by Arti Sangar Partner, DiazReus, Dubai
Resource-rich Latin America has enormous investment opportunities which have been untapped by the United Arab Emirates (UAE). At the same time, the governments of Latin American countries such as Argentina, Brazil, Chile, Colombia, Mexico and Venezuela are opening their doors to Middle East investment.
The UAE’s strong economy with a prominent status as a gateway to the Middle East, North Africa and Asia has recently attracted the attention of many Latin American countries. A few years ago, only two Latin American countries had diplomatic missions in the UAE, but now, at least six more Latin American countries including Venezuela, Mexico, Argentina, Brazil and Panama have opened diplomatic missions in the UAE. The reason for the opening of these diplomatic missions is also because the UAE has thousands of Latin Americans working and living in the UAE.
The UAE economy remains strong
Ten years ago there were only two man-made structures that could be seen from the space, the Pyramids and the Great Wall of China. Two more have recast the face of Dubai in the form of a Palm Tree and a map of The World. In the face of such visible displays of wealth, it is hardly surprising that the UAE is on the radar for all those who are looking for a helping hand.
Favorably for the UAE — the current financial challenge is mitigated by enormous oil wealth and state economies that have been carefully managed. Being financially strong does not suggest the absence of fiscal concern. The UAE, which has built up huge cash surpluses owing to the natural resources beneath its sands, is becoming more and more risk-averse due to depleting capital markets triggered by the current global economic crisis. However, scarcity of capital should not be perceived as complete unavailability. There are ample funds available for investment capital from the UAE.
The most important investment vehicles being used in the UAE are the Sovereign Wealth Funds (SWFs) – enormous investment funds that are generally government-backed and make strategic investment choices for the country, predominantly in equity markets and in stakes in companies and projects mainly in developed nations. Broadly speaking, SWFs can invest in whatever they want, just as if they were independent investment funds. It appears that liquidity and funding for the SWFs in the UAE is not an issue. They are sophisticated investors and all investments are and should be on sound commercial principles.
Investing in Latin America
With the economic world going into a financial turmoil, the crucial question arises why should UAE investors invest in Latin America? The answer to this question is rather subjective. Many years of political and social change in Latin America are finally beginning to bear fruit, and it’s no surprise that the most stable investment environment in many years has come at a time when the region has seen the spread of democracy. At the same time more conservative fiscal policies and more realistic monetary policies by central banks have slowly helped Latin American economies turn the corner. Now Mexican and Chilean government bonds have been upgraded to investment grade. These countries are good examples of how a mixture of strong commodity prices, good fiscal policies and a more stable government come together to benefit the region.
Latin American countries (behind China and other Asian economies) are the key global pillars of growth that will save the global economy and the U.S. financial system from total collapse. Certainly Latin America is a rich source of profitable opportunities for foreign investment. High levels of strategically diversified overseas reserves, floating exchange rates and strong fiscal accounts will enable some Latin American countries not only to survive this crisis but provide above-average returns for the investor.
Before the global recession started to appear, the greatest financial worry for the UAE was high inflation. Now with the slowdown in growth, the inflationary pressure will be virtually eliminated proving that the current international economic situation is not purely bad news. The UAE has the resources and yet the responsibility to leverage the opportunities that Latin America can offer.
Where there is a problem, there are opportunities. The UAE is looking for growth opportunities outside the Gulf and, on the other hand, Latin American governments and companies are seeking funds to finance their projects and thus maintain growth. Why not merge both objectives?