latin america - outlook 2011

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

[email protected]

Analyst: Josh Hoffman-Senn

[email protected]


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


Economy Overview


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



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.


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.


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


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.


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


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.


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


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


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.


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


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.


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


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


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.


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


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


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.


Hospitality


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


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



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.



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


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




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


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


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


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




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.


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


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.”


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


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.


Manufacturing


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


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


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.


Information Technology


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


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


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


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.


Rising Middle Class


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


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.


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.


Political Risk


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


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


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


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


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


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


M&A and Credit 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


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


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


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


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


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


470 Atlantic Ave.

4th Floor Boston MA 02211, USA

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