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Latin America - Mexico, Colombia and Brazil economies and business opportunities
Citation preview
08 Fall
Latin America Outlook
Prepared By
1 Latin America Outlook
About: Beamonte Investments is a corporate advisory firm headquartered in Boston, Massachusetts.
The firm focuses on middle market transactions, primarily assisting clients with mergers,
acquisitions, divestitures, and capital sourcing. Beamonte Investments’ team brings a high level
of domestic and international expertise to middle market companies.
Our successful transaction experience includes seasoned representation in the capital raising
process and in the sale or merger of client companies with strategic buyers, financial buyers,
private investment groups, and publicly traded companies from around the world. Our services
include complex deal structuring, sophisticated negotiations and complete and professional
client services, including: comprehensive valuations, extensive confidential client marketing
materials and targeted buyer/seller search assignments.
Luis F. Trevino Managing Director +1.617.275.8960 x 103
Analyst: Josh Hoffman-Senn
2 Latin America Outlook
Contents
About: 1
Economy Overview 3
REGION OF GROWTH 4
MERGERS AND ACQUISITIONS 6
MEXICO OVERVIEW 9
PAST 9
CURRENT STATE 11
COLOMBIA OVERVIEW 14
BRAZIL OVERVIEW 19
Hospitality 22
HOSPITALITY IN MEXICO 23
HOSPITALITY IN COLOMBIA 30
Manufacturing 37
MANUFACTURING IN MEXICO 38
Information Technology 41
Rising Middle Class 46
Political Risk 50
THE POLITICAL – ECONOMIC BOND 51
PROGRESS 52
RISK 55
M&A and Credit Outlook 57
M&A 58
CREDIT 59
Currency Exchange Trends 61
3 Latin America Outlook
Economy Overview
4 Latin America Outlook
Region of Growth
The outlook in Latin America is quite promising from an investor’s prospective. An increasing number of companies look to this region to satisfy their business needs. Exports from the area are very attractive, and robust growth is expected in this emerging economy. The following figures represent the regioni:
US$ billion Unless Otherwise Stated
Latin American Indicators 2009 2010e 2011f 2012f
GDP 4,045.5 4,809.5 5,718.5 6,496.5 Real GDP growth, % -1.8 6.2 4.4 4.1 Inflation, eop, % 6.8 5.8 6.9 6.5 Exports 762.9 954.7 1,027.8 1,115.4 Imports 725.3 913.5 997.5 1,093.2 Trade balance 37.5 41.2 30.3 22.2
i These figures represent Argentina, Barbados, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Rep., Ecuador, El Salvador,
Guatemala, Guyana, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Trinidad & Tobago, Uruguay and Venezuela.
Data Source: Business Monitor International
Economy Overview
Data Source: Business Monitor International
5 Latin America Outlook
Real GDP growth forecasts are strong and steady, while frequent trade connects the region well to the rest of the world. The countries of Mexico, Colombia, and Brazil show particular promise.
An extravagant boom blessed the years of 2003-2007. Just prior to that period, a deep recession, commonly referred to as the “lost half decade,” distressed the region. Poor economic conditions prompted political shifts away from right wing candidates. Many new leaders then implemented free market reforms and capitalistic policies that initiated strong growth and tremendous commodity performances. The region had not enjoyed comparable growth rates since the early 1970s.
Most governments reacted better to the recent recession than to those of the past. Historically, pro-cyclical fiscal policies often augmented the business cycle, exacerbating downturns. Such policies were party the fault of international credit markets that discouraged lending to developing countries during recessions, and partially the result of political pressures that encouraged spending during booms.1 In contrast, regimes avoided contractionary policies when the recent crisis hit. Although leaders did not adequately neutralize the preceding boom,2 they had followed a beneficial trend toward countercyclical policies since the 1990s. Such activity put many countries in better positions to offset the recent financial crises. Colombia, Mexico, Chile, and Peru all practiced countercyclical fiscal policies particularly when the recession hit.3
Currently, comprehensive government plans to promote activity accompany strong commodity markets and high levels of investment. While public spending creates opportunity in many industries, external demand drives vibrant export markets. At the same time, a wide scale shift away from poverty bolsters domestic consumer demand, introducing a new internal growth driver to the region. In addition, the public credits leaders with economic success, thereby increasing political stability and favor of democracy.
6 Latin America Outlook
Key Deals:
America Movil acquires Carso Global Telecom and Telmex (US$27.5 billion and US$5.5 billion)
COSAN S/A Industria E Comercio acquires Esso Brasileria de Petroleo Limitada (US$890 million)
Japan-based Marubeni Corporation acquires 30% of two copper mining companies in Chile ($1.3 billion)
Grupo Aeroportuario del Sureste in Mexico - IPO ($335 million) Information Source: Bamrud, 2010
Mergers and Acquisitions
Recent activity in Latin America suggests tremendous
opportunity for businesses and investors. Firms should
credit the recent economic recovery for such dramatic
performance. In 2009 the world saw an overall 27%
decrease in total value of mergers and acquisitions.
Latin America saw only a 10% fall that same year,
making tremendous 2010 improvements even more
impressive, as they were not solely the response to a
prior deep loss. Mergers and acquisitions value doubled
in 2010, reaching US$220 billion. Growth is expected to
remain robust.4
Since the recession passed, large corporations wish to
expand. At the same time, promising forecasts in the
region make local businesses prime targets for
acquisition. Such factors promote valuable synergy
between multinational corporations and small
businesses in Latin America. For example, Asian
investors and companies increasingly favor Latin
American prospects for acquisition. To illustrate, in
2010, US$10 billion in deals involving Asian firms
marked a threefold increase compared to values over
the past several years.5
As multinational corporations continue to realize the
benefits of a solid presence in Latin America, corporate
mergers and acquisitions remain commonplace. Also,
private equity investors increasingly add Latin American
companies to their portfolios in order to embrace
recent and expected growth.
7 Latin America Outlook
Roles of financial advisors in the region exemplify the magnitude of the mergers and
acquisitions market. The following advisors play major roles in Latin America:ii
Financial Advisor Number of
Deals (2010)
Deal Value Per
Advisor (US$MM)
Credit Suisse 46 79,507.5
Citi 15 53,276.5
Santander 42 47,582.5
JP Morgan 33 37,566.3
Banco BTG Pactual SA 56 34,759.8
Bank of America Merrill
Lynch
26 33,427.4
Morgan Stanley 21 30,105.7
UBS 13 21,166.6
Goldman Sachs 22 18,813.3
Caixa Geral de Depositos 9 15,753.9
Rothschild 18 14,528.8
Itau Unibanco 30 14,104.1
Banco Espirito Santo 7 13,617.5
Deutsche Bank 13 13,235.8
Credit Agricole CIB 8 12,109.3
Mediobanca 6 11,878.7
Societe Generale 2 10,753.4
Standard Chartered PLC 2 9,560.0
Scatiabank-Bank of Nova
Scotia
2 7,585.0
Banco Bradesco 18 7,434.0
Allen & Co. 1 7,325.0
Barclays Capital 5 6,069.1
BR Partners 24 5,618.1
Estater Gestao e
Financas
6 4,582.7
HSBC Holdings 8 4,513.7
Total 433 220,933.6
Several key deals greatly impacted the business scene. The largest were America Movil’s acquisitions of Carso Global Telecom and Telmex for US$27.5 billion and US$5.5 billion respectively. Such activity placed America Movil in prime position to compete with other global giants in the region, as the company’s newfound combined revenue of US$50 billion ranks it the fourth largest firm in Latin America.6
ii This list is not exhaustive. Rather, it outlines key players.
Data Source: Thomson
Reuters
8 Latin America Outlook
In the energy sector, Sinopec Group, a Chinese refiner, acquired 40% of Repsol Brazil for US$7.1 billion. Similarly, the Indian company ONGC Videsh Ltd. bought a 40% share in a Venezuelan oil field.7 Such activity illustrates the obvious economic benefits of the region’s natural resources.
The region’s abundance of natural resources extends beyond oil, attracting a variety of firms. For example, European aluminum producer Norsk Hydro acquired Brazilian Vale’s aluminum holdings for US$4.9 billion.8 Also, Japan-based Marubeni Corporation acquired 30% of two copper mining companies in Chile for $1.3 billion.9
In the food and beverages sector, Grupo Bimbo spent US$959 million to acquire Sara Lee’s North American Bakery, while Heineken absorbed Mexican based Femsa’s beer operations for US$7.9 billion.10
Such deals prove multinational corporations’ desires to gain presence in Latin America. Companies of all sizes in the region often exhibit tremendous promise and opportunity, making them prime targets for acquisition or investment.
9 Latin America Outlook
Past A series of events in Mexico’s history redefined the country’s economic prospects. Of the many interesting developments, one stands out above the rest, the introduction of the North American Free Trade Agreement (NAFTA). This and other Free Trade Agreements revolutionized the country’s export market.
NAFTA eliminated a wide array of trade barriers between the U.S., Canada, and Mexico. NAFTA and numerous other agreements prepared Mexico well to become a leader in exports. It should be noted that in 1994, an extreme devaluation of the country’s currency, the peso, was necessary. Although unfortunate for the portfolios of investors at the time, it had one positive effect. The event made Mexican goods appear very cheap in the eyes of the rest of the world, making Mexican exports even more attractive. The currency devaluation that coincided with the milestone Free Trade Agreement further fueled the Mexican export market.
Prior to these major developments, Mexico produced large amounts of agricultural and mineral products on account of an abundance of natural resources. Economic liberalization in the 1980’s began to shift the country’s focus,11 while events of the 1990’s truly set the scene for major changes, including development and growth of manufacturing and other industries.
Data proves the notion that Mexican exports became quite attractive. Outstanding export growth of 8.2% per annum was observed shortly after the implementation of NAFTA, along with import increases reaching 7.7%.12
The graphical representation below13 exhibits tremendous, consistent growth for nearly two decades as a result of free trade.
• Outstanding export growth of 8.2%pa
• Strong ties between Mexico and the U.S.
Effects of NAFTA
Mexico Overview
10 Latin America Outlook
Data Source: OECD, 2010
The benefits of the Free Trade Agreements still show themselves today. In fact, such arrangements contribute to 90% of Mexico’s trade. Moreover, NAFTA greatly strengthens the connection between Mexico and the United States. This connection is quite beneficial given the lasting and proven strength of the U.S. economy. However, the bond harms Mexico when the U.S. finds itself in difficult times. For example, when U.S. imports fell dramatically in 2009 on account of a recession, Mexico suffered a 15% fall in exports as a result.14 Still, long term benefits of the strong connection far exceed costs.
11 Latin America Outlook
Current State
The outlook in Mexico is promising. Naturally, the recent recession impacted Mexico along with its close trading partner, the U.S., and the rest of the world. Real GDP growth, inflation, and unemployment offer useful figures to assess the health of the economy.
2008 2009 2010 2011 (forecast)
2012 (forecast)
Real GDP growth (%) 1.3 -6.2 5.4 4.8 3.8
Inflation (%) 5.1 5.3 4.2 4.3 4.8
Unemployment (%) 4.0 5.5 5.4 4.4 3.7 Data Source: Dun & Bradstreet Inc.
Depressed real GDP growth in 2008 and 2009, and the coinciding rises in inflation and unemployment demonstrate the harm of the recession. A 2011 slowdown in GDP growth may be attributed to recent unfavorable performances by the
5.4% Real GDP growth (2010)
Falling unemployment
Well managed debt
Continued export
prospects
12 Latin America Outlook
agriculture, mining, and construction industries. In addition, Mexican factories recently adjusted production to an unfavorable U.S. outlook, which decreased exports from Mexico to the U.S.15
In spite of reduced activity in some areas, the above figures suggest quality growth in 2011. Public infrastructure spending and an expected rise in consumer demand will fuel activity. Experts forecast strong GDP growth in 2012-13 as well, especially as the U.S. economy improves. As the U.S. sees a future 11% increase in non-fuel import demand, along with investment and consumption improvements, Oxford Economics claims Mexico’s growth should rise to 5.5%.16 Other sources share optimism, often estimating 2012 growth near 4% in accordance with the data in the table above. Fuel exports should also apply positive pressure on GDP growth because of high oil prices. The positive effect of the oil industry would be greater if the government allowed private investors to develop the industry, as opposed to supporting the publicly run firm “Pemex.”17 Still, oil is just one of the many promising areas that will fuel growth in the coming years.
Unemployment continues to restrict the economy more than it did when the country saw a 4% rate before the recession. Fortunately, this figure is on a downward trend, and forecasted to fall below 4% in 2012. Since unemployment is temporarily higher than usual, growth in private consumption may be restricted. Historically, however, it should be noted that a major shift away from poverty is occurring. The result is a much larger middle class that offers a new market for consumer demand. A substantial rise in domestic consumption should follow this trend in the long term.
Inflation is under control in Mexico. Generally, Banco de Mexico (Banxico), the central bank, gears monetary policy toward adjusting inflation, aiming for 3% each year. During the past recession the rate was higher, although more recent figures better approach the target. Current policy is to avoid high inflation, as the central bank believes the recovery may succeed without lowering interest rates below 4.5% this year. Note that some sources expect to see CPI inflation at only 3.8% at the ends of 2011 and 2012.18 In 2012 however, rates are expected to approach 6%, especially because the U.S. will raise its interest rates as the economy recovers and investment demand increases.19
Although global food price increases push up inflation in other Latin American countries, the effect in Mexico is minimal. Domestic food prices increased only 5.2% from last year, whereas Brazil and Chile saw 7.8% and 6.9% increases respectively. 20
Mexico’s lower rate may be attributed a strengthening peso and an observed decrease in some areas of economic activity. This May, the peso traded at MX$11.7:US$1, while last year it traded at MX$13.1:US$1.21 Continued strengthening
13 Latin America Outlook
of the peso is not expected, in spite of the fact that foreign direct investment increases. In fact, a mild weakening in 2012 should bring its value to MX$12:US$1.22
Consumer confidence also suggests a strong economy. Although a 2011 consumer confidence indicator fell from 92.3 in February to 91.9 in March and 89.3 in April, it is still approximately 8 points higher than corresponding 2010 figures. The fall those two months likely resulted from uncertainty in the U.S. and a rise in global commodity prices. Fortunately, since forecasts predict reduced unemployment and low inflation, consumer confidence should increase over the course of 2011.23
Mexico’s debt is under control. Attempted decreases in public spending successfully reduce the annual deficit. Naturally, the country did suffer during the recent recession. However, conservative fiscal strategy helps the country manage its debt well.24 Further, at the end of April 2011 the Mexican central bank held reserves of US$126 billion, a high figure for the country. Such reserves ensure Mexico can meet foreign financing commitments. A strengthening of the Mexican peso further contributed to increases in foreign reserves.25
Overall, prospects in Mexico are promising. The long term success of country exports fuels growth in several industries. Recent recovery also shows signs of promise, suggesting the recession’s blow should concern investors less. Although a mild decrease in pace of the recovery exists, improvement will continue. The following long term forecasts represent a country with future stable growth.
Long Term Forecasts (Average annual percent changes)
2011-2015 2016-2020
GDP (% growth) 4.5 3.5
Unemployment (%) 4.2 3.7
Consumer Prices (% increase) 3.5 3.0
Exchange Rate (MXN to USD) 12.7 13.7 Data Source: Oxford Economics
The 2011-2015 figures forecast robust growth, while 2016-2020 figures exhibit expectations of stability.
14 Latin America Outlook
Colombia shows promising growth prospects. Although the country faced past difficulties, the current state gives rise to great optimism. Key figures are as follows:
Data Source: Dun & Bradstreet Inc
Comprehensive recovery plan
underway
$2.6bn IMF credit line
Increasing Real GDP growth
forecasts
Falling unemployment
2008 2009 2010 2011 (forecast)
2012 (forecast)
Real GDP growth (%) 3.5 1.5 4.3 4.5 5.0
Inflation (%) 7.0 4.2 2.4 4.5 4.8 Unemployment (%) 11.2 12.1 11.5 11.2 11.0
Colombia Overview
15 Latin America Outlook
The 2009 fall in Real GDP growth and rise in unemployment indicate the impact of the global recession. Fortunately, recovery is underway and expected to continue. The government already began vigorous work on a well-organized recovery plan that should prove quite effective.
Government involvement will enhance growth dramatically in coming years. President Juan Manuel Santos called for 6.2%pa GDP growth, exports of US$52.6 billion by 2014, and reduction of unemployment to 9% by creating 2.4 million new jobs.26,27 A comprehensive public plan to achieve these goals makes them plausible. Examples of planned reforms include reductions in corporate taxes and investment barriers.28
The fact that the International Monetary Fund (IMF) blesses Colombia with help makes President Santos’s goals even more realistic. In fact, the IMF opened a two year, US$2.6 billion credit line to help spur growth. In April, the additional credit in conjunction with an observed increase in consumer demand prompted the central bank to project 2011 GDP growth at 5.5%.29
Data Source: Dun & Bradstreet Inc.
16 Latin America Outlook
Unfortunately, the government faces the challenge of organized crime, which sometimes inhibits commercial activity. For example, attacks frequently interfere with oil pipelines and transmission lines. In addition, guerilla warfare sometimes impedes construction of major roads across the country. For this reason, infrastructure lags behind a comfortable level in Colombia.30
Still, regarding trade and investment, Colombia manages to stay well connected to the U.S.31 Colombia’s economic promise makes it a valuable investment prospect, in spite of a large amount of criminal activity in the area. Further, the government observed recent success in fighting crime.
Colombia’s attraction shows itself in strong foreign direct investment inflows. Such investment largely benefits the manufacturing, mining, and energy industries, but also greatly impacts communications, transportation, and finance. An unusually large FDI increase blessed the country in 2005. That year, FDI more than doubled from US$4 billion in 2004 to US$10 billion. Even during poor economic times, the country saw FDI increase from US$9 billion to US$10 billion in 2007 and 2008 respectively.32
The following data identifies main sectors that attract FDI:
Foreign Direct Investment by Balance of Payments – Main Sectors
Sector 2009 (US$MM)
2010 (US$MM)
%Part. 2009*
%Part. 2010*
Mining & Quarrying 3,025.0 2,054.6 37.3% 28.0%
Petroleum 2,428.2 2,862.0 29.9% 38.9%
Commerce, Restaurants & Hotels
594.3 445.5 7.3% 6.1%
Financial Establish 720.4 945.1 8.9% 12.9%
Manufacturing 621.1 593.8 7.7% 8.1%
Transportation, Storage & Communications
347.9 -588.9 4.3% -
Construction 261.5 262.0 3.2% 3.6%
Community services 88.2 98.9 1.1% 1.3%
Agriculture, Livestock, Fishing, Forest & Hunting
27.9 52.1 0.3% 0.7%
Electricity, Gas and Water -977.3 34.8 - 0.5%
TOTAL 7,137 6,760 100% 100%
Source: Balance of Payments. Central Bank *Participation share within total of sectors with positive net investment. Total 2009: US$ 8,114.6 Million; Total 2010: US$ 7,348.8 Million
17 Latin America Outlook
The data indicates that Colombia’s abundance of natural resources is quite lucrative, as mining and petroleum account for proportionately large shares of FDI. Still, great diversity exists for investment. As a result, many industries benefit from foreign expansion.
Below is a snapshot of mergers and acquisitions in Colombia to offer examples of influential investments in a variety of industry segments.
Example M&A deals, by inward investing firm, 2007-2009, Colombia:33
Year Acquiring Company
Home Economy
Target Company
Target Industry Shares Acquired
(%)
Estimated or announced transaction
value (US$MM)
2009 Vale Brazil Cementos Argos SACoal
Mine
Cement, hydraulic 100.0% 373
2009 Kimberly- Clark Corp
United States
Colombiana Kimberly Colpapel
Sanitary paper products
100.0% 289
2009 Investor Group
Chile Vabaria SA-Agua Brisa
Bottled
Bottled & canned soft drinks & carbonated
waters
100.0% 60
2009 Cencosud Chile Easy Colombia SA
Grocery stores 100.0% 60
2008 GE Money United States
Banco Colpatria SA
Banks 39.3% 227.95
2008 Pacific Rubiales Energy Corp
Canada Kappa Energy oldings Ltd.
Crude petroleum and natural gas
100.0% 168
2008 Brysam Global Partners
United States
Banco Caja Social SA
Banks 18.8% 101.7
2007
Telefonica SA Spain
Colombia
Telecomunicaciones SA
Telephone communications,
except radiotelephone
50.0%
2627.2
Source: Thomson ONE Banker, Thomson Reuters
18 Latin America Outlook
The leading stock exchange, Bolsa, de Valores de Colombia, saw tremendous growth from 2002-2007. During this period, market capitalization increased from US$10 billion to US$102 billion. Although the exchange felt major impact from the recent global recession, falling to US$82.6 billion by 2009, prior performance illustrates the country’s progress and potential.34
By March 2011, the central bank allowed interest rates to rise to 3.5% from 3%. This is likely a response to increased credit and housing costs.35 Such factors encourage the central bank to act more conservatively. Tighter policy also helps control inflation. Although forecasted 2011 and 2012 inflation rates are higher than typical targets, they permit healthy expansion and implementation of the government’s comprehensive plan.
Foreign exchange reserves amounted to US$29.8 billion in April 2011, offering import cover for approximately 7 months. At 3.5% of GDP in 2010, the budget deficit is large, but the government recently took great strides to fix the issue. For example, it prohibited any spending financed by public debt issuance. In addition, the country will save a large portion of extractive industry revenues for the purpose of reducing the deficit.36 Such a strong commitment to debt reduction reassures investors of long term national stability.
19 Latin America Outlook
The largest economy in Latin America, Brazil is the tenth largest in the world. The past
ten years hosted major political reforms in attempts to achieve economic stability. The
government took great strides to integrate Brazil into the world economy, allowing
the country to grow steadily from this point forward.
Current projections are quite optimistic:
2009 2010 2011 2012 2013 2014
GDP growth (%) -0.6 7.5 4.3 4.8 4.7 4.1
Consumer Prices (% growth) 4.9 5.0 6.1 4.7 4.2 3.6 Data Source: Oxford Economics
Largest economy in
LATAM
GDP growth of 7.5% in
2010
Quickly increasing FDI inflows
Government stimulus
Brazil Overview
20 Latin America Outlook
Brazil saw extraordinary GDP growth in 2010. A 2011 fall may be attributed to
government spending cuts and interest rate hikes. Notice that from January to April
2011, public spending increased by only 9.7%, whereas spending increased by 18.4%
the first third of 2010.37
An increase in foreign direct investment inflows exhibits investor optimism. In January
to April of 2011, foreign direct investment inflows reached $22.9 billion. That period
last year, FDI inflows totaled $7.7 billion. Such growth and confidence not only
reflects the positive outlook of Brazil, but also the successful recovery of investing
countries.38
Exports are a great success in Brazil. In May 2011, export value was 31% higher than a
year earlier. Products show diversity, including everything from manufacturing, to
iron ore. Brazilian exports are widely accepted around the world, reaching the E.U.,
U.S., Asia, and remaining Latin American countries. 39
Data Source: Oxford Economics
21 Latin America Outlook
The following table outlines long term country forecasts:
Average annual percent changes
2006-2010 2011-2015 2016-2020
GDP growth 4.4 4.4 3.9
Unemployment (%) 8.4 5.7 5.6
Consumer Prices 4.7 4.5 4.0
Several factors contribute to a positive outlook for Brazil in the coming years.
Through 2014, the government plans to spend $530 billion on housing, energy, and
transportation. 40 In addition, the country will host the 2016 Olympics and 2014
World Cup, two major events that attract global attention.
22 Latin America Outlook
Hospitality
23 Latin America Outlook
Hospitality in Mexico
Mexico’s hospitality industry experienced a blow from the recent recession without a
doubt. Fortunately, signs of improvement accompany a successful nationwide
economic recovery. Leaders in travel accommodation and foodservice expand to
prepare for growth that is fueled by a steady rise in tourism.
Travel Accommodation
Travel accommodation comprises a major sector of the hospitality market. This
sector is a MX$170 billion industry, serving both domestic and foreign customers.iii
Over 16,000 outlets define this market in Mexico.
The year 2010 saw only modest growth of 1%. Fortunately, industry players take
great strides to grow more rapidly. For example, generous deals and sales are
commonplace to attract business. Additionally, hotels increasingly open
professionally oriented hubs in major cities in an attempt to grow.41
Past performance in the industry illustrates a harmful impact from the recent global
financial crisis. A 2007-2010 market size record is below.
iii The stated figure does not account for foodservice and related activities. Rather, it represents room sales and similar directly
applicable values.
Hospitality
24 Latin America Outlook
Fortunately, market size is expected to maintain an upward trend for the next several
years, offering stability and improved investment prospects. A 2010-2015 industry
forecast follows:
Data Source: Passport by Euromonitor International
Data Source: Passport by Euromonitor International
25 Latin America Outlook
A major player in the travel accommodation sector, which runs 120 outlets, is
InterContinental Hotels Group. This group operates Holiday Inns, Crowne Plazas,
Staybridge Suites & Indigos, as well as others. The company placed recent emphasis
on debuting new Holiday Inns, as travelers from the United States and Canada prefer
recognizable brand names as assurance of quality and credibility.42
A number of major companies boast widespread presence in Mexico, while a wide
array of competitors comprise the entire industry. The chart below represents a
snapshot of industry makeup.
Overall, recent activity and expansion of industry leaders reflect optimism in the industry.
Data Source: Passport by Euromonitor International
26 Latin America Outlook
Tourism
Foreign tourists fuel the hospitality industry. Current prospects promise growth and
opportunity. The recent global recession proved harmful, as foreigners allocated less
wealth to leisure and travel. A second blow came in the form of disease when the
Swine Flu alarmed potential visitors, prompting many to cancel arrangements.
Fortunately, government and private action helped rejuvenate the industry.
The government actively supported tourism for quite some time. In 2006, Mexico, the
U.N., and Expedia agreed to collectively promote the 25 historic Mexican World
Heritage Sites. Such promotion attracted visitors to the country, which benefited
hospitality industry segments.43 Today, the country holds tenth place in rankings of
most visited countries. Moreover, the Tourism Ministry predicts 15% growth in tourism
each year for seven years.44
One method to measure the health of the industry is to monitor tourist arrivals. Past
and expected figures are as follows:
Arrivals Data (2007-2014):iv,v 2007 2008 2009 2010e 2011f 2012f 2013f 2014f
Arrivals ('000) 91,210 97,975 95,722 96,252 96,691 98,317 99,046 99,723
Tourists ('000) 20,401 20,447 18,445 19,316 20,083 20,751 21,398 21,960
% change y-o-y 1.453 0.225 -9.79 4.725 3.968 3.327 3.12 2.625
Same-day ('000) 63,995 70,847 73,164 72,155 71,268 70,495 69,746 69,096
Tourist arrivals by mode of transport used
Air (‘000) 10,157 9,563 6,706 7,950 9,044 9,998 10,922 11,724
Road (‘000) 10,243 10,883 11,739 11,366 11,038 10,753 10,476 10,235
Tourist arrivals by purpose of trip
Leisure (‘000) 7,924 7,404 5,384 6,263 7,037 7,711 8,364 8,930
Business (‘000) 808 758 468 594 705 802 896 977
Other (‘000) 11,670 12,285 12,592 12,459 12,341 12,239 12,139 12,053
Source: Business Monitor International
iv
Tourists are non-resident arrivals at national border that stay the night; same-day non-residents that do not stay overnight; cruise means non-residents arriving on cruise ships; tourists, same-day and cruise add up to total arrivals. Tourists are calculated by the sum of regional data (historic and forecast). Mode of transport and purpose of trip were estimated using proportions of old data. Original source: UNWTO
v All figures reduced by three orders of magnitude (indicated by ‘000), so “20,401” tourists in 2007 represents 20.4 million
27 Latin America Outlook
A graphical representation of
tourist arrivals exemplifies
the harm of the recession,
but subsequent growth and
future promise in the
industry.
Tourist expenditure did not
grow quite as fast as number
of tourists. Still, growth is
both observed and expected
in the near future.
The Mexican government reaped past benefits of tourism, and understands the
industry’s prior success and future promise. For these reasons it set up the National
Trust Fund for Tourism Development to develop tourist locations and encourage
investment. This organization focuses heavily on the coast, as do private investors, as
beachfront scenery and activities add great value to coastal attractions. Overall, the
government invests nearly US$2 billion each year in tourism.45
Data Source: Business Monitor International
Data Source: Business Monitor International
28 Latin America Outlook
The fact that a far greater portion of
arrivals visit for pleasure rather
than business reinforces an
investor’s or developer’s decision to
favor coastal attractions and
accommodations, since leisure
oriented visitors more frequently
seek beachfront activities.
Although tourists originate from
around the globe, several key
source areas exist. Most tourists in Mexico come from the United States or Canada.
Particular states for which many citizens have Mexican ancestry or relatives, such as
California, send large percentages of tourists. Still, visitors from Europe are not
uncommon. In addition, Asian travelers increasingly visit Mexico.46 Diversity in tourist
sources permits a wide array of businesses to achieve success, as consumer interests
are varied. Still, trends enable businesses to identify key areas of opportunity based
on the typical consumer.
Following the fact that a large portion of tourists originates in the Unites States is the
inevitable connection between the Mexican hospitality industry and the health of the
U.S. economy. Growth in tourism is expected to persist for the next several years.
However, a sluggish U.S. recovery may slow down industry growth in Mexico.47
In spite of this potential weakness, industry players act with great optimism. For
example, Grupo Posadas continues to open new hotels to accommodate travelers
and attract tourists. Additionally, construction of related attractions, such as golf
courses and spas, is on the rise.48
Data Source: Business Monitor
International
29 Latin America Outlook
Foodservice
Foodservice is an integral piece of the hospitality industry. Companies in this market
place particular emphasis on geographic areas with strong retails presence, as
Mexicans regularly spend time in such locations. All varieties of foodservice
providers, including fast food chains, street vendors, and restaurants, often follow
this trend. Restaurants in particular favor proximity to very large chain stores, such
as Wal-Mart.49
International brands are more prominent in busy retail and tourist locations, both
because they can afford the prime locations, and because the average foreign
traveler favors familiar foodservice providers. Independently owned outlets show
their presence at accommodation and leisure spots.50
Growth in the foodservice industry is expected to remain positive for the foreseeable
future, as indicated below.
Figures from Euromonitor International
30 Latin America Outlook
Hospitality in Colombia
Colombia’s hospitality industry shows signs of promise. Generous government
incentives encourage travel accommodation expansion, while safer cities attract
tourists and investment growth. In addition, well defined trends in the behavior of
foodservice providers help identify areas of opportunity.
Travel Accommodation
Much opportunity exists in Colombia’s travel accommodation industry, which saw
3% growth in 2010 and boasts value of Col$2.5 trillion. Diversity does not
characterize the industry. Hotels collect 97% of retail value sales, and dominate
travel accommodation as a result. In 2010, hotels made up 52% of all outlets in the
country.51
The government works to strengthen accommodation development by offering
monetary reward to developers in the form of tax exemptions. The country allows
hotel leadership to take advantage of such opportunities while expanding. For
example, thirty year income tax exemptions are available on services provided by
any hotels built or remodeled between 2003 and 2018. In the case of remodeled or
expanded hotels, the tax exemption is prorated based on the cost of expansion.52
Large brands such as Marriot, Holiday Inn, and Hilton favor Colombia because of
such government sponsorship.53
International brands increasingly build in Colombia on account of government
incentives and a favorable market. They compete with two very powerful domestic
chains, Hoteles Estelar and Hoteles Dann. Combined, these chains ran 27 hotels in
2010. Their target market consists largely of business travelers. To attract business
tourists, the brands strive to run high quality facilities. While Hoteles Estelar
operates branches that earn three to five stars for three distinct brand names,
Hoteles Dann earns four or five stars for all of its outlets.54
31 Latin America Outlook
In spite of their success, Hoteles
Dann and Hoteles Estelar by no
means monopolize the industry.
Plenty of opportunity exists for
international and domestic brands to
engage in competition. Organizations
understand the opportunity and
continue to expanded presence in
Colombia accordingly.
The graphical representation to
the right reveals size of Colombia’s
travel accommodation industry in
recent years.
Steady industry growth is expected in the foreseeable future as existing brands
expand and additional foreign companies make debuts. The fact that Colombian
hotels boast very high revenue per available room (RevPAR) compared to hotels in
other Latin American countries also drives growth. Five star hotels in particular may
retrieve far more than
US$100 each night.55
Overall, several factors make
this sector an area of
opportunity in Colombia.
Government sponsorship in
the form of generous tax
exemptions successfully
entices developers. Public
Data Source: Passport by Euromonitor International
Data Source: Passport by Euromonitor International
32 Latin America Outlook
encouragement and high RevPar, especially for quality hotels, create potential for
profitable investment in the industry.
Tourism
Just as tourism fuels Mexico’s hospitality industry, so too does it fuel Colombia’s
hospitality market. The past decade blessed Colombia with tremendous growth in this
area. Between the years of 2000 and 2009, international tourism grew by an average
of 10.4% each year, one of the largest growth rates in the world. In comparison, the
global average of this figure was only 2.9%.56
Colombia’s geographic location makes it a prime tourist spot, which partially explains
the unusually high growth rate of the industry. Even the New York Times included the
country on their 2010 list of “31 Places to Go.” Mountains and rainforest that offer
unique sites to visit strengthen attraction to the country. Moreover, tourism is
profitable all year round on account of the country’s location and climate. Popular year
round tourist activities are less common in many other climates.57
In the past, crime was a major deterrent to tourism. Fortunately, the current scene is
safe enough to subdue such a concern. The achieved security may be attributed to
major government emphasis on crime reduction since 2002.58 The United States also
contributes to Colombia’s efforts to fight guerilla warfare, helping the country achieve
its overall mission of safety and security.
Homicide rates below offer representations of cities’ security levels, permitting crime
comparisons between densely populated areas in nearby regions and the rest of the
world.
33 Latin America Outlook
Notice that by the above indicator, the major Colombian cities of Medellin, Cartagena,
and Bogota, are safer than many other major cities in Latin America, and even safer
than Washington D.C. Thus it appears the government achieved major progress in its
fight against organized crime.
A far more tourist friendly environment on account of increased safety is just one
factor that attracts investment in related areas. Investors understand the potential of
hospitality. Hotel and hotel services investment saw exceedingly high growth in the
past, reaching rates of well over 100 percent, as illustrated by the figure below.59
Data Source: Crime Observatories
34 Latin America Outlook
The downward growth trend from 2002-2007 is of little concern, as current figures
prove better than ever. In fact, restaurants and hotels recently saw 1,090.3%
investment growth per annum. In particular, 5.1% growth in the first quarter of 2010
contrasts 15.2% growth that quarter of 2011.60
One reason investors favor Colombia is because the government takes significant
measures to encourage investment in hospitality. For example, a 40% tax deduction
on tourism investment is available.vi This is in addition to generous income tax
exemptions on hotel building and expansion projects, and twenty year exemptions
for ecotourism services.61
In essence, the world increasingly realizes that Colombia is a prime tourist spot. The
industry often sees impressive growth, especially as security improves. The
hospitality sector expands as a result, which further strengthens tourist attraction to
the country.
Foodservice
A number of trends stand out in the food service industry. In 2009, 56% of
foodservice locations were standalone. These providers exhibit similar behavior and
expansionary trends. Standalone hubs tend to spread to non-concentrated areas and
leisure spots. In contrast, many local brands increasingly prefer to serve major
airports in an attempt to broadcast their names to incoming foreigners.62 Such a
strategy not only capitalizes on revenue from airport outlets, but also takes
advantage of new arrivals’ first impressions of the country. Newcomers develop a
sense of familiarity with the brand, and gravitate towards those outlets throughout
their trips.
Most restaurants, cafes, and bars remain standalone. Chain retail outlets are quite
prominent in the remaining 44% of the industry that is not standalone. Retail
foodservice establishments as a whole consisted of 11,597 premises by the start of
2010, suggesting outreach to a wide base of customers.63
A multitude of retail spots retrieved 24% of all Colombian foodservice sales in 2009.
Restaurants and fast food outlets together collected 56% of these retail sales. Such
data suggests that said sectors are particularly profitable. Lodging and travel also
vi
This only applies for investments made in “real fixed productive assets acquired.”
35 Latin America Outlook
recovered a fair share of the overall market, earning five and eight percent of
foodservice sales respectively. Fast food providers and coffee shops in major airports
and bus stations account for most sales in the travel sector, while upscale
restaurants account for the larger portion of sales in lodging. Expansion of the
lodging sector is expected to average 6% the next several years, offering promising
prospects for investment in that area.64
The foodservice industry saw growth for many years. The graphical representation
below illustrates that growth.
The past growth resembles a trend that is expected to continue for the next several
years.
Figures from Passport by Euromonitor International
Figures from Passport by Euromonitor International
36 Latin America Outlook
While foodservice is a widespread and diverse industry, behavioral trends are easy to
spot. Some providers aggressively target foreign travelers, as in the case of local
brands that congregate in high traffic airports. Other outlets prefer to remain more
discrete. Overall, opportunity increases as the entire hospitality industry expands to
meet foreign and domestic demand.
37 Latin America Outlook
Manufacturing
38 Latin America Outlook
Manufacturing in Mexico
The manufacturing industry in Mexico capitalizes well on the country’s unique
export advantages. Firms create products with low cost, and trade freely with the
world on account of multiple Free Trade Agreements, including the landmark North
American Free Trade Agreement. A friendly import environment also promotes
activity and helps the country establish lasting global relationships. Currently, a
variety of domestic programs are underway to increase products with no tariffs to
65% by 2013, in contrast to 20% in 2008.65 Such programs and agreements prove
the government’s ability and intent to promote trade. These goals positively impact
the manufacturing industry, as foreign consumers often drive sales in this area. In
fact, many companies strategically place factories in Mexico with intent to export
the manufactured products.
In March of 2011, exports from Mexico reached US$31.3 billion, a record period
high for the country. Moreover, a trade surplus for the first quarter of the year, at
US$1.8 billion, was the highest it had been since the first quarter of 1996.66 Such
growth may be attributed to vibrant success of the manufacturing industry, a major
growth driver for the export market. Impressive figures suggest recovery from the
recent recession is particularly robust for manufacturers.
As indicated by impressive export statistics, manufacturing in Mexico enjoys
thriving growth. Such promise becomes apparent when compared with that of
other major industries in the country. The following table outlines recent growth of
a variety of major industries in Mexico.
Manufacturing
39 Latin America Outlook
GDP by Industry (% change)
2010 2011 Q1
Agriculture, forestry & fishing
3.3 1.2
Mining 2.2 -2.5
Construction 0.0 4.9
Manufacturing 9.9 7.4
Retail 13.3 9.5
Financial & insurance services
2.4 2.6
GDP 5.4 4.6 Data Source: Instituto Nacional de Estadística y Geografía
The data shows that manufacturing expands far more rapidly than most other
industries, and thus resembles an area of tremendous opportunity. A 9.9% growth
rate in 2010 represents a very strong recovery from the recession. Prolonged, steady
growth of that magnitude is unrealistic, as it is the product of quick recovery from a
deep recession. Still, strong growth will last, as the industry is expected to perform
very well in the future. Indicated in the figure above, the industry was up 7.4% the
first quarter of 2011 compared with the corresponding period of 2010, confirming the
prediction of substantial continued growth.
Since the export market of Mexico is closely tied to foreign markets, it is wise to
assess the health of importing countries. Recent high inventory turnover for U.S.
wholesalers suggest strong sales, which benefit Mexican manufacturers that export
to buyers in NAFTA countries. High U.S. demand for manufactured goods contributes
to the optimistic manufacturing industry forecast.67
Transport manufacturing, such as vehicle exports to the U.S., fueled industry progress
with 22.8% growth.68 By 2013, automobile production is expected to hit 3.1 million
units, twice the production of 2008.69 The earthquake in Japan may temporarily
inhibit the tremendous growth in this area, as Honda and Nissan both manufacture in
Mexico. Still, transport manufacturing represents an area of opportunity within the
manufacturing industry.
In addition to low costs and free trade, Mexico’s geographic proximity to the U.S.
makes it a desirable production spot. Even some Chinese firms manufacture in
40 Latin America Outlook
Mexico to take advantage of low transport costs.70 Such advantages enable Mexico to
steal business from producers around the globe.
Although Asia has proven its ability to occupy a significant share of the manufacturing
market, Mexico increasingly represents a better option with long term advantages. As
do some Chinese firms, foreign companies begin to place factories in Mexico instead
of China. This is largely the result of Free Trade Agreements, minimal transport costs,
and low wages, especially as wages in China are on the rise. In particular, as the U.S.
automotive industry adjusts, industry producers prefer to take advantage of Mexico.71
Investors increasingly capitalize on manufacturing as an area of opportunity. As a
whole, seasonally adjusted gross fixed investment was 8.4% higher this January than
it was a year earlier. Moreover, such investment largely focused on sectors that focus
on exports, supporting the notion that foreign demand is a major growth driver in the
region.72 Since manufacturing fuels the export market, it attracts foreign investors.
41 Latin America Outlook
Information Technology
42 Latin America Outlook
As do hospitality and manufacturing, so too does the IT industry in Latin America
shows signs of promise. This area of opportunity extends throughout the region,
while specific countries show particular advantages. To illustrate, in Mexico, a 16%
increase in IT spending is expected for 2011. Such growth will bring IT spending to
US$14.7 billion.73 Similarly, technology spending in Brazil is expected to approach 10%
of total GDP in 2012.74 Thirdly, in order to satisfy the needs of IT professionals,
Colombia developed a Free Trade Zone geared towards IT service companies in
particular.75 Widespread growth in this industry offers promise to investors.
Innovation makes the Latin American IT sector extremely competitive. For example,
an application developer in Brazil, named Ci&T, fully embraced the ideals of Agile
software development, which ensure close collaboration with customers and
continuous evolution of products. Such techniques prove very effective. Further, in
the areas of outsourcing, it is far easier for Latin American firms to utilize Agile
methods on account of shared time zones with the United States that permit
Information Technology
Brazil
• 10% of 2012 GDP on Technology
Mexico
• 16% IT spending increase in 2011
Colombia
• Free Trade Zone for IT service companies
43 Latin America Outlook
frequent contact with clients.76
Many foreign companies and
local governments recognize and
encounter similar innovation.
In Mexico, public spending will serve as a particularly effective growth driver for the
IT industry. The government plans to allocate significant resources this year for
national projects that require large IT budgets. Among other goals, the country
aspires to increase tax collection efficiency, advance health services, heighten
security, and promote trade. Each of those
improvements requires significant
investment in IT solutions. Other projects
include a US$485 million valued three year
commitment to provide software and
training programs for small businesses.77
The following outline of Mexico’s IT sector forecasts robust, steady growth:
Figures in US$MM unless otherwise stated
2008 2009e 2010e 2011f 2012f 2013f 2014f 2015f
IT Market 12,753 10,712 12,641 14,663 16,716 18,555 20,410 21,839
IT Market as
% of GDP
1.2 1.2 1.3 1.3 1.3 1.3 1.3 1.3
Hardware 6,058 4,928 6,131 6,800 7,710 8,512 9,312 9,909
Services 4,272 3,749 4,171 5,132 5,872 6,541 7,220 7,753
Software 2,423 2,035 2,339 2,731 3,134 3,502 3,878 4,177
PCs 4,846 3,991 4,966 5,522 6,322 7,048 7,711 8,205
Servers 545 443 552 612 694 766 838 892S
Business Monitor International, 2011; ITU (internet and broadbank penetration data)
Area of Opportunity
• Government spending in Mexico
•Rapid product delivery
•Continuous collaboratoin with client
•Adaptability to change
•Communication between business and software players
•Continuous product evolution
Agile Software
Development
44 Latin America Outlook
An increasing presence of multinational corporations in the area, a trend sweeping the
entire Latin American region, strengthens the Mexican IT sector’s success and ensuing
optimistic forecast. For example, IBM embraced the increase in Mexican public
spending by supporting health services and security. The company initially invested
$10 million to set up a center in Mexico. Upon regional success, IBM invested another
US$200 million to earn greater presence throughout Latin America. Moreover,
company plans call for US$650 million more in spending over ten years to build centers
in Argentina, further solidifying IBM’s Latin American outreach.78
IBM is not the only major industry player taking advantage of the unique features that
grant Latin America a thriving IT industry. In the past, Google outsourced major
projects to Globant, a software company in Argentina. Globant contributed to the
development of key projects such as Google AdWords and Google Checkout.79
In 2008, HP acquired EDS because of EDS’s well performing Latin American operations.
Similar activity is not at all uncommon. For example, Unisys’s planned software
development center in the region represents a US$50 million investment. Similarly,
Infosys, an Indian firm, has two Latin American Development Centers that together
employ over 330 people.80
Evidence suggests that in the IT sector, the appeal of a Latin American presence is
undeniable. Multinational corporations eagerly take advantage of the strategic
geographic location. Additionally, business process outsourcing and full service call
centers are more prominent.81
As do many industries in Latin America, so too does the IT industry benefit from United
States demand. Firms in the U.S. increasingly outsource projects to the region to take
advantage of low costs and productive work environments. Companies that
collaborate or outsource projects to the region often realize the benefits without a
doubt. For example, when U.S. headquartered Idera worked with Brazillian based
Stefanini IT Solutions, the CEO commented, “Even though the Stefanini staffers were
remote, they worked in the same time zone as our team members in Houston and
melded into our teams and development approach. We have not found another firm
that could integrate so seamlessly."82
45 Latin America Outlook
Strategic location, innovative leadership, and public support all contribute to robust
growth in Latin America’s IT industry. Multinational corporations increasingly realize
such attributes and either build new sites in the region, or find IT companies as prime
targets for acquisition.
46 Latin America Outlook
Rising Middle Class
47 Latin America Outlook
Recent reduction in poverty improves business opportunities in Latin America. In the
past, poverty made it difficult for domestic consumer spending to drive the economy.
To compensate for lack of local demand, regional leaders took great strides to
promote trade with the outside world. As a result of many Free Trade Agreements
and other encouraging government measures, export markets exploded, allowing
economies to boast rapid growth and attract attention from foreign investors and
multinational corporations.
Profound economic growth came hand in hand with rising living standards for the
local population. While past generations were trapped in poverty, members of the
current population quickly enter the ranks of the middle class. This trend adds a new
growth driver to the region, domestic consumer demand.
Overall, approximately 56 million new individuals earned middle class status since
1999.83 From 2005-2010 alone, the overall percentage of homes in Brazil that earned
over US$25,000 in disposable income increased from 21.7% to 30.1%. In Argentina,
the proportion of households with said income increased from 33.5% to 44.8%.
Similar statistics in other Latin American countries are not uncommon, particularly in
Chile, Venezuela, and Peru.84
The OECD’s definition of middle class includes anyone whose income is within 50% of
the median in either direction. Such a definition categorized nearly half of the
population of Latin America as middle class in 2006. 85
Rising living standards as a product of increased spending couples the rapid flow from
poverty to middle class. For example, a tripling of home loans in Mexico between
1998 and 2006 suggests many more families can afford homes of their own, also
proven by the fact that more than 7 million additional Mexican homes were built this
past decade. Falling prices and smaller average family sizes also contribute to rising
living standards, as family income buys more. 86
Rising Middle Class
48 Latin America Outlook
Both naturally improving living standards and
generously funded programs strengthen the trend
away from poverty. Organizations and
governments take direct action to award families
middle class stature.
The Inter-American Development Bank funded a
number of successful endeavors, loaning US$220
million to programs that help poverty stricken
families in Colombia afford higher living standards,
including better health care, education, and
nutrition.87 In addition President Lula of Brazil
managed to implement government programs that
brought 30 million individuals from lower to
middle class.88
Lula’s achievements in Brazil contributed to
income rises that surpass minimal middle class
conditions. In fact, a total of 38 million Brazilians
who used to suffer from poverty now enjoy
income exceeding four times the poverty line. The
transition of those individuals occurred entirely in
the last decade.89
A number of democracies in the region implement
conditional cash-transfer programs to combat
poverty. In essence, the government offers
monetary incentives to ensure children receive an
education and adequate health care. Mothers
receive monthly, per child checks if they ensure
such activity. Such programs prove quite
successful, with noticeable direct effects in Mexico
and Brazil in particular. Not only do families
receive monetary aid, but the public benefits from
a more educated, healthier community of
citizens.90
Highlights
Nearly 56 million Latin Americans
joined the middle class in 10
years.
Brazilian homes earning over
US$25,000 a year rose from
21.7% to 30.1% of households in
five years.
Nearly half the population of
Latin America qualified as middle
class in 2006.
7 million new homes were built in
Mexico over the past decade.
49 Latin America Outlook
As an increasing number of citizens gain wealth, purchases increase and businesses
perform better. In essence, the transition generates an entirely new consumer
market that demands quality goods, food products, electronics, better healthcare,
and more valuable education. Such a population may reduce the region’s typical
dependence on foreign demand for exports, offering additional growth and economic
stability to the region.
Recent success of pet product distributors and pet healthcare providers serves as an
example of beneficial consumer spending. Pet healthcare saw an increase in sales
from US$69.4 million to US$119.1 million in the past half-decade. A 36% increase in
pet fashion accessory sales was also observed.91 Such growth may be attributed to
the fact that an increasing number of families in Latin America have enough wealth to
participate in these markets. Many other businesses benefit from such participation
as well.
The transition likely benefits political systems as well. Middle class citizens often push
for responsible governance and hold political figures accountable for their actions.
Such individuals demand spending and tax schemes that combat income inequality,
as some past policies inflicted the poor far more than the wealthy. For example,
governments’ past heavy reliance on consumption taxes burdened the less fortunate
significantly more than the well off.92 In addition, reduction in poverty offers
additional tax revenue that the government may use to fight crime, building
infrastructure and further stimulate the economy.
50 Latin America Outlook
Political Risk
51 Latin America Outlook
The Political – Economic Bond
Although the Latin American political situation is not the most stable or virtuous in the
world, it improved significantly in recent times. Political changes often accompany
economic shifts. Policy changes may impact the greater economy, or difficult times
may lead to changes in public sentiment. A prime example of such a relationship is the
“lost half-decade” of 1998-2002.
Economists and historians often refer to 1998-
2002 as the “lost half-decade” on account of
poor economic performance. Prior to this
period, right wing political figures dominated
country governments. The public criticized these
leaders and held them responsible for a
substantial rise in poverty and fall in GDP.93
Thus, citizens granted left wing candidates the
privilege of power, with hopes of change.
Many candidates originally spoke out against
the IMF, U.S. and free market reforms. However, once elected, leaders often
maintained policies of reform and free market economics, especially in Brazil and
Chile. This may be attributed to the fact that prior reforms lowered inflation, made it
easier to seek credit, and benefited the middle class.94 Observed advantages provoked
leaders to maintain similar policies.
Political Risk
Leaders Emerging from the Lost Half Decade
What they said
•Oppose free market reforms
•Reject the IMF
•Reject U.S. policies
What they did
•Free market economics
•Reform
52 Latin America Outlook
The years of 2003-2008 offered quite the
opposite economic situation as did the
previous half decade. GDP grew at
approximately 5% annually for six years
in a row, while unemployment and
poverty fell. The extravagant 2003-2008
boom permitted rises in government
spending and coinciding falls in fiscal
debt. Such lasting growth made this era
one of the most economically stable and profitable in the region’s modern history.95
Naturally, the public credited the left leaning political leaders with the dramatic
improvements. However, experts do not associate the success with official left leaning
policies. Rather, success may be attributed to free market reforms and capitalistic
policies that led to tremendous commodity performance.96 Still, the positive
atmosphere produced lasting positive sentiment towards the left.
Progress The recent recession burdened the entire world economy. In Latin America, it ended
the 6 year continuous trend of extravagant growth. Fortunately, Latin America as a
whole was less devastated than many nations around the globe.
Interestingly, the public was hesitant to blame political leaders for poor economic
conditions during the latest recession. Past recessions prompted wide scale protests
and political demands. The most recent downturn prompted a much different
response. In fact, the start of the recent recession coincided with an observed rise in
support for democracy. Polls show that democratic satisfaction in Latin America
increased to 44% from 37% at that time. It seems popular sentiment credits
democracy with the changes that led to the tremendous growth of 2003-2008, and
that has not been forgotten. Additionally, lack of turmoil may be due in part by
leaders’ abilities to blame the global recession on the rest of the world.97
53 Latin America Outlook
Differences between past and recent reactions to economic cycles suggest increased
stability and satisfaction in the region.
Satisfaction may partially be attributed to the ability of governments to pass
productive legislation. Colombia offers a recent example of such productivity.
Leadership in Colombia maintains a congressional majority, allowing the country to
push through legislation without much trouble. Such an environment permits positive
change and economic growth. Although in theory such ease of reform may lead to
abuse of power, effective Colombian institutional checks are in place for protection.98
The achievements of former President Lula
de Silva of Brazil offer additional prime
examples of why the public may view the
government with greater approval. Lula
successfully practiced fiscal restraint. Such
behavior reduced the overshadowing burden
of debt, diminishing investment risk in the
region. The country enjoyed several
generous fiscal surpluses during Lula’s
presidency on account of such restraint and
fair economic conditions.
A less cooperative Congress burdened Lula’s 2006-2010 term as the Workers’ Party
lost influence. Still, his government managed to implement programs that brought 30
Past Downturns
Protests
Political demands
Instability
Recent Recession
Support for democracy
Support for current regimes
Lula's Achievements
Repeat fiscal surpluses
30 million individuals entered middle class from
poverty
54 Latin America Outlook
million individuals from lower to middle class.99 Naturally, public support followed
such obvious success. Dilma Rousseff, who began his Presidency in 2011, attempts to
continue Lula’s legacy.
Evolution of populism and the social democratic left also benefits the economy and
reduces political risk. Populism, which supports grass roots organizations and the
underrepresented, has seen some success in the region. This movement gained
particular popularity in Venezuela, Bolivia, Ecuador, and partly in Argentina. Classic
populism often used to result in uncontrolled short term spending that, while
temporarily beneficial, harmed the nation in the long run. Fortunately, more recent
populist governments act to promote long run economic stability.100
The social-democratic left
contrasts the sentiment of
the populist movement.
Supporting views are more
popular under regimes with
better established public
institutions, as is the case in
Brazil and Uruguay. Leaders
that share social-democratic
opinions widely promote
market friendly reforms,
foreign investment, and social programming. Such policies implemented by Lula
helped reduce inequality in Brazil in particular. These governments are usually
supportive of, and supported by, the IMF and the United States. Lula established
particularly close ties with the Obama administration, although Lula’s relationship
with Iran and Venezuela apply recent strain.101
The Obama Administration attempted to strengthen ties with Latin American
governments. Overall, regional governments cooperated with these efforts, yet there
was tension in some areas. For example, Colombia’s relationship with the U.S. military
and their joint fight against guerilla attacks caused problems between Colombia and
Venezuela. In addition, member nations of the Bolivarian Alliance for the Peoples of
Our America maintain an alliance with Iran that is strongly opposed by the United
States.102
Classic Populism
Extravagant short term spending
Long term issues
Modern Populism
Increasing emphasis on long
term stability
55 Latin America Outlook
Risk In spite of progress, political stability should not be taken for granted in all of Latin
America. A 2009 military coup in Honduras offers an example of instability and
dissatisfaction. Still, this was the first military coup in Latin America since democracy
began to spread over 30 years ago.103
Colombia faces major issues with organize crime and guerrilla warfare. The
Revolutionary Armed Forces of Colombia (FARC), a guerrilla organization that
violently attempts to represent the poor, had an estimated 17,000 members in 2008.
FARC continues to promote violence and kidnappings in recent years in order to
oppose the government’s lack of focus on poverty. This is in spite of the fact that
poverty fell 10% to 45.5% during Uribe’s presidential term. The government fights
such crime with substantial effort, taking military and diplomatic measures to achieve
success. Current President Juan Manuel Santos is still trying to make peace with
FARC.104
Organized crime continues to draw government attention and resources away from
other important issues. Such crime tends to make investors weary of the region.105 To
illustrate, military forces deployed by the Mexican government in order to fight
organized crime amount to 45,000 individuals. In spite of these efforts, drug cartels
remain active. Activity is confirmed by the recent discovery of 35 graves, suggesting
the issue is worse than previously predicted.106
Other than crime, corruption also interferes in Mexico. Transparencia Mexicana’s
2010 index of good governance and corruption showed poor results for the country.
According to the organization, corruption plagued 10.3% of public service
transactions, and the number of corrupt actions amounted to over 200 million
occurrences. Lastly, the organization discovered that bribes averaged MXN$165 in
2010, up from MXN$138 in 2007. Unfortunately, such findings might reduce
President Calderon’s chances of reelection.107
Failure to reelect President Calderon of the National Action Party would be
unfortunate, as he advocates favorable reform that may better the country’s
prospects. Unfortunately, Mexican congress prevented changes that would have
proven quite beneficial for the economy. President Calderon pushed through some,
but was unable to convince Congress to privatize the oil industry, for example.108
56 Latin America Outlook
Overall, Latin American governments are not always blessed with profound
institutional strength. To illustrate, 14 elected Presidents in the region were
prematurely removed from office in the past 18 years. Such occurrences are less
common in stronger, more developed democracies.109
57 Latin America Outlook
M&A and Credit Outlook
58 Latin America Outlook
M&A
The outlook for M&A activity in Latin America is very optimistic. 2010 marked a year
of tremendous growth as multinational corporations and investors aggressively
bought up the region, doubling the yearly value of mergers and acquisitions to
US$220 billion. Even during the recession, Latin America suffered only a 10%
decrease in deal values, while the rest of the world saw reductions averaging 27%.110
United States firms increasingly target the region to satisfy their emerging market
interests. In fact, more than 40% of emerging market acquisitions by U.S. companies
focused on Latin America in the second half of 2010. Of all emerging market
purchases worldwide by U.S. companies at that time, 18.1%, or 21 deals, targeted
Brazilian companies, 14.7% involved Central American and Caribbean firms, and an
additional 8.6% focused on companies in other areas of Latin America. Such behavior
proves that Latin American firms compete well with other classic emerging markets,
such as India and China.111
In addition to multinational interest in the region, many Latin American companies
acquire others, following a global trend of that nature. In 2010, 250 emerging
markets companies acquired a portion or whole of other emerging firms. 132 of
those deals occurred in the second half of the year, illustrating a rising trend in such
activity.112
M&A and Credit Outlook
59 Latin America Outlook
Credit
The credit outlook for Latin America is quite positive. Optimism stems from overall
robust economic growth and a promised effort by governments to apply more
conservative fiscal and monetary policies. Changes in regional credit ratings by
Moody’s exemplify enthusiasm.
In 2010, Latin America’s ratings improved more than any other region’s in the world,
represented by a net notch increase of +12. Never before has Moody’s allotted such
a high net rating increase for any global region. In comparison, the Middle East,
Africa, and Asia all earned recent +2 net notch increases, while Europe experienced a
-15 loss. It should be noted that Europe’s tremendous downgrade was largely the
fault of poor conditions in Greece and Ireland.113
National debt in the region is far less of an issue than it was several years ago. The
government debt to GDP ratio will likely hover near 30%, compared to a more
dangerous 2002 metric of above 55%.114
Data Source: Moody’s Investor Service
60 Latin America Outlook
External debt ratios show the same downward trend as those of overall national
debt. The following representation of external debt as a percentage of GDP exhibits
steady foreign debt reduction since the late 1990s:
The decreasing proportion of external debt suggests a decreasing burden on future
generations. Fewer foreign obligations that hinder growth and pose default risks will
exist.
Strong domestic policies and economic trends encourage a positive credit outlook.
However, foreign troubles may affect Latin America’s performance. For example,
experts predict that Chinese growth may slow in the coming years. Such an
occurrence could harm some Latin American industries that export to China. In
addition, the U.S. economy shows signs of a slowing recovery, harming areas that
rely heavily on U.S. demand, such as Manufacturing in Mexico.115 Still, the overall
credit outlook for Latin America exhibits signs of stability and continued
improvement.
Source: Ocampo, 2011
61 Latin America Outlook
Currency Exchange Trends
The following section offers statistical insight into currencies of interest in Latin
America.
USD/MXN 6 Month Trend
Currency Exchange
Source: exchangerates.org.uk
62 Latin America Outlook
USD/MXN 2 Year Trend
Latin America Currency Forecasts
Currency 8/2010 Q3 ‘10 Q4 ‘10 Q1 ‘11 Q2 ‘11 Q3 ‘11 Q4 ‘11
USD/MXN 12.718 12.600 12.600 12.600 12.600 12.800 13.000
USD/BRL 1.7688 1.8000 1.7500 1.7000 1.7200 1.7400 1.7500
USD/CLP 509.65 540.00 560.00 580.00 600.00 615.00 625.00
HSBC USD/MXN Forecast Changes
Old Forecast New Forecast 1Q10(f) 12.90 12.65
2Q10(f) 12.90 12.45
3Q10(f) 12.90 12.25 4Q10(f) 12.90 12.25
Source: Yahoo Finance
Data Source: research.hsbc.com
Data Source: currency-forecasts.com
63 Latin America Outlook
USD/COP 6 Month Trend
USD/COP 2 Year Trendvii
vii BullTick Capital Markets forecasts USD:COP currency exchange rate to trade at $1750 by the end of
2011.
Source: currency-forecasts.com; research.hsbc.com
Source: exchangerates.org.uk; bulltick.com
Source: Yahoo Finance
64 Latin America Outlook
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65 Latin America Outlook
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