Commodity Blues: Corporate Investment in Latin America
IMF Blog, May 12, 2015
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- Commodity Blues: Corporate Investment in Latin America
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Bibliographic details
- Authors: Nicols Magud
- Published: May 12, 2015
Context and scope
- Author: Nicolás Magud
- Date: May 12, 2015
- Dataset and coverage:
- Firm-level data spanning 24 years and 38 countries, with a total of close to 500,000 company-year observations.
- Focus: drivers of corporate investment in Latin America, with emphasis on commodity export prices and capital inflows.
Latin America’s investment position
- Investment-to-GDP:
- Has fallen about two percentage points from its 2008 peak.
- Stands at 19.6 percent, slightly above the historical average.
- Persistently below comparable values from other emerging market regions, posing a constraint on potential growth.
Micro-level determinants of corporate investment (empirical findings)
- Firm characteristics associated with higher investment:
- Expected profitability: firms expected to be more profitable tend to invest more.
- Internal cash flow: firms rely on internal cash flow to finance investment, indicating financial constraints.
- Firm characteristics associated with lower investment:
- Higher existing debt burdens: firms with higher leverage tend to invest less.
- Net borrowing dynamics are linked to investment decisions (as included among firm-level regressors).
Macro-level determinants of corporate investment (empirical findings)
- Commodity export prices:
- Stand out as a key factor affecting corporate investment across all sectors in the dataset (not only the narrowly defined commodity sector).
- A one standard deviation shock to commodity export prices (a change of over 10 percentage points) tends to increase the average firm’s investment-capital ratio by nearly 4 percentage points.
- Capital inflows:
- Times of larger capital inflows coincide with higher corporate investment.
- Capital inflows help relax firms’ financial constraints, particularly for firms that produce nontradable goods.
Explaining the recent slowdown (since mid-2011)
- Private investment has been decelerating throughout emerging markets since mid-2011; Latin America is no exception.
- The regression results imply the relationship between investment and its drivers has not materially changed since mid-2011.
- Sharp moves in drivers since 2011 explain the investment slowdown.
- For Latin America, lower commodity export prices account for almost the entire decline in average investment-to-capital ratios.
- In other regions, additional factors—capital inflows, expected profitability, leverage, and financial constraints—have also contributed significantly.
Outlook and policy implications
- External environment risks:
- Commodity prices are generally expected to remain subdued, which is discouraging for investment prospects.
- Capital flows to emerging markets could moderate, particularly as U.S. monetary policy starts to normalize.
- Potential output projections for emerging economies have been revised downward, reducing firms’ expected profitability.
- Policy recommendations to revive private investment:
- Address long-standing obstacles in Latin America, including:
- Low domestic saving rates.
- Weak educational outcomes.
- Challenging business environments in many countries.
- Tackling these structural weaknesses is the best strategy to revive private investment dynamics and boost medium-term growth prospects, especially in a less benign external environment.
Source: Commodity Blues: Corporate Investment in Latin America — Nicolás Magud, May 12, 2015
Content in this bundle
- A melancolia das commodities: o investimento empresarial na América Latina; May 12, 2015
