Latin America | Emerging Markets Regional Review

Author: Antonio Guerrero


Mexico could become the region’s star performer. Widespread reforms approved this year will begin affecting the economy in 2015, including opening the oil sector to private investment, in partnership with the state-owned Pemex oil company, for the first time in 70 years. Pemex has already signed memoranda of understanding with global players like ExxonMobil, BHP Billiton and Eni. Investors are awaiting details of energy reform provisions, including structural costs, taxation rules and contract terms.

“Regarding Mexico, after a very disappointing first half of 2014, Euler Hermes expects it to outperform other big Latin American countries, such as Argentina and Brazil, in 2015,” says Ludovic Subran, chief economist and director for economic research at Euler Hermes, a global export- and trade-credit insurance provider. “The economy will benefit from stronger exports in 2015, owing to a recent depreciation of the Mexican peso and, especially, stronger economic growth in the United States.”

Other markets present a mixed bag. “Chile is suffering from lower demand for commodities, especially in its mining sector,” notes Campos. “However, Chile’s stability and market-friendly policies—compared to its Latin American neighbors—have always made it an attractive country for investors. We often see Chile being used as an entry point into Latin America for more conservative companies and private equity firms.”

Pristaw, GTIS Partners: With foreign debt now coming due and limited capital available for refinancing, balance sheet issues have arisen for many Brazilian companies.

Fitch lowered Chile’s 2014 GDP growth forecast to 1.8% from a previous 4.1%, and expects 2.6% growth in 2015. The slowdown, initiated by commodity weakness, is intensified by a controversial tax reform implemented this year that will boost corporate tax rates progressively to 25% by 2017. “Chile remains the most competitive economy in Latin America, with a strong institutional setup, low levels of corruption and an efficient government,” says Daniel Aranda, a partner in the Mexico City office of international law firm Gardere Wynne Sewell.

Colombia and Peru will fare well, and Colombia is on the rise. “The clear up-and-comer in South America is Colombia,” says William Andrews, chair of the Department of International Business at Stetson University’s School of Business Administration. “The drug and terrorist infestation that typified Colombia a decade ago has been brought under control. Foreign direct investment is at the highest level ever, and Colombia ranks only behind Brazil and Chile in South America in the amount of FDI received.”

In Peru the state-owned Petroperu oil company will sell a 49% stake in the company during the second quarter of 2015. The government expects oil production to increase by more than 5% during the year, ending more than a decade of declining output.

Argentina and Venezuela will remain outliers, as their economies plunge. Venezuelan GDP is expected to contract by 3.5% in 2014, according to Standard & Poor’s, despite having the world’s largest oil reserves, as a result of the Nicolás Maduro administration’s failed economic policies. And Fitch analysts contend that Argentina’s 2014 debt default will continue to stunt growth, fuel inflation, pressure exchange rates and deplete hard-currency reserves. Argentina’s GDP is expected to contract by 1.9% in 2014 and 2.6% in 2015, further affected by falling commodity prices.

Overall, the region will remain attractive for investors in 2015. As part of its Deal Flow Predictor, which tracks global M&A trends, Intralinks is seeing positive dealmaker sentiment in the region. “The appetite for deals doesn’t seem to be in peril in Latin America,” says Matthew Porzio, vice president of M&A strategy at Intralinks, which operates virtual deal rooms for M&A transactions. “More than 49% of participants in the region said that they expect to do more deals than they did six months ago, and 44% of respondents were optimistic about the current environment.” Another 69% of dealmakers that responded to the Intralinks survey expect deal volume to rise in coming months.

According to Gibley at the Charles Schwab Center, “The theme for Latin America is, ‘Slower is the new normal.’”


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