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While Latin America is doing better than the developed world at this point, there are still challenges that need to be understood when looking to invest, writes Rudy Martin of Latin Stock Investing.

Latin America is in relatively better fiscal shape than the US and Europe, according to Scotiabank's Latin America Regional Outlook, Summer 2012. Most countries in the region, even those which are adopting inconsistent policy options like Argentina or Venezuela, enjoy manageable fiscal deficit positions, prompting the states to play more dominant roles in adopting pro-growth stimulus strategies, according to the report.

“The region’s overall debt profile has steadily improved, raising the prospects for credit ratings upgrades,” in Scotiabank’s opinion. “Long-term equity investors continue to see enormous potential in thriving sectors connected either to infrastructure or the development of vast energy and mineral resources.

Brazil alone has received $60 billion in foreign direct investment (FDI) flows over the past 12 months. Colombia’s energy sector, Mexico’s industrial sector, Peru’s mining sector, and even Uruguay’s forestry sector are notable FDI targets.”

The report describes the pace of growth in Latin America as “uneven,” with marked differences between the US-linked countries in North and Central America and the more Asia-influenced, domestic-driven economies in the South.

Scotiabank feels that Brazil will initiate a new phase of sustained economic growth, following a marked slowdown in industrial activity during the second half of 2011. It feels that Mexico remains on a solid economic growth path due to its close link to the US industrial and monetary cycles and growing domestic demand in an electoral year.

“Colombia, Peru, and Chile also enjoy similar rates of economic expansion, strongly influenced by commodity export markets and steady access to domestic credit,” notes the report. “Meanwhile, both Venezuela and Argentina are poised for steep economic contraction, courtesy of ill-defined and erratic policy implementation.”

As for the political landscape, Scotiabank feels that Latin America continues to show progress in developing democratic institutions and a more predictable policy environment. Brazil’s growing regional leadership, Mexico’s enhanced party-based political system, improved bilateral relations between Colombia and Venezuela, regional integration amongst economies in the Pacific, and the increased professionalism of regional central banks are some of the structural advances that will transcend the still-fragile global market context.

Nevertheless, the report cautions, new issues of concern have emerged that require decisive consensus-based action by national governments. Labor market rigidities, persistent violent crime in Mexico, Colombia, and Central America, increasing trade protectionism and corruption allegations in Brazil, student social unrest in Chile, erratic government policy decisions in Argentina, and leadership succession uncertainties in Venezuela are some of the challenges faced by regional leaders.

Brazil's benchmark inflation index rose 0.33% in the month to mid-July, up from 0.18% in the previous period. It was the first month-over-month rise in the mid-month inflation index since September of last year. The inflation rate for the most recent trailing 12 months rose to 5.24% from an annual reading of 5% a month earlier. The Brazilian government's target rate of inflation stands at 4.5%, plus or minus two percentage points.

Separately, the International Monetary fund predicted that Brazil’s economy will likely pick up speed in the second half of this year due to monetary easing, but the growth could put pressure on the government's inflation target in 2013, the International Monetary Fund said on Friday.

The IMF expects the economy to grow at an annual pace of more than 4% during this year’s fourth quarter, propelled by brisk domestic demand following the aggressive rate-cutting cycle by the central bank and strong job creation. "Under the staff's baseline scenario, monetary settings are now more than sufficiently supportive," the IMF said.

Mexico's central bank held its benchmark interest rate steady at 4.5%. The Banco de Mexico said that a recent spurt in the nation’s inflation rate would be offset by a growing risk of a slowdown in the global economy.

Chile’s Social Development Minister, Joaquin Lavin, the percentage of the nation’s citizens living below the poverty line fell to 14.4% in 2011 from the previous level of 15.1% in the previous survey conducted in 2009. As recently as 1990, 38.6% of Chileans were determined to be living below the poverty threshold. The percentage of people in Chile unable to afford a basic basket of foods fell to 2.8% last year, from 3.7% in 2009.

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