## Commodity Blues: Corporate Investment in Latin America

_IMF Blog, May 12, 2015_

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**Canonical URL:** [Commodity Blues: Corporate Investment in Latin America](https://www.imf.org/en/blogs/articles/2015/05/12/commodity-blues-corporate-investment-in-latin-america)

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## Bibliographic details
- Authors: Nicols Magud
- Published: May 12, 2015

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### 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*

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## Content in this bundle

- **A melancolia das commodities: o investimento empresarial na América Latina; May 12, 2015**
  - [A melancolia das commodities: o investimento empresarial na América Latina; May 12, 2015 (Markdown version)](/external/lang/portuguese/np/blog/2015/051215p.pdf.md){rel="alternate" type="text/markdown"}
  - [A melancolia das commodities: o investimento empresarial na América Latina; May 12, 2015 (PDF)](/external/lang/portuguese/np/blog/2015/051215p.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2015/05/slide11.jpg](https://www.imf.org/wp-content/uploads/2015/05/slide11.jpg)
- [Regional Economic Outlook](http://www.imf.org/external/pubs/ft/reo/2015/whd/eng/wreo0415.htm)
- [https://www.imf.org/wp-content/uploads/2015/05/slide21.jpg](https://www.imf.org/wp-content/uploads/2015/05/slide21.jpg)
- [https://www.imf.org/wp-content/uploads/2015/05/slide31.jpg](https://www.imf.org/wp-content/uploads/2015/05/slide31.jpg)
- [https://www.imf.org/wp-content/uploads/2015/05/slide4.jpg](https://www.imf.org/wp-content/uploads/2015/05/slide4.jpg)

_Source: https://www.imf.org/en/blogs/articles/2015/05/12/commodity-blues-corporate-investment-in-latin-america_