Latin America helped transform Spanish firms into global ones. But conditions are changing and some are getting cold feet.
A few months ago, El País ran a curiously titled article, “Las promesas incumplidas de América Latina”, which more or less translates as “The Broken Promises of Latin America.” In it the author lays out how and why Latin America is no longer delivering the goods for big Spanish corporations. For the past 30 years the region has provided huge money-making opportunities for many of those companies. It has also served as a giant springboard for international expansion as well as a highly lucrative home from home during Spain’s sovereign debt crisis. But in the face of deteriorating economic conditions and rising political uncertainty in the region, some firms are now getting cold feet.
“Latin America is Bleeding”
That’s how the El País article starts, somewhat graphically. It goes on:
“‘As if its chronic problems were not enough, Covid has struck a blow that threatens to condemn the region to a lost decade economically and at least two lost decades socially,’ says Rebeca Grynspan, Secretary General of the Ibero-American Summit.”
Even before Covid made its first official appearance in Latin America, big cracks were already showing in the region’s economy. Both Chile and Colombia had been rocked by massive social protests over economic inequality. Argentina was waiting for yet another restructuring of its vast debt mountain. The largest economy, Brazil, had barely recovered from its longest recession in history (2014-2017). The second largest, Mexico, had effectively stalled, having experienced three quarters in a row of gently declining annual GDP.
Things are a lot worse today. The region accounts for around 30% of all Covid-19 deaths despite having just 8% of the world’s population. Poverty has soared back to 1990 levels. Inflation is surging in many countries, including Brazil and Mexico, despite repeated interest rate hikes. Unlike more advanced economies, most of the region’s cash-strapped governments with weak currencies couldn’t afford to provide the sort of financial support programs being rolled out in more advanced economies. The fiscal response in Latin America has added just 28 cents of extra deficit spending for every dollar of lost output. By contrast, governments of more advanced economies have boosted their spending by a dollar for every dollar of lost output.”
“Twenty-twenty was the worst year for the region’s economy since records began,” says Grynspan.
As conditions deteriorate, Spanish companies are packing their bags, although many of them will not be leaving any time soon. First, they have to find a buyer for all their assets. In many cases those assets are spread over multiple borders, if not throughout the entire region. And now is not exactly a good time to sell businesses in Latin America.
In November 2019, the over-indebted telecom giant Telefonica announced it was selling off most of its assets, with the exception of those in Brazil. It needed the money to pay down its debt in order to avoid losing its investment grade rating. In 2019, it divested its operations in Panama and Nicaragua. In 2020, it offloaded its Costa Rican subsidiary. In January this year, it sold its mobile phone masts in Europe and Latin America to American Towers for €7.7 billion. But many other assets are still up for sale.
Earlier this year the utility company Naturgy announced a partial withdrawal from the region. The company will reduce its operations by a third and in future will focus on countries with stronger currencies after suffering “a significant depreciation [in its revenues] in key Latin American countries” last year. The company also plans to sell its electric grids in Chile to the Chinese state-owned utility China State Grid, for €2.57 billion.
As companies gradually retreat from certain markets, Spanish direct investment in Latin America is falling. In 2019, it fell by 38% to €6.6 billion euros. Between January and September 2020, the latest period for which data is available, it plunged by a further 58% year over year, to €3.2 billion.
Depreciating currencies is an oft-cited reason for why Spanish companies are reducing their footprint in Latin America. Telefonica made a $2.2 billion write-down to its accounts last year, which it largely blamed on the collapsing value of the real against the euro. In its presentation of its financial results for 2020 Grupo Santander acknowledged that slumping exchange rates in Latin America had led to a 7-8 percentage point decrease in its revenues.
Another reason is that politics in the region is getting more complicated, meaning that fiscally challenged, left-leaning governments are beginning to demand a higher price for their natural resources.
“The business climate is no longer favorable,” says Alfredo Arahuetes, a professor of international economics at ICADE School of Business and Economics, in Madrid. “The most striking example is Andrés Manuel López Obrador in México,” whom Arahuates describes as a “super-interventionist”.
As NC has previously reported, AMLO has not exactly endeared himself to US and European multinationals over the last year, after, among other things, banning GMO corn and the toxic weed killer glyphosate; strong-arming global corporations into finally settling their decades-long tax debts with the Mexican state; passing one of the strictest food labeling laws on the planet, in a desperate bit to halt Mexico’s obesity epidemic; and most recently announcing that Mexico will no longer sell its crude oil abroad.
Yet even as AMLO’s government intervenes more in the economy, overseas companies continue to bet big on Mexico. In 2020, it was one of just six countries in Latin America and the Caribbean that saw an increase in foreign direct investment. The country has, however, lost some of its shine for Spanish energy giants, as AMLO has sought to reverse privatisation of the energy sector. Iberdrola, the main private electricity generator in Mexico whom AMLO recently accused of corruption and price gouging, has ruled out new investments until the regulatory framework is clarified.
Another Case in Point: Peru
Things also appear to be changing in Peru, where Pedro Castillo, a trade unionist from an indigenous background, has won the presidency. His prime-minister Guido Bellido recently told Reuters that the Peruvian State, now under new management, should take a more active role in “strategic sectors” such as natural gas and new hydroelectric projects. In some cases the government will even seek to form direct partnerships with private companies in key industries.
“From my point of view, for example, gas is a strategic resource and the government should play an active role,” said Bellido.
That statement will not have gone down well in the C-suites of Spanish oil major Repsol, which is part of a consortium of firms developing Peru’s Camisea field, one of the biggest natural gas fields in Latin America. In total Spanish companies have more than €15 billion invested in Peru, most of it in the mining, construction and services sectors, according to El Economista. Four companies — Enagas, Telefonica and the two construction giants FCC and ACS — have already taken Peru to international arbitration over contractual disputes with former administrations in Lima.
Peru is not the only country in Latin America to have seen a revival of resource nationalism in recent years. From the southernmost tip of Chile to the natural gas fields in northern Mexico moves toward resource expropriation are on the rise. So too are tax and royalty increases, as well as demands for local participation in companies’ ownership.
This is happening for a variety of reasons. Most importantly, governments are desperate for cash. After the fiscal bloodbath of 2020, when spending exploded as tax revenues collapsed, they need to raise money wherever they can, as quickly as they can. During the worst of the crisis the prices of many commodities collapsed, which meant government revenues also fell sharply. At the same time, governments were having to borrow and spend more than ever. As a result, deficits and debt have shot up in most countries. Now that economic activity is increasing, inflation is raging and commodity prices are surging, governments want a little extra piece of the action, which is understandable.
Latin America is the jurisdiction where “risks of expropriation and tax hikes” have increased the most, according to a recent report by risk consultancy Verisk Maplecroft. Robert Cohen, vice president and portfolio manager at Canada-based 1832 Asset Management LP, recently told the Wall Street Journal he is avoiding shares in Latin American countries such as Peru and Chile for the first time in decades, since governments are demanding higher taxes and royalties from miners.
“I don’t think it’s worth the risk until the smoke clears,” he said.
Once again, as happens every decade or two, the political sands appear to be shifting in Latin America. And the general direction of travel is leftward. Just as happened in the first decade of this century, leftist heads of state are coming together to forge a common path. In July, Mexico’s President Andrés Manual Lopez Obrador — or AMLO, as he is popularly known — called for the Washington-based Organization of American States to be replaced by “a body that is truly autonomous, not anybody’s lackey”. His suggested replacement, to be modelled on the European Union, is the Community of Latin American and Caribbean States (CELAC).
The proposal already has the backing of Argentine President Alberto Fernandez. What’s more, both countries have further deepened their historically close ties after agreeing to coordinate on regional initiatives such as Covid-19 vaccine distribution.
These moves have not gone unnoticed in Washington or Madrid, both of which are concerned about losing influence in the region. The uncertainty is heightened by the fact that Latin America is in the midst of a two-year electoral super-cycle involving six of the largest countries in the region, including Brazil, Chile and Colombia. Peru has already elected, with the narrowest of margins, Pedro Castillo, a former schoolteacher and farmer who ran largely on a socialist platform. If Luiz Inácio Lula da Silva beats Bolsonaro in next year’s election, both of Latin America’s two largest economies, Mexico and Brazil — which between them account for almost 60% of the region’s GDP — will be run by leftist, non-aligned governments, for the first time in decades.
Few international companies are as exposed to these shifting sands as large Spanish ones. In the 1980s and 1990s, as neoliberalism became the dominant creed in international relations, Spanish companies, many of them recently privatised, piled into Latin America, where they bought up local firms, many of them also recently privatised, often on the cheap. Some Spanish companies got burnt in Argentina’s corralito and first default of this century (2001-02). But most companies stuck around. The pickings were just too juicy to be passed up.
In the aftermath of Spain’s real estate collapse, opportunities at home and in Europe’s mature, stagnant markets dried up to such an extent that access to Latin America’s fast-growing, commodity-rich economies became a godsend. But it could become a curse.
Even as many Spanish companies stage a gradual retreat from the region, they are still hugely dependent on it for the income they generate. Twenty-three percent of all the revenues reported by Spain’s IBEX-35 companies is made in Latin America. More worrisome still, many of the biggest companies are most exposed. Telefonica, Naturgy and Iberdrola respectively earn 37.5%, 37% and 25% of their income in the region.
Spain’s two biggest banks, Santander and BBVA, are even more exposed. A whopping 44% of their revenues in came from Latin America in 2020, mostly from Brazil (in the case of Santander) and Mexico (in the case of BBVA). As the IMF cautioned in 2017, this “high reliance on foreign subsidiaries in profit generation could imply significant vulnerabilities if the economic and financial conditions in host countries were to deteriorate.” Which is exactly what has happened.