South America.
But in 2021, this shifted. China is now the main trading partner for every large economy in South America, including Brazil, Chile, and Argentina.
+What could a new era mean for Latin America - McKinsey
Despite our personal connection and economic advantages with the region, the upcoming U.S. election will only focus on immigration.
Anyone looking beyond this politically charged discussion will find a region where global solutions to our climate issues can be tested and scaled.