This article examines the investment environment across Latin America, according to some of the region's leading lawyers. In particular, the article considers recent developments in: Brazil; Mexico; Central America (particularly Costa Rica and Panama); Colombia, Peru and Uruguay; Venezuela; and Argentina.
Latin America is currently receiving unprecedented levels of interest from foreign investors. As a result of diminished opportunities and lower investment returns in the US and Europe, international businesses are looking to capitalise on the region’s expanding economies, growing middle class, economic and political stability and relative resilience to the financial crisis.
However, Latin America is a diverse region and some jurisdictions are considerably more appealing to international investors than others.
According to Fernando Alonso, who heads Hunton & Williams's Miami-based Latin America practice, "a few decades ago, large parts of Latin America were openly hostile to foreign investment. The opposite is now true; there is a virtual 'welcome mat' and people are sitting up and taking notice."
In addition, some of Latin America’s largest companies (known as multilatinas) are expanding both within the region and into Asia, Europe and the US.
Lawyers across Latin America agree that the region is attracting, and embracing, significant foreign investment. However, the economic and political environment in certain jurisdictions remains challenging. For instance:
Political opposition to foreign private investment still exists in countries such as Bolivia and Venezuela.
A series of economic and political peaks and troughs have led to a decline in foreign investor interest in Argentina over the past decade.
Against this background, this article examines the investment environment across Latin America, according to some of the region's leading lawyers. In particular, the article considers recent developments in: Brazil; Mexico; Central America (particularly Costa Rica and Panama); Colombia, Peru and Uruguay (three countries with rising profiles); Venezuela; and Argentina.
Brazil is currently the top destination for businesses looking to launch or expand their Latin American portfolios.
According to Henrique Dias Carneiro, a partner at Dias Carneiro Advogados−associated with Uría Menéndez in São Paulo, "the unique situation in Brazil is not just the result of economic growth but also of careful economic planning. The global financial crisis was felt very differently throughout Latin America depending on the varying levels of external debt that each country held."
Dias Carneiro continues: "Against this background, Brazil has spent the past decade boosting its capacity to pay external debt, increasing exports and reducing its dependence on imported oil. These measures, aligned with severe regulation (which almost banned overseas investments by Brazilian financial institutions) considerably softened the impact of the global downturn on Brazil."
José Luis Freire, founding partner of Tozzini Freire, notes that, although Brazil's exports have declined in line with a global drop in demand, they only account for 15% of the country's GDP, so the decline had a limited impact on the economy. The decrease was also partly offset by growing internal consumption (boosted by tax incentives), longer credit terms and an increase in the income of skilled and unskilled workers. Freire also expects the recently-discovered, offshore pre-salt oil exploration areas to attract additional interest from overseas investors (for further background on oil and gas exploration in Brazil, see GC Agenda in this issue).
As Freire emphasises, "our economy is doing better not only in comparison to our immediate neighbours but also compared to other economies. Brazil's GDP growth during the first quarter of 2010 was the world's second highest after China's."
Brazil's substantial and sustained economic growth has fuelled the emergence of some of the region's foremost multilatinas. Indeed, partly as a result of the rise of these corporate juggernauts, Brazil's foreign investment flows are gradually becoming two-way, as highlighted by:
Petrobras's growing presence in Europe, notably Portugal.
Vale's increasing investments in Africa.
The ongoing three-way battle between cement and steel producers Companhia Siderúgica Nacional (CSN), Votorantim and Camargo Corrêa to acquire control of Cimpor, Portugal’s largest cement producer.
According to practitioners, the forthcoming presidential elections are only having a minor impact on market sentiment. The eight-year term of President Lula Da Silva has cemented the notion of centrist pro-market politics, which have helped consolidate Brazil’s position as Latin America’s economic powerhouse (Brazil: a country of continuing opportunities).
According to Thomson Reuters, M&A activity in Latin America rose by 171% in the second quarter of 2010, with Brazil accounting for over EUR1.8 billion (about US$2.3 billion) worth of completed deals in the region.
These deals included the US$1.2 billion (about EUR944 million) acquisition of Grupo Qualicorp, a Brazilian health services provider, by US private equity giant the Carlyle Group. According to media reports, one of the key motivations behind the transaction was Carlyle's desire to capitalise on demand from Brazil's growing middle class.
Following a relatively sluggish 2009, equity capital markets activity is also showing signs of recovery. On 3 September 2010, Petrobras, Brazil’s state-owned oil and gas company, announced plans to raise nearly US$75 billion (about EUR59 billion) in what could become the world's largest ever share sale. Petrobras intends to use the proceeds of this offering to finance investments in developing offshore oil fields (which could bring Brazil within the world’s top ten oil producers).
In addition, several international companies have expanded their presence in Brazil over the past two years. For instance:
In October 2009, Spain’s Banco Santander successfully completed the partial EUR5.4 billion (about US$6.9 billion) flotation of Santander Brasil, last year’s largest IPO worldwide.
Telefónica and Portugal Telecom (PT) are currently in the midst of a EUR7.5 billion (about US$9.5 billion) battle for control of their jointly-owned Brazilian mobile telecommunications operator Vivo, as both Iberian companies seek to expand their Brazilian operations.
The surge in Brazilian deal activity is inevitably prompting leading international law firms to reassess the country's importance for their own networks.
A raft of leading US firms, including Chadbourne & Parke, Milbank Tweed Hadley McCloy and Simpson Thacher & Bartlett, have opened Brazilian offices over the past two years. Although Cleary Gottlieb Steen & Hamilton does not currently have an office in Brazil, it enjoys a stellar track record on account of its involvement in major capital markets, finance and M&A transactions across Latin America, including, most recently, advising Petrobras on its planned record-breaking share issue.
Latin America is also a strong area of international focus for Iberian law firms. Garrigues (which is advising PT in the Vivo contest) recently announced its decision to open an office in Rio de Janeiro in association with Schmidt Valois Miranda Ferreira & Agel Advogados (SVFMA). Cuatrecasas and Gómez-Acebo & Pombo have well-established referral networks across the region, as do the leading Portuguese firms, including PLMJ, Vieira de Almeida and Morais Leitão Galvão Teles Soares da Silva & Associados.
Practitioners are quick to point out that there is more to Latin America than Brazil. Mexico is second on many businesses’ regional target lists. However, according to local lawyers, due to the country’s high dependence on the economic health of the US, 2009 was not a particularly kind year. "When the US catches a cold, Mexico gets pneumonia," says Daniel del Rio, a partner with Basham Ringe & Correa in Mexico City. The combined effects of the financial crisis, economic downturn and an outbreak of swine flu resulted in a negative growth of 6.5% last year according to the Mexican Central Bank (Banco de México).
However, 2010 has been significantly better so far, and the Mexican Central Bank predicts that GDP growth will return to around 4.5% to 5% by the end of the year. As Del Rio points out, "2010 is a different story. With the relative rebound of the US economy, Mexico is experiencing growth once again following an increase in exports to the US, which represent around 80% of what Mexico sells abroad." Del Rio foresees the coming year offering more investment opportunities, which may see figures return to 2008 levels. However, he believes that the country still needs substantial reforms in areas such as tax, labour and the telecommunications and energy sectors to further boost investment activity.
Del Rio believes that Mexico's sturdy financial institutions could facilitate the country's predicted economic rebound. "Mexico’s banks have remained strong throughout the crisis". Observers see Latin America’s banks as having learnt the lessons of previous financial crises, which has allowed them to weather the global downturn with a mixture of caution and strong regulation.
Most Latin American banks have traditionally operated along national lines, but atrend in recent years has shown a movement towards an increase in cross-border mergers of financial institutions. For instance, Spain’s BBVA is already the major domestic player in Mexico, through its local subsidiary BBVA Bancomer.
Santander is also placing renewed emphasis on Mexico. It recently announced the purchase of Bank of America’s (BofA) minority stake in its Mexican operations, giving it back full control of the business. Santander agreed to pay US$2.5 billion (about EUR1.88 billion) for the 25% stake that it sold to BofA in 2003 for US$1.6 billion (about EUR1 billion). The deal will broaden Santander’s Latin America coverage, where it already generates an estimated 40% of its revenues (it has an estimated market share of 10% to 20% across Argentina, Brazil, Mexico, Chile and Uruguay).
Del Rio also mentions recently enacted reforms, which have enabled domestic pension funds (known as Administradoras de Fondos para el Retiro (Afores)) to invest in a wider range of financial instruments, allowing them to become more flexible and improving liquidity.
Like Brazil, Mexico is host to some of the region's largest multilatinas. Telmex, Mexico’s leading telecommunications operator (owned by the world’s richest man, Carlos Slim) is an established regional powerhouse. Its 2004 acquisition of AT&T’s Latin American operations helped it extend its reach across Colombia, Peru, Chile, Argentina, Uruguay and Brazil (where it owns Embratel, the country’s number two operator).
Likewise, Cemex is now the world’s largest building materials supplier and third largest cement producer. In 2009, Cemex carried out a major refinancing of its estimated US$15 billion (about EUR11 billion) debt through its European headquarters in Madrid. The transaction saw Uría Menéndez act alongside Slaughter and May and Skadden Arps Slate Meagher & Flom, with Clifford Chance and Cleary Gottlieb Steen & Hamilton advising the creditor syndicate.
Central America vicariously felt the effects of the economic downturn in the US, which caused the area's economy to contract by approximately 0.5% in 2009. According to Mauricio Salas, a partner with BLP Abogados, in Costa Rica the decline was primarily due to a fall in tourism, changing consumption patterns, and a decrease in both foreign direct investment (FDI) and remittances from the country's main economic partners, Spain and the US.
The implementation of the Dominican Republic-Central America Free Trade Area (DR-CAFTA) has helped open up the region’s economies, but it has also meant that economic contagion has spread more quickly.
Two economies of particular note in Central America are Costa Rica and Panama.
The Costa Rican economy is performing reasonably well in light of the crisis, but "the recovery has been fragile so far and remains largely dependent on external factors, such as demand in the US and developments in the Eurozone," says Salas.
Salas believes that Costa Rica has fared better than some of its neighbours in terms of unemployment and dependence on remittances from overseas. Tourism rates and agricultural exports have improved, but the real estate market, which boomed until the onset of the crisis, has not yet recovered. Such changes are evidently being felt in the Central American legal market, as firms’ once booming real estate practices are now stagnating.
In the specific case of Panama, major infrastructure projects have helped the country avoid recession despite the global downturn. As Salas points out, "our once trailing neighbour is quickly gaining ground on us".
Panama recently embarked on its US$5.25 billion (about EUR4.1 billion) "Third Set of Locks" project, which is expected to double the Panama Canal’s capacity by 2014. The project involves the construction of two new lock complexes (one on the Atlantic side and one on the Pacific side), new access channels and the widening and deepening of existing channels.
The project, driven by rising sea freight volumes and vessel sizes, is expected to generate total revenues of around US$6.2 billion (about EUR4.9 billion) by 2025, according to the Panama Canal Authority. Spanish construction company Sacyr is among the lead contractors.
Some Latin American countries that have traditionally proved more challenging to international investors are now generating considerable interest, including Peru, Uruguay and especially Colombia.
Alejandro Linares-Cantillo, a partner at Gómez-Pinzón Zuleta Abogados in Bogotá, believes that "there are still plenty of opportunities in Colombia for Spanish and Portuguese businesses looking to expand in Latin America. Against all odds, Colombia has become the country to watch in the hemisphere."
Spanish financial institutions such as BBVA, Santander and MAPFRE have recently made successful investments in Colombia. Other multinationals such as Planeta, Prisa, Sanitas and Telefónica are also active in the country. In addition, construction, energy and infrastructure companies such as OHL, Gas Natural - Union Fenosa, Endesa and Agbar are reportedly looking at opportunities in this fast-growing Latin American market.
International law firms are gradually reacting to Colombia's economic awakening. In September 2010, Macleod Dixon, which is widely acknowledged for its expertise in the natural resources sector, announced the opening of an office in Bogotá.
As several lawyers emphasise, certain Latin American jurisdictions, such as Bolivia and Venezuela, still present challenges for international investors. Although investment opportunities exist in these jurisdictions, apparent political opposition to foreign private investment means that successful transactions require careful planning and an intricate understanding of prevailing economic and political drivers. Adding to uncertainty in Venezuela is the upcoming election in late 2010. While incumbent President Hugo Chavez’s leftist government may remain popular with many at home, this has been at the cost of increasing international commercial isolation (see box, Understanding the government: key to Venezuelan investment success).
According to some of Argentina's top lawyers, the country is also facing issues. The aftershocks of Argentina's sovereign debt default at the start of the millennium continue to be felt in the form of low international investor confidence and domestic consumer behaviour.
Recent protectionist government initiatives, such as the nationalisation of Aerolineas Argentinas (a subsidiary of Spain’s Marsans), have further deterred potential foreign investors. Telecom Argentina, a subsidiary of Telecom Italia, has also reportedly come within the sights of President Cristina Kirchner’s government, which has already set price caps on domestic fuel prices.
As Tomas Miguel Araya, a partner at M&M Bomchil in Buenos Aires explains, "unlike our neighbours, notably Chile, Peru and Brazil, Argentina has not received a strong influx of FDI over the past decade. Consequently, the country's economic growth has mainly been fuelled by rising internal consumption and expansionary fiscal policies, which have in turn caused an inflation problem."
Apart from some collateral effects on recent government bond swaps, the global financial crisis had a relatively modest direct impact on Argentina. The country’s peculiarities mean that there is little possibility of economic contagion from its neighbours.
"There remains a degree of caution towards utilising the domestic banking system and so, with minimal deposits there is minimal lending. Conversely, there is an emphasis on consumerism, which means that many local businesses are doing very well," says Alberto Lasheras-Shine, a partner at Estudio Beccar Varela in Buenos Aires.
The country’s economy may still be growing, but this growth is very much fuelled by government spending. Despite the importance of agricultural exports for the Argentine economy, the country's ability to capitalise on the past decade’s commodities price boom has been marred by various problems, including the recent crisis caused by the imposition of tax increases on major agricultural exports such as soy. The recent tax increases were implemented partially to combat inflation, which is officially stated to be 15%, although several private economists, including the Foundation for Latin American Economic Investigations (FIEL) maintais that the real figure is actually close to 25%.
"Investors need economic, political and legal certainty and, for too long, we have had varying degrees of these. We have, however, recently seen positive developments at the Supreme Court, which have noticeably reduced the impact of some of the government’s more puzzling policies," says Lasheras-Shine. As a result, he says, "many of us are now more optimistic and are beginning to see light at the end of the tunnel, although always thinking that there might be yet another train coming towards us."
While the Latin American region may be performing better than others around the world, strong differences remain in economic performance and investor appetite among individual countries. However, it is undeniable that the basic attractions of the region continue to exist. The main challenge for international investors is to adapt their expectations and operational methods to local realities.
Brazil's rate of economic growth has surprised even the most optimistic observers. Spurred on by this growth, its businesses are slowly beginning to expand internationally, but the scale of opportunities within the country remain enormous, says Nuno Galvão Teles, head of corporate at Morais Leitão Galvão Teles Soares da Silva & Associados in Lisbon. He says that he has "long believed that Brazil would grow and become an economic superpower, not just regionally within Latin America, but globally. The rate of economic growth now being experienced is really tremendous and there remains so much still to do."
11 IPOs are reportedly in the planning stages at the Sao Paulo Stock Exchange (BM&FBOVESPA), more than Europe as a whole experienced in 2009.
"The domestic financial markets are becoming increasingly sophisticated," notes Galvão Teles. He continues: "A number of the leading financial institutions are growing in scale but expansion across Latin America is limited. The vast majority of Brazilian businesses, including the financial institutions, remain completely focused on the domestic market."
Political emphasis is being placed on developing stronger ties, particularly with other major emerging economies, including in Africa, India and particularly China. However, Galvão Teles notes that many Brazilian businesses simply do not need to expand internationally.
Portugal may be seeing a three-way Brazilian battle for control of its leading cement producer, Cimpor (see main text, Brazil: everyone's favourite), but this is being driven by a requirement to source construction materials and know-how for Brazil’s own infrastructure boom in anticipation of the FIFA World Cup in 2014 and the Olympic Games in 2016.
Says Galvão Teles, "Brazil may not be the 'promised land' but it does offer opportunities on a scale far beyond, for example, Portugal’s domestic market. The major Portuguese energy, infrastructure and telecommunications companies are already well-established but internationally we are seeing more medium-sized businesses in the services, technology and finance sectors looking at Brazil."
This new wave of investors is apparently not only looking for new market share, as Galvão Teles emphasises: "Of equal interest to many are the finance-raising opportunities. We are seeing a greater focus by international companies on the access Brazil offers to completely new pools of capital."
Arbitration disputes are an inevitable by-product of increased investment across Latin America, and Miami is playing an increasingly pivotal role in both the pre-contractual and dispute resolution phases, note Pedro J Martinez-Fraga and C Ryan Reetz of Squire Sanders & Dempsey.
As Reetz notes, "there is a recurring acceptance that there is no credible alternative to arbitration particularly when it comes to concession agreements with states. Governments always prefer matters to be litigated in the national courts, but investors clearly do not; a middle way needs to exist."
According to Martinez-Fraga, although arbitration remains a popular dispute resolution mechanism across Latin America, "there have been some recent changes to the way disputes are administered. For instance certain governments in the region are increasingly reluctant to use the ICSID, and are favouring more commercial institutions instead." Conversely, many investors retain a preference for the ICSID process, even though it can be cumbersome and perhaps more "state-friendly" than some would like. At the same time, a rise in European and Asian investment is helping to raise the profile of institutions such as the ICC.
Miami has become the preferred venue and seat for regional arbitrations. Florida courts support the arbitration process and are reluctant to interfere in disputes.
Notes Reetz: "Miami is the primary contact point for businesses investing across the region. It has a growing banking sector, many Latin American companies now have operations there, and US companies are increasingly using it as an administrative focal point for Latin American issues. Several Fortune 500 companies have already relocated their regional general counsel there".
In any event, as investors take a more sophisticated approach towards Latin America there is acceptance that more thought has to be given to what happens if things "go wrong". "There is now much more analysis of the choice of arbitration venue, language, rules and seat," says Martinez-Fraga. In addition, he notes that: "Disputes need to be resolved properly and this means that there is no 'one-size fits all' formula that can be adopted. The inclusion of a 'midnight' arbitration clause, thrown in at the end of negotiations, is already a thing of the past."
To capitalise on the significant opportunities that still exist in Venezuela, it is vital to understand the drivers behind government policy and to adapt to a changing economy.
The economic outlook for Venezuela remains both challenging and uncertain for foreign businesses, according to Fernando Peláez-Pier and Patrick Petzall, partners at Caracas-based Hoet Peláez Castillo & Duque.
"The government continues to use nationalisation and expropriation as means of controlling strategic economic activities and punishing regulatory violations and those not adhering to the official policy line," says Peláez-Pier, who is currently the President of the International Bar Association (IBA). He comments, however, that "even within this scenario there are significant opportunities for foreign businesses as investors, contractors or suppliers of goods and services to the public sector".
Venezuela has one of the highest inflation rates in the world despite having suffered five consecutive quarters of negative growth according to the Central Bank of Venezuela (Banco Central de Venezuela). Currency exchange control has also been tightened as the Central Bank’s foreign reserves have dropped by more than 20% this year alone.
Notes Petzall: "Foreign investment from markets such as the US and Europe into traditional industrial and service sectors has fallen noticeably in recent years. This is the direct result of the political and economic environment and the punishments being handed out to companies that breach increasingly onerous regulations".
At the same time, Petzall says, Venezuela has seen a rise in investment from new economic partners including Russia, China and Brazil, stimulated through new bilateral agreements and growing involvement in infrastructure projects. He comments:
"The oil and gas sectors have been subject to ever-greater regulation and restrictions but remain the most attractive investment sectors of the economy. It is worth noting also, that as the government's funding needs increase, so does its dependence on foreign investors capable of expanding production to enhance the foreign currency revenue stream."
Understanding the changing political and economic scene, and learning how to do business with the Venezuelan state, is critical to the success or even survival of any significant business venture, adds Peláez-Pier. He notes that: "In a scenario of greater government control, regulation and direct participation in all sectors of the economy, foreign companies must understand that business opportunities are largely confined to the public sector. Understanding what drives government interest and the key regulations that shape the channels for interaction is therefore essential."
Certain methodologies must be employed to ensure positive outcomes, Peláez-Pier emphasises. "For the current government, all matters have a political relevance − foreign businesses must support certain government objectives, particularly relating to social policy, but they must also avoid any appearance of direct political participation," he says.
Understanding the impact of current budgetary constraints on government payments is vital, as is an awareness of the details of the exchange control regime. Companies must focus on those activities where it remains permissible to retain foreign currency revenues and to avoid dependence on the standard foreign currency approval process. It is also important to understand the public contracting regime and to be diligent in complying with all labour and tax regulations.
Says Petzall: "Companies have to analyse the best strategy to structure their business and to take advantage of the numerous co-operation agreements, investment treaties and double taxation agreements, and they need to be prepared to adapt to longer business set-up periods and higher costs − forming a 'business ready' company can take from several weeks to a few months."
However, according to Peláez-Pier and Petzall protections do exist for foreign investors and Venezuela remains party to several bilateral investment protection treaties. But the current government is strongly against international arbitration and looks to impose the local jurisdiction in any new joint venture, contract or transactions executed with state agencies. "The government is likewise moving away from ICSID but has so far refrained from actually denouncing the treaty; ongoing disputes do remain and the government continues to pursue their defence, professionally and aggressively," says Peláez-Pier.
Ultimately, Peláez-Pier notes that for those wishing to do business in Venezuela, it is vital to be prepared to deal with uncertainty and change. He points out: "It is important to understand that it remains a very complex business environment. Flexibility and patience are required but opportunities are still out there."