Ride the rollercoaster

Author: | Published: 24 Apr 2015
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The IFLR1000’s Chris Cooper assesses the risks and opportunities in a vibrant region

Latin America continues to be attractive generally to foreign investors. But countries where regulators have eased their grip on business, and where state-owned firms have avoided controversy, are outpacing their competitors by a wide margin. Mexico has loosened energy sector regulations that kept away investors in the past, while steadily trying to foster and promote a transparent investment climate.

Chile, Peru and Colombia continue to thrive and offer welcoming and lightly regulated markets. Investment from China in particular, is running strong. Taking note of the promise of Latin America's resources and commodities, China has pledged $250 billion in investment in the region over the next decade. It's reported that the Chinese are enthusiastic about Venezuela's oil, Peru and Chile's cooper mining capabilities, and soybean from Argentina and Brazil.

At the same time, some jurisdictions remain plagued with a variety of issues and problems, some regulatory and some climatic in nature. The slump in oil prices is crippling Venezuela's economy, and Brazil has its own issues as it deals with corruption at a semi-public firm, Petrobras, compounded by a historic drought. Given the complexity and variety of the region's markets, its key jurisdictions merit case-by-case scrutiny.

"Mexico’s energy market is open for business, and the world is taking note"

Although the Chinese continue to be heavily invested in Argentina, the outlook isn't as bright as one would hope. A traditionally strong ally to China, Argentina's condition has made Chinese investors wary. In a March 28 interview with Emerging Markets' Elliot Wilson, Xiang Songzuo, chief economist at the state-run Agricultural Bank of China, said China is "more and more cautious about investing in Argentina, both directly [in state-to-state transactions], and in terms of purely equity deals."

Growth in Argentina has stalled, with a contraction of 0.5% forecasted for 2015. Songzu also added that there is a "potential political risk" and concerns "about dealing with countries that have clear tensions with the US." There's hope that things will begin to turn around for Argentina after October 2015, when voters go to the polls to elect a new government. There is much excitement surrounding the three frontrunners as many expect that either one of them will be able to move the country forward and reclaim a good standing in the international financial markets.

Brazilian difficulties

It's hard not to concur with observers who say that Brazil is facing some of its most trying times in living memory. The economy continues to shrink as inflation rises and consumer confidence declines. The country's central bank predicts that Brazil will end 2015 with inflation hovering at 8%, and an economy contracted by 0.5%. Brazil is also having an unwanted moment in the global spotlight as it works through the biggest corruption scandal in its history. Executives of the state-run oil firm Petroleo Brasileiro (Petrobras) are accused of money laundering following an investigation launched in the summer of 2013. Reportedly, several construction companies paid officials nearly $800 million in bribes to get profitable Petrobras contracts.

Arrests have been made, including the former director of Petrobras' international division, the former director of engineering and services at Petrobras, and the former director of downstream operations at Petrobras. In addition, the company's chief executive officer and five executives were forced to resign.

Moody's downgraded all ratings for Petrobras on February to "reflect the challenges related to the corruption investigations." But despite all this, investors remain confident in the company's success. On April 1, Petrobras announced that it received $3.5 billion from China Development Bank. The bank's investment clearly signifies China's continued strong interest in the region.

Compounding its problems, Brazil is in the midst of a severe drought, which has caused increased pressure on its hydroelectricity capabilities. São Paulo is said to have been most affected, but Brasilia and Rio de Janeiro have hardly been spared.

More positively, Mexico's energy market is open for business, and the world is taking note. President Peña Nieto reorganised the nation's energy market between 2013 and 2014, and there are now laws on the books regarding hydrocarbons and their revenues, the electric industry, geothermal electricity and the Federal Electricity Commission. The reform established the Coordinated Regulating Agencies of the Energy Sector and the Mexican Petroleum Fund for Stabilization and Development.

"Brazil is in the midst of a severe drought, which has caused increased pressure on its hydroelectricity "

Moreover, the overhaul introduced the National Agency of Industrial Security and Environmental Protection of the Hydrocarbon Sector. Petróleos Mexicanos (Pemex) is now a productive state-owned company with a new tax regime, budgetary autonomy, and more competitiveness and transparency.

The state-owned company will play a part in the oil and gas electricity markets with non-regulatory roles. Despite the dip in the price of crude oil, the Mexican Energy Ministry pushed on with its round one bidding process, which is now in its second phase. According to the ministry, in the first phase of round one launched in December 2014, the ministry put on auction 14 exploration blocks in shallow waters off the coast south of Veracruz, Tabasco and Campeche. No fewer than 43 companies have expressed interest, with 26 paying for access to the data room, and 16 enrolling in the prequalification process. The second phase of the round auctions nine shallow-water fields in the Gulf of Mexico. The fields, which will be auctioned to five contractors, are expected to attract nearly $5 billion by 2020.

Canal connections

Nicaragua is in the spotlight as it forges ahead with plans to build a $50 billion canal expected to be three times longer than the Panama Canal and able to accommodate larger ships. The canal is expected to be deeper and wider. Once again the Chinese role in the region is evident in Nicaragua – the project is being financed by the Hong Kong Nicaraguan Canal Development Group (HKND), which is contracted to build, develop and manage the project. Wang Jing, chairman and chief executive officer of HKND, told the BBC on March 18 that Chinese firms have spent decades building up expertise and experience with large infrastructure projects, so having a Chinese company leading the development of the canal adds to its prospects of success. "This canal is connecting East and West. It's definitely commercially viable; otherwise we wouldn't be investing in it," Jing said. Construction of the canal is set to be completed in five years.

Venezuela's economic woes escalate as the price of crude oil falls. The country's economy is heavily dependent on its rich oil reserves, but has been unable to compete with oil prices at about $50 per barrel, dropping from $115 a year ago. China has stepped in to help the struggling country, whose inflation sits at nearly 70%. The Chinese have agreed to invest more than $20 billion in the country's economy. Venezuela and China have maintained an agreement that in exchange for cash, Venezuela will provide China with oil. The Nicolas Maduro presidency is barely stable following the death of longtime leader Hugo Chavez, and as the economy worsens, it's widely predicted that Venezuela will default on its loans later this year.

Clearly, the region presents both risks and opportunities, which is why this inaugural Americas Regional Report should prove such an invaluable resource. Featuring insights from leading local counsel, regulators and stock exchanges we hope readers will gain market intelligence into a continent that continues to both baffle and attract in equal measure.