Investing in Latin-American businesses involves the same due diligence that is required for investment in any business. In the case of Latin-America however, the investing environment has its own nuances, risks, pitfalls and potential. Thus, a part of the due diligence required for investment in Latin-American businesses is identifying these investment risks.
Latin-America consists of several countries as far North as Mexico and as far South as Argentina. The business, legal, and economic environments for all these countries varies considerably, enough so to warrant individual research for each country prior to investing in them.
Generally speaking, Latin-America is susceptible to certain risks that other countries' businesses may not be. These risks include 1) inflation or deflation risk, 2) political risk, 3) sovereign risk, and 4) economic growth/demand risk. This article will review these potential investment risks facing existing and potential investors in Latin America.
Inflation or deflation risk
According to the Center for Economic Policy Research, several Latin American countries in 2009 are either subject to inflationary or deflationary pressures. Economically, there are many other potential risks, however for Latin-America inflation and deflation is one of them in addition to demand risk which will be discussed in the following section.
Inflation above 4-5% is fairly high and deflation is indicative of shrunken or shrinking economy. Several of the following countries have inflation values bordering on, or in excess of high or low inflationary and deflationary values. Headline inflation indicates overall annualized inflation rates whereas core inflation refers to a specific group of inflation measured products.
• Venezuela: 24% headline inflation, 20% core inflation
• Chile: -2% headline deflation, 5% core inflation
• Brazil: 4% headline and core inflation
• Colombia: 4% headline inflation, 4% core inflation
• Mexico: 10% headline inflation, 4% core inflation
• Dominican Republic: -20% headline deflation, 2% core inflation
• Peru: 5% headline and core inflation
• Ecuador: 0% headline inflation, 2.5% core inflation
• Bolivia: 2.5% headline inflation, 5% core inflation
• Guatemala: 0% headline inflation, 5% core inflation
In the short-term, deflation is a factor for stable economies with low inflation, whereas inflation is a risk for those Latin-American companies subject to either an over liquid money supply, and/or rising prices of goods and services. The above statistics are approximate figures obtained from the Center for Economic Policy Research going into 2009. Moreover, the inflation trend-lines for these values is up for Brazil, Venezuela, Columbia and Mexico and is down for Chile, Dominican Republic, Bolivia, Ecuador, Peru and Guatemala.
Political risk
Another investment risk facing some Latin American countries is political risk. For U.S. investors, these risks are higher with countries that have anti-American economic policy such as Venezuela and Panama. Up to date news and information on specific Latin-American countries can be found at http://www.latinamericanmonitor.com. Other political risk arises from single events rather than policies within a country.
In a 2007 essay from Professor Christopher Moser of the University of Mainz, Germany Department of Economics the possibility of market correlations with political events in Latin America is discussed. Specifically, the essays studies the market affects of changes in political structure on national bond spread pricing. The research by Moser indicates Latin-American countries are subject to political risk in terms of financial markets.
Politically, some Latin-American countries are more at risk than others. Those countries with weak leadership, rebellious movements, large economic problems and volatility, and a significant history of political turmoil are the higher candidates on the political risk scale. Naturally, the type of investment(s) also having bearing on how much political risk holds sway. For example, investment in local companies may be safer than investment in foreign subsidiaries operating in the Latin-American country.
Sovereign risk
The Political Risk Insurance center has performed an analysis of sovereign risk on Latin American countries. Specifically, this risk and studies of it, assist in determining how likely a country is to pay its national debt whether that debt be in the form of Bonds or other financial instruments. The PRI-Center study indicates a negative outlook on sovereign risk for Latin-America with some countries holding higher credit worthiness than others. Of those countries Brazil, Mexico, Trinidad & Tobago, Chile and Peru have the higher credit ratings in the B- to B+ range.
The countries with the lowest PRI-Center credit ratings include Uruguay, Jamaica, Argentina, Dominican Republic, Ecuador, El-Salvador and Costa Rica with credit ratings in the E to D+ range. Factors that can lead to increased sovereign risk include negative GDP growth, high inflation, and over extended debt burdens for a nation-state. Consequently, looking for a range of indicators such as inflation, national debt, GDP growth, trade deficit etc. can all point to different levels of investment risk of one kind or another.
Economic growth/Demand risk
In a 2009 report from the Brookings Institution entitled 'Latin America's Economic Outlook for 2009: No Time for Optimism', the economic factors contributing and/or related to the performance of investments within the region are discussed. A growth rate of 3% was predicted for the regions biggest economies, however this is a lower rate than originally forecasted.
Nevertheless, despite declining economic indicators in the region such as capital inflow, international and regional demand trends, and GDP growth, Latin-American countries as a whole are still expected to grow on average, just not a sustained pace similar to previous years. Other economic factors mentioned in the Brookings report included Asian treasury investment within Latin-American countries and those countries ' ability to raise capital, financial reserves, and exchange rates as they relate to investment in the region.
In light of the U.S. and global recession of 2008-2009, a contraction in economic conditions within Latin American countries is not surprising. However, economic conditions after such a contraction are key in determining how well investments in the region may perform. Lagging indicators despite global economic recovery may point to internal economic difficulties such as debt problems, demand declines and high inflation among other things.
Summary
It is a good idea to study the risks of international investments before proceeding with such either independently or via a fund or other financial instrument or investment product. In Latin-America, specific risks exist for different countries within the region. Among these are risks discussed, but not limited to those in this article.
Some of the key investment risks affecting Latin-American countries include inflation or deflation, demand, political risk, sovereign risk, regulatory and operational risk. Each Latin-American country is subject to different economic conditions except for those more regional in nature. Consequently, taking both national and regional investment risks into account when or before investing in Latin-America may also be financially prudent.
Latin-America consists of several countries as far North as Mexico and as far South as Argentina. The business, legal, and economic environments for all these countries varies considerably, enough so to warrant individual research for each country prior to investing in them.
Generally speaking, Latin-America is susceptible to certain risks that other countries' businesses may not be. These risks include 1) inflation or deflation risk, 2) political risk, 3) sovereign risk, and 4) economic growth/demand risk. This article will review these potential investment risks facing existing and potential investors in Latin America.
Inflation or deflation risk
According to the Center for Economic Policy Research, several Latin American countries in 2009 are either subject to inflationary or deflationary pressures. Economically, there are many other potential risks, however for Latin-America inflation and deflation is one of them in addition to demand risk which will be discussed in the following section.
Inflation above 4-5% is fairly high and deflation is indicative of shrunken or shrinking economy. Several of the following countries have inflation values bordering on, or in excess of high or low inflationary and deflationary values. Headline inflation indicates overall annualized inflation rates whereas core inflation refers to a specific group of inflation measured products.
• Venezuela: 24% headline inflation, 20% core inflation
• Chile: -2% headline deflation, 5% core inflation
• Brazil: 4% headline and core inflation
• Colombia: 4% headline inflation, 4% core inflation
• Mexico: 10% headline inflation, 4% core inflation
• Dominican Republic: -20% headline deflation, 2% core inflation
• Peru: 5% headline and core inflation
• Ecuador: 0% headline inflation, 2.5% core inflation
• Bolivia: 2.5% headline inflation, 5% core inflation
• Guatemala: 0% headline inflation, 5% core inflation
In the short-term, deflation is a factor for stable economies with low inflation, whereas inflation is a risk for those Latin-American companies subject to either an over liquid money supply, and/or rising prices of goods and services. The above statistics are approximate figures obtained from the Center for Economic Policy Research going into 2009. Moreover, the inflation trend-lines for these values is up for Brazil, Venezuela, Columbia and Mexico and is down for Chile, Dominican Republic, Bolivia, Ecuador, Peru and Guatemala.
Political risk
Another investment risk facing some Latin American countries is political risk. For U.S. investors, these risks are higher with countries that have anti-American economic policy such as Venezuela and Panama. Up to date news and information on specific Latin-American countries can be found at http://www.latinamericanmonitor.com. Other political risk arises from single events rather than policies within a country.
In a 2007 essay from Professor Christopher Moser of the University of Mainz, Germany Department of Economics the possibility of market correlations with political events in Latin America is discussed. Specifically, the essays studies the market affects of changes in political structure on national bond spread pricing. The research by Moser indicates Latin-American countries are subject to political risk in terms of financial markets.
Politically, some Latin-American countries are more at risk than others. Those countries with weak leadership, rebellious movements, large economic problems and volatility, and a significant history of political turmoil are the higher candidates on the political risk scale. Naturally, the type of investment(s) also having bearing on how much political risk holds sway. For example, investment in local companies may be safer than investment in foreign subsidiaries operating in the Latin-American country.
Sovereign risk
The Political Risk Insurance center has performed an analysis of sovereign risk on Latin American countries. Specifically, this risk and studies of it, assist in determining how likely a country is to pay its national debt whether that debt be in the form of Bonds or other financial instruments. The PRI-Center study indicates a negative outlook on sovereign risk for Latin-America with some countries holding higher credit worthiness than others. Of those countries Brazil, Mexico, Trinidad & Tobago, Chile and Peru have the higher credit ratings in the B- to B+ range.
The countries with the lowest PRI-Center credit ratings include Uruguay, Jamaica, Argentina, Dominican Republic, Ecuador, El-Salvador and Costa Rica with credit ratings in the E to D+ range. Factors that can lead to increased sovereign risk include negative GDP growth, high inflation, and over extended debt burdens for a nation-state. Consequently, looking for a range of indicators such as inflation, national debt, GDP growth, trade deficit etc. can all point to different levels of investment risk of one kind or another.
Economic growth/Demand risk
In a 2009 report from the Brookings Institution entitled 'Latin America's Economic Outlook for 2009: No Time for Optimism', the economic factors contributing and/or related to the performance of investments within the region are discussed. A growth rate of 3% was predicted for the regions biggest economies, however this is a lower rate than originally forecasted.
Nevertheless, despite declining economic indicators in the region such as capital inflow, international and regional demand trends, and GDP growth, Latin-American countries as a whole are still expected to grow on average, just not a sustained pace similar to previous years. Other economic factors mentioned in the Brookings report included Asian treasury investment within Latin-American countries and those countries ' ability to raise capital, financial reserves, and exchange rates as they relate to investment in the region.
In light of the U.S. and global recession of 2008-2009, a contraction in economic conditions within Latin American countries is not surprising. However, economic conditions after such a contraction are key in determining how well investments in the region may perform. Lagging indicators despite global economic recovery may point to internal economic difficulties such as debt problems, demand declines and high inflation among other things.
Summary
It is a good idea to study the risks of international investments before proceeding with such either independently or via a fund or other financial instrument or investment product. In Latin-America, specific risks exist for different countries within the region. Among these are risks discussed, but not limited to those in this article.
Some of the key investment risks affecting Latin-American countries include inflation or deflation, demand, political risk, sovereign risk, regulatory and operational risk. Each Latin-American country is subject to different economic conditions except for those more regional in nature. Consequently, taking both national and regional investment risks into account when or before investing in Latin-America may also be financially prudent.
Sources:
1. http://seekingalpha.com/article/65523-investing-in-latin-america
2. http://tinyurl.com/5w73axv
3. http://www.cepr.net/documents/publications/inflation-latin-america-2009-02.pdf
4. http://ideas.repec.org/p/zbw/gdec07/6804.html
5. http://www.pri-center.com/documents/BMILatam.pdf
6. http://www.brookings.edu/opinions/2009/0122_latin_america_cardenas.aspx
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