Investing in Latin America: Short-run Reluctance, Long-run Opportunity
Despite recent economic travails, Latin America still offers great opportunities as an emerging market. But investors there need a stomach for risk and the patience to invest for the long term. Countries in the region, for their part, need to better manage their economies and thus reassure investors abroad, especially in the United States. Otherwise, they will lose even more ground to the fast-developing nations in Asia.
That was the consensus of a panel of investment professionals who participated in Wharton’s Latin America Conference. “The region’s macroeconomic performance has been poor,” said Carlos Aguilar, a managing director for a Latin American subsidiary of Bechtel, a San Francisco-based multinational construction and engineering giant. “Governments have been slow in reacting to crisis. In the 1980s, Latin America was held out as a great growth market for U.S. companies, especially big banks. Labor was cheap. People in the region were hungry for consumer goods; governments, for infrastructure projects. But the promise hasn’t panned out and, in the 1990s, the region was beset by economic troubles. Mexico devalued its currency, the peso, in 1995. Brazil devalued its real in 1999. And Argentina, once the richest country in the region, is enduring a severe recession that is in its fourth year.”
Despite these problems, Bechtel has continued to take on new projects, mainly power plants, in Latin America, Aguilar said. “We have about $2.5 billion in projects now, primarily in Mexico. And we have done about $29 billion worth of projects since 1975, mostly in power but also in water systems, airports and rail transportation.” Among the steps Bechtel takes to ensure the success of these projects is assessing the local “political commitment” to them, he said. That means not just talking with government officials but also with opposition leaders. “Infrastructure projects take a long time, and governments change.” Bechtel also tries to promote transparency – the use of American-style accounting standards and bidding processes that are predictable and fair. That helps it not only with its current projects but future ones, too.
Bridgestone, the world’s largest tire and rubber company, remains committed to doing business in Latin America, according to Mark Emkes, CEO and president of the company’s North American subsidiary. Before a September promotion, Emkes led Bridgestone’s Latin American operations.
Bridgestone has seven tire plants and 8,000 employees in the region. And it is in the midst of a $40 million expansion of a plant in Costa Rica. “We’re investing in Latin America because there’s a big market there and because of its proximity to the United States,” Emkes said.
If the company has a worry, it’s that labor costs are higher than in the developing countries in Asia. But Bridgestone has developed a good relationship with unions in Latin America, and that has allowed it to stay competitive. “In Mexico last year, two of our competitors closed plants,” he said. “But we went to the union, and they stepped up and agreed to a wage decrease.”
Mexico, along with Chile, has been one of the region’s economic successes, said Ellis Juan, head of capital markets for the Inter-American Development Bank. More so than other Latin American countries, it has tied its economic fortunes to the United States and North American companies such as Bridgestone. (It’s part of the North American Free Trade Agreement.) That has allowed it to make great progress since its 1995 devaluation.
Chile has made its advances through prudent financial management, according to David Stevens, president of XL Capital Assurance, a New York-based financial guarantee insurance company. (“We’re almost like a rental agency. We rent our triple A credit rating to issuers of debt securities.”) Chile reduced its deficit and promoted low inflation expectations and thus manageable interest rates. And it did this with a flexible exchange rate rather than the fixed rate that, say, Argentina used for most of the ‘90s. Argentina pegged its peso to the U.S. dollar, one for one. That stamped out high inflation but also brought on high interest rates. “A fixed rate can undermine a country’s competitiveness,” Stevens said. “It can severely constrain government control over monetary policy.”
If companies and investors in the United States are confident about Mexico and Chile, they’re skittish about Brazil in the wake of the election in October of a socialist president. Since his election, Luiz Inacio Lula da Silva – known as Lula – has tried to reassure investors abroad, noted William Bethlem, president of Unibanco Securities, an arm of Brazil’s third-largest private sector bank. Even so, they’re pulling back. “There are no long-term [stock market] investors in Brazil right now. Liquidity” – the ability to get their money out when they want it – “is a key concern. Two billion dollars was taken out of the market in 2002.”
Corporations have slowed their direct investments, too. “It was about $22 billion to $23 billion in 2001,” Bethlem said. “We’re estimating $16 billion in 2002 and $17 billion to $18 billion in 2003.” And U.S. banks have clamped down on the country’s credit lines for trade, even though it hasn’t defaulted on trade lines. “We talk to the managers, and they say they’ve been burned in the U.S. with corporate scandals and burned in Argentina, and they can’t afford to be burned in Brazil.”
In general, investors are pessimistic these days about Latin America. “There’s quite a bit of fright after the meltdown in Argentina,” said Stevens of XL Capital. “And there’s concern about the reform fatigue that seems to have overtaken the region.” Many analysts, for example, have interpreted Lula’s election in Brazil as a response to the economic austerity measures undertaken at the behest of the U.S. government, Wall Street and international development organizations such as the World Bank and International Monetary Fund. But in the longer run, Stevens predicted, “the countries of Latin America will be significant economic players.”