December 2015: India-Mercosur: Argentina- A Diamond in the Rough & Brazil takes the Good with the Bad

In Bloomberg’s Index of 2015, Argentina was ranked second after Venezuela due to the country’s high inflation rate of 30 percent at the time, combined with an unemployment rate of 7 percent earlier in the year. With such dire economic figures, it’s no surprise why most foreign investors have shunned away from South America’s second-largest economy in spite of its vast natural resources and economic potential.

However, with the positive result in the general elections last month, the new government in Argentina has changed the mood in the country, Latin America, and the approach of many global investors. The President-elect Mauricio Macri (his father is business tycoon Franco Macri) is pledging to turn Argentina’s economic and foreign policy on its head, introducing market-friendly and free-trade measures — a nail in the coffin of the economic populism that has dominated much of South America for a decade. Argentina’s strong infrastructures and vast natural resources make the country an attractive buy for foreign investments. In addition, Argentina has the fastest growing middle class in LATAM; and a shrinking unemployment rate from 7.5 earlier this year to 6.6 in Q4.

In comparison, Brasil’s economy, three times the size of Argentina and with its consumer class still nascent, is faced with the fiscal shortfall and President Dilma Rousseff is unwinding tax breaks, cutting spending and lifting price caps on fuel and energy as the budget deficit balloons. In response, her disapproval rating has surged to the highest of any Brazilian head of state.

As Brazilian President Dilma Rousseff (talks of her impeachment hovering) combats a weak economy and corruption accusations, the country’s inflation surged above 10 percent while unemployment jumped to 8 percent, according to the recent official data.

Concurrently with the falling currency (Real), Brazilian assets are becoming increasingly attractive to foreign investors. The sinking real may be a blessing in disguise for tourists and foreign investors. The real’s depreciation, combined with the slow-down of the economy, has translated into a substantial decrease in the Brazilian trade deficit by roughly 30 percent compared with last year.

India-Mercosur and the right wing politics in the new Latin America:

Brazil and Mercosur is keen to further strengthen trade ties with India, and in a recent visit of Ms. Katia Abreu, Brazilian Minister of Agriculture, Livestock and Food Supply to India, she explained that existing agreement with India is “timid” and there is a need to expand the base from the current 450 products to 2,500 products.

India and MERCOSUR, comprising Brazil, Argentina, Uruguay, Venezuela, Paraguay, and Bolivia already has a preferential trade pact. India-MERCOSUR preferential trade agreement (PTA) came into effect from June 1, 2009. The major sectors covered in the offer list under the PTA include meat, chemicals, leather goods, iron and steel products, machinery items and electrical machinery. There has been talks to expand tariff agreement, harmonise and make rules easier.

The change to right wing politics in the new Latin America is creating a lot of positive buzz in the markets. In Venezuela, for the first time in 17 years, “Chavismo”—the unique brand of leftist politics championed by former President Hugo Chávez —failed to win nationwide elections in Venezuela. parliamentary elections were a tremendous blow to President Nicolás Maduro, Chávez’s chosen successor. The opposition Democratic Unity Roundtable alliance—a coalition of centrist, center-left and center-right parties—won 112 of the 167 seats in the National Assembly

Over the past decade, China has pumped billions of dollars into countries across Latin America, diversifying its own investment portfolio while dipping into the region’s pool of raw materials like oil, iron ore and soybean. China’s appetite for raw materials fuelled its trade relationship with Latin America for much of the past decade, but a slowdown in China’s economy in recent years has sent prices of commodities plummeting and stung the region badly. China’s growth rate continues to decline–to 6.8 percent in 2015 and then decrease further to 6.3 percent in 2016—India’s growth rate will substantially exceed China’s over the same period, reaching 7.5 percent in 2016.

In Contrast, experts see India as a strong export, software, and engineering hub, with the growing need for power for all, industrial efficiency, urbanisation, rising middle class and infrastructure growth, India-Mercosur (LatAm) should work on building a stronger relationships going forward.