South America contains some of the biggest economies in the Latin America and Caribbean region. Its sector strengths include agriculture, oil and tourism. In 2020 the South America region accounted for more than 60% of overall GDP of the Latin American and Caribbean region and more than 50% of foreign direct investment (FDI) projects. While many economies in the region are flourishing, they are not without their challenges.
Which South American economies are prospering?
Brazil boasts the highest GDP in South America. In 2020 the country accounted for one-third of the Latin America and Caribbean region’s total GDP. Brazil’s GDP has fluctuated over the past ten years, however, from a high of $2.6bn in 2011 to a low of $1.4bn in 2020. GDP per capita in the country has remained below the Latin American average since 2012. In 2015 Brazil had the highest inflation rate in the region at 9% and the country entered a recession. The slowing of China’s economy led to waning demand for Brazil's commodities, alongside rising electricity prices, driving inflation up.
In 2016 the Rio de Janeiro Olympic Games were hailed as an event to showcase Brazil to the world. Many argued that the cost of hosting the games outweighed the benefits in the long run. A study by Brazil's Institute for Applied Economic Research showed the Olympic Games had a positive economic impact in Rio de Janeiro. The research found that, without the games, the city's GDP per capita would have been 7.5% lower in the period leading up to the event (2012–15) and 5.1% lower in Greater Rio. The legacy of the economic benefit of the games, however, is less certain.
Despite the impact of Covid-19, Brazil's economy showed recovery at the end of 2020 and GDP growth is expected to reach 3.7% in 2021 and 2.5% in 2022 as a result of increasing consumption and investment.
The country is implementing several reforms including improvements to the current tax regime alongside a new Business Environment Law that aims to drive economic activity after the pandemic and to attract foreign capital by making it easier to open and operate a business in Brazil.
Agriculture plays an important role in the economy of Argentina and is the country’s main export. However, there are large taxes on agriculture exports and the costs tend to be passed to farmers, one of several issues the country faces. Argentina’s economy has been suffering since 2018 when high inflation and the loss of purchasing power devalued the Argentine peso. The country turned to the International Monetary Fund for support and received a $57.1bn loan to boost the country’s finances. Repayments are due soon, but the government's focus on elections in November have left many doubting if a repayment agreement will be reached in time. The victorious party will face challenges to avoid further economic downturns. While growth is expected, with 2021 forecasts raised to 7.2%, inflation remains high and business confidence low.
Colombia has been one of the fastest-growing economies in Latin America with GDP reaching $323.4bn in 2019 and GDP per capita remaining above $6,000. A decline in GDP to below $300bn was seen in 2015 and 2016 as a result of a drop in oil prices. Overall reforms including export-orientated growth strategies, high commodity prices and the signing of a peace agreement in 2016 have created a strong economic framework for growth.
The country has also been building on historic reforms. In 2000, backed by the US, it implemented ‘Plan Colombia’, an initiative to solve the problem of drug trafficking and internal conflict. While not without its issues and shortcomings, the government has deemed the plan successful. Effective areas included investment in infrastructure, education and democratic practices to enable growth and security.
Uruguay has the highest GDP per capita in the South America region, reaching $18,703 in 2018 and $17,688 in 2019. The country's social spending is one of the highest in the region. In 2016 the World Bank stated social spending accounted for more than 80% of total public spending, which has in part contributed to the country's success. To further grow, in September 2021 Uruguay advanced free-trade talks with China to boost exports of key products such as beef. Government adviser Alvaro Delgado stated the objective was for Uruguay to be a "gateway to Mercosur" for China.
Chile has the second-highest GDP per capita in the region, reaching $14,741 in 2019. The IMF expects Chile’s GDP per capita to reach $30,000 in 2026, the first South American country to hit this level, driven by an aggressive response to Covid-19, the economic recovery of trade partners, increases in copper prices and government support packages that aid development. In addition, following its trade deal with the EU in 2002, the country is currently planning to update this deal taking into account trade, climate change and education.
Guyana, expected to become a hotspot for oil production, has seen its GDP per capita increase since 2015, reaching a high of $6,956 in 2020. The IMF’s April 2021 report predicts the country's GDP will grow by 16.4% in 2021. Cited as one of the poorest economies in the Americas, new oil discoveries have boosted the Guyanian economy to an extent that not even Covid-19 could hinder. However, its newly found oil wealth will come with challenges for the government to ensure the country capitalises on these opportunities and isn’t plagued by uneven development or corruption.
Suriname, the smallest country in the region, is one of the world's poorest. The country has been plagued by political and economic instability. In 2019 President Desi Bouterse was sentenced to 20 years in prison over the execution of 15 political opponents in 1982. He took office in 2010 and was re-elected again in 2015. New president Chan Santokhi stated: "The government we form will pursue a coherent policy to work together towards that one goal: the recovery of Suriname."
Highly dependent on oil exports, the Suriname economy suffered due to shrinking oil prices, increases in inflation and rising debt. Recently, however, there has been exploratory success. GlobalData expects that the initial capital investment for an average project in Suriname could be between $6bn and $8bn, with recoverable reserves reaching about 600 million barrels of oil. The country requires a smaller cut from oil companies than its counterparts, with these lower costs proving appealing to investors. The findings could launch Suriname as an oil hotspot and aid with its economic development.
Venezuela has the largest oil reserves in the world. In 2019 oil exports accounted for 95% of the country's total value of exports. A loosening of foreign currency controls brought in by President Hugo Chávez in 2003 eased shortages as traders could then sell goods in dollars. However, this meant (and continues to mean) that many goods are largely unaffordable to the poor or those without access to the US currency. Economic negligence, corruption, unstable government and sanctions have all contributed to Venezuela's economic collapse. The IMF previously stated the cumulative decline of the Venezuelan economy since 2013 would reach 65% in 2019, while its hyperinflation rate increased to 10,000,000% in 2019.
Brazil dominates in attracting FDI
Brazil is the top location for FDI in South America. In 2019 Brazil accounted for 27.4% of all capital investment from FDI in Latin America, and 30% in 2020. In an effort to streamline processes, in 2019 the Ministry of Economy created the ombudsman’s office to provide foreign investors with a single point of contact for concerns related to FDI. The country's strategic geographic location, bordering nine countries in South America, and sustainable investment landscape is proving popular with investors.
Peru’s openness to investors makes it an attractive destination for FDI. In 2019, capital investment in FDI in Peru accounted for 11.6% of all capital investment from FDI in Latin America and the Caribbean. The Peruvian Constitution states that national and foreign investments are subject to the same conditions. Its economic zones currently offer exemption from taxes until 2042.
Colombia is keen to maintain its momentum as one of the top countries for FDI in South America. In 2020 the government announced plans to attract $11.5bn in non-related energy foreign investment projects by 2022. The country will offer tax incentives and simplify bureaucracy to encourage investors. It currently has one of the highest values of FDI per capita in the region, at 0.46 greenfield FDI projects per 100,000 people in 2020.
Total capital investment from FDI in Chile reached $5.5bn in 2020. Chile takes the top spot for Latin America in Milken Institute’s Global Opportunity Index, which assesses countries' attractiveness to international investors using a combination of economic, financial, institutional and regulatory factors.
In a bid to inject funds into the economy, the Venezuelan government is opening up foreign investment in the oil sector. In 2021 President Nicolas Maduro announced his goal of increasing oil production to 1.5 million barrels per day. New legislation has been introduced called the 'anti-blockage law'. It aims to offer new ways for foreign investors to invest and also gives more powers to the government, while allowing the free trade of fuel in a bid to combat sanctions.
Peru sees benefit in developing talent
In 2019 Peru had the lowest unemployment rate in South America at 3.4%. It ranked as one of the most improved nations by the World Economic Forum’s Global Talent Competitive Index in 2019, as a result of its focus on investing in and developing talent. Former president Ollanta Moisés Humala Tasso, who served between 2011 and 2016, increased the country's education budget by 88% during his presidential term, according to Peru's Ministry of Education (Minedu). Tertiary education enrolment in 2017 was more than double the Latin American and Caribbean average at 70.7%.
Argentina also offers some of the best human capital in the region. Mauricio Macri, who served as president between 2015 and 2019, placed a focus on the country’s education system. His aim was to provide students with skills to compete in the global marketplace. In 2018, literacy rates in Argentina were at 99% and tertiary education enrolment reached 90% in 2017.
Brazil's unemployment rate was just above 11.6% in 2016 and has remained above this figure ever since. Following a recession, Jair Bolsonaro was elected as president in 2019. As part of his plans to kick-start growth, Bolsonaro stated that worker protection may be cut in order to create jobs, saying: “What I am trying to offer the worker is this: fewer rights and jobs, or all their rights and unemployment.” Covid-19 has further impacted unemployment rates in Brazil.
Uruguay’s stability attractive to investors
Uruguay ranks as the least corrupt country in South America and is often hailed for its stability. The country’s political landscape is based on strong parties that have strengthened the rule of law, government transparency and democracy. Fixed broadband subscriptions were the highest in the region in 2019 at 29.2 per 100 people. Uruguay's 2025 digital agenda identifies the expansion of fibre-to-the-home networks to locations with less than 3,000 inhabitants and the continued roll-out of 5G networks.
Chile has the highest percentage of individuals using the internet in South America at 82.3% in 2017. The country has been investing in infrastructure including the expansion of its Fibra Óptica Nacional and Fibra Óptica Austral networks. As a result, Subtel, Chile’s telecoms regulator, noted a 62% increase in fibre-optic connections in the country by the end of 2020 and strong growth in residential fixed internet access.
Venezuela ranks as the most corrupt country in South America. President Maduro won a new six-year term in 2018, in what many decreed to be a highly questionable election. In January 2019, opposition leader Juan Guaido declared himself acting president in an effort to oust Maduro. At the time Maduro declared that his government would break all diplomatic ties with the US. The country remains in political turmoil. In 2018 the head of PDVSA, the state oil company, was sacked and Maduro handed control over to the military.
The average time to start a business in Venezuela hit 230 days in 2019, 202 days longer than the Latin America and Caribbean average. Alongside a high corporation tax rate of 34% in 2021, the country’s attractiveness to investors falls short of its counterparts.
South America leading the way in renewables
Brazil sets a high standard when it comes to renewable energy, with renewables accounting for 45.3% of the energy mix in 2018 . In 2018 emissions from the energy consumed in Brazil were 39% lower than the global average, according to the government of Brazil. In 2021 Enel Group’s Brazilian subsidiary started commercial operations of the 716MW Lagoa dos Ventos I and II wind farms in Brazil, the largest in South America. Wind and bioenergy are growing in the country, and in 2018 energy production in Brazil exceeded demand, with a surplus of 1.6%. Moving to solar, in 2020 Enel Group launched a 475MW chunk of the Sao Goncalo solar PV plant, the largest in the region. At full output, the plant will eventually prevent the emission of more than 860,000 tonnes of carbon dioxide each year.
Paraguay uses large amounts of hydroelectric power to produce much of its electricity, having previously relied on fossil fuel imports. The country’s Itaipu Dam is the largest hydropower plant in the world in electricity generation and the second-largest in terms of installed capacity. In 2018 it produced 90.8% of the electricity for Paraguay. The country is keen to build on its hydropower outputs and is currently upgrading its hydropower assets. Paraguay's National Development Plan 2014–2030 sets out plans for renewable energy to reach 60% of total energy consumption by 2030. Also by 2030, Paraguay aims to reduce consumption of fossil fuels as a portion of the country's total energy consumption by 20%.
With the demand for power expected to triple, in line with a growing economy, Guyana plans to move away from fossil fuels. The country has launched a low-carbon strategy to introduce thermoelectrical, hydropower, solar and wind projects to meet this demand.
Many South American countries offer investors an attractive location to establish operations, rich with natural resources and a cheap, educated workforce. However, much of the region struggles when it comes to political stability, cultivating an image that can put off many investors.
This is the third in our series of investor guides covering Latin America and the Caribbean. Click here for our guide to the Caribbean, and here for our coverage of the Central America and Mexico region.