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From issue: Trafficking and Transnational Crime (Spring 2010)

AQ Feature

Investment: The Middle East Comes to Latin America

China usually tops the list of new investors in Latin America—and with good reason. Roughly half of China’s $50 billion in overseas investments in 2008 went to the region. Between 2000 and 2008, Latin America-China trade—driven by Chinese interest in the region’s natural resources—grew tenfold to $142 billion.

But the attention focused on China has allowed another growing source of investment dollars in Latin America to go largely unnoticed: the Middle East.

Capital flows between the Middle East and Latin America are on the rise, paralleling the stepped-up diplomatic relations between the two regions. Like their Chinese counterparts, Middle Eastern investors are focused on securing access to raw materials such as iron, copper, agricultural land, and food crops. In 2008, total merchandise trade between the regions rose to $18.8 billion—more than triple the total in 2000—with $11.9 billion representing Middle East imports of Latin American goods.

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Brazil is at the forefront of the ballooning Middle East merchandise trade, while at the same time, Brazilian companies are increasingly looking to the Middle East for capital. Trade between Brazil and all Arab countries (a larger group than just the Middle East) rose to $20.2 billion in 2008 (from $8 billion in 2004) with the United Arab Emirates (UAE) leading the way as Brazil’s major trading partner. In 2009, Abu Dhabi Investment Authority undertook construction of two towers in Rio de Janeiro, and the Emirates’ Aabar Investments invested $328 million in the initial public offering of Banco Santander of Brazil.

In a further sign of interest, Middle East-based trade organizations are registering in increasing numbers with Brazil’s Securities and Exchange Commission, a step that allows them to invest more easily in Brazilian public companies. In 2007, 12 new registrations were reported, compared to just one in 2001. The total number of registrants now stands at 26.

Middle Eastern investment in Brazil is largely driven by investor and government concerns about food scarcity at home. As a result of their arid climate, the region’s countries are currently forced to import 90 percent of their food supply. They have responded by purchasing large tracts of arable land throughout the developing world. Saudi Arabia, for example, recently announced the establishment of an $800 million company to support investment in overseas farmland. Saudi officials included Brazil as one of their target investment markets.

That’s not a surprise. Brazil’s regular rainfall and its abundance of solar energy provides a year-round growing season. And the fact that Brazil holds 13 percent of global freshwater reserves is a major attraction to the parched nations of the Middle East. Moreover, its agribusiness industry is efficient, modern and competitive, providing a lucrative margin for investment. Global investors are also attracted by the fact that Brazil imposes no export restrictions on commodities.

The Middle East is already a major importer of Brazilian agricultural products, but agribusiness between the two regions is poised for even greater trade volumes. Currently, the region ranks third among Brazil’s major markets, accounting for 10.6 percent of total exports, a marked increase from last year’s 8.4 percent. Brazilian participation in this year’s Gulfood fair—the Middle East’s premier food exhibition—was one of the largest among participating countries. Sales in 2010 are expected to exceed the previous year by 50 percent and to jump to $60 million by year end.

Iran is one of Brazil’s principal importers, with trade, largely as a result of food sales, doubling to $2 billion between 2003 and 2007. The relationship between Iran and Brazil is evidence of Brazil’s willingness to engage with even the most distant of Middle Eastern nations.

Investment activity in other countries in the Americas is also increasing. The United Arab Emirates committed $250 million to a joint venture with Cuba to transform the port of Mariel into a world-class transshipment center. The UAE is also looking to strengthen economic ties with Argentina. In the backdrop of booming trade between the two countries, which in 2008 posted a 92.3 percent increase from the previous year, a three-day business roundtable will be held in December 2010. And Venezuela has caught the attention of Iran, having engaged in a number of joint ventures, including crude oil production and car manufacturing.

Economic ties have been facilitated by developments such as direct flights between Dubai and São Paulo. In the UAE, a commercial center provides easy access to Latin American products, investments and marketing opportunities.

Heightened trade activity is also being driven by Middle Eastern investment funds’ partial refocus of investment strategies toward emerging markets. This is likely driven by a quest for alternative investment opportunities, but it also may be a reaction to a heightened scrutiny of foreign investment in Western countries and pressure for greater transparency. For example, the Kuwait Investment Authority cut its portfolio investment in Europe and the U.S. to less than 70 percent (from 90 percent) in 2008 and announced in 2010 that it is increasing investment in emerging markets to 9 percent (from 3 percent), focusing on countries with 8 percent to 10 percent growth. Dubai International Capital is also focusing its $13 billion fund on emerging markets, with Brazil positioned as a potential benefactor.

There is no doubt that China will continue as a key, if not dominant, investment player in Latin America. Yet this should not distract attention from the Middle East, where a rising wave of investment promises to spill across Latin America. But it cannot be predicted whether this wave will gain momentum or quickly recede.

Gulf countries are investing millions in advanced technology to improve domestic agricultural practices and to be able to provide food sources internally. This investment may eclipse the current focus on Latin America, but Middle Eastern countries will continue to enjoy surplus funds that will likely be directed to investment abroad. Even so, food source security will remain a priority, and Latin America, with its abundant land and willingness to engage with new partners, will remain a focus.

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