Get used to volatility, say Latin Lawyer Live Capital Markets speakers
From social unrest to political shifts, a growing number of Latin American countries are making headlines across the world. Panellists at Latin Lawyer Live 2nd Annual Capital Markets conference – which took place on 19 November in São Paulo – said volatility occurring both inside and outside countries’ borders was also creating a new paradigm for doing business in the region.
“I think the fact that the final of the Copa Libertadores has been moved from Chile to Peru says a lot about the state of affairs within Chile at the moment,” said Roberto Silva, partner at Argentina’s Marval, O'Farrell & Mairal. He was speaking on a panel moderated by Paul Hastings LLP partner Jonathan Kellner.
But Chile is by no means the only country in the region facing internal struggles. Social protests, political shifts and a slowdown of the commodities cycle have made many countries in the region – notably Ecuador, Bolivia and Argentina – melting pots of market uncertainty. “If you turn on your TVs, the Latin America you see these days is like a horror film,” notes Silva. “It’s easier to list the countries that don’t have major problems rather than those that do – we see Colombia, Brazil and Uruguay doing much better these days compared to their neighbours.”
A state of unrest is not exclusive to Latin America: from Hong Kong to Iran to France to the US, how populations view and participate in politics globally is changing. But Latin American markets have something special to offer. “Investors looking for short-term returns tend not to look to markets like Latin America, but I think this is holding them back from great potential,” explains Cristiano Guimarães, director at Itaú Bank. “I think investors need to adapt to the new reality that uncertainty is part of the game now, rather than seeing it as an obstacle to investment.”
For example, there was widespread unease among the legal industry when leftist President Andrés Manuel López Obrador came to power in Mexico in 2018, but despite the upset there have been some (good) surprises. AMLO’s cancellation of the US$13 billion national airport project at the beginning of his term sparked criticism, but – pointed out Rodrigo Castelazo, partner at Creel Garcia-Cuellar Aiza y Enriquez SC – his immediate liquidation of the project, among other decisions taken by the government, at least gave Mexico’s capital markets some relative certainty. “The renegotiation of USMCA has also brought some certainty to the country’s capital markets, while anticipated labour and tax reforms are going to give investors even more confidence as these will help tackle the long-standing issue of corruption for the country,” he adds.
The main uncertainty now for Mexico, said Castelazo, is the government’s attitude towards its state-owned companies. The previous government’s favour for privatisation and the opening of the oil and gas sector is something AMLO looks set to backpedal, though in some cases it’s unclear how exactly he plans on doing this. “The big elephant in the room for Mexico is Pemex – AMLO doesn’t want the participation of the private sector, but so far he’s provided no clear plan over how he is going to get there,” said Castelazo. “For now, Pemex continues to be a drag on Mexico’s GDP growth.”
At the other end of the privatisation spectrum sits Brazil. Panellists are confident President Jair Bolsonaro’s privatisation plan is a great opportunity for growth across all sectors, with hundreds of state-owned companies ready for a boost from private investment in the next few years. “This should bring more companies to access the capital markets too, in addition to M&As, attracting both foreign and Brazilian investors,” says Jane Goldman, partner at BMA - Barbosa, Müssnich, Aragão.
But internal polarisation continues to hold Brazil back and leave investors nervous. “The government’s liberal agenda is benefitting Brazil’s capital markets and economy, but Bolsonaro’s Brazil is very polarised, and things are not moving as fast as they could be,” explains Goldman.
Contributing to uncertainty is volatility outside Brazil’s borders. Populations can quickly identify with a political message or ideology through social media. This can be dangerous for countries that already face festering social discontent. “Unrest and uncertainty in neighbouring countries doesn’t just impact commerce in a country; it moves people,” explains Goldman. “Seeing demonstrations can give other nations the push to rise up themselves.”
Some theorists believe this is why Bolsonaro is afraid to propose certain reforms that could trigger a popular movement on the streets of Brazil. These theorists say the Brazilian population could be influenced by unrest abroad, for example in Chile. “The fact that our neighbours are so tense could lead Brazilians down a similar path,” Goldman says.
Meanwhile there are 19 days left until Argentina’s president-elect Alberto Fernández takes office. Argentines “still have no clue” about what sort of agenda he and his government will put forward; Silva warns that while the relationship between Brazil’s Bolsonaro and Argentina’s Fernández is bound to be strained, due to their polarised political views, the two countries must maintain a strong relationship to ensure both economies don’t suffer. “We can’t let this inevitable tension between the two presidents impact how we do business between Brazil and Argentina,” he says.
Market volatility does not necessarily mean stifled deal-flow. In Mexico, the fintech industry is booming and there is an uptick in both local and foreign start-ups. In Argentina, stocks are relatively cheap – meaning many Brazilian companies will continue to invest there, despite anticipated recession, which is likely to remain for the next two years at least. Argentine lawyers have not lost all hope. “Once confidence is restored in the government after this political and economic transition period we are in now, we will see a recovery of prices,” notes Silva.