LATIN AMERICA TRADE & INVESTMENT Nick Robson Credit, Political & Security Risks
AGENDA LATIN AMERICA TRADE & INVESTMENT - IDENTIFYING RISK CHALLENGES AND REALISING OPPORTUNITY A huge subject - in a short space of time. No Crystal Ball – but there are credible indicators: • Key Trends • Risk Triggers & Outcomes • Understanding Risk • Managing Risk - Realising Opportunity • Distributing Risk – Securing Opportunity • Conclusions 1
LATIN AMERICAN RISK TRENDS IN A VOLATILE RISK ENVIRONMENT STUDYING TRENDS AND RISK TRIGGERS IS A HELPFUL FORM OF NAVIGATION 1. End of commodity super cycle Vocal middle class/ ‘Failure’ of Chavismo 2. 3. Terrorism/War on Drugs 4. End of cheap money 5. Institutional Corruption 2
1. END OF THE COMMODITY SUPER-CYCLE The end (?) of commodity super cycle has placed Latin American countries with an over-reliance on extractive industries under immense strain as reduced revenues have left holes in public finances. 3
1. END OF THE COMMODITY SUPER-CYCLE Countries that rely on soft commodities, metals or oil to underpin their budget face heightened economic volatility causing governments to make spending cuts with impact on infrastructure and living standards… Investors will face a less stable operating environment. Spending cuts may ignite civil commotion, pressure on government finance heightens credit and cancellation risk. 4
VENEZUELA • Oil 95% of government’s budget. For every “loses” $1 fall in oil price, Venezuela USD700m of revenue. • Venezuela budget based on a USD140+ oil price => economic outlook extremely negative. • As election approaches Maduro will continue to deflect criticism onto ‘external enemies’ and the political opposition. • Risks for investors include expropriation, licence cancellation or repudiation, changes to tax and royalty regimes. • The government will need to address its Venezuela June 15 Strikes, Riots & Civil Commotion 7 budgetary shortfall which could mean cuts in Terrorism 3 spending that prompt civil disorder => War and Civil War 4 9 Country Economic Risk heightened physical damage, personnel 9 Currency Inconvertibility & Transfer Risk 9 Sovereign Credit Risk security and trade disruption risk. Expropriation 9 • Maduro unlikely to change economic course; Contractual Agreement Repudiation 8 Legal & Regulatory Risk 7 lenders / traders should expect continued Countries are rated between 1 and unrest, currency risks and non-payment risks. 10. 1=Low Risk, 10=High Risk. = Under Review 5
2. VOCAL MIDDLE CLASS / ‘FAILURE’ OF CHAVISMO 6
2. VOCAL MIDDLE CLASS A rising middle class brings new challenges for governments: • A growing, vocal (critical) political opposition • Greater political accountability on electoral promises • Public expectations of a certain standard of living rise • More urgency for governments to deliver solid, sustainable economic growth • Corruption and opaque political infrastructure tolerated less Arguably we have seen the ‘failure’ of Chavismo as Latin American governments recognise that it is economically unsustainable for governments that are over dependant on commodities that are subject to international price swings to provide generous state subsidies , increased public sector wages and pro-worker labour policies in tough times. Latin American governments are now having to walk a fine line between meeting electoral promises which benefit the people, and the realities of economic cycles. The protests seen across South America 2012-2014 are likely to reignite. 7
BRAZIL • Under Lula 29m Brazilians became ‘middle class’. • Under Rousseff’s government GDP growth slowed and inflation soared. • Despite government commitment to the working classes, Rousseff has been forced to cut public spending to rein in the deficit. • The FIFA World Cup and the Olympic Games have prompted protests as living standards deteriorate. Other grievances include poor public services, police brutality and corruption. Brazil June 15 • The Petrobras corruption scandal has 4 Strikes, Riots & Civil Commotion further seen public anger directed against 3 Terrorism 2 War and Civil War Rousseff. 5 Country Economic Risk 4 • Currency Inconvertibility & Transfer Rousseff must now further cut Risk government spending, whilst trying not to 5 Sovereign Credit Risk 3 Expropriation upset her union supporters. 6 Contractual Agreement Repudiation • Increased risk of business disruption, 6 Legal & Regulatory Risk Countries are rated between 1 and repudiation of agreements and the 10. 1=Low Risk, 10=High Risk. = Under Review broader credit environment. 8
3. TERRORISM/ WAR ON DRUGS • In 2015 terrorism in Latin America is largely limited to the actions of the FARC in Colombia • However, it is challenging to separate the influence of drug and criminal gangs from terrorism funding. • The war on drugs particularly in Mexico has caused great volatility as the government struggles to contain the influence of gangs. • With drug money passing through Latin America into West Africa and MENA and into the hands of terrorist groups, governments are required to continue to crackdown on drug trafficking. • Central American governments, such as Guatemala, continue to have negative economic outlooks as the cost of controlling these gangs weighs on government finances. 9
COLOMBIA • Terrorist activity from the FARC and ELN has continued to plague the operating environment in Colombia. • Risks include kidnapping of employees, property damage, and business interruption. • Peace talks between the government and the FARC are continuing but are repeatedly derailed by both continued FARC attacks and government aerial bombings. • If a peace deal is signed, funding for post- conflict investment is expected to cost USD40bn, weighing on already strained Colombia June 15 government finances. 3 Strikes, Riots & Civil Commotion Terrorism 4 • As such, concerns are growing that War and Civil War 4 government funding may be diverted away 5 Country Economic Risk 5 Currency Inconvertibility & Transfer from core infrastructure projects to help Risk ex-rebels reintegrate to society. Sovereign Credit Risk 5 Expropriation 3 • This could anger the public, leading the Contractual Agreement Repudiation 5 Legal & Regulatory Risk 4 potential protests. Countries are rated between 1 and 10. 1=Low Risk, 10 10=High Risk. = Under Review
4. END OF CHEAP MONEY • US Federal Reserve prepares to raise interest rates, era of cheap money coming to an end. • Issue for Latin American countries that have already been hard hit by the end of the commodity super cycle • Bond yields and debt servicing costs will rise • More challenging for governments to offset slower growth from reduced commodities revenues with lower taxes and/or increased spending. • Currency risks, inflationary / credit risks and risks to local banking markets could develop . 11
MEXICO • Mexico’s economic health relies heavily on the health of the US. • Positive economic figures from the US bodes well for Mexico. • However, Mexico has major challenges ahead including power shortages, the continued drug gang war, the need to attract energy investors when prices are low and the need to develop the manufacturing industry. • The end of QE in the US has repercussions for Mexico’s economic outlook. • There is a risk that US capital may exit Mexico June 15 3 Strikes, Riots & Civil Commotion Mexico, with a knock on effect on the 4 Terrorism 4 War and Civil War value of the currency. 4 Country Economic Risk • Initially this may help manufacturing 5 Currency Inconvertibility & Transfer Risk revenue, however there could be 4 Sovereign Credit Risk inflationary risks and pressures on the 4 Expropriation 5 Contractual Agreement Repudiation local banking system leading to 5 Legal & Regulatory Risk Countries are rated between 1 and heightened credit risk. 10. 1=Low Risk, 12 10=High Risk. = Under Review
5. CORRUPTION Petrobras Scandal Alberto Nisman Scandal 13
5. CORRUPTION The operating environment in Latin America remains plagued by government corruption that continues to deter foreign investment. Corruption scandals are toxic and can have knock on effects for investors operating in the region. PETROBRAS SCANDAL DEATH OF ALBERTO NISMAN • President Rousseff’s involvement in the • Protests erupted following Nisman’s death criticising Kirchner’s influence Petrobras scandal tainted her reputation resulting in a drop in public support. over the judicial process damaging Kirchner’s popularity ratings. • Foreign investors contracting with • Petrobras projects remain at heightened Opposition leader Mauricio Macri has risk as the company cuts investment to been given a boost following the poor weather the corruption scandal. handling of the investigation into the death of Nisman. • The government will take a tough line on • any foreign investor corruption with risks of Foreign investors have been given a contract cancellation and/or penalties. stark reminder of the politicisation of the Argentine judiciary and the impact that this could have in the case of a dispute with the host government. 14
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