The history of foreign investment in Latin America is a story of opportunities, but also of risks. In it there is room for cyclical crises, instability, tensions and, at times, open hostility from political power. Ultimately, it is a chronicle of back-and-forth signals and insights. The last chapter is being written in Mexico, as it had previously happened in Bolivia or Argentina. The energy plan promoted by the president, Andrés Manuel López Obrador, set off all the alarms months ago. This week an electrical reform has come into force that disrupts the existing model and prioritizes the supply of a state company with obsolete plants, the Federal Electricity Commission (CFE), despite the economic and environmental impact that this shift entails. One day after its entry into force, it has been stopped by the Justice.
Faced with this decision, a nationalist bet of an eminently political nature, Iberdrola ruled out new investments in the country at the end of last year. Subsidiaries of the same company or Red Eléctrica suffered expropriations from the Government of Evo Morales in Bolivia years ago. The takeover of YPF was one of the most emblematic nationalizations of Cristina Fernández in Argentina. Venezuela, whose government is now seeking foreign capital to face the crisis and circumvent Washington’s sanctions, has become a wasteland for investment. And the rest of the region, often plagued by insecurity, systemic corruption stripped bare by the Odebrecht case or the volatility of public policies, does not now offer the best conditions to explore markets. Even in Colombia, where a huge vein of opportunities opened up after the signing of peace with the FARC guerrillas in 2016, China is the country that is filling the void left mainly by Spain and the United States.
The phenomenon is, in general terms, prior to the covid-19 pandemic and has to do precisely with political messages. Some of the measures adopted by López Obrador in Mexico and his statements, even speaking of “neocolonialism” and linking Spanish and American companies without evidence to corruption and unbridled speculation, represent, for example, a clear disincentive. “Investment is the best indicator of trust there is, because it is not so much what people say, but what people do. Investment begins to fall in the third quarter of 2018 ”, points out the economist Valeria Moy, director of the Mexican Institute of Competitiveness (Imco). “The context prior to the pandemic is important. The cancellation of the Texcoco airport, for example, announced even before the president’s inauguration, was a terrible sign. Investors were not so concerned with the cancellation itself, but with the process and the ways to do it, with a biased query. It was a sign that said: ‘This is how we are going to play,’ he says. “With the covid there was a drastic fall, but yes, the rules of the game changed and I think that remains. There are national and international businessmen who are not interested in accommodating. Unless the profitability is impressive, nobody gets into where the rules of the game change from time to time, ”continues Moy.
To this has been added a factor that especially affects the financial sector: interest rates have fallen, and that advantage, which is what also attracts investment, is being diluted. On the other hand, there is a growing fear of arbitration, especially in the energy and infrastructure sectors. “Mexico is not being a pleasant country for investment of any kind and we are showing signs that it is not welcome, and not only foreign,” concludes this analyst.
But there are also other considerations that help to understand the big picture. There was a time when even in contexts of deep political instability, as happened in Venezuela, the risk factor attracted some investors. It’s not like that. “International investors have a much lower risk appetite, the commodity boom is already seductive and there is a clear trend of divestment of coal, mining and infrastructure companies”, highlights Sergio Guzmán, director of the consulting firm Colombia Risk Analysis. Just as some large Spanish companies have opted for prudence, so have the North American ones. At the tender for the Bogotá metro, for example, one of the most emblematic works in the Andean country, not a single US company came forward.
Risk of impunity
The risks of impunity in Latin America, with almost daily news about new cases of corruption, do not help the perception of the markets in the subcontinent. “Entrepreneurs are not going to get into an eleven-yard shirt,” continues Guzmán, who also highlights the frequent changes in legal architecture. With each government, we can expect some radical change that responds more to an ideological and political logic than an economic one. The case of López Obrador is being especially evident. As has happened with the electricity reform, which in practice opens the door to a kind of disguised nationalization, each decision has an undertone of “national pride.” That is for the consultant David Shields the purpose behind this type of structural reform. “To be great national heroes and return to a golden past in which everything was better.”
These laws can give electoral revenue. However, they are clouds on the horizon for the economy. “These changes and those to come are not favorable, especially for companies that have the priority of quarterly growth as the main indicator of success,” continues Guzmán. “Companies that are making plans with terms of 30 or 40 years can find opportunities,” in his opinion. But these conditions open another chapter of investment in Latin America in which China, in search of an economic and also political roots, wants to be the protagonist.
Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.