beyondbrics

By Jude Webber in Buenos Aires and Naomi Mapstone in Lima

Foreign investors pondering a plunge into Latin America will note with interest Mercer’s latest cost-of-living study, which confirms São Paulo as the most expensive city in all the Americas and high-altitude La Paz as the cheapest.

Of course, cost of living is just one of many factors that go into decisions about allocating staff and resources – not least the level of investment risk, which is still high in a region that sees its shares of coups, caudillos and nationalisations.

These risks aside, the region has made great economic strides and is proving ever more enticing. According to the latest United Nations estimates, FDI to the region should rebound 40 to 50 per cent this year after shrinking 42 per cent to $76.7bn in 2009 from a record high of $132bn the year earlier. The Economic Commission for Latin America or ECLAC, published that outlook and the following data earlier this month.

A study by consultants Mercer provides a nice little checklist for corporates and nation states (China has been on a veritable mineral resource spree in the region in the past few years), weighing up the pros and cons of country bases.

There’s no denying that La Paz, Bolivia, which ranks 211th, (just three places above the cheapest – Karachi in Pakistan), is cheap, although the ever present threat of nationalisation is not to be discounted. Rurelec, of the UK, is the most recent foreign company to pay that hefty price.

Could Asunción, the Paraguayan capital, which ranked 204th , and Tegucigalpa, capital of Honduras, at 206th, be undiscovered gems? It’s worth noting that during the 2009 downturn, FDI contracted in Bolivia by only 18 per cent, and it actually grew in Paraguay – albeit from a tiny base. The coup in Honduras contributed to a 44 per cent drop-off on in investment in the same period.

ECLAC says Brazil is still the top recipient of FDI in the region, and São Paulo, with its high security costs, unsurprisingly ranks 21st in the cost-of-living stakes and is the most expensive city in both North and South America, as a result of the strengthening of the real against the US dollar. Rio ranks 29th and Brasilia 70th.

Perhaps Chile and Peru offer better deals. Chile is the region’s second biggest FDI recipient, and has the highest proportion of FDI to gross domestic product – 8 per cent. During the 2009 recession, FDI shrank by 16.3 per cent, the lowest contraction in the region. Yet Mercer ranks Santiago 123rd in the cost-of-living stakes, apparently making it a value-for-money destination.

Lima, capital of Peru, which ranks fifth in terms of FDI flows to the region, is a bargain for anyone who can put up with the long gloomy winters, according to Mercer, which puts it in 135th position. An excellent $3 ceviche can do a lot to offset the misery of the city’s renowned Garúa fog.

Bogota, meanwhile, is doing well at attracting investment, partly via expensive subsidies and incentives that are contributing to Colombia’s fiscal challenge, but settling in this city of lawyers is expensive, relative to the rest of South America. Colombia ranks third in terms of FDI flows, and Bogota comes in at 66 in terms of cost of living, higher than Brasilia.

Among the region’s bigger and more outward-looking economies, Argentina is the FDI laggard, attracting only $4.9bn in 2009, less than half Chile’s $12bn, and a fraction of Brazil’s $26bn and Mexico’s $11.4bn. As FDI dried up amid the global economic crisis, Argentina was worse hit than anywhere else in the region with the exception of Ecuador.

Argentina has just conducted a successful debt swap, which has significantly reduced the amount of debt outstanding from its 2001 default, but as this Bloomberg story highlights, it still has a long way to go to regain trust.

“We have a region where competitors and neighbours are much better placed to receive FDI and we have to make an effort to improve this. Brazil attracts FDI because of its outlook; Chile, Uruguay and Peru because of their conduct. So far, we have done nothing to show investors we are as safe as other markets. We have to show we can compete with the world for FDI”, according to one Argentine lawyer involved in international trade issues. “We have a problem with credibility.”

But the Mercer study shows one thing running in Argentina’s favour: in spite of inflation which most private economists say is more than double the government’s much-distrusted 10.7 per cent official data, Buenos Aires is a surprisingly cheap place for expats to live. Though a cup of coffee there costs virtually the same as in New York and even a bit more than in London, a two-roomed apartment rental is less than half the price and a fast-food hamburger is cheaper. The city, once dubbed the “Paris of the South”, rates 161st in the Mercer index. Food for thought?