IFR Latin America Special Report 2014
The good, the bad and the downright ugly: The People’s Republic of China may be more than 10,000 miles away from Latin America, but given the influence it has been having on the region, you could be forgiven for thinking it occupies the same barrio. There’s been no bigger influence on the region’s economy over the past few years than the PRC. With China’s growth slowing to about 7.5% from the runaway double-digit peak it reached in 2010–11, it’s not surprising that LatAm has suffered similarly.
The People’s Republic of China may be more than 10,000 miles away from Latin America, but given the influence it has been having on the region, you could be forgiven for thinking it occupies the same barrio.
There’s been no bigger influence on the region’s economy over the past few years than the PRC. With China’s growth slowing to about 7.5% from the runaway double-digit peak it reached in 2010–11, it’s not surprising that LatAm has suffered similarly.
The good news is that the IMF says the region’s growth will pick up this year to 3% from 2.6%, led by Mexico, Central America and the Caribbean.
Mexico is indeed the region’s shining light as the government starts to undertake landmark reform of its energy sector. Lawmakers are working towards ending state-oil company Pemex’s monopoly on crude production that they hope will attract significant private investment into the country’s creaking energy infrastructure.
The reforms, together with the economic recovery in the US, is leading to increased optimism about Mexico’s future. Both equity and debt issuance is already picking up and bankers expect more new names to raise funding in the coming years.
The picture for the rest of the region is mixed, with Brazil in particular under pressure. Higher-than-expected fourth-quarter GDP growth has given a much-needed boost to Dilma Rousseff’s administration. With interest rates at 10.75%, consumer debt high and an inadequate infrastructure, Brazil’s economy, however, remains troubled.
Nothing exemplifies better how quickly Brazil has lost its lustre than OGX, the oil company founded by tycoon Eike Batista, which is heading towards the region’s biggest ever corporate restructuring. Batista was arguably the poster-child of Brazil’s boom. But now he is scrambling to keep his business and reputation intact.
Creditors face the prospect of getting little money back from their investments but questions also need to be asked why they bought debt from a company that had no cashflows in the first place.
Another measure of Brazil’s struggles is the dearth of share offerings. In 2007, there were 70 IPOs from the country. This year there have been no filings, as Brazil is off to its worst start in more than a decade in the equity capital markets. Research from Credit Suisse shows that just 37 of the 117 IPOs priced since 2005 have yielded returns above the benchmark CDI interbank lending rate.
Some argue that pessimism on Brazil is overdone, with consumer spending and investment holding up well and the government promising to cut US$18.5bn in public spending to bring the deficit under control. The rise in rates at least helps to bring inflation down, with the level at 5.6% after peaking at 6.7% in June 2013.
Other parts of the region remain attractive only for the biggest risk takers. Argentina continues to battle hold-out investors from its 2005 restructuring deal. Talk about backroom negotiations between creditors has been rife but the outcome of the sovereign’s US legal battle with creditors, including Elliott Associates, remains unclear.
There’s a possibility that Argentina could default once again, though sovereign debt prices are holding firm and investors seem to be looking ahead to a post-Kirchner era with presidential elections scheduled for next year.
Any new administration will have to push ahead with a slew of reforms to get the economy on an even keel. The list of challenges is daunting: the peso is one of the worst performing currencies, inflation is rampant, reserves are dwindling and the sovereign is barred from the international capital markets.
Venezuela is arguably a bigger mess and even more mismanaged. After all, the Andean nation enjoys one of the biggest oil reserves in the world. The death of President Hugo Chavez has not changed the country’s fortunes; if anything the situation is getting bleaker.
While poverty levels fell by 20% in 2012, according to the World Bank, now the country’s citizens face a shortage of everything from dollars to consumer goods.
Still, investors continue to buy the country’s debt, putting faith in the sovereign’s ability and willingness to pay its external debt. Brave or foolhardy? Only time will tell.
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