In May, Archer Daniels Midland announced that it is building a new port terminal in Uruguay to export corn, soybeans, wheat and soybean meal to Europe and elsewhere.  ADM is not alone in beefing up its presence in Latin America.

Lately there’s been a lot of hype surrounding the market growth and emerging consumer class of Latin America.  The investment potential there has been intriguing for several years because of the possibility of significant growth, but so far it hasn’t played out.  This time around it appears that the fundamentals are in place for the region to become a true force in the global economy.

While the global credit crisis has had many victims, Latin America was left fairly unscathed.  Previous debt and credit crises from over a decade ago taught many hard lessons, so they were in a much better position to weather the storm.  Coupled with the rise in commodity prices and China’s insatiable thirst for natural resources, this has resulted in an expanding middle class in the region.

For example, the middle class in Colombia has increased approximately 30 percent in the last five years.  That means members of society who were once drains on their economy are becoming consumers.  Quite simply, the region is experiencing a substantial increase in disposable income.

One of the most important reasons for this emergence is that unlike the U.S. and Europe, Latin America’s consumers did not have much debt to default on. Access to credit was much more difficult in these countries or the interest rates were just outright onerous.  Additionally, the price for commodities has skyrocketed recently. In the past five years the price of gold increased over 159 percent; oil has gone up 87 percent.   As a result, there has been a substantial increase in the investment infrastructure for many countries in the region.  Panama, for example, has attracted $2.3 billion in foreign direct investment.

A combination of these factors, among others, has led to the level of Foreign Direct Investment (FDI) growing to unprecedented levels.  Many of the world’s premier economies have allocated a significant amount of capital and resources to develop the region further and help to sustain this growth indefinitely.

Considering an investment?

Each Latin American country should be evaluated independently since they’re all vastly different. Five major factors should be taken into: political environment, macro environment, corporate environment, globalization and competitiveness and infrastructure level.

There has been a major improvement in governance and stability in countries such as Colombia. These economies are growing because of the fiscal policies in place and a concerted effort to implement ethical regimes.   For example,Colombia under the Uribe administration made a substantial investment in the security of the country.  Mr. Uribe has been quoted; “If foreign investors do not feel safe, they will not invest.”  Individual countries in the region are making significant moves to make themselves more attractive to potential investors. For example, Peru, Colombia, and Chilemerged their stock exchanges into one, and there is already speculation that Mexico could be close behind.

Because of the devaluation of the U.S. dollar, buying U.S. products is now more affordable. With extra income and access to credit cards this trend will certainly continue.  As sales rise retailers and wholesalers will be encouraged to expand into Latin American countries.  The retail sector looks like it will experience substantial growth over the next few years and could present itself to be a solid investment opportunity.

On the coat tails of this trend of higher income throughout each class level we’ll start to see many new products and services popping up. People are starting to need and want nicer houses, but considering there has not been much of a market in the past, the demand for new home construction will certainly boom in the coming years. As their economy continues to mature you’ll see an exponential corresponding uptick in construction and infrastructure development to keep up which will lead to even more job creation.

In addition to increased demand, there are incentives to expand operations to Latin America. The US Department of Commerce will help investors find businesses and will set up meetings with the appropriate locals, whether entrepreneurs or government officials. And its close proximity to the US makes the market very accessible.

The consumer class in Latin America is likely here to stay. They are getting better education and embracing new technology. The literacy rate for the region is over 90 percent. Their online presence is growing significantly and the digital divide is slowly being closed. Mobile phone penetration in Latin America and the Caribbean is already at 80 percent and Chile has free Wi-Fi for its citizens. Costa Rica has been nicknamed “the Silicon Valley of Latin America.”This region has solidified itself as one of the major global players in technology and has bold plans to make it one of their primary focuses going forward, making this sector very attractive to foreign investors.

Another positive sign is that the middle class in Latin America is very young, concentrated in the 12 to 35 age range. They will continue to be a force going forward. Having disposable income is a very empowering feeling. Getting a taste for discretionary and luxury goods will only compound this effect as they will continue to work harder to maintain this lifestyle.

Women are becoming more empowered as well. They are increasingly becoming the primary breadwinners or at least contributing significantly to their household income. Often they tend to be the decision makers with regard to household purchases. They are active online and able to participate in e-commerce.

What are some risks?

One concern with this sector is inflation. As these markets continue to develop the value of their currencies is being affected. Inflation decreases purchasing power for discretionary products and services because the cost of basic needs such as food and energy rise. But consumer spending here is outpacing that of the developed world, and Latin America doesn’t rely on imports nearly as much as other regions such as Asia and Russia.  Another potential risk is that not all of the countries have stable, democratic governments. Instability, corruption, and leftist populist governments remain in a few countries and this has had a negative effect as in the case with Venezuela.

Consider diversifying your portfolio or expanding your business to Latin America.  Despite some risk, the potential reward is well worth it.  With the right approach there are incredible opportunities to capitalize on the growing middle class and their newly acquired purchasing power. As the world continues to globalize rapidly, it’s imperative to get exposure to emerging markets with high growth potential.

Raul A. Garcia, CPA, is a manager in the audit financial services department at Kaufman Rossin, one of the top accounting firms in the Southeast. He can be reached at rgarcia@kaufmanrossin.com.