In recent years, Latin America, as a region full of diversity and potential, has gradually caught the attention of global investors. Especially in the fields of e-banking and e-commerce, Latin America has demonstrated notable investment opportunities. This region has a large young population who generally possess high mobile phone penetration rates and frequent usage habits, making it easier for them to accept and adopt new platforms and networks. Additionally, a large and growing middle-class population brings strong consumer momentum to the e-commerce market. With the proliferation of the internet and smartphones, more and more consumers are opting for online shopping, which has driven the rapid development of e-commerce platforms. Moreover, the rise of digital banking has filled the gap left by traditional banking services, providing various high-quality online digital banking services to Latin American consumers with great efficiency and low cost. This article will start with a more macro perspective to understand the current economic situation in Latin America.
From a demographic and age perspective, the population of Latin America is close to that of Southeast Asia, with a relatively young population. Latin America has approximately 650 million people, with a population growth rate of 0.7%. Among them, Brazil has 215 million people, and Mexico has 127 million people. The populations of Brazil and Mexico account for 52% of the total population in Latin America. The average age across Latin America is 31 years, with Brazil and Mexico at 34.7 and 30.6 years respectively, both in the most productive age range. Compared to Europe, North America, and China, where aging is intensifying, the population structure of Latin America is more conducive to economic production.
Source：Median age by country, CIA World Factbook, 2016 est
In 2022, the total GDP of Latin America was approximately $6.3 trillion, which is about 35% of China's GDP of $18 trillion for the same year. Among this, Brazil's GDP was $1.92 trillion and Mexico's was $1.46 trillion, together accounting for 54% of the total GDP in Latin America. Thus, from the perspectives of GDP and population alone, Brazil and Mexico hold significant positions in Latin America.
In 2022, the per capita GDP in Latin America was $9,559, while in China it was $12,720, and in the United States, it was $76,329. Specifically, Brazil had a per capita GDP of $8,917 and Mexico had $11,496. Mexico's per capita GDP was roughly equivalent to China's, while Brazil's was slightly lower. According to IMF forecasts, by 2024, the per capita GDP of Brazil and Mexico is expected to reach $11,352 and $15,249 respectively, indicating a rapid growth rate.
History background
To understand the current economy of Latin America, it's essential to delve into its historical background. Latin America's colonial history is primarily characterized by resource plundering and exploitation. Spain and Portugal, through the conquest of civilizations such as the Aztec and Inca empires, established the encomienda system, which granted land and indigenous labor to colonizers for the exploitation of local resources. Mines (like the silver mines in Peru) and plantations (such as sugar plantations in the Caribbean) became the pillars of the colonial economy, driving the transatlantic slave trade to meet labor demands. Colonial rule brought the spread of Catholicism and cultural integration, but it also led to a significant reduction in the indigenous population and the disruption of social structures, which eventually led to independence movements in the early 19th century that overthrew colonial rule.
As a result, most Latin American countries today speak Spanish or Portuguese, and culturally, they are mainly influenced by Spain and Portugal, leaning more towards Western traditions. Although there are many countries, there is a relative unity. From an investment perspective, Latin America can be understood as a relatively unified large market, rather than a dispersed economy composed of islands like Southeast Asia. Thus, we can observe substantial replicability of businesses in Brazil, Mexico, Colombia, and Argentina, primarily due to similarities in language and culture.
Furthermore, some Latin American countries are naturally endowed with abundant natural resources. For instance, Brazil is rich in mineral resources, and Venezuela has significant oil reserves. Unlike the meticulous craftsmanship concept of China, Latin Americans do not have the same level of "intensity" as East Asians in their work culture, pursuing more of a balance between life and work, with a tendency to enjoy life in the present.
Inflation
The discussion of Latin America inevitably brings up the severe inflation of the 1980s, which continues to profoundly influence the region's monetary policies, interest rates, and exchange rates. In the 1980s, government over-borrowing, fiscal deficits, currency devaluation, and uncontrolled credit expansion were rampant. Countries like Argentina, Brazil, Peru, and Mexico experienced skyrocketing inflation rates, reaching levels of hyperinflation. To address the crisis, the International Monetary Fund (IMF) and the World Bank intervened, demanding the implementation of structural adjustment programs, which included measures such as reducing public spending and privatization. Additionally, these countries undertook currency reforms and tightened fiscal policies.
After experiencing the severe inflation of the 1980s, Latin America has maintained inflation within a relatively stable range, but the psychological impact on people persists to this day. Both external investors and local central banks/consumers still remember those turbulent times. The historical experience of massive inflation in Brazil has made the Brazilian Central Bank more cautious in its monetary policy-making. Sometimes, this caution can be excessive, with policy interest rates being raised further to preempt any potential resurgence of inflation. This historical context helps explain the current cautious approach in Latin American monetary strategies and the continued vigilance against inflation among policymakers and the public.
Currently, the inflation levels in major Latin American countries are within a relatively reasonable range. Notably, Brazil and Mexico, the two largest economies in the region, have seen their inflation rates fall back into the ranges previously set by their central banks, prompting them to start cutting interest rates earlier than the Federal Reserve in the U.S. We'll delve deeper into interest rates in a later discussion.Argentina presents a unique case. After December 2023, the newly inaugurated President Milei implemented a "shock therapy" approach. The government adjusted the official exchange rate from 366.5 Argentine pesos per US dollar to 800 pesos per US dollar, a one-time devaluation of 54%. The central bank's monetary policy aims to promote a stable depreciation of the peso against the dollar at a rate of 2% per month. Consequently, we observe significant fluctuations in Argentina's inflation, interest rates, and exchange rates, indicating a more volatile economic scenario compared to other countries in the region. This kind of aggressive monetary adjustment reflects the continuous challenges faced by Argentina in stabilizing its economy and managing external pressures.
Brazil
From the late 1960s to the mid-1970s, the annual economic growth rate reached as high as 10%, heralded as the "Brazilian Miracle." In the 1980s, plagued by high inflation and debt, the economy fell into a long period of stagnation. In the 1990s, the Brazilian government implemented an export-oriented economic model, and the economy regained momentum. Affected by the 1998 Asian financial crisis, severe financial turbulence occurred in 1999, and economic growth slowed once again. After Luiz Inácio Lula da Silva of the Workers' Party took office in 2003, he adopted prudent and pragmatic economic policies, gradually steering the Brazilian economy towards stable development, and by 2010, Brazil had become the seventh largest economy in the world.
After reaching a record high GDP in 2014, the Brazilian economy has been in a state of decline. Essentially, various political forces in Brazil, in their efforts to secure votes, have continually made promises regarding social welfare and fiscal commitments to win public support. This approach to high welfare policy has limited the government's fiscal options, whether in terms of wage system reforms or competitive selection mechanisms. Several reform projects, including minimum wage, minimum pension benefits, and retirement age, have been forced to a standstill with no significant progress.
Due to excessive social welfare support, Brazil has faced fiscal deficits. Development in education, technology, and high-tech sectors has been consequently sidelined. At its core, Brazil has always been a large economy driven by domestic demand, with foreign trade not playing a significant role in its economy—certainly not as strong as some might imagine. During the presidency of Dilma Rousseff (2011-2016), there was a shift in the overall policy of the Brazilian government. An overly expansive economic policy was implemented, depleting fiscal surpluses. Social capital did not enter into a large cycle, leading to a decrease in the enthusiasm for private capital investment and a slowdown in economic growth.
Today, Brazil exhibits strong trade protectionist tendencies, from the localization of the banking sector, which has seen foreign banks gradually withdrawing from the local market, to the tariffs on cross-border trade. These measures are intentionally designed to protect domestic industries. This approach aims to bolster local businesses and reduce dependency on foreign entities, but it can also lead to challenges such as decreased competitiveness and potential retaliation in trade relations with other countries.
Mexico
During the severe inflation of the 1980s, Mexico was impacted, but its inflation rates did not reach the extreme levels seen in Brazil and Argentina and were subsequently brought under effective control. In modern history, Mexico's economy has been heavily dependent on the United States, at one point becoming the largest importer to the U.S. after China. However, after 2018, the trade war initiated by President Trump against China and the geopolitical tensions between China and the U.S. led to a gradual shift of industries around the world, with Mexico becoming one of the main beneficiaries of this industrial relocation. According to data released by the U.S. Department of Commerce, in 2023, Mexico surpassed China for the first time in over twenty years to become the largest source of imports to the United States.
In 2018, the United States, Mexico, and Canada signed the USMCA (United States-Mexico-Canada Agreement), which simplified processes and raised duty-free thresholds compared to the previous NAFTA (North American Free Trade Agreement). Particularly in the automotive sector, NAFTA required at least 62.5% of the parts used in assembling a vehicle to be manufactured in the U.S., Canada, or Mexico to qualify for tariff relief; the USMCA increased this threshold to 75%. Mexico's relatively open foreign policy has led to significant investment by automotive industry chains in building factories in Mexico, aiming to benefit from the U.S. duty-free policies for automobiles. This shift underscores Mexico's strategic positioning in global trade dynamics, especially in its integration with North American economic activities.
At the beginning of June this year, Mexico's ruling party, the National Regeneration Movement (Morena), won a decisive victory in the general elections, with Claudia Sheinbaum becoming the next President of Mexico. Following the election results, the Mexican peso rapidly depreciated due to concerns that Morena could secure an absolute majority in both chambers of Congress, enabling it to implement comprehensive constitutional reforms. Some of these reforms, such as increased pension payments and raising the minimum wage, could lead to costly social welfare expenditures. This path is similar to that of Brazil, where populist social welfare spending could potentially cause significant fiscal pressures, presenting a considerable challenge for Sheinbaum.
According to a Moody's research report, between 2010 and 2016, Brazilian government spending accounted for 27% of GDP, with 55% of that spending allocated to social welfare and 25% to debt interest payments. These rigid fiscal burdens have far exceeded Brazil's fiscal capacity. Generally, left-wing parties in Latin America prioritize welfare, while right-wing parties prioritize developmental efficiency. The swings between these two policy orientations are also factors contributing to the economic turbulence in Latin America. This explains the recent rapid depreciation of the Mexican peso.
Although there are many uncertainties in the overall development of Latin America, our research also identifies certain areas of opportunity, particularly in the digital banking and e-commerce sectors. Both industries share common characteristics such as low penetration rates and immature markets in Latin America, which present significant growth potential. The Latin American market is large and unified, providing ample space for expansion. Leading companies can continuously strengthen their competitive advantages as penetration rates increase, ultimately growing into firms with high barriers to entry and strong profitability. We will continue to share more on this topic in our next issue.
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