Few financial reports coming out of Argentina sound hopeful; the slew of economic calamities that have plagued the South American nation for the better part of the last decade can seem endless. Yet, Argentina has continued to register as a bright spot in two significant areas: resilient entrepreneurialism and technology adoption and innovation. This includes the current boom in generative artificial intelligence (GenAI), a market niche that is expected to be worth over $110 billion by 2026 according to Statista, a German data-gathering research firm. Argentina currently ranks fourth in Latin America and has the region’s fifth-largest regional overall potential for producing AI-centered solutions, according to Statista.

“Argentinian companies, especially startups, are at a different maturity level than other Latin American markets,” says Pablo Gottifredi a technology specialist and an entrepreneur and former director of Systems Technology at the Ministry of Justice. “In Brazil and Mexico, the two largest regional economies, they’re still advancing on primary market needs such as fintech, supply issues, Warp and marketplace spaces.” Argentina, by contrast, had its first wave of tech startups 15 years prior to Brazil, “so many of the companies here are already dealing with the advancements of AI integration and development, but by integrating it in their natural flow of operations and not as a separate niche.”

Most larger Argentinian tech companies have already incorporated AI predictive model analyses into their business flow, Gottifredi notes. “They were not born as native AI companies but are using those tools in advanced form due to their maturity level. This is different from other, newer Latin markets, where some of the startups are AI-native.”

According to startupable.com, Argentina is currently home to 238 tech startups and unicorns, 20 of them native-AI startups, or roughly 8%, a figure that aligns with other developed countries and regions. Most local native-AI startups are still at a pre-seed or seed stage, with a handful in series A funding rounds. Market data compiled by KPMG and Statista show that over the past five years and across verticals—and in spite of government-imposed hurdles and a lack of incentives—the Argentinian tech sector had an approximate output equivalent to 63% of the heavily subsidized automobile industry.

Within the DeepStage segment, which encompasses tech startups with licensable or patented models, Argentina captures 30% of total investment in Latin America, says Gottifredi, who is also a co-founder and chief technology officer of MatchIT.

“This is huge, and this includes many biotech companies,” he says, “but this doesn’t mean that venture capital is flowing to these companies because of their AI component or the AI tools they employ. Rather, investments are being made because the business plan is sound, innovative and scalable.”

One factor favoring Argentina as a seedbed for innovation and entrepreneurialism is the quality of its educational system. Data for the past 30 years from the UN Development Program (UNDP) places it among the top 30 globally and the best in Latin America. Additionally, the country’s many crises over the past several decades have produced Argentinian entrepreneurs who are highly adaptable in the face of economic uncertainty and adept at reading the marketplace.

“Argentina has a small domestic market, and you can’t count on it for your business to thrive because of misguided government policies,” says Gottifredi, “so it is natural for local businesses to think global—or at least in terms of regional scalability—right from the start. This is in contrast to what you see in big domestic markets such as Brazil, Mexico, or even the US, where startups are often born to offer a specific solution demanded by their domestic markets.”

Out of this landscape come startups such as Bioceres, a biotech crop productivity company, and Satellogic, producer of earth-observation nano satellites. “AI is deeply ingrained in the technology used by such companies, as well as by local fintechs and retail companies,” Gottifredi says. “This is nothing new, and it would be logical for the next big tech evolution to come from countries thinking beyond their borders, like Argentina.”

While the government’s capital control policies have damaged the country’s business climate, including for venture capital, the announced removal of many such restrictions by President Javier Milei’s government could create singular opportunities for investment in Argentina, despite a lack of trust in the markets.

“Recovering market confidence could take some years, but it will happen,” Gottifredi predicts. “We’ve been there before, and I am optimistic that once the political-economic equation is resolved, Argentina will be very relevant in the global tech and startup space.

Now is the time for foreign investors to start deep-mapping the market, he urges. “Seed and pre-seed tickets in Argentina are significantly cheaper than elsewhere, and among startups in Series A or B funding rounds, it’s possible to find companies which already have market-fit products and only need capital to go global.”

The year 2023 cost Latin American economies an estimated $20 billion in destruction from natural calamities: the highest total since Hurricane Maria hit Puerto Rico in 2017.

Numbers-wise, the regional impact and cost are in line with such events elsewhere on the planet. According to the World Economic Forum, globally reported economic losses attributed to climate and water extremes reached $1.48 trillion in the decade ending in 2019: a 47.9% increase over the previous decade. However, compared to other regions, Latin America is uniquely positioned to leverage its natural riches to become a focal point of economic opportunity through green solutions at comparatively lower transition costs—if it manages to accelerate locally as well as regionally coordinated efforts.

The region is grappling with the economic impact of rising temperatures, shifting weather patterns and an increased frequency of natural disasters. Slow-to-act governments and a lack of coordinated proactiveness are the main hurdles preventing several Latin countries from catapulting to the forefront of the global ESG agenda.

“Without a decision to coordinate on following a specific path, we risk letting the single biggest economic opportunity for Latin America this century slip through our fingers,” says Marina Cançado, head of Converge Capital, who has worked for 15 years connecting investors, corporations and ESG/green economy solutions in the region.

Ana Luci Grizzi, partner at EY and Latin America deputy-lead for Sustainability and Climate Change, underscores the need for the public authorities to step up.

“We still need decisions that become state policies instead of the policies of a government,” she says. “There’s gigantic regional opportunity in the transition to a low-carbon economy, the bioeconomy, and the circular economy. We have natural capital available here both in quantity and in quality and this could give us a leadership position.”

According to Boston Consulting Group (BCG), if the world implements the Paris Accords by 2030, limiting temperature rise to no more than 1.5°C by 2100, the world will suffer less than an 8% loss of GDP to disasters and climate change. But at current levels, temperatures will rise 2.9°C by then, causing losses estimated at 24% of the global economy.

Latin America is already impacted in many ways.

“If we look at Colombia, loss of arable and forest land is one of the greatest risks,” says Bogotá-based economist Jorge Farfan, a partner at Brazilian venture capital firm KPTL. “We lose an average of 300,000 hectares of land annually, especially in the Amazon and in woodland, to nature degradation. We are also highly impacted by the stronger and more frequent Caribbean tropical storms and hurricanes reaching points farther south in the region. Chile and Mexico are already suffering extreme droughts, converting large tracts of land into barren deserts unusable for anything at an alarming rate.”

Research by the World Resources Institute places both Chile and Mexico, two of the most important Latin American economies, in the top 30 countries impacted by baseline water risks, the highest in the Western Hemisphere, while Peru is at 32nd place.

Flooding in the southernmost Brazilian state of Rio Grande do Sul in April and May vividly illustrates the challenge.

In just five days, cities and towns across the state saw rainfall equaling one-third of the annual average. The results were catastrophic. A study by EY showed 90% of the municipalities in the state were adversely affected; 30% declared a public emergency. Civilian authorities put the death toll at 183. Damage to public and private infrastructure was so extensive that the Brazilian Confederation of National Insurance Companies classified the disaster as the single largest claim-generating event in Brazil’s history.

Much of the blame, according to Cançado, lies with the expansion of single-crop agriculture over the years in Rio Grande do Sul, especially soybeans, which has adversely impacted the soil and exacerbated the potential for flooding.

“The effects of this incident go beyond the immediate tragedy,” she says. “Accounting for the potential of another event like this now impacts and alters the market value of assets, the feasibility and price of insurance, how public infrastructure concession bids need to be drafted and valued and what municipal spending priorities need to be.”

Climate and nature risks involve physical impacts that must be measured through risk-analysis methodologies, EY’s Grizzi points out, and these need to be revised to include forward-looking capabilities.

“Risks associated with shifting weather and nature can be dealt with either through mitigation or adaptation,” she notes. “The impacts filter down through the entire economic system, and that’s why financial institutions are also concerned about the systemic risks associated with contagion or holding assets and investments in places and companies that do not comply with transition goals.”

The good news is that Latin America has the potential to become a global leader in green solutions; according to BCG, Brazil is already the brightest star in the region, with the potential to double its yearly foreign direct investment and attract up to $3 trillion by 2050. It has the capability to generate excess green energy through renewables and increase sustainable regenerative agricultural output at scale while protecting and restoring biomes: distinct geographical regions with specific climate, vegetation, and animal life. And it could become a key player in providing cost-competitive green industrial products and services.

Brazil will host the COP30 climate summit next year, Grizzi notes; its own record has been mixed, but she remains hopeful.

“We have many good projects still in Congress,” she says, “such as the Brazilian System for Emissions Trade, which will be functional by them. But Brazil still lags behind the global north; they had more time to adapt while facing many more natural-resources restrictions. While Brazil is still catching up with the European CBAM [Carbon Border Adjustment Mechanism] or the American Inflation Reduction Act, the end results will still be positive and can place the country among the global players.”

BCG ranks Brazil as the world’s leader in profiting from regenerative agriculture at scale; first as a carbon-offset supplier through nature-based solutions, forecast to create up to $50 billion in revenue locally by 2030; and as a protagonist in wind, solar and green hydrogen generation. Brazil is expected to become a leader in biomass fuel development and a worldwide hub for low-carbon industrial products, which benefit from clean energy, ample natural resources and circularity.

“Brazil has 40% of the world’s biodiversity and one-third of the global biomes, but we don’t yet have a single global product tapping those resources directly,” says Danilo Zelinski, head of KPTL’s Forest and Climate Fund.

KPTL just concluded a round of investment in a company that taps molecules only available in the Amazon to create new products aimed at extending longevity and guaranteeing health in old age. “The opportunity to explore this biome in a sustainable way, protecting the forest, is tremendous,” Zelinski says, “and the economic incentive for this is there, too. It is much more lucrative to have such products and science coming out of the Amazon than to simply clear it for cattle pasture.”

Brazil could also see increased international investment in the relocation or construction of major data centers in its northeast, according to research from Santander, much of it built on advances in generative artificial intelligence. A simple query on ChatGPT requires 10 to 15 times more electricity than a query made through regular search engines. Brazil could capture a significant share of the $440 billion market simply because it can offer what most other countries cannot: cheap, clean, renewable energy and water to cool data centers at scale. Additionally, it has geographic proximity to Chile, a global supplier of the copper needed for the critical electrical applications required for servers.

“We have all the sectorial assets in place in Latin America in general,” says Cançado, “and in Brazil specifically: mining, energy, food, agriculture. We are the only region able to sustainably develop all of these assets while transitioning to net-zero carbon emissions. And we are able to do this propelling development, spawning economic growth, creating jobs, and generating income.”

Her conclusion couldn’t be more poignant.

“At this point, we are only missing one thing: a shared vision and a regional call-to-action,” she says. “We need to decide if we want to be the global power and global hub of climate solutions for the planet. This decision needs to be shared across governments, the private sector and societies throughout our countries. But we need coordination. The risk, if we don’t do that, is we’ll once again only be the region that could have been, but never was.”   

For the better part of 30 years, Argentina has been making economic headlines for the wrong reasons. Its persistent and serious economic and social crisis led the country to default on its international sovereign debt in 2001, 2014 and, most recently, 2020.

The ongoing credit and currency crisis has left Argentina with the equivalent of only about 5% of GDP currently available in credit lines and mortgages; more functional economies tend to have the equivalent of at least 100% of GDP available.

Yet, opportunities within traditional sectors are opening up this year following a slew of initial shock-therapy measures implemented by the country’s controversial President, Javier Milei.

Even a minor improvement in economic conditions could generate a flurry of opportunity, says Matias Bellani, managing director in Argentina for global logistics and frieght company Craft.

“Argentina is an emerging market in the most hardcore sense,” he adds. “There are obvious risks associated with doing business. In the past years, we had to renegotiate payments and income with foreign partners since there was no certainty surrounding our ability to send and receive money.”

Yet, even in the most difficult years, Craft’s business importing and exporting commodities, chemicals and raw industrial materials for the automobile industry continued to function. “As foreign trade stabilizes, I can only see this growing at a very fast pace,” he says.

Latin America offers a wealth of contradictions: One of the regions least prone to all-out war of the type currently playing out in the Middle East and Europe, yet plagued by wobbly infrastructure, corruption, criminality, structural poverty and declining social standards.

Thus, it is no surprise that Latin American countries were some of the worst affected Covid-19. Like elsewhere, travel and aviation were among the sectors hardest hit; unlike elsewhere,  both have made a strong comeback.

PhocusWright, a specialized travel market research company, found that Latin America surpassed its pre-pandemic travel revenue by 29% at the end of 2023, reaching $62.1 billion. “Growth in the region will remain strong, and we forecast that by the end of 2024, the total market revenue should be $71.7 billion,” says Carolina Sass de Haro, PhocusWright’s senior analyst for the Latin American market and a managing partner of MAPIE, a Brazilian consultancy specializing in the tourism sector.

Oxford Economics forecasts slightly weaker economic growth in Latin America in 2024, but still predicts the region will outperform most advanced economies—with travel and tourism key drivers of economic growth.

Bolstering that growth will be strong US demand, the source of 48% of the Latin American inbound travel market, Oxford Economics predicts; American visitors spent an average 17% more in 2023 than they did in 2019. Intraregional travel will account for 34% of market share in 2024, the firm says; in many of the region’s countries, the domestic market is stronger than the foreign.

This is particularly the case in aviation. Latin America’s load factor is currently 84.7%: the highest in the world, according to the International Air Transport Association (IATA).

According to Peter Cerda, IATA’s vice president for the Americas, last year was a success for airlines in Latin America. “Traffic rose 28.6%, capacity climbed 25%” and the airlines “did a really good job not only recuperating the lost capacity and connectivity but increasing it and bringing new connectivity between cities that didn’t exist in the past.”

Two Western Hemisphere subregions have fully recovered from the pandemic as defined by international tourist arrivals, according to the UN World Tourism Organization: Central America is 5% above 2019 levels, and the Caribbean is 1% over. South America still trails at -6%, although that number is markedly better than the worldwide average of -12%.

“In the Americas, including North America, the overall contribution of tourism to regional GDP is 0.5%,” says Sandra Carvão, UNWTO’s chief of Tourism Market Intelligence and Competitiveness. “It sounds small, but you have countries that do not depend on tourism like the US or Brazil. The US has a big weight, and tourism makes up a smaller percentage of total GDP there. This is very different compared, for example, the Bahamas, where tourism is 15% of the local GDP; Jamaica, where it’s 10%; or Mexico, where it’s 7%.”

Mexico, Central America and the Caribbean benefit from their proximity to the US and the strength of the US dollar. According to Oxford Economics, travelers originating in the US comprise 82% of arrivals in Mexico, 49% in the Caribbean, and 33% in Central America based on 2023 trend numbers.

“Mexico plays a big part in total Latin American numbers,” says PhocusWright’s de Haro. “It was able to position itself very differently during the pandemic and it remained open while most countries closed their borders. This led to a very rapid recovery of tourism, propelled by the outbound US market.”

That in turn bolstered Mexico’s position as the top tourism market in Latin America, representing 51% of the regional total, de Haro adds. Mexico’s tourism revenue came to $8.9 billion in 2019, dropping by half in 2020 but already recovering to pre-pandemic levels in 2021. “As of mid-2023, we forecast Mexican tourism sales to reach $15 billion, inching toward double the pre-pandemic levels.”

Other major success stories, albeit smaller in absolute numbers, include El Salvador (up 36% from 2019 levels), Guatemala (+26%), and Honduras (+23%).

South America is seeing healthy but generally less dramatic numbers. Colombia should welcome 29% more international arrivals in 2024 than in 2019, according to IATA; the country has already seen an increase of 18% in international flight capacity compared to the pre-Covid-19 period, despite the fact that two of its airlines have ceased operations. Countering the trend, Peru can expect international arrivals to shrink by 28% from 2019 levels, largely due to civil unrest there and issues surrounding tourist access to Machu Picchu.

And Argentina’s current sharp recession skews the numbers. IATA forecasts 10% more international arrivals this year than in 2019, but with inflation out of control at 211.4% and the Argentine peso crumbling—it was devalued by 54% in December—the tourism sector is actually shrinking in US dollar terms.

“We run the numbers multiple times a year for Argentina because of the inflation and exchange rate fluctuations, and it’s simply disheartening,” says de Haro. “Argentina’s tourism sector was worth $1 billion in 2016. Despite gains in both absolute numbers and in pesos-value through the years, the sector was worth only $317 million by 2019. It fell drastically to $37 million in 2020. Tourism grew by 72% between 2021 and 2022, and it sustained growth in 2023, but we now forecast it’ll end 2024 generating only $121 million.”

Brazil may be Latin America’s most complex story. According to the International Monetary Fund, the economy grew 3.1% in 2023 to become the world’s ninth largest. But lingering infrastructue deficiencies, an undervalued currency, persistent fiscal imbalances, high corporate taxation, and labor and regulatory burdens point to a meager 0.4% growth in 2024, the IMF forecasts.

The country’s tourism and aviation sectors are heavily propped up by the domestic market, which by most estimates represented anywhere from 75% to 90% of the $9.9 billion total in 2023. But Brazil’s domestic air travel capacity is now 15% greater than in 2019, according to IATA, and despite the country’s undervalued currency, PhocusWright predicts travel-sector revenue will grow by 17% in US dollar terms, to $11.6 billion in 2024.

“The outlook is very promising,” says Ana Carolina de Souza, head of the Brazilian Association of Travel Agents, a 2,500-business-strong trade group. “Despite the infrastructural gaps, the entire tourism sector structure has improved, further professionalized, and streamlined to better cater to travelers. We obviously hope to attract even more international tourists, but the biggest growth driver is still the domestic one.”

Another optimistic voice is that of Daniel Topper, CEO of (OTA) Zarpo, a package-oriented Brazilian online travel agency that focuses heavily on the domestic market.

“The quality and resilience of the Brazilian market are strong,” he says. “This means we cater to several niches, but mostly domestically.” Zarpo grew by a double-digit percentage in 2023 to a  revenue of BRL150 million ($31 million), Topper reports.

Serra Verde Express, Brazil’s largest tourist-train operator, runs the famous Curitiba-Morretes line through a mountainous section of rare Atlantic rainforest. The company enjoyed 17% revenue growth over pre-pandemic levels in 2023 and expects further growth of 12% this year. The numbers are telling because rail travel demand is vastly underserved in Brazil. And while the line is known internationally among fans of train journeys, domestic tourists were responsible for 97% of passenger sales in 2023.

The upshot is that despite Brazil’s tourism potential, the country receives an average of only six million foreign visitors per year; by comparison, the Dominican Republic saw 10 million international arrivals in 2023. Brazil’s problems, including lack of adequate infrastructure across the travel industry and poor air connectivity, are common throughout the region.

“Airlines are poorly impacted across Latin America due to undervalued local currencies against costs fixed in US dollars, poor infrastructure, extremely heavy taxation, and overregulation,” says IATA’s Cerda. “However, there are also many opportunities, with ample room for policy flexibilization, public-private partnerships, competitiveness, passenger experience, and—crucially—improved connectivity among both first- and second-tier city pairs.”

The introduction of narrow-body, long-range twin jets like the Airbus 321XLR should open the door to new routes into the region that previously did not make economic sense, Cerda notes. “Despite the challenges, I am very optimistic about the regional prospects in 2024,” he concludes.

The UN, through its Economic Commission for Latin America and the Caribbean (ECLAC), released new data regarding foreign direct investment (FDI) in July. Latin America attracted a record-breaking US$224.58 billion in 2022. For the first time since 2013, the region attracted more than US$200 billion in FDI.

But more recent data from individual central banks shows that the inflow of capitals might be slowing down, making the  outlook uncertain.

Argentina has an upcoming election—and some of the candidates are not helping allay market concerns. Mexico and Colombia remain largely dependent on the US. And Brazil, still remains an open question mark for worldwide investors, as it reasserts its more traditional protaganist with Luiz Inácio Lula da Silva at the helm.

“There are positive developments in the region, despite the fact Latin America as a whole remains an outlier,” says. Paloma Lopes, an economist and investment advisor at Valor Investimentos, one of the top offices for Brazilian investment management powerhouse XP Inc.

Despite the record numbers, Latin America only captured 8% of last year’s total global foreign investment, putting it behind every other region in the globe. Just two countries managed to snag nearly two-thirds of the capital coming to the area: Brazil attracted 41% of that total (approximately US$92.1 billion) followed by Mexico, pulling 18% (approximately US$40.4 billion) of the regional share.

“Rightfully or not, Latin America suffers from lower levels of investor confidence based on its 20th-century history,” she adds.

According to Marcos Piellusch, finance professor at the Administration Institute Foundation arm of the University of São Paulo (FIA-USP), because Latin America relies heavily on exports to China, where the economy is slowing down, there is an increased perception of the risk associated with regional investment.

“In no way does this mean Latin exports to China will halt—the Chinese have ample appetite and need for commodity exports from Latin America,” Piellusch explains. “But we don’t know exactly how slower Chinese growth may negatively affect commerce on both sides.”

China is only one concern. In Europe, inflationary pressures persist, and interest rates are going up, slowing growth even further than previously forecast, and Germany now offically in a recession.

“The monetary policy in the US, on the other hand, makes it currently very attractive to investors both as a risk-aversion measure, as well as an opportunity for increased base-level earnings. That is the reason why it’s somewhat natural for capital to be flowing out of emerging markets in spite of a favorable outlook for Latin America,” Piellusch says.

And notwithstanding possible slow-downs, China is keeping its options open and forging ahead on its continued courtship of Latin America with heavy direct investment and wooing countries throughout the area with enticing preferential trade-deals. Sources at the Ministry of Foreign Affairs of Uruguay stated with no uncertain words in September that the country may forge ahead on a unilateral trade-deal with China even if this means exiting South America’s Mercosur trade bloc. According to a study by the Council on Foreign Relations (CFR), a New York-based think tank, China is already Latin America’s largest trading partner and has invested over US$73 billion in the region’s raw materials sector alone since the beginning of this century.

The country is also the largest partner and mastermind in the emerging-economies BRICS political grouping—along Brazil and India—and has pushed the group to announce an ambitious expansion at the end of August, which includes some odd-ducklings like Iran and Ethiopia, but also Argentina (at the behest of Brazil) and heavyweight Saudi Arabia.

Argentina, one of the largest markets in the region, remains a major point of concern and an unknown in the greater Latin equation. “The economic crisis in Argentina is at staggering levels, with hyperinflation and an extremely high base interest-rate making life even more difficult for its impoverished population,” Lopes says.

According to her, “Argentina has entered a seemingly eternal loop where the economy keeps hurting its politics, but its politics keep harming the national economy.”

Adding to the uncertainties in the southernmost country in the western hemisphere are looming presidential elections on October 22nd, which are almost certain to require a second-round of voting.

Leading the polls is the extreme-right economist Javier Milei, who advocates “an anarchic form of capitalism in a fully dollarized economy” as the way to salvage the country.

Among other things, he also favors dropping the Mercosu (of which Argentina is a founding member along with Brazil, Paraguay, and Uruguay) precisely at a moment when the Southern Bloc is edging towards a free-trade agreement with the European Union (EU). Milei also says he does not plan to accept Brazil’s President Lula’s negotiated invitation for Argentina to join the BRICS.

If elected, Milei plans to pivot Argentina away from the Global South, focusing its economic efforts on “agreements and partnerships with the US and Israel.”

“It doesn’t bode well if he wins and follows through with his plans,” Piellusch argues. “The Argentinian economy, despite its state, is still very important for Latin America. Whatever happens there has repercussions throughout the region. Even though the population has lost significant purchasing power over the years, we are still talking about a market of 40 million potential consumers,” he adds.

For Tomaz Paoliello, professor and coordinator of the Pontifical Catholic University of São Paulo’s (PUC-SP) global governance and international policy formulation master’s program, Argentina has great potential to “make or break Latin America,” swaying regional trends either way.

“Argentina still is a highly developed and educated country and this creates significant opportunity. If the country remains a functioning partner of Mercosur and helps the bloc reach a trade deal with the EU, this can lead to a positive impact both throughout South America and in Europe. However, Argentina also currently carries an aura of “damaged goods,” which is unfavorable for the whole of South America. Brazil is making a real effort to include Argentina in international forums and to improve their neighbor’s image in investors’ eyes, because of the deep historical, economic, and political integration between the two nations.

“A recovered Argentina can significantly boost Latin America’s economy. However, if that doesn’t materialize, remaining at its current state may not be the absolute worst prospect for the country or the region, considering all the noise on the campaign trail regarding the option of a drastic break with established norms,” says Paoliello.

Structural factors continue to hamper local development.

Criminality and corruption continue to heavily plague almost every country in the region with important exceptions in Uruguay and Chile. In Ecuador, presidential candidate (and the runner-up in polls) Fernando Villavivencio was assassinated at a campaign event in early August—just 10 days before the first-round of voting.

“Criminality and corruption exact a heavy toll across the region,” Paoliello explains. “Investors need to factor bribery, heavy security, and a high rate of cargo theft into the cost of doing business in Latin America,” he says.

Chronic infrastructural problems affecting freight routes, roads, ports, waterways and railways are also common themes in large swathes of the hemisphere.

“Those issues could, however, easily turn into major opportunities for growth and investment, if there’s also a little bit of political will,” argues Paloma Lopes.

According to the economist, major infrastructure developments necessarily require large direct investment. “If the region is open to international partnerships this could translate into very large sums of FDI,” she explains.

Yet, for all the conditionals impeding a more assertive Latin American take-off, analysts agree the region presents great—and safer—opportunities when compared to other emerging areas.

“Latin America continues to be extremely safe when compared to other developing markets. Political stability, democracy, personal freedoms, and human development indicators are much more deeply rooted here than in Africa, the Middle East, and parts of Asia,” says Paoliello.

“From a financial standpoint, Latin America continues to be extremely attractive for FDI. You have large consumer markets, who are relatively well-educated, along with a sizable middle-class that is finally starting to receive government incentives after the Covid-19 hiatus, which concentrated government expenditure on the lower-income classes. There’s appetite for internal consumption and a young, dynamic, workforce available in the region. That is not something you find everywhere,” Lopes adds.

When Luiz Inácio Lula da Silva (or Lula) won the Brazilian presidency in November 2022 by a slim 1.8% margin, Latin America’s leftward swing seemed complete. For the second time this century the region experienced a so-called “pink tide.”

However, most polls indicate that the current shift is more of an anti-incumbent movement than it is a lasting ideological realignment. Put simply, conservative governments failed to deliver sufficient growth and were punished accordingly by voters.

The window of opportunity for a more concerted regional articulation built around common political goals may be narrow, but it is also one of the faster paths to better economic results.

Regional Integration

Take the Mercosur trading bloc comprised of Argentina, Brazil, Paraguay, and Uruguay (Venezuela is currently suspended, the remaining eight South American countries are associated members, while Mexico and New Zealand are observer members): it aims to establish full free trade and movement across the region and encompasses a territory of over 19.9 million sq. km (an area 15% larger than Russia and more than double that of the US). Though still an imperfect customs union and relegated to marginal status during the tenure of Lula’s predecessor Jair Bolsonaro, Mercosur delivered a combined GDP of over $5 trillion in 2022, making the bloc the world’s fifth largest economy.

Other regional economic integration mechanisms include the creation of the Community of Latin American and Caribbean States (Celac) in 2010, the Union of South America (Unasur) in 2008, and the Latin American Integration Association (Aladi) in 1980.

Aladi’s 1982 Agreement on Reciprocal Payments and Credits (CCR) mechanism among Latin America’s central banks is arguably one of the region’s greatest success stories. The CCR allowed Latin countries to trade with each other while minimizing the need for international reserve currencies such as the US dollar. Members register their trade credits and subtract owed amounts over a period of time. Thus, hard currency is only necessary for liquidating the smaller sums of the regional trade balance. Brazil—the economic powerhouse behind the CCR— rescinded its participation in the agreement in 2019 under Bolsonaro.

“Withdrawing unilaterally from the CCR was especially damaging for Brazil,” explains Unasur’s former director of economic affairs Pedro Silva Barros, because it was the principal beneficiary of the arrangement. “Brazil is by far the region’s largest and most diversified economy and a net exporter to other Latin American countries. The CCR enabled countries with fewer resources or with difficulties in securing hard currencies—such as Argentina and Venezuela—to maintain higher import flows from Brazil.”

Pink Alliances, Green Tints

Since taking office in January, President Lula has indicated his desire to rekindle a modern version of the CCR and imbue Mercosur with renewed impetus. He is not alone in that enterprise. Fernandez’s Argentina is especially interested in a payment system based on a supranational currency.

“This is very different from the euro,” warns Brazil’s Applied Economics Research Institute (Ipea) coordinator and former UN Economic Commission for Latin America and the Caribbean (Eclac) director Renato Baumann. “What is being discussed is a common currency—possibly a virtual one—that wouldn’t supplant national currencies, but instead be used for intra-bloc trade to avoid external hard currencies,” he explains.

The pink tide this time around also has a decidedly greenish tint as leftist governments throughout the region prioritize fighting climate change and environmental degradation. Lula’s Brazil is hosting a summit of Amazon nations later in 2023 and hopes to host the UN’s Climate Change Conference in 2025, a sharp reversal from Bolsonaro’s refusal to protect the Amazon and its indigenous peoples. The latter derailed free trade agreement (FTA) negotiations between Mercosur and the EU in 2020, meaning talks can now resume.

Seeing Red And Yellow in Uruguay

Spurned by Bolsonaro and with Mercosur morose, Uruguay’s President Luis Lacalle Pou turned away from Latin America and towards China. Uruguay has formally started negotiating an FTA with the Asian giant—which could have serious implications for Mercosur—and China has overtaken Brazil as the top importer and exporter to the small South American nation.

According to Baumann, these developments are not entirely unexpected. “Uruguay has formally renounced its industrial efforts and is content with its place as a commodity and services exporter, so China’s cheap imports do not pose a threat to its industry,” he says.

“The move by Uruguay has a lot to do with Bolsonaro’s lack of interest in Mercosur, and his personal dislike for the current Argentine president. If the two largest members of the bloc are not talking, there’s very little hope for the smaller ones,” Baumann says.

China’s inroads into Latin America are part of a broader pattern of increasingly intense Chinese-US strategic competition explains Dr. Cui Shoujun, a professor and director of Latin American studies at the Renmin University of China in Beijing.

“As a global power and global south country, China needs Latin America to deal with numerous international issues. Latin America is a partner in promoting world governance and the rise of the global south. Economically, Latin America is rich with natural resources, which China needs for its manufacturing industry. Signing an FTA with Uruguay may catalyze ongoing talks with others,” he says.

According to Ipea’s Baumann, China’s courtship of Uruguay is part of its global strategy of becoming an alternative to the West and making the Chinese currency—the yuan—more global.

But Chinese ambitions in the region do not stop at Mercosur. An Ecuador-China FTA has been negotiated this past January with China set to finance six hydroelectric projects across South America to the tune of some $3 billion. Ecuador, on the other hand, is supplying cheap oil to PetroChina in a debt repayment program.

“Even though there is nothing precluding Uruguay from signing an independent trade pact with China per Mercosur agreements, it would almost certainly mean the country would have to leave the bloc. Tariff-free goods from China could otherwise enter Uruguay and, from there, freely cross into the other member countries. This would signify a complete demise of both Brazilian and Argentine industries,” Baumann says.

Lula is trying to counter China’s moves by prioritizing the FTA with the EU and reviving Latin American integration. According to Silva Barros, Brazil’s isolation came at a cost: lower intra-regional commerce. “South American commerce is low, but extremely important for Brazil—it used to comprise 19% of all Brazilian exports in 2011, but is now at 13%,” he says.

“This decrease has not been compensated by export gains to other parts of the world, principally because Brazil’s exports to Latin America comprise more specialized goods with higher intrinsic added value than the country’s exports to other regions,” Silva Barros adds.

Brazil’s average value per exported metric ton (AVET) to South America is $1,600—compare that to Brazil’s $260 AVET to China, and it becomes clear how important regional trade is for Latin America’s largest country.

“South America is also an extremely preferential market for Brazil. While the region imports only 1.6% of the global output, it currently absorbs 13% of Brazil’s exports—and 35% of that volume is made up of goods of either medium-high or high technological added value,” Silva Barros notes.

So, how does Brazil solve the Sino-Uruguayan conundrum? According to Baumann, the best way forward is for Lula’s government to deepen relations with both Argentina and Uruguay.

“Oil and liquid gas pipelines connecting the three countries would be significant incentives for the other Mercosur members to focus on local strategy instead of Asian trade. Brazil can further sweeten the deal by providing access incentives to the burgeoning Uruguayan services sector. But the initiative must come from Brazil, which represents around 75% of the bloc’s GDP,” he says.

Silva Barros adds a cautionary warning should Mercosur fragment: “Lack of integration means South America becomes open to external actors and another stage in the disputes of bigger world powers. There is no such thing as a power vacuum, once a player is out another one takes its place. This can be seen in Venezuela: the influence of Argentina, Brazil, Mexico, and the US dwindled only to be swiftly replaced by that of Turkey, Russia, and Iran. Integration goes beyond trade issues and could very well mean the stability and maintenance of peace for all of South America.”

Markets have reacted with surprising good cheer to the election in Brazil that put left-leaning Luiz Inácio Lula da Silva in charge.

The São Paulo stock exchange (Bovespa) had its best first trading day after a presidential election in Brazil’s modern history—the Ibovespa index rose by 1.31% on Monday, and by an added 0.77% on Tuesday. For comparison, the index fell by 4.4% when Lula was first elected in 2002, and by 2.24% when Jair Bolsonaro was elected in 2018.

The Brazilian real (BRL) also saw its sharpest value increase against the US dollar on a first post-election trading day, rising 2.6% on Monday and another 0.92% on Tuesday. The currency had been absorbing the brunt of market worries concerning Bolsonaro’s erratic and unpredictable policies—even with market-darling neoliberal Paulo Guedes by his side as Minister of Economy—and a storm of problems, including poverty, joblessness, inequality and declining purchasing power had further taken a toll, leaving the currency undervalued.

Normally markets don’t cheer for leftist leaders, but there are several factors fueling market optimism in Brazil and making it follow a separate path from international markets this week. First, any left-wing urge for social spending will be tempered by the composition of the new Congress, which will include a significant portion of Bolsonaro supporters in both houses.

Lula comes to power on the wings of a coalition of 10 parties that came together to defeat an increasingly authoritarian Bolsonaro, and many of these parties are slightly right of center. So is Lula’s pick for vice-president, former Sao Paulo-state governor Geraldo Alckmin, who in the 2006 presidential elections was defeated by Lula himself in the run-off. Alckmin is slated to have a much more prominent role in Lula’s term than most vice-presidents, and he has already been appointed head of the transition team.

Second, Lula will abolish the so-called “secret budget”—a parallel budget that was one of the more bizarre features of the Bolsonaro administration to gain support in Congress. The budget was dubbed secret by the local press because money slated for health or educational spending needed not have the amount, objective, or names of those who approved it made public, rendering the oversight of billions of reais of federal spending virtually impossible. Beyond the risks of blowing the budget ceiling, there is mounting suspicion that at least part of these funds were funneled into the political campaigns of presidential allies.

Finally, despite Brazil’s record agribusiness exports, Bolsonaro’s disregard for ESG had relegated the country—a former champion of environmental agreements—to the sidelines of the sustainability debate. The position triggered fears in the commodity sector of possible organized retaliation against Brazilian agricultural products. Lula has a much stronger diplomatic reach than his predecessor and has pledged to put Brazil back in the forefront of environmental protections.

There are several challenges ahead for Lula. Most pressing is the federal budget to fund spending into 2024, which needs to be approved by the current Congress. None of the priorities signaled by Lula during his campaign (and almost none of the social programs Bolsonaro had pledged to carry over from the pandemic emergency) are contemplated in the version currently being discussed by Congress. Lula will have less than two months to articulate changes that will allow him to govern once he assumes office on January 1—and this will have to be done despite a hostile outgoing president.

The expected world downturn and recession in 2023 will also affect Lula’s ability to enact reforms while mitigating recession and inflation. If Lula fails to produce popular reforms and create social stimulus for the lower classes, or if the country’s economy contracts, his government will lose support too early in his term, hampering his ability to effectively govern.

Brazilians voted Sunday in the most polarizing elections the country has seen since it transitioned back to democracy in 1988. Former two-term leftist president Luiz Inácio Lula da Silva, known as Lula, won the run-off elections by a thin margin (50.9%) against the conservative right-wing incumbent Jair Bolsonaro (49.1%). This is the first time a sitting president was not reelected for a second term in office in modern Brazilian history.

But while Bolsonaro may be going, he is not going quietly. His supporters put up roadblocks across the country, and business associations have warned that industrial supplies are already being impacted.

Despite Brazil’s enormous size (larger than the continental US, all of Europe, or Australia) and population (215 million inhabitants), the country tallied the results of almost 124 million votes cast Sunday within approximately three hours of polling stations closing. Its electronic balloting system, which can be independently audited and verified, has won praise the world over since it was introduced, in Brazil’s 1998 elections.

It was nevertheless the target of continuous accusations of fraud vulnerabilities by Bolsonaro in the months before the vote. Internal and international reviews of the system yielded fresh testimony to the security and integrity of the electronic machines, the claims inflamed social divisions. Many wondered whether Bolsonaro would accept a loss or instead emulate the actions of his former ally, Donald Trump.

For two days after Brazil’s Supreme Electoral Court (TSE, in its local acronym) had declared Lula the president-elect, Bolsonaro kept silent, perhaps in the hopes support would emerge. Instead, he was blindsided by some of his staunchest allies who were quick to concede defeat and signal they would not spread political narratives that could undermine the democratic process. Both the presidents of the Senate and Chamber of Deputies (the Brazilian equivalent of the US House of Representatives) congratulated Lula within minutes of the results being announced.

Foreign governments that wished to mitigate the risk of further turmoil in a world already shook by the pandemic and the Russian war on Ukraine, sent a cascade of congratulatory messages and recognition of Lula’s victory through Sunday night and into the week. The White House put out a statement by President Joseph Biden congratulating Lula and praising the transparency of the polls less than 40 minutes after the TSE officialized the results.

Finally, in a two-minute scripted speech that did not mention his rival, Bolsonaro signaled he would not contest the results. Still, Bolsonaro’s silence had been read by some supporters as a green light to protest the election results. Shortly after midnight on Monday, truck drivers started blocking highways across the country. The Federal Highway Patrol, an agency whose director, Silvinei Vasques, is a Bolsonaro ally, received no instructions to respond to these actions. Vasques had already come under fire for stopping vehicles for “traffic inspections” in the heavily pro-Lula northeastern states—inspections that delayed thousands of voters in getting to the polls.

By the time Bolsonaro made his speech, more than 65 partial or complete roadblocks were in place in 22 of Brazil’s 26 states, as well as the Federal District, which encompasses the capital, Brasília. According to economist Denis Medina, a professor at the College of Commerce of São Paulo, the blockades put critical fuel and food supplies at risk, particularly if they persist. The Supreme Court has empowered state police forces to dismantle the blockades.  

The threat to the constitutionally mandated transition of power seems to have been resolved for now. After President Bolsonaro’s short speech Nov. 1, his chief of staff said the team had been allowed to initiate transition arrangements with Lula’s team.

No one knows Brazil’s volatility—in economics, in politics, in society—better than Brazilians themselves. Locals often explain these ups and downs with the popular adage “Brazil is not for amateurs.”

Just three weeks before a pivotal general election, this wry cliché is being cited so often by economists and political commentators that it increasingly sounds like a motto to explain away the seemingly impossible choices facing the nation.

The coming presidential vote has two extremely polarizing candidates pitted against one another–and many Brazilians wish neither were the frontrunners for the country’s top job. The incumbent president, Jair Bolsonaro, a right-wing populist whose tenure has been marked by pro-gun, misogynistic and homophobic rants, along with support for scientifically debunked methods of containing the Covid-19 crisis, is trying to secure a second term in office.

Bolsonaro’s main adversary is the former liberal left-wing two-term populist president Luiz Inácio “Lula” da Silva. (The Brazilian Constitution limits presidential candidates to two consecutive presidential terms but doesn’t preclude candidates from future nonconsecutive runs after serving their initial two terms.) Lula is credited with reducing enormous income inequalities deeply expanding the country’s fiscal deficit. And while Brazil’s economy did well during his two terms in office—thanks to the early-2000s sustained commodity boom—his tenure was marred by deeply divisive rhetoric against the middle and upper classes, who were financing his reforms, as well as continuous corruption scandals that saw Lula land in jail and be barred from public office. He later had the entire ruling against him expunged by the Supreme Federal Court, on the basis of legal misconduct and political persecution by the chief prosecutor and his team.

Although other candidates are running, the latest polls suggest there is no stopping Bolsonaro and Lula from being the de facto two candidates left standing if no one garners the 50%-plus-one vote needed to avoid a runoff.

Optimistic Signs

Brazil’s gloom has been somewhat lifted over the past few weeks by improved economic data pouring in—though most economists treat it with extreme caution and predict a much more challenging 2023 in a globally difficult environment, irrespective of who wins the election.

Whereas earlier in 2022, Brazil was expected to grow a meager 0.8%, the country’s GDP growth has been revised up by its central bank and the International Monetary Fund to 2.5% this year. Inflation, meanwhile, is being revised down. The leading national consumer inflation index (IPCA) decreased steadily during July and August, from June’s peak of 9.25% to August’s 7.02%. The Central Bank of Brazil, in its weekly Focus market report of September 9, estimated that 2022 would end with an annual inflation rate of 6.4%.

“Such lower inflation rates do not come without consequences,” warns Nicola Tingas, chief economist of the Financial Credit Association (Acrefi). “The primary source of lower inflation forecasts comes from the government’s aggressive tax cuts on gas prices—not only at the federal level, but also by capping state taxes on fuels.”

Nonetheless, the strategy presents three problems, Tingas says. It widens the fiscal deficit, which has always been a problem in Brazil; it forces individual states into higher debt by depriving them of part of the tax they collect; and it creates uncertainty about next year, when tax cuts on fuel are due to end.

Although gas prices have been continually falling at the pump and currently stand at a national average of 4.99 Brazilian reais a liter (about $3.67/gallon), consumers have had but little respite in the price of food, which rose an average of 9.83% in 2022, or clothing, which rose 11.02%. Brazilians have seen the price of kitchen staples similarly skyrocket. At the end of July, year-on-year price increases grew by 75% for onions, 74% for strawberries, and 66% for both milk and potatoes.

This has had another adverse effect on the country’s fiscal outlook, as the government expanded its handouts and social incentive programs to various constituencies.

“This would be common in an electoral year, but the scope of welfare and the fact that the two main candidates keep promising to maintain and even expand these programs in 2023 are worrisome,” says Tingas. “We are already predicting BRL300 to BRL400 billion (about $57 billion to $76 billion) in fiscal deficits for the coming year.”

Another tool being used by the government to try to tame inflation is the continuous rise of the central bank’s interest rate, known as the Selic rate, currently standing at 13.75%. According to Patrícia Krause, chief Latin America economist at French global credit insurer Coface, the current interest rate is high, but tolerable. “A high interest rate can cap economic growth, but it is also an important tool in a volatile market with high inflationary trends and uncertainties,” she says.

Overall, this year’s trend is cautiously optimistic, as Coface upwardly revised Brazil’s credit rating to B from a previous C, even though the firm remains concerned about the country’s fiscal situation, mainly due to a worsening indebtedness of families and an increase in the government’s assistance programs.

According to Krause, Coface doesn’t see additional room for an interest hike this year and expects 2023 to end with the central bank’s Selic rate at 12%. “This isn’t to say there aren’t troubles on the horizon. We expect delinquency rates to increase in Brazil next year, even with a lower inflation rate of 5.3%. And we are currently forecasting only 0.2% GDP growth for 2023 amid more global uncertainty.”

Caution On The Path Ahead

Although the consensus points to marginal GDP growth in 2023, not all economists agree that this is a certain path.

“Many variables are changing right now across the globe and in the country that inform our perspectives. But the transition between 2.5% approximate growth in 2022 to a drop of more than 0.5% without clear perspectives for 2023 seems a bit arbitrary, despite the various economic models used to make such forecasts,” says Roberto Macedo, who currently coordinates the faculty of economics at FAC-SP and is a professor at the University of São Paulo.

“We have seen a lot of stimuli toward increased consumption during the pandemic, and that is already having some effect; the level of savings has recently decreased from its all-time high in 2020,” he says. “We have also seen a post-pandemic recovery in the services industry, but that hasn’t translated into a recovery—both in qualitative and quantitative terms—of employment.”

“We tend to talk a lot about the pandemic recession, but the fact is that Brazil has not faced a crisis. It has been in a constant depression since 2014. Even with the better-than-forecast growth this year, our GDP will still be lower than it was back then. It would take a growth rate of approximately 2% next year to put us back where we were eight years ago.

Brazil is far from the impressive growth it experienced in the 1960s, which sometimes surpassed double-digit rates. Sluggish economic output and over 20 years of hyperinflation in the 1970s led to increased poverty.

“Lula’s distributive economic policies closed some of that gap in the early 2000s at the expense of increased taxation,” says Macedo. “That was possible back then because of the sustained economic boon in commodities. Despite the recent uptick in commodity demand, all signs currently point to a very different scenario: China’s decreased growth and trade balance should mean less demand for much of Brazil’s exports.”

If he is right, 2023 could prove difficult for Brazil’s recovery as it starts a new political cycle. The national currency, the real, is undervalued by all standards, even after accounting for the strongest US dollar in over 20 years.

“The currency has absorbed the market risk associated with the widening fiscal deficit and the institutional political crisis that has plagued the country for almost eight years,” says Acrefi’s Tingas.

The devalued currency partially offset some of the pandemic woes by making Brazilian exports cheaper internationally. However, it helped increase inflation due to the higher price of imports. Worse yet, it takes away some of the incentives for modernizing Brazilian industry and infrastructure while exports grow despite a lack of competitiveness.

There’s a real danger of Brazil falling into the downward spiral that led Argentina to the terrible economic grounds where it currently stands, warns Macedo. Perpetual populist measures create unsurmountable fiscal deficits. That—along with a lack of government investment, high-interest, and a devalued currency—would not bode well for any economy.

“Argentina was one of the greatest economies of the early 20th century,” he says. “It is a cautionary tale of how ill-advised and populist measures can break a country—even a great one. What we see in the dynamics of Argentina and Brazil is that while the former constantly pursues a past that doesn’t come back, the latter keeps chasing a future that won’t materialize.”

Brazil, for the moment, seems to have found some breathing space, even amid global chaos. But unless a tight fiscal policy that doesn’t leave much room for political favors is pursued—irrespective of who wins October’s election—the country risks sliding back into stagnation and remaining far away from the promised future it wants.

Brazil may be going through a turbulent political and economic period, but the country continues to be a center for innovation in Latin America. The South American powerhouse has seen revolutions in financial services, communications, agribusiness and aviation in the last few years. Nonetheless, how the nation’s government, corporates and financial institutions operate regarding environmental, social and governance (ESG) concerns remains a sticking point.

In a nation where the current administration has become identified with poor environmental practices in the eyes of domestic and foreign stakeholders, good ESG management has become an urgent matter for businesses eager to dissociate themselves from the images of deforestation and degraded biomes. In the case of Brazil’s potent agribusiness sector, transparency, innovation and high adherence to ESG best practices are the only way to stay ahead of foreign competition that politicizes the country’s environmental status. Moreover, the industry’s adoption of ESG practices is imperative if it wants unhindered access to the international market for Brazilian produce.

According to an unnamed investment fund manager who counts Brazilian agricultural producers among the fund’s credit-lending clients, Brazil has done a terrible PR job institutionally. “This definitely affects Brazilian producers and processors in their access to the international investment markets,” says the manager. “We do not yet see off-takers reducing their appetite for Brazilian commodities, but robust and transparent official information channels are much needed at this point.”

Of course, the fastest way for the country to improve its global image would be through strong government action. “Honestly, we do not foresee that happening in the near future; so it is up to market players and businesses to provide investors with data in a constant and trustable manner,” the fund manager adds.

But in many ways, corporates and agribusiness have already understood this message, according to the authors of a KPMG study titled The Time Has Come. The authors found that 85% of the 100 largest Brazilian companies already publish continuously updated ESG reports—making Brazil second in Latin America only to Mexico (which has a 100% publishing rate) for providing such timely data.

In fact, Latin America is the global leader in sustainability reporting by businesses that could threaten biodiversity, with an overall average of 31% of national top 100 companies reporting. Asia Pacific (23%) comes second, followed by Europe (22%) and the Middle East and Africa (19%), while North America (13%) trails last.

The study considers the largest 100 Brazilian companies and compares them to the largest 100 companies in other countries, according to Nelmara Arbex, KPMG’s lead partner in ESG Advisory in Brazil.

“Globally, big companies are the ones that publish the most sustainability reports,” she explains. “This shows that the biggest Brazilian companies—many of which are subsidiaries of multinationals—are aligned with the global movement on transparency. This is good. However, these companies do not represent the great majority of Brazilian companies, which mostly do not publish such reports.”

On the other hand, Arbex adds, many of those companies of all scales not publishing reports already have some sort of ESG management in place. “They do not have this information organized or coordinated with their business strategy … and they miss an opportunity to gain important reputational [value], which would enable them to enter new markets, gain access to certain types of loans, and attract talent and consumers.”

By all measures, ESG is a good investment strategy: It benefits communities and businesses while creating deeper synergies between them and their markets.

However, ESG’s benefits involve enormous investment in education, human resources, infrastructure and technology. The Brazilian Development Bank estimates that the nation will need domestic and foreign direct investment of at least $1.3 trillion by 2030 to modernize current infrastructure to be more sustainable. It is a high figure even by international standards. Global ESG investment is likely to reach up to $50 trillion by 2025, according to Bloomberg Intelligence, meaning Brazil would need to attract more than 2% of that alone.

“[Brazil] has one of the strictest environmental laws in the world. Combined with food security issues in other parts of the planet, there is no doubt we will see more investors coming [into the country]—but of course with many more ESG filters embedded into their offers,” says the investment fund manager.

ESG-linked requirements by investors are a strong national and global trend, according to KPMG’s Arbex. “For the past 15 years, investment managers have been changing their risk-assessment matrixes and increasingly inserting ESG aspects to evaluate the businesses in which they invest. In Brazil, the central bank and other regulatory bodies have published clear directives regarding such evaluation for financial institutions and investors.”

The most significant innovations in Brazil relate to alliances between private businesses, citizens and specialist organizations vying for a common goal, such as the protection of the Amazonian ecosystem, the safeguarding of public and tuition-free education, or the defense of a public health system, she adds. “At [the UN] COP26, we saw these alliances becoming very active to keep Brazil on track towards decarbonization domestically and as part of the international carbon market. These alliances are important forms of articulation and long-term projects in Brazil.”

Payment and Banking Innovations

Much attention is devoted to the private and third-sector approach to ESG and the clusters of high-tech agribusiness forming close to the country’s greenbelt, and churning out new technologies that increase agricultural productivity without expanding the size of agricultural land. However, it is impossible to speak of innovation in Brazil without looking at its financial sector.

Brazil is forging ahead nimbly in innovative banking and payment methods. The country already has a robust electronic payment system and secure financial institutions with some of the world’s largest proportional revenues.

Pix—a free, state-owned electronic instant payment system that lets people who do not hold credit or debit cards use their phones to pay for almost anything—debuted in 2020 and is already a successful market disruptor. The system has reached over 112 million users and has the fastest adoption rate among payment systems globally, reports Folha de S. Paulo, Brazil’s largest daily newspaper.

All financial institutions with more than 500,000 active customer accounts in Brazil are obliged to provide their clients access to the payments system free of charge.

The platform permits users to receive electronic bills for prescheduled payments and withdraw cash from ATMs, while enabling merchants to credit customers electronically for cash transactions. Additional functions are planned and await deployment.

The widespread use of payment machines and apps spawned by Pix has spurred further innovation. The fintech CloudWalk, which offers the InfinitePay payment terminal, recently announced its intention to start rewarding customers with cashback in cryptocurrency in return for using the company’s payment app. The company expects to hand out up to 1 million Brazilian reais (about $178,000) in cryptocurrency rewards monthly.

Fueling these fintech innovations is Brazil’s Open Banking initiative that allows customers to selectively share portions of their financial, personal and credit records with various credit bureaus and with lending and financial institutions. The client controls how much and what information is shared and can switch accounts within the same financial institution without all the red tape this usually entails.

The portable banking scheme, whose latest phase was rolled out in October, promises that cheap and nonbureaucratic credit facilities will be more amply available. For financial institutions, it means more business and better insights into the creditworthiness of individuals and companies.

Once Brazil’s financial industry completes the fourth and final phase, which should start in December, clients will be able to simultaneously send requests for credit facilities and loans to various financial institutions and receive an almost immediate response of all approved offers, with tools to compare interest rates and repayment terms. Brazilian authorities hope that Open Banking increases the competition among institutions while lowering fees for consumers and businesses—all in a faster, more secure, transparent and less bureaucratic manner.