Latin America’s embrace of mega trends fuels its advance

If a winner is emerging from the global turmoil of the COVID pandemic, rising geopolitical tensions and the world’s battle against climate change, that winner is Latin America. 

While the disruptions of the past few years have impacted most markets and economies negatively, the region from Mexico to Argentina has been an outlier, benefitting from a boom in commodity prices (which, admittedly, has faded lately), as well as greater political stability and more disciplined macroeconomic policies across most of its major countries.

Beyond that, two secular mega trends are creating a highly favourable environment for the region, says Luis Sainz, Latin America Head at Societe Generale: this is turning it from “a nice-to-have to a must-have” in terms of direct investment for many international companies and portfolio flows for global investors.

The first of these trends is the energy transition. Many Latin American nations have significant deposits of the metals and minerals that are key inputs for batteries and other clean energy products. At the same time, the region has the cleanest electricity matrix in the world, with 61% coming from renewable power, according to the Inter-American Development Bank.

Going green: Chile

Chile is, perhaps, the prime example. It is the world’s top copper producer, with a quarter of global output, and the second-largest producer of lithium, with 30%. Both of these metals are critical inputs into batteries for electric vehicles and energy storage devices. “This has turned the country’s mining sector from a low-value primary industry into a vital part of the energy transition’s supply chain”, says Paul Miquel, Societe Generale’s Country Head for Chile.  

Meanwhile, the country boasts the world’s highest solar radiation levels in its Atacama desert in the north, while the south has some of the best global wind speeds. This has led to a boom in solar and wind farms and renewables now make up over half of Chile’s electricity production, with new capacity being increasingly aimed at producing zero-carbon fuels like green hydrogen and green ammonia, primarily for export.

On top of that, Chile offers open capital markets, an investment grade credit rating and a strong institutional framework – strong enough to weather attempts to rewrite the constitution from both the radical left and far right over the past five years. 

The modern maquila: Mexico

The second trend is the ongoing reshaping of global supply chains, as western countries work to reduce imports, particularly from China, and build up local supplies in strategic industries, including technology and – once again – clean energy. This ‘nearshoring’ or ‘friendshoring’ is benefiting Mexico the most given its proximity to the huge US market and historic role as the site of ‘maquiladora’ assembly plants for the car industry. But it is spreading to countries further south such as Guatemala and El Salvador, says Mr Sainz. 

More interestingly, supply chain integration is far more sophisticated today, with major components or sub-assemblies – whether for cars, consumer goods or semiconductors - crossing the US-Mexican border from five to nine times in the course of their assembly. Untangling such supplier relationships is costly and time consuming at the least and sometimes simply impossible.

And with national security dictating that the US will maintain or even increase tariff barriers against China and Asia, no matter who is in the White House, Mr Sainz argues that this integration will continue for many years and spread to ever more industries.   

Accompanying the investors

Risks remain, of course, from the near-term course of US monetary policy and a potential US recession to relatively sluggish growth at home – with the World Bank estimating that regional GDP will expand by only 1.6% in 2024. And there will always be political noise coming out of Latin America, though the political pendulum has been moving back to the center and away from radicalism in most markets. 

However, the multinational corporations and big financial institutions that see a presence in Latin America as increasingly essential tend to look through such short-term volatility. “These sophisticated investors are our clients”, say Mr Sainz and Mr Miquel, “and it is our job to accompany them on their journey and support their projects – particularly more complicated transactions where we can bring our global expertise to bear.”

One such recent deal is the $4.5 billion expansion of Antofagasta’s Nueva Centinela copper mine, which is backed by a $2 billion financing package that Societe Generale helped put together. 

Another key client is efuels startup HIF Global, which is developing clean fuels for vehicles, ships and airplanes. The company is building initial production sites in Chile and Uruguay, costing around $ 1.3 billion in the case of Chile, and 4 bn in the case of Uruguay, as well as in the US and Australia. Meg Gentle, Executive Director of HIF Global, says that having Societe Generale as financial advisor complements management’s own experience: “We feel confident that the same approach that has successfully managed to unlock the investment required to build a 400m ton per annum LNG industry can be implemented to roll out the infrastructure for the required millions of tons of eFuels.”  

Innovating into the future

Meanwhile, the bank has advised the Chilean government, one of the earliest issuers of green and ESG-linked bonds, since 2019; and helped it become the first sovereign to issue a sustainability-linked bond (which stipulates specific environmental targets): a $2 billion, 20-year issue in 2022.

Increasing levels of foreign investment and local innovation, coupled with the favourable mega trends of the energy transition and the realignment of supply chains, suggest that Latin America has a bright future, even in an uncertain world.