One of the best times to invest in Latin America has been over the last few short years following the 2008 financial crisis. Investments in countries like Brazil and Mexico are at some of their highest rates in modern history. Despite this growth trend, some old investment problems still exist, combined with a new investment climate in the region. With competition coming from China and increased trade ties between the EU, Canada and Latin America on the horizon, the region formerly assumed to be the investment focus of solely the United States have brought in non-traditional competition and increased diverse investment from abroad.
While new investment has grown, traditional barriers to trade still exist in some countries and should be considered when placing investments into Latin America. Venezuela has been the most obvious cautionary tale. While Venezuela has one of the largest oil reserves in the world, the government has made it part of its policy platform to expropriate companies that are seen as having a negative impact on Venezuelan society or its business climate. While many of the expropriations are questionable in their justifications, as an investor there must be an understanding that some investments may be subject to expropriations if a conflict arises with local or national government agencies or local competition. While the international legal norms for expropriations have been defined over many decades and Venezuela has had to address violations to international laws on the matter, legal conflicts are often never a positive outcome for investors as conflicts over the investment often dwindles investment returns in the legal defense process.
One of the most notable recent expropriations was of Repsol’s investments in Argentina last year. Repsol, a Spanish energy company had their investments in an Argentine company YPF expropriated by President Kirchner’s government due to a commercial conflict that gave fuel to a political opportunity in her government. While the Venezuelan government took to using a traditional policy tactic by allowing expropriations of local and foreign companies, Argentina’s expropriation of Repsol’s assets came from a country that was seen as leaving the old tactics behind, then reverting back to a tactic that would by default scare away most foreign investment. Recently, Mexican energy giant PEMEX has sought to mediate some compensation by YPF towards Repsol in order to avoid any legal action by Repsol if PEMEX would seek to invest in YPF and to bring the legal norm of just compensation with expropriation into the Repsol issue with Argentina. While there is hope for some resolution and compensation coming to Repsol, the idea that in Argentina a company may be expropriated outside of international legal norms of just, fair and equitable compensation may reduce investor interests in Argentina and perhaps the region in general.
One major issue that was always a barrier to trade is the drug conflict in the region. Colombia has had to deal with a reduction in investment over the last few decades due to the violence coming out of the drug trade in that country. While the government was unable to control many regions of the country and foreigners and locals were often subject to brutal kidnappings, investments stayed at a low level as company officials and their local investment partners were targeted in many unsettled regions of the country. With the crackdown on cartels in Colombia, investment has begun to flourish in Colombia and Colombia has become one of the top destinations for investment in Latin America. Mexico has inherited much of the violence from Latin America’s drug conflict and while it has a massive impact on society and commerce in Mexico, Mexico has been able to sustain a high level of investment despite the violence and health issues to plague the country over recent years. While it is not fully understood how an increase in violence and a slump in the U.S. economy could lead to Mexico having one of its highest growth rates in recent memory, investor sentiments towards countries with internal conflicts usually are seen as unfavorable.
One lasting traditional problem that is at the centre of popular protests in Brazil is the lingering of corruption in government and commerce in Brazil and across Latin America. While this traditional system will most likely modernize as opposed to disappearing, it should be noted that corruption in Latin America and many countries abroad is extremely difficult to extinguish as it is tantamount to getting a cat to eat its own tail. Organizations like Transparency International are at the forefront of highlighting corrupt systems worldwide, but to get a system to voluntarily eliminate itself is a difficult process, and must be realistically dealt with by investors where these issues are prominent. With successes in Latin America, the region may become the source of how to handle the above non-traditional and traditional issues in investment and policy development in the region and abroad. Cautious and well researched investments in the region are the key to turning a profit on investments in Latin America.
