Latin America Business: Best in 2014

Mexican President Enrique Peña Nieto holds up the historic energy reforms he signed into law. (Photo: Juan Carlos Morales/Mexico Presidency)

The best news in Latin America business in 2014.

BY LATINVEX EDITORS

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


#1 The Mexico Moment

Notwithstanding protests over the death of 43 students in Iguala and a railway bid gone wrong, 2014 was clearly was Mexico’s Moment, with investor enthusiasm skyrocketing.

The implementation of Mexico’s energy and telecommunications reforms top our list of best business events in 2014. (Last year the reforms themselves were among the best business events).

In August, Mexico’s Congress approved secondary laws that will open up the country’s energy sector to more local and foreign competition and is expected to attract more than $50 billion in investments the next four years.

To put that in perspective, Mexico attracted an average FDI of $21.5 billion in the five year period 2009-13, according to a Latinvex analysis. In other words, reform will likely double that.

Officials also estimate that state oil producer Pemex (Latin America's second-largest company) will see profits increase by $6.9 billion within five years as a result of tax cuts provided by the reform. That means a final end to years of losses.

US business leaders also praise Peña Nieto for his energy reform. “We commend President Peña Nieto and the Mexican Congress for this momentous achievement,” Robert Mosbacher, Jr., former President and CEO of the Overseas Private Investment Corporation (OPIC) and Chair of the Energy Action Group of Americas Society/Council of the Americas, said in a statement.  “Development of the energy sector will boost growth, create jobs, and improve livelihoods throughout Mexico, while contributing directly to building the economic competitiveness which all three North American nations seek.

As a result of the reform, the Mexican government estimates that energy costs will decrease, 2.5 million new jobs will be created by 2025, and Mexico’s GDP will increase by 2 points by 2025, the Council of the Americas points out.

"Through these reforms, Mexico is taking critical steps to boost its competitiveness,” John Negroponte, Chairman of the Council of the Americas and Former U.S. Ambassador to Mexico, said in the statement. “We believe that Mexico will take advantage of this opportunity to deepen investment and growth, which will have far reaching effects on the Mexican economy. We look forward to our continued engagement with Mexico on these matters.”

Meanwhile, Mexico also has moved to open up its telecommunications sector. In July, Congress approved the final reform, which will open up the sector to more competition after years of dominance by America Movil, controlled by Mexican mogul Carlos Slim. Even before the congressional approval, Slim started selling off America Movil assets in order to comply with the new regulations.

Mexico’s telecom reform will attract investment and provide higher quality and less-expensive services for consumers, experts told the Inter-American Dialogues’ daily Latin America Advisor.

“The market has been positively shocked by the depth and breadth of Mexico’s most promising reforms: telco and energy,” pointed out John Price, managing director of Americas Market Intelligence, in a recent analysis.

And it’s not just economic policies that are driving the Mexico Moment. Mexico has seen far more capital market activity this year than Brazil, with real estate investment trusts known as Fibras leading the way. In June, Fibra Uno – the largest of the Mexican REITs – raised $2.5 billion in a share sale, the largest equity offering ever in the real estate sector in Latin America and the third-largest equity offering out of Mexico since 2000.

“That’s a very positive sign for the market,” Michael Fitzgerald, chairman of the Latin America practice at law firm Paul Hastings, told Latinvex after the Fibra Uno share offer.

Paul Hastings, which advised Fibra Uno on the share sale, advised on over $12 billion for Mexican companies during the first half of the year.  “That’s a record volume for us for any six month period,” Fitzgerald said. “I see the deals becoming larger and larger [and there are] more billion dollar plus deals than I have ever seen coming out of Mexico.”



#2
Levy Appointment

While there is no shortage of skepticism about the real impact – including from Latinvex – we have included the naming of Joaquim Levy as Brazil’s finance minister as one of the best five business events in Latin America in 2014.

The reason is that even a slight improvement in Brazil is a big step forward, both for that country and for Latin America. Brazil is the largest economy by far in the region and the 7th largest in the world.

We don’t expect miracles, but we do expect a stop to the reckless fiscal policies of his predecessor, Guido Mantega, which led to high inflation – and just as important – constant misses of inflation targets despite repeated promises of the opposite.

We also hope and expect Levy to not repeat the constant surprise announcements from Mantega that alternately raised and lowered taxes depending on his mood or his whim, resulting in too much uncertainty for many investors.

Where we realistically don’t expect Levy to make much progress is in implementing the structural reforms Brazil badly needs – especially in terms of reducing taxes, protectionism and red tape.  After all, Levy is an economist, not a miracle worker. And his boss, President Dilma Rousseff, has shown a genuine dislike of markets.

As Aecio Neves, who almost defeated Brazil’s president Rousseff in October’s elections, aptly put it: “Choosing Joaquim Levy as finance minister in a PT government is like naming the CIA chief to head the KGB.”

Still, a CIA “mole” at “Rousseff’s KGB” could be what Brazil needs to avoid a ratings downgrade and stabilize the economy.




#3 Chevron Victory in US Court

It’s fascinating story of lies, damned lies and statistics mixed with parallels to David versus Goliath and Erin Brockovitch. Except that in this case, David is the bad guy and certainly no Erin Brockovitch.

The “David” in question is US activist lawyer Steven Donziger, who has stopped at nothing to achieve his goal of getting Chevron to pay billions of dollars for environmental damage in Ecuador.

In March, a US judge revealed just how far Donziger had gone. U.S. District Judge Lewis Kaplan ruled that a $9.5 billion verdict in Lagro Agrio in Ecuador against Chevron was based in fraud.  “The decision in the Lago Agrio case was obtained by corrupt means,” he said. “The defendants here may not be allowed to benefit from that in any way.”

The March verdict came after a trial that saw Chevron’s law firm Gibson Dunn call more than a dozen witnesses, including an environmental expert who provided Donziger with a $6 billion estimate of environmental cost cleanup based on “scientific wild-assed guessing” (SWAG).

During the trial, Gibson lead lawyer Randy Mastro managed to get former judge Nicolas Zambrano, who issued the verdict against Chevron, to admit that he never even read his own judgment or key evidence included.  “I’ve never seen anything like it in my 33 years as a lawyer and public prosecutor,” Mastro told Latinvex before the trial ended. “It’s really the brazenness, the audaciousness  of the conduct, and then to take the false narrative created in Ecuador and trumpet it in the US, to shake down a US company.”

Six months after the Kaplan verdict, Bloomberg Businessweek assistant managing editor Paul Barrett released a book showing the story leading up to the Ecuador verdict in 2011. “Network television, glossy magazines, and a celebrated filmmaker heralded Donziger as a pioneer,” he writes in Law of the Jungle: The $19 Billion Legal Battle Over Oil in the Rain Forest and the Lawyer Who'd Stop at Nothing to Win “Donziger’s choice of the courtroom, even one in Lago Agrio [Ecuador], subjected him to the strictures of lawyerly behavior. He believed his foe violated those limitations, so he could violate them, too. He went further and further, until he drew the skeptical attention of the US judiciary thousands of miles away. He alienated his closest comrades and lost his ethical bearings.”

Meanwhile, Kaplan last month ruled that ruled that Chevron may “conduct discovery” regarding a $6.4 million contract between the government of Ecuador and MCSquared, a Brooklyn, N.Y., public-relations firm that has staged fake protests against Chevron and invited celebrities like Mia Farrow and Danny Glover to Ecuador to denounce Chevron.

Kaplan’s March ruling clearly marks a victory for Chevron’s efforts to oppose the fraudulent shakedown attempt.



#4 Pacific Alliance Success

On February 10, the presidents of the Pacific Alliance members Chile, Colombia, Mexico and Peru signed an agreement to eliminate 92 percent of the tariffs between them. It is seen as the most promising trade block in Latin America today.

“Given that trade among the four countries is currently a mere 4 percent of their total trade, the potential to expand trade and investment flows is huge,” argues Moises Naim in an article in The Atlantic in February. Naim is a senior associate in the International Economics Program at the Carnegie Endowment for International Peace and a former Venezuelan trade minister.

The Pacific Alliance outperforms Brazil – Latin America’s largest economy -- in estimated growth of GDP, inflation, exports and imports this year as well as combined GDP, FDI, trade and population size, according to a Latinvex analysis of data from the International Monetary Fund (IMF). The alliance includes Chile, Colombia, Mexico and Peru.

"These four countries are individually very attractive, but combined they are really a magnet that attracts enormous attention from the international community," Colombian finance minister Mauricio Cardenas told CNN en Español.

With several other Latin American countries in line to join, the Pacific Alliance may even help relaunch the idea of a hemispheric free trade block. In 1994 – 20 years ago --  all leaders of the Western Hemisphere except Cuba met in Miami and agreed to create a Free Trade Area of the Americas by 2004. However, it died in 2011 after opposition from Argentina, Brazil and Venezuela.

“If managed above the fray of politics and built on solid institutional footing, the alliance could become the Free Trade Area of the Americas (FTAA) that never was,” US-based consultancy Americas Market Intelligence said in an analysis.


#5 M&A Boom Despite Economic Slowdown

Despite a lackluster economic performance this year, Latin America has seen a strong increase in mergers and acquisitions.  In fact, during the first nine months of 2014, the value of announced M&As jumped 34 percent to $102.3 billion. That compares with a 6 percent decline during same period in 2013.

In a surprise move, Peru replaced Mexico as the second-largest M&A market during the first nine months.  And experts tell Latinvex that they expect 2014 will be a record year for Peru M&As.

“While the biggest increase in M&A activity during this year has occurred in North America, LatAm has continued to show healthy M&A volume,” Paola Lozano, a partner who heads Skadden’s Spanish language corporate practice, told Latinvex recently.


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