Latin America’s New Kids on the Bloc

Macro Watch: Earlier this year, in April, four of Latin America’s most neoliberal economies – Chile, Colombia, Mexico, and Peru – signed the Pacific Alliance agreement. This agreement will boost existing trade ties and enhance economic cooperation within the region. Joint exports between these four economies are estimated at USD 15.77 billion for 2010 compared to USD 10.95 billion in 2009, having grown at a compound annualised rate of 9.18% since 2006. This alliance will also allow these Latin American economies to increase economic clout, especially through collective trade negotiations with other economic blocs rather than through a series of bilateral agreements. In the context of rising uncertainties in the U.S. and in the EU, increased bargaining power may come in handy in possible trade talks between Asia and other emerging markets. Chile, Colombia, Mexico, and Peru have combined annual total exports of USD 444.89 billion in 2010, reporting a 5.67% compound annualised growth rate for the period 2006-2010. This, according to Peruvian President Alan Garcia, represents 55% of Latin America’s exports and rivals the trade union Mercosur.

The trade alliance was further complemented by the recent joint launch of the Mercado Integrado Latino Americano (MILA) in May 2011 by Chile, Colombia, and Peru, which will merge the stock exchanges of these countries, forming the second largest financial instruments market in Latin America after Brazil. This represents a bold attempt toward deepening capital market integration in these economies, allowing mutual access to increased capital, liquidity, and exposure to a wider range of investment opportunities. As of May 2011, the Santiago Stock Exchange (Chile) recorded a market capitalisation of approximately USD 338.50 billion, while the Colombian Stock Exchange and the Lima Stock Exchange (Peru) recorded market capitalisations of USD 218.88 billion and USD 131.10 billion, respectively.
Although increased economic cooperation is not a new phenomenon in Latin America, these multilateral trade ties and stock exchange mergers represent a major shift towards “deep integration” in the region. While deep integration may not necessarily be a precursor to an economic union similar to the European Union, successful integration of these pro-market economies may inspire further opportunities for similar deep integration in the region. In the context of possible financial crises in the U.S. and the EU, these neoliberal economies may find strength in unity.
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By Ian Lim in Malaysia – CEIC Analyst