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Mexico City's $13 billion international airport is a third finished, but new president Andres Manuel Lopez Obrador has scrapped it, triggering a plunge in investor confidence. (Photo: Mexico Government)
Thursday, December 13, 2018
Analysis

Latin America Business: Worst in 2018


The worst news in Latin America business in 2018.

BY LATINVEX EDITORS

The worst events in Latin American business this year, according to Latinvex editors.

#1 Mexico Airport Cancellation

On October 29, Andres Manuel Lopez Obrador – less than five weeks away from assuming Mexico’s presidency for a six-year period -- made a historic blunder which the country likely won’t recover from until he is out of office.

Lopez Obrador (popularly known as AMLO) announced that he would scrap the new $13 billion international airport being built in Mexico City – the largest infrastructure project in the country – despite it being a third built, warnings from local and foreign investors about the signal that would send and warnings from local and foreign experts on the negative impact that would have on air traffic.

The news led to the peso plunging and stocks falling $22.5 billion in a few days, ironically almost enough to finance almost two new Mexico City airports, as Bloomberg’s Eric Martin pointed out.

Fitch Ratings downgraded its outlook for Mexico’s sovereign debt from stable to negative.

It clearly signaled that AMLO had no qualms about breaking contracts with private sector companies.

[UPDATE: On December 19, The tender offers by Mexico City Airport Trust (MEXCAT) for the four series of notes representing $1.8 billion of $6 billion of notes issued in the international markets were oversubscribed at the early tender/consent deadline, markingan important achievement in the Mexican Government's relationship with stakeholders and future infrastructure development, legal advisor Cleary Gottlieb said].

#2 Argentina Economic Crisis

It wasn’t supposed to be like this. Led by Mauricio Macri, a pro-business president, Argentina was expected to be recovering after 12 years of investor-hostile policies under Cristina Kirchner and her late husband Nestor Kirchner (2003 – 2015).

But this year, Argentina suffered a major setback when the peso plunged after the government mishandled its inflation target. The peso crash led to Central Bank chief Federico Sturzenegger leaving in June. Finance minister Luis Caputo took the helm, promising an improved coordination with the government. Yet, he himself resigned after only three months.

The peso volatility comes as the Macri government has failed to reduce double-digit inflation, which it inherited from the Kirchner governments.  Private economists like consultancy Elypsis see inflation this year ending at 47 percent, a dramatic increase from last year’s 25.7 percent rate. Both rates are the highest in Latin America outside of economic basket case Venezuela.

The rising inflation comes as Argentina is suffering a recession. This year, the economy is expected to decline by 2.6 percent after growing 2.9 percent last year (which really wasn’t much to brag about since that followed a 1.8 percent decline in 2016), according to projections and data from the International Monetary Fund (IMF).

The private sector, which welcomed Macri after the years of mismanagement and anti-business policies of the Kirchners, are now disillusioned with the current government as well.

They are especially unhappy with the government shelving plans to ease taxes and tariffs after it inked an emergency credit agreement with the IMF aimed at shoring up the peso.

To top it off, local and foreign investors now worry that Macri may not win re-election next year and that Cristina Kirchner could return to power.

“The possibility that a populist government returns and interrupts the process of normalization and turns back many decisions is a major concern for the local and foreign business sector and investors, and a key reason why investments are not growing outside of competitive areas like energy and agro,” Miguel Blanco, head of Swiss Medical and the business group Foro de Convergencia Empresarial, told La Nacion .

#3 Mexico Energy Nationalism

AMLO is clearly aiming to reshape the energy and many investors fear he will eventually redo the historic energy liberalization of his predecessor, Enrique Peña Nieto, who opened up the energy sector by ending the monopoly state oil company Pemex had held since the oil sector was nationalized in 1938. He also allowed competition in the distribution of gasoline, leading to a rush in foreign oil companies operating in upstream and downstream business.

AMLO wants to make the financially troubled and inefficient Pemex the cornerstone of his energy policies. He is planning to build a $8 billion Pemex refinery and cancelling oil auctions.

His goal is clearly to reduce foreign companies' role in Mexico’s energy while boosting that of Pemex and state electricity company CFE.

In addition to a $106 billion debt burden, Pemex is the worst company in Latin America in terms of financial performance. Pemex saw its losses jump from $9.3 billion in 2016 to $16.8 billion last year, thus keeping its position as the worst performer on the Latinvex 500 ranking of Latin America’s largest companies. (In contrast, Brazilian state oil producer Petrobras went from 2016 losses of $4.5 billion to a loss of $134.8 million last year.)

Ratings agencies such as Moody’s as well as the IMF have warned against the refinery plans before fixing Pemex’ finances.

“A new refinery could take three years just for design and another three for contracting and financing,” George Baker, publisher of Mexico Energy Intelligence in Houston, told the Inter-American Dialogue’s Energy Advisor.López Obrador would likely leave office before the first shovelful of earth was turned for the new refinery.”

#4 Peru Turmoil

When Pedro Pablo Kuczynski became president of Peru in July 2016, local and foreign investors were thrilled. Kuczynski, popularly known as PPK, was highly qualified to boost investments since he had ample public and private sector experience, including serving as prime minister, economy and finance minister and energy and mines minister as well as serving as co-chairman of First Boston for nine years and founding and heading private equity firm Latin American Enterprise Fund (LAEF) in Miami.

Yet, despite his impressive background he was unable to cope with a combination of factors, including fallout from the Odebrecht corruption scandal (some observers would argue he mismanaged his and the government’s response from the get-go) and constant attacks by opposition leader Keiko Fujimori (who controlled a majority of Congress). In March this year, PPK was forced to resign as he faced an impeachment trial by lawmakers over alleged vote-buying.

His first vice president, Martin Vizcarra, was named to serve the rest of PPK’s mandate, which ends in 2021. Vizcarra appears to have more luck than PPK insofar that Fujimori is now behind bars in connection with alleged Odebrecht bribes and her party Fuerza Popular weakened after several defections, including from her brother Kenji Fujimori.

Meanwhile, Vizcarra is gaining popularity among Peruvians for his management and on December 9 won a referendum aimed at reducing corruption.

While the political noise may subside, local and foreign investors remain nervous about Peru. The economy is expected to grow 4.1 percent this year, an improvement over the 2.5 percent increase last year, but a far cry from the average 6.5 percent expansion seen during the 2005-13 period.

The IMF only expects a slight improvement next year, with GDP growing 4.12 percent. Fortunately inflation has been kept relatively low, thanks to the well-respected Central Bank led by Julio Velarde.

#5 Continued Venezuela Problems

Just as you thought Venezuela’s economy couldn’t possibly get any worse, it did. After a 14 percent GDP fall in 2017 and 16.5 percent decline in 2016, Venezuela’s economy is set to suffer a 18 percent plunge this year, according to the IMF.

Meanwhile, inflation is expected to reach a whopping 1.4 million, after already reaching an incredible 1,088 percent last year, according to IMF data and projections.

Venezuela – which ranked as Latin America’s second-richest country in 1998 – is getting poorer and poorer.

It fell to tenth place in 2016 and now ranks in 12th place. Next year it will rank among the sixth poorest countries before ending up among the three poorest countries in 2023. Only Honduras and Nicaragua will be poorer that year, according to a Latinvex analysis.

The GDP per capita projections are in line with Venezuela being the Latin American laggard in GDP growth this and the next five years.

Poverty rates have gone from 48 percent in 1998 – when Hugo Chavez became president – to 87 percent today, according to Venezuelan research quoted by La Republica.

After mismanaging the key oil sector (oil production is at its lowest level in 50 years), President Nicolas Maduro is only hanging on thanks to loans from China.

 

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