Latin America - Outlook 2011

Latin America Outlook

Prepared By

About: Beamonte Investments is a corporate advisory firm headquartered in Boston, Massachusetts.

The firm focuses on middle market transactions, primarily assisting clients with mergers, acquisitions, divestitures, and capital sourcing. Beamonte Investments’ team brings a high level of domestic and international expertise to middle market companies.

Our successful transaction experience includes seasoned representation in the capital raising process and in the sale or merger of client companies with strategic buyers, financial buyers, private investment groups, and publicly traded companies from around the world. Our services include complex deal structuring, sophisticated negotiations and complete and professional client services, including: comprehensive valuations, extensive confidential client marketing materials and targeted buyer/seller search assignments.

Luis F. Trevino Managing Director +1.617.275.8960 x 103 ltrevino@beamonteinvestments.com Analyst: Josh Hoffman-Senn jhoffmans@beamonteinvestments.com

1 Latin America Outlook

Contents About:

1

Economy Overview

3

REGION OF GROWTH MERGERS AND ACQUISITIONS MEXICO OVERVIEW PAST CURRENT STATE COLOMBIA OVERVIEW BRAZIL OVERVIEW

4 6 9 9 11 14 19

Hospitality

22

HOSPITALITY IN MEXICO HOSPITALITY IN COLOMBIA

23 30

Manufacturing

37

MANUFACTURING IN MEXICO

38

Information Technology

41

Rising Middle Class

46

Political Risk

50

THE POLITICAL – ECONOMIC BOND PROGRESS RISK

51 52 55

M&A and Credit Outlook

57

M&A CREDIT

58 59

Currency Exchange Trends

61

2 Latin America Outlook

Economy Overview

3 Latin America Outlook

Economy Overview Region of Growth The outlook in Latin America is quite promising from an investor’s prospective. An increasing number of companies look to this region to satisfy their business needs.

Exports from the area are very attractive, and robust growth is expected in this emerging economy. The following figures represent the regioni: US$ billion Unless Otherwise Stated

Latin American Indicators GDP Real GDP growth, % Inflation, eop, % Exports Imports Trade balance

2009 4,045.5 -1.8 6.8 762.9 725.3 37.5

2010e 4,809.5 6.2 5.8 954.7 913.5 41.2

2011f 5,718.5 4.4 6.9 1,027.8 997.5 30.3

2012f 6,496.5 4.1 6.5 1,115.4 1,093.2 22.2

Data Source: Business Monitor International

Data Source: Business Monitor International

i

These figures represent Argentina, Barbados, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Rep., Ecuador, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Trinidad & Tobago, Uruguay and Venezuela.

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Real GDP growth forecasts are strong and steady, while frequent trade connects the region well to the rest of the world. The countries of Mexico, Colombia, and Brazil show particular promise.

An extravagant boom blessed the years of 2003-2007. Just prior to that period, a deep recession, commonly referred to as the “lost half decade,� distressed the region. Poor economic conditions prompted political shifts away from right wing candidates. Many new leaders then implemented free market reforms and capitalistic policies that initiated strong growth and tremendous commodity performances. The region had not enjoyed comparable growth rates since the early 1970s.

Most governments reacted better to the recent recession than to those of the past.

Historically, pro-cyclical fiscal policies often augmented the business cycle, exacerbating downturns. Such policies were party the fault of international credit markets that discouraged lending to developing countries during recessions, and partially the result of political pressures that encouraged spending during booms.1 In contrast, regimes avoided contractionary policies when the recent crisis hit. Although leaders did not adequately neutralize the preceding boom,2 they had followed a beneficial trend toward countercyclical policies since the 1990s. Such activity put many countries in better positions to offset the recent financial crises. Colombia, Mexico, Chile, and Peru all practiced countercyclical fiscal policies particularly when the recession hit.3 Currently, comprehensive government plans to promote activity accompany strong

commodity markets and high levels of investment. While public spending creates opportunity in many industries, external demand drives vibrant export markets. At the same time, a wide scale shift away from poverty bolsters domestic consumer demand, introducing a new internal growth driver to the region. In addition, the public credits leaders with economic success, thereby increasing political stability and favor of democracy.

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Key Deals:  America Movil acquires Carso Global Telecom and Telmex (US$27.5 billion and US$5.5 billion)



 

COSAN S/A Industria E Comercio acquires Esso Brasileria de Petroleo Limitada (US$890 million)

Japan-based Marubeni Corporation acquires 30% of two copper mining companies in Chile ($1.3 billion) Grupo Aeroportuario del Sureste in Mexico - IPO ($335 million) Information Source: Bamrud, 2010

Mergers and Acquisitions Recent activity in Latin America suggests tremendous opportunity for businesses and investors. Firms should credit the recent economic recovery for such dramatic performance. In 2009 the world saw an overall 27% decrease in total value of mergers and acquisitions.

Latin America saw only a 10% fall that same year, making tremendous 2010 improvements even more impressive, as they were not solely the response to a prior deep loss. Mergers and acquisitions value doubled in 2010, reaching US$220 billion. Growth is expected to remain robust.4 Since the recession passed, large corporations wish to expand. At the same time, promising forecasts in the region make local businesses prime targets for acquisition. Such factors promote valuable synergy between multinational corporations and small businesses in Latin America. For example, Asian investors and companies increasingly favor Latin American prospects for acquisition. To illustrate, in 2010, US$10 billion in deals involving Asian firms marked a threefold increase compared to values over the past several years.5 As multinational corporations continue to realize the benefits of a solid presence in Latin America, corporate mergers and acquisitions remain commonplace. Also, private equity investors increasingly add Latin American companies to their portfolios in order to embrace recent and expected growth.

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Roles of financial advisors in the region exemplify the magnitude of the mergers and acquisitions market. The following advisors play major roles in Latin America:ii

Financial Advisor Credit Suisse Citi Santander JP Morgan Banco BTG Pactual SA Bank of America Merrill Lynch Morgan Stanley UBS Goldman Sachs Caixa Geral de Depositos Rothschild Itau Unibanco Banco Espirito Santo Deutsche Bank Credit Agricole CIB Mediobanca Societe Generale Standard Chartered PLC Scatiabank-Bank of Nova Scotia Banco Bradesco Allen & Co. Barclays Capital BR Partners Estater Gestao e Financas HSBC Holdings Total

Number of Deals (2010)

Deal Value Per Advisor (US$MM)

46 15 42 33 56 26

79,507.5 53,276.5 47,582.5 37,566.3 34,759.8 33,427.4

21 13 22 9 18 30 7 13 8 6 2 2 2

30,105.7 21,166.6 18,813.3 15,753.9 14,528.8 14,104.1 13,617.5 13,235.8 12,109.3 11,878.7 10,753.4 9,560.0 7,585.0

18 1 5 24 6

7,434.0 7,325.0 6,069.1 5,618.1 4,582.7

8

4,513.7 220,933.6

433

Data Source: Thomson Reuters

Several key deals greatly impacted the business scene. The largest were America Movil’s acquisitions of Carso Global Telecom and Telmex for US$27.5 billion and US$5.5 billion respectively. Such activity placed America Movil in prime position to compete with other global giants in the region, as the company’s newfound combined revenue of US$50 billion ranks it the fourth largest firm in Latin America.6

ii

This list is not exhaustive. Rather, it outlines key players.

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In the energy sector, Sinopec Group, a Chinese refiner, acquired 40% of Repsol Brazil for US$7.1 billion. Similarly, the Indian company ONGC Videsh Ltd. bought a 40% share in a Venezuelan oil field.7 Such activity illustrates the obvious economic benefits of the region’s natural resources.

The region’s abundance of natural resources extends beyond oil, attracting a variety of firms. For example, European aluminum producer Norsk Hydro acquired Brazilian Vale’s aluminum holdings for US$4.9 billion.8 Also, Japan-based Marubeni Corporation acquired 30% of two copper mining companies in Chile for $1.3 billion.9 In the food and beverages sector, Grupo Bimbo spent US$959 million to acquire Sara Lee’s North American Bakery, while Heineken absorbed Mexican based Femsa’s beer operations for US$7.9 billion.10 Such deals prove multinational corporations’ desires to gain presence in Latin America. Companies of all sizes in the region often exhibit tremendous promise and opportunity, making them prime targets for acquisition or investment.

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Mexico Overview Past A series of events in Mexico’s history redefined the country’s economic prospects. Of the many interesting developments, one stands out above the rest, the introduction of the North American Free Trade Agreement (NAFTA). This and other Free Trade Agreements revolutionized the country’s export market.

NAFTA eliminated a wide array of trade barriers between the • Outstanding export U.S., Canada, and Mexico. NAFTA Effects of growth of 8.2%pa and numerous other agreements • Strong ties between NAFTA prepared Mexico well to become Mexico and the U.S. a leader in exports. It should be noted that in 1994, an extreme devaluation of the country’s currency, the peso, was necessary. Although unfortunate for the portfolios of investors at the time, it had one positive effect. The event made Mexican goods appear very cheap in the eyes of the rest of the world, making Mexican exports even more attractive. The currency devaluation that coincided with the milestone Free Trade Agreement further fueled the Mexican export market.

Prior to these major developments, Mexico produced large amounts of agricultural and mineral products on account of an abundance of natural resources. Economic liberalization in the 1980’s began to shift the country’s focus,11 while events of the 1990’s truly set the scene for major changes, including development and growth of manufacturing and other industries.

Data proves the notion that Mexican exports became quite attractive. Outstanding export growth of 8.2% per annum was observed shortly after the implementation of NAFTA, along with import increases reaching 7.7%.12 The graphical representation below13 exhibits tremendous, consistent growth for nearly two decades as a result of free trade.

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Data Source: OECD, 2010

The benefits of the Free Trade Agreements still show themselves today. In fact, such arrangements contribute to 90% of Mexico’s trade. Moreover, NAFTA greatly strengthens the connection between Mexico and the United States. This connection is quite beneficial given the lasting and proven strength of the U.S. economy.

However, the bond harms Mexico when the U.S. finds itself in difficult times. For example, when U.S. imports fell dramatically in 2009 on account of a recession, Mexico suffered a 15% fall in exports as a result.14 Still, long term benefits of the strong connection far exceed costs.

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Current State

5.4% Real GDP growth (2010)

Falling unemployment

Well managed debt

Continued export prospects

The outlook in Mexico is promising. Naturally, the recent recession impacted Mexico along with its close trading partner, the U.S., and the rest of the world. Real GDP growth, inflation, and unemployment offer useful figures to assess the health of the economy.

Real GDP growth (%) Inflation (%) Unemployment (%)

2008

2009

2010

1.3 5.1 4.0

-6.2 5.3 5.5

5.4 4.2 5.4

2011 2012 (forecast) (forecast) 4.8 3.8 4.3 4.8 4.4 3.7 Data Source: Dun & Bradstreet Inc.

Depressed real GDP growth in 2008 and 2009, and the coinciding rises in inflation and unemployment demonstrate the harm of the recession. A 2011 slowdown in GDP growth may be attributed to recent unfavorable performances by the 11 Latin America Outlook

agriculture, mining, and construction industries. In addition, Mexican factories recently adjusted production to an unfavorable U.S. outlook, which decreased exports from Mexico to the U.S.15 In spite of reduced activity in some areas, the above figures suggest quality growth in 2011. Public infrastructure spending and an expected rise in consumer demand will fuel activity. Experts forecast strong GDP growth in 2012-13 as well, especially as the U.S. economy improves. As the U.S. sees a future 11% increase in non-fuel import demand, along with investment and consumption improvements, Oxford Economics claims Mexico’s growth should rise to 5.5%.16 Other sources share optimism, often estimating 2012 growth near 4% in accordance with the data in the table above. Fuel exports should also apply positive pressure on GDP growth because of high oil prices.

The positive effect of the oil industry would be greater if the government allowed private investors to develop the industry, as opposed to supporting the publicly run firm “Pemex.”17 Still, oil is just one of the many promising areas that will fuel growth in the coming years.

Unemployment continues to restrict the economy more than it did when the country saw a 4% rate before the recession. Fortunately, this figure is on a downward trend, and forecasted to fall below 4% in 2012. Since unemployment is temporarily higher than usual, growth in private consumption may be restricted. Historically, however, it should be noted that a major shift away from poverty is occurring. The result is a much larger middle class that offers a new market for consumer demand. A substantial rise in domestic consumption should follow this trend in the long term.

Inflation is under control in Mexico. Generally, Banco de Mexico (Banxico), the central bank, gears monetary policy toward adjusting inflation, aiming for 3% each year.

During the past recession the rate was higher, although more recent figures better approach the target. Current policy is to avoid high inflation, as the central bank believes the recovery may succeed without lowering interest rates below 4.5% this year. Note that some sources expect to see CPI inflation at only 3.8% at the ends of 2011 and 2012.18 In 2012 however, rates are expected to approach 6%, especially because the U.S. will raise its interest rates as the economy recovers and investment demand increases.19 Although global food price increases push up inflation in other Latin American countries, the effect in Mexico is minimal. Domestic food prices increased only 5.2% from last year, whereas Brazil and Chile saw 7.8% and 6.9% increases respectively. 20 Mexico’s lower rate may be attributed a strengthening peso and an observed decrease in some areas of economic activity. This May, the peso traded at MX$11.7:US$1, while last year it traded at MX$13.1:US$1.21 Continued strengthening

12 Latin America Outlook

of the peso is not expected, in spite of the fact that foreign direct investment increases. In fact, a mild weakening in 2012 should bring its value to MX$12:US$1.22 Consumer confidence also suggests a strong economy. Although a 2011 consumer confidence indicator fell from 92.3 in February to 91.9 in March and 89.3 in April, it is still approximately 8 points higher than corresponding 2010 figures. The fall those two months likely resulted from uncertainty in the U.S. and a rise in global commodity prices. Fortunately, since forecasts predict reduced unemployment and low inflation, consumer confidence should increase over the course of 2011.23 Mexico’s debt is under control. Attempted decreases in public spending successfully reduce the annual deficit. Naturally, the country did suffer during the recent recession. However, conservative fiscal strategy helps the country manage its debt well.24 Further, at the end of April 2011 the Mexican central bank held reserves of US$126 billion, a high figure for the country. Such reserves ensure Mexico can meet foreign financing commitments. A strengthening of the Mexican peso further contributed to increases in foreign reserves.25 Overall, prospects in Mexico are promising. The long term success of country exports fuels growth in several industries. Recent recovery also shows signs of promise, suggesting the recession’s blow should concern investors less. Although a mild decrease in pace of the recovery exists, improvement will continue. The following long term forecasts represent a country with future stable growth.

Long Term Forecasts (Average annual percent changes) 2011-2015 2016-2020 GDP (% growth) 4.5 3.5 Unemployment (%) 4.2 3.7 Consumer Prices (% increase) 3.5 3.0 Exchange Rate (MXN to USD) 12.7 13.7 Data Source: Oxford Economics

The 2011-2015 figures forecast robust growth, while 2016-2020 figures exhibit expectations of stability.

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Colombia Overview

Comprehensive recovery plan underway

$2.6bn IMF credit line

Increasing Real GDP growth forecasts

Falling unemployment

Colombia shows promising growth prospects. Although the country faced past difficulties, the current state gives rise to great optimism. Key figures are as follows:

2008

2009

2010

Real GDP growth (%) Inflation (%)

3.5 7.0

1.5 4.2

4.3 2.4

Unemployment (%)

11.2

12.1

11.5

2011 (forecast) 4.5 4.5

2012 (forecast) 5.0 4.8

11.2

11.0

Data Source: Dun & Bradstreet Inc

14 Latin America Outlook

The 2009 fall in Real GDP growth and rise in unemployment indicate the impact of the global recession. Fortunately, recovery is underway and expected to continue.

The government already began vigorous work on a well-organized recovery plan that should prove quite effective.

Data Source: Dun & Bradstreet Inc.

Government involvement will enhance growth dramatically in coming years.

President Juan Manuel Santos called for 6.2%pa GDP growth, exports of US$52.6 billion by 2014, and reduction of unemployment to 9% by creating 2.4 million new jobs.26,27 A comprehensive public plan to achieve these goals makes them plausible. Examples of planned reforms include reductions in corporate taxes and investment barriers.28 The fact that the International Monetary Fund (IMF) blesses Colombia with help makes President Santos’s goals even more realistic. In fact, the IMF opened a two year, US$2.6 billion credit line to help spur growth. In April, the additional credit in conjunction with an observed increase in consumer demand prompted the central bank to project 2011 GDP growth at 5.5%.29

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Unfortunately, the government faces the challenge of organized crime, which sometimes inhibits commercial activity. For example, attacks frequently interfere with oil pipelines and transmission lines. In addition, guerilla warfare sometimes impedes construction of major roads across the country. For this reason, infrastructure lags behind a comfortable level in Colombia.30 Still, regarding trade and investment, Colombia manages to stay well connected to the U.S.31 Colombia’s economic promise makes it a valuable investment prospect, in spite of a large amount of criminal activity in the area. Further, the government observed recent success in fighting crime.

Colombia’s attraction shows itself in strong foreign direct investment inflows. Such investment largely benefits the manufacturing, mining, and energy industries, but also greatly impacts communications, transportation, and finance. An unusually large FDI increase blessed the country in 2005. That year, FDI more than doubled from US$4 billion in 2004 to US$10 billion. Even during poor economic times, the country saw FDI increase from US$9 billion to US$10 billion in 2007 and 2008 respectively.32 The following data identifies main sectors that attract FDI: Foreign Direct Investment by Balance of Payments – Main Sectors

Sector

2009 2010 %Part. %Part.

(US$MM) (US$MM) 2009* 2010*

Mining & Quarrying

3,025.0

2,054.6

37.3%

28.0%

Petroleum

2,428.2

2,862.0

29.9%

38.9%

Commerce, Restaurants & Hotels

594.3

445.5

7.3%

6.1%

Financial Establish

720.4

945.1

8.9%

12.9%

Manufacturing

621.1

593.8

7.7%

8.1%

Transportation, Storage & Communications Construction

347.9

-588.9

4.3%

-

261.5

262.0

3.2%

3.6%

Community services

88.2

98.9

1.1%

1.3%

Agriculture, Livestock, Fishing, Forest & Hunting Electricity, Gas and Water

27.9

52.1

0.3%

0.7%

-977.3

34.8

-

0.5%

TOTAL

7,137

6,760

100%

100%

Source: Balance of Payments. Central Bank *Participation share within total of sectors with positive net investment. Total 2009: US$ 8,114.6 Million; Total 2010: US$ 7,348.8 Million

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The data indicates that Colombia’s abundance of natural resources is quite lucrative, as mining and petroleum account for proportionately large shares of FDI. Still, great diversity exists for investment. As a result, many industries benefit from foreign expansion.

Below is a snapshot of mergers and acquisitions in Colombia to offer examples of influential investments in a variety of industry segments.

Example M&A deals, by inward investing firm, 2007-2009, Colombia:33 Year Acquiring Home Target Target Industry Company Economy Company

2009

Vale

Brazil

2009

KimberlyClark Corp

United States

2009

Investor Group

Chile

2009

Cencosud

Chile

2008

GE Money

2008

Pacific Rubiales Energy Corp

United States Canada

2008

Brysam Global Partners

2007

Telefonica SA

Cementos Argos SACoal Mine Colombiana Kimberly Colpapel Vabaria SAAgua Brisa Bottled Easy Colombia SA Banco Colpatria SA Kappa Energy oldings Ltd.

Shares Acquired (%)

Cement, hydraulic

100.0%

Estimated or announced transaction value (US$MM) 373

Sanitary paper products

100.0%

289

Bottled & canned soft drinks & carbonated waters

100.0%

60

Grocery stores

100.0%

60

Banks

39.3%

227.95

Crude petroleum and natural gas

100.0%

168

United States

Banco Caja Social SA

Banks

18.8%

101.7

Spain

Colombia Telecomunicacio nes SA

Telephone communications, except radiotelephone

50.0%

2627.2

Source: Thomson ONE Banker, Thomson Reuters

17 Latin America Outlook

The leading stock exchange, Bolsa, de Valores de Colombia, saw tremendous growth from 2002-2007. During this period, market capitalization increased from US$10 billion to US$102 billion. Although the exchange felt major impact from the recent global recession, falling to US$82.6 billion by 2009, prior performance illustrates the country’s progress and potential.34

By March 2011, the central bank allowed interest rates to rise to 3.5% from 3%. This is likely a response to increased credit and housing costs.35 Such factors encourage the central bank to act more conservatively. Tighter policy also helps control inflation.

Although forecasted 2011 and 2012 inflation rates are higher than typical targets, they permit healthy expansion and implementation of the government’s comprehensive plan.

Foreign exchange reserves amounted to US$29.8 billion in April 2011, offering import cover for approximately 7 months. At 3.5% of GDP in 2010, the budget deficit is large, but the government recently took great strides to fix the issue. For example, it prohibited any spending financed by public debt issuance. In addition, the country will save a large portion of extractive industry revenues for the purpose of reducing the deficit.36 Such a strong commitment to debt reduction reassures investors of long term national stability.

18 Latin America Outlook

Brazil Overview

Largest economy in LATAM

GDP growth of 7.5% in 2010

Quickly increasing FDI inflows

Government stimulus

The largest economy in Latin America, Brazil is the tenth largest in the world. The past ten years hosted major political reforms in attempts to achieve economic stability. The government took great strides to integrate Brazil into the world economy, allowing the country to grow steadily from this point forward.

Current projections are quite optimistic:

GDP growth (%) Consumer Prices (% growth)

2009 -0.6 4.9

2010 7.5 5.0

2011 4.3 6.1

2012 4.8 4.7

2013 4.7 4.2

2014 4.1 3.6

Data Source: Oxford Economics

19 Latin America Outlook

Brazil saw extraordinary GDP growth in 2010. A 2011 fall may be attributed to government spending cuts and interest rate hikes. Notice that from January to April 2011, public spending increased by only 9.7%, whereas spending increased by 18.4% the first third of 2010.37

Data Source: Oxford Economics

An increase in foreign direct investment inflows exhibits investor optimism. In January to April of 2011, foreign direct investment inflows reached $22.9 billion. That period last year, FDI inflows totaled $7.7 billion. Such growth and confidence not only reflects the positive outlook of Brazil, but also the successful recovery of investing countries.38 Exports are a great success in Brazil. In May 2011, export value was 31% higher than a year earlier. Products show diversity, including everything from manufacturing, to iron ore. Brazilian exports are widely accepted around the world, reaching the E.U., U.S., Asia, and remaining Latin American countries. 39

20 Latin America Outlook

The following table outlines long term country forecasts: Average annual percent changes 2006-2010 2011-2015 GDP growth 4.4 4.4 Unemployment (%) 8.4 5.7 Consumer Prices 4.7 4.5

2016-2020 3.9 5.6 4.0

Several factors contribute to a positive outlook for Brazil in the coming years.

Through 2014, the government plans to spend $530 billion on housing, energy, and transportation. 40 In addition, the country will host the 2016 Olympics and 2014 World Cup, two major events that attract global attention.

21 Latin America Outlook

Hospitality

22 Latin America Outlook

Hospitality Hospitality in Mexico Mexico’s hospitality industry experienced a blow from the recent recession without a doubt. Fortunately, signs of improvement accompany a successful nationwide economic recovery. Leaders in travel accommodation and foodservice expand to prepare for growth that is fueled by a steady rise in tourism.

Travel Accommodation Travel accommodation comprises a major sector of the hospitality market. This sector is a MX$170 billion industry, serving both domestic and foreign customers.iii Over 16,000 outlets define this market in Mexico.

The year 2010 saw only modest growth of 1%. Fortunately, industry players take great strides to grow more rapidly. For example, generous deals and sales are commonplace to attract business. Additionally, hotels increasingly open professionally oriented hubs in major cities in an attempt to grow.41 Past performance in the industry illustrates a harmful impact from the recent global financial crisis. A 2007-2010 market size record is below.

iii

The stated figure does not account for foodservice and related activities. Rather, it represents room sales and similar directly applicable values.

23 Latin America Outlook

Data Source: Passport by Euromonitor International

Fortunately, market size is expected to maintain an upward trend for the next several years, offering stability and improved investment prospects. A 2010-2015 industry forecast follows:

Data Source: Passport by Euromonitor International

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A major player in the travel accommodation sector, which runs 120 outlets, is InterContinental Hotels Group. This group operates Holiday Inns, Crowne Plazas, Staybridge Suites & Indigos, as well as others. The company placed recent emphasis on debuting new Holiday Inns, as travelers from the United States and Canada prefer recognizable brand names as assurance of quality and credibility.42 A number of major companies boast widespread presence in Mexico, while a wide array of competitors comprise the entire industry. The chart below represents a snapshot of industry makeup.

Data Source: Passport by Euromonitor International

Overall, recent activity and expansion of industry leaders reflect optimism in the industry.

25 Latin America Outlook

Tourism Foreign tourists fuel the hospitality industry. Current prospects promise growth and opportunity. The recent global recession proved harmful, as foreigners allocated less wealth to leisure and travel. A second blow came in the form of disease when the Swine Flu alarmed potential visitors, prompting many to cancel arrangements.

Fortunately, government and private action helped rejuvenate the industry.

The government actively supported tourism for quite some time. In 2006, Mexico, the U.N., and Expedia agreed to collectively promote the 25 historic Mexican World Heritage Sites. Such promotion attracted visitors to the country, which benefited hospitality industry segments.43 Today, the country holds tenth place in rankings of most visited countries. Moreover, the Tourism Ministry predicts 15% growth in tourism each year for seven years.44 One method to measure the health of the industry is to monitor tourist arrivals. Past and expected figures are as follows: Arrivals Data (2007-2014):iv,v 2007

2008

2009

2010e

2011f

2012f

2013f

2014f

Arrivals ('000)

91,210

97,975

95,722

96,252

96,691

98,317

99,046

99,723

Tourists ('000)

20,401

20,447

18,445

19,316

20,083

20,751

21,398

21,960

% change y-o-y

1.453

0.225

-9.79

4.725

3.968

3.327

3.12

2.625

Same-day ('000)

63,995

70,847

73,164

72,155

71,268

70,495

69,746

69,096

Tourist arrivals by mode of transport used Air (‘000)

10,157

9,563

6,706

7,950

9,044

9,998

10,922

11,724

Road (‘000)

10,243

10,883

11,739

11,366

11,038

10,753

10,476

10,235

Tourist arrivals by purpose of trip Leisure (‘000)

7,924

7,404

5,384

6,263

7,037

7,711

8,364

8,930

Business (‘000)

808

758

468

594

705

802

896

977

Other (‘000)

11,670

12,285

12,592

12,459

12,341

12,239

12,139

12,053

Source: Business Monitor International iv

Tourists are non-resident arrivals at national border that stay the night; same-day non-residents that do not stay overnight; cruise means non-residents arriving on cruise ships; tourists, same-day and cruise add up to total arrivals. Tourists are calculated by the sum of regional data (historic and forecast). Mode of transport and purpose of trip were estimated using proportions of old data. Original source: UNWTO v

All figures reduced by three orders of magnitude (indicated by ‘000), so “20,401” tourists in 2007 represents 20.4 million

26 Latin America Outlook

A graphical representation of tourist arrivals exemplifies the harm of the recession, but subsequent growth and future promise in the industry.

Data Source: Business Monitor International

Tourist expenditure did not grow quite as fast as number of tourists. Still, growth is both observed and expected in the near future.

Data Source: Business Monitor International

The Mexican government reaped past benefits of tourism, and understands the industry’s prior success and future promise. For these reasons it set up the National Trust Fund for Tourism Development to develop tourist locations and encourage investment. This organization focuses heavily on the coast, as do private investors, as beachfront scenery and activities add great value to coastal attractions. Overall, the government invests nearly US$2 billion each year in tourism.45

27 Latin America Outlook

The fact that a far greater portion of arrivals visit for pleasure rather than business reinforces an investor’s or developer’s decision to favor coastal attractions and accommodations, since leisure oriented visitors more frequently seek beachfront activities.

Data Source: Business Monitor Although tourists originate from International around the globe, several key source areas exist. Most tourists in Mexico come from the United States or Canada.

Particular states for which many citizens have Mexican ancestry or relatives, such as California, send large percentages of tourists. Still, visitors from Europe are not uncommon. In addition, Asian travelers increasingly visit Mexico.46 Diversity in tourist sources permits a wide array of businesses to achieve success, as consumer interests are varied. Still, trends enable businesses to identify key areas of opportunity based on the typical consumer.

Following the fact that a large portion of tourists originates in the Unites States is the inevitable connection between the Mexican hospitality industry and the health of the U.S. economy. Growth in tourism is expected to persist for the next several years.

However, a sluggish U.S. recovery may slow down industry growth in Mexico.47 In spite of this potential weakness, industry players act with great optimism. For example, Grupo Posadas continues to open new hotels to accommodate travelers and attract tourists. Additionally, construction of related attractions, such as golf courses and spas, is on the rise.48

28 Latin America Outlook

Foodservice Foodservice is an integral piece of the hospitality industry. Companies in this market place particular emphasis on geographic areas with strong retails presence, as Mexicans regularly spend time in such locations. All varieties of foodservice providers, including fast food chains, street vendors, and restaurants, often follow this trend. Restaurants in particular favor proximity to very large chain stores, such as Wal-Mart.49 International brands are more prominent in busy retail and tourist locations, both because they can afford the prime locations, and because the average foreign traveler favors familiar foodservice providers. Independently owned outlets show their presence at accommodation and leisure spots.50 Growth in the foodservice industry is expected to remain positive for the foreseeable future, as indicated below.

Figures from Euromonitor International

29 Latin America Outlook

Hospitality in Colombia Colombia’s hospitality industry shows signs of promise. Generous government incentives encourage travel accommodation expansion, while safer cities attract tourists and investment growth. In addition, well defined trends in the behavior of foodservice providers help identify areas of opportunity.

Travel Accommodation Much opportunity exists in Colombia’s travel accommodation industry, which saw 3% growth in 2010 and boasts value of Col$2.5 trillion. Diversity does not characterize the industry. Hotels collect 97% of retail value sales, and dominate travel accommodation as a result. In 2010, hotels made up 52% of all outlets in the country.51 The government works to strengthen accommodation development by offering monetary reward to developers in the form of tax exemptions. The country allows hotel leadership to take advantage of such opportunities while expanding. For example, thirty year income tax exemptions are available on services provided by any hotels built or remodeled between 2003 and 2018. In the case of remodeled or expanded hotels, the tax exemption is prorated based on the cost of expansion.52 Large brands such as Marriot, Holiday Inn, and Hilton favor Colombia because of such government sponsorship.53 International brands increasingly build in Colombia on account of government incentives and a favorable market. They compete with two very powerful domestic chains, Hoteles Estelar and Hoteles Dann. Combined, these chains ran 27 hotels in 2010. Their target market consists largely of business travelers. To attract business tourists, the brands strive to run high quality facilities. While Hoteles Estelar operates branches that earn three to five stars for three distinct brand names, Hoteles Dann earns four or five stars for all of its outlets.54

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In spite of their success, Hoteles Dann and Hoteles Estelar by no means monopolize the industry.

Plenty of opportunity exists for international and domestic brands to engage in competition. Organizations understand the opportunity and continue to expanded presence in Colombia accordingly.

The graphical representation to the right reveals size of Colombia’s travel accommodation industry in recent years.

Data Source: Passport by Euromonitor International

Steady industry growth is expected in the foreseeable future as existing brands expand and additional foreign companies make debuts. The fact that Colombian hotels boast very high revenue per available room (RevPAR) compared to hotels in other Latin American countries also drives growth. Five star hotels in particular may retrieve far more than US$100 each night.55 Overall, several factors make this sector an area of opportunity in Colombia.

Government sponsorship in the form of generous tax exemptions successfully entices developers. Public Data Source: Passport by Euromonitor International

Latin America Outlook

31

encouragement and high RevPar, especially for quality hotels, create potential for profitable investment in the industry.

Tourism Just as tourism fuels Mexico’s hospitality industry, so too does it fuel Colombia’s hospitality market. The past decade blessed Colombia with tremendous growth in this area. Between the years of 2000 and 2009, international tourism grew by an average of 10.4% each year, one of the largest growth rates in the world. In comparison, the global average of this figure was only 2.9%.56 Colombia’s geographic location makes it a prime tourist spot, which partially explains the unusually high growth rate of the industry. Even the New York Times included the country on their 2010 list of “31 Places to Go.” Mountains and rainforest that offer unique sites to visit strengthen attraction to the country. Moreover, tourism is profitable all year round on account of the country’s location and climate. Popular year round tourist activities are less common in many other climates.57 In the past, crime was a major deterrent to tourism. Fortunately, the current scene is safe enough to subdue such a concern. The achieved security may be attributed to major government emphasis on crime reduction since 2002.58 The United States also contributes to Colombia’s efforts to fight guerilla warfare, helping the country achieve its overall mission of safety and security.

Homicide rates below offer representations of cities’ security levels, permitting crime comparisons between densely populated areas in nearby regions and the rest of the world.

32 Latin America Outlook

Data Source: Crime Observatories

Notice that by the above indicator, the major Colombian cities of Medellin, Cartagena, and Bogota, are safer than many other major cities in Latin America, and even safer than Washington D.C. Thus it appears the government achieved major progress in its fight against organized crime.

A far more tourist friendly environment on account of increased safety is just one factor that attracts investment in related areas. Investors understand the potential of hospitality. Hotel and hotel services investment saw exceedingly high growth in the past, reaching rates of well over 100 percent, as illustrated by the figure below.59

33 Latin America Outlook

The downward growth trend from 2002-2007 is of little concern, as current figures prove better than ever. In fact, restaurants and hotels recently saw 1,090.3% investment growth per annum. In particular, 5.1% growth in the first quarter of 2010 contrasts 15.2% growth that quarter of 2011.60 One reason investors favor Colombia is because the government takes significant measures to encourage investment in hospitality. For example, a 40% tax deduction on tourism investment is available.vi This is in addition to generous income tax exemptions on hotel building and expansion projects, and twenty year exemptions for ecotourism services.61 In essence, the world increasingly realizes that Colombia is a prime tourist spot. The industry often sees impressive growth, especially as security improves. The hospitality sector expands as a result, which further strengthens tourist attraction to the country.

Foodservice A number of trends stand out in the food service industry. In 2009, 56% of foodservice locations were standalone. These providers exhibit similar behavior and expansionary trends. Standalone hubs tend to spread to non-concentrated areas and leisure spots. In contrast, many local brands increasingly prefer to serve major airports in an attempt to broadcast their names to incoming foreigners.62 Such a strategy not only capitalizes on revenue from airport outlets, but also takes advantage of new arrivals’ first impressions of the country. Newcomers develop a sense of familiarity with the brand, and gravitate towards those outlets throughout their trips.

Most restaurants, cafes, and bars remain standalone. Chain retail outlets are quite prominent in the remaining 44% of the industry that is not standalone. Retail foodservice establishments as a whole consisted of 11,597 premises by the start of 2010, suggesting outreach to a wide base of customers.63 A multitude of retail spots retrieved 24% of all Colombian foodservice sales in 2009.

Restaurants and fast food outlets together collected 56% of these retail sales. Such data suggests that said sectors are particularly profitable. Lodging and travel also vi

This only applies for investments made in “real fixed productive assets acquired.�

34 Latin America Outlook

recovered a fair share of the overall market, earning five and eight percent of foodservice sales respectively. Fast food providers and coffee shops in major airports and bus stations account for most sales in the travel sector, while upscale restaurants account for the larger portion of sales in lodging. Expansion of the lodging sector is expected to average 6% the next several years, offering promising prospects for investment in that area.64 The foodservice industry saw growth for many years. The graphical representation below illustrates that growth.

Figures from Passport by Euromonitor International

The past growth resembles a trend that is expected to continue for the next several years.

Figures from Passport by Euromonitor International

35 Latin America Outlook

While foodservice is a widespread and diverse industry, behavioral trends are easy to spot. Some providers aggressively target foreign travelers, as in the case of local brands that congregate in high traffic airports. Other outlets prefer to remain more discrete. Overall, opportunity increases as the entire hospitality industry expands to meet foreign and domestic demand.

36 Latin America Outlook

Manufacturing

37 Latin America Outlook

Manufacturing Manufacturing in Mexico The manufacturing industry in Mexico capitalizes well on the country’s unique export advantages. Firms create products with low cost, and trade freely with the world on account of multiple Free Trade Agreements, including the landmark North American Free Trade Agreement. A friendly import environment also promotes activity and helps the country establish lasting global relationships. Currently, a variety of domestic programs are underway to increase products with no tariffs to 65% by 2013, in contrast to 20% in 2008.65 Such programs and agreements prove the government’s ability and intent to promote trade. These goals positively impact the manufacturing industry, as foreign consumers often drive sales in this area. In fact, many companies strategically place factories in Mexico with intent to export the manufactured products.

In March of 2011, exports from Mexico reached US$31.3 billion, a record period high for the country. Moreover, a trade surplus for the first quarter of the year, at US$1.8 billion, was the highest it had been since the first quarter of 1996.66 Such growth may be attributed to vibrant success of the manufacturing industry, a major growth driver for the export market. Impressive figures suggest recovery from the recent recession is particularly robust for manufacturers.

As indicated by impressive export statistics, manufacturing in Mexico enjoys thriving growth. Such promise becomes apparent when compared with that of other major industries in the country. The following table outlines recent growth of a variety of major industries in Mexico.

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GDP by Industry (% change) 2010 Agriculture, forestry & 3.3 fishing Mining 2.2 Construction 0.0 Manufacturing 9.9 Retail 13.3 Financial & insurance 2.4 services GDP 5.4

2011 Q1 1.2 -2.5 4.9 7.4 9.5 2.6 4.6

Data Source: Instituto Nacional de Estadística y Geografía

The data shows that manufacturing expands far more rapidly than most other industries, and thus resembles an area of tremendous opportunity. A 9.9% growth rate in 2010 represents a very strong recovery from the recession. Prolonged, steady growth of that magnitude is unrealistic, as it is the product of quick recovery from a deep recession. Still, strong growth will last, as the industry is expected to perform very well in the future. Indicated in the figure above, the industry was up 7.4% the first quarter of 2011 compared with the corresponding period of 2010, confirming the prediction of substantial continued growth.

Since the export market of Mexico is closely tied to foreign markets, it is wise to assess the health of importing countries. Recent high inventory turnover for U.S. wholesalers suggest strong sales, which benefit Mexican manufacturers that export to buyers in NAFTA countries. High U.S. demand for manufactured goods contributes to the optimistic manufacturing industry forecast.67 Transport manufacturing, such as vehicle exports to the U.S., fueled industry progress with 22.8% growth.68 By 2013, automobile production is expected to hit 3.1 million units, twice the production of 2008.69 The earthquake in Japan may temporarily inhibit the tremendous growth in this area, as Honda and Nissan both manufacture in Mexico. Still, transport manufacturing represents an area of opportunity within the manufacturing industry.

In addition to low costs and free trade, Mexico’s geographic proximity to the U.S. makes it a desirable production spot. Even some Chinese firms manufacture in

39 Latin America Outlook

Mexico to take advantage of low transport costs.70 Such advantages enable Mexico to steal business from producers around the globe.

Although Asia has proven its ability to occupy a significant share of the manufacturing market, Mexico increasingly represents a better option with long term advantages. As do some Chinese firms, foreign companies begin to place factories in Mexico instead of China. This is largely the result of Free Trade Agreements, minimal transport costs, and low wages, especially as wages in China are on the rise. In particular, as the U.S. automotive industry adjusts, industry producers prefer to take advantage of Mexico.71

Investors increasingly capitalize on manufacturing as an area of opportunity. As a whole, seasonally adjusted gross fixed investment was 8.4% higher this January than it was a year earlier. Moreover, such investment largely focused on sectors that focus on exports, supporting the notion that foreign demand is a major growth driver in the region.72 Since manufacturing fuels the export market, it attracts foreign investors.

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Information Technology

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Information Technology As do hospitality and manufacturing, so too does the IT industry in Latin America shows signs of promise. This area of opportunity extends throughout the region, while specific countries show particular advantages. To illustrate, in Mexico, a 16% increase in IT spending is expected for 2011. Such growth will bring IT spending to US$14.7 billion.73 Similarly, technology spending in Brazil is expected to approach 10% of total GDP in 2012.74 Thirdly, in order to satisfy the needs of IT professionals, Colombia developed a Free Trade Zone geared towards IT service companies in particular.75 Widespread growth in this industry offers promise to investors.

Brazil

Mexico

Colombia

• 10% of 2012 GDP on Technology

• 16% IT spending increase in 2011

• Free Trade Zone for IT service companies

Innovation makes the Latin American IT sector extremely competitive. For example, an application developer in Brazil, named Ci&T, fully embraced the ideals of Agile software development, which ensure close collaboration with customers and continuous evolution of products. Such techniques prove very effective. Further, in the areas of outsourcing, it is far easier for Latin American firms to utilize Agile methods on account of shared time zones with the United States that permit 42 Latin America Outlook

frequent contact with clients.76 Many foreign companies and local governments recognize and encounter similar innovation.

Agile Software Development

•Rapid product delivery •Continuous collaboratoin with client •Adaptability to change •Communication between business and software players •Continuous product evolution

In Mexico, public spending will serve as a particularly effective growth driver for the IT industry. The government plans to allocate significant resources this year for national projects that require large IT budgets. Among other goals, the country aspires to increase tax collection efficiency, advance health services, heighten security, and promote trade. Each of those improvements requires significant • Government investment in IT solutions. Other projects spending in Mexico Area of include a US$485 million valued three year Opportunity commitment to provide software and training programs for small businesses.77

The following outline of Mexico’s IT sector forecasts robust, steady growth: Figures in US$MM unless otherwise stated 2008 2009e 2010e 2011f IT Market IT Market as

2012f

2013f

2014f

2015f

12,753 10,712 12,641 14,663 16,716 18,555 20,410 21,839 1.2

1.2

1.3

1.3

1.3

1.3

1.3

1.3

Hardware

6,058

4,928

6,131

6,800

7,710

8,512

9,312

9,909

Services

4,272

3,749

4,171

5,132

5,872

6,541

7,220

7,753

Software

2,423

2,035

2,339

2,731

3,134

3,502

3,878

4,177

PCs

4,846

3,991

4,966

5,522

6,322

7,048

7,711

8,205

545

443

552

612

694

766

838

892S

% of GDP

Servers

Business Monitor International, 2011; ITU (internet and broadbank penetration data)

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An increasing presence of multinational corporations in the area, a trend sweeping the entire Latin American region, strengthens the Mexican IT sector’s success and ensuing optimistic forecast. For example, IBM embraced the increase in Mexican public spending by supporting health services and security. The company initially invested $10 million to set up a center in Mexico. Upon regional success, IBM invested another US$200 million to earn greater presence throughout Latin America. Moreover, company plans call for US$650 million more in spending over ten years to build centers in Argentina, further solidifying IBM’s Latin American outreach.78 IBM is not the only major industry player taking advantage of the unique features that grant Latin America a thriving IT industry. In the past, Google outsourced major projects to Globant, a software company in Argentina. Globant contributed to the development of key projects such as Google AdWords and Google Checkout.79 In 2008, HP acquired EDS because of EDS’s well performing Latin American operations.

Similar activity is not at all uncommon. For example, Unisys’s planned software development center in the region represents a US$50 million investment. Similarly, Infosys, an Indian firm, has two Latin American Development Centers that together employ over 330 people.80 Evidence suggests that in the IT sector, the appeal of a Latin American presence is undeniable. Multinational corporations eagerly take advantage of the strategic geographic location. Additionally, business process outsourcing and full service call centers are more prominent.81 As do many industries in Latin America, so too does the IT industry benefit from United States demand. Firms in the U.S. increasingly outsource projects to the region to take advantage of low costs and productive work environments. Companies that collaborate or outsource projects to the region often realize the benefits without a doubt. For example, when U.S. headquartered Idera worked with Brazillian based Stefanini IT Solutions, the CEO commented, “Even though the Stefanini staffers were remote, they worked in the same time zone as our team members in Houston and melded into our teams and development approach. We have not found another firm that could integrate so seamlessly."82

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Strategic location, innovative leadership, and public support all contribute to robust growth in Latin America’s IT industry. Multinational corporations increasingly realize such attributes and either build new sites in the region, or find IT companies as prime targets for acquisition.

45 Latin America Outlook

Rising Middle Class

46 Latin America Outlook

Rising Middle Class Recent reduction in poverty improves business opportunities in Latin America. In the past, poverty made it difficult for domestic consumer spending to drive the economy.

To compensate for lack of local demand, regional leaders took great strides to promote trade with the outside world. As a result of many Free Trade Agreements and other encouraging government measures, export markets exploded, allowing economies to boast rapid growth and attract attention from foreign investors and multinational corporations.

Profound economic growth came hand in hand with rising living standards for the local population. While past generations were trapped in poverty, members of the current population quickly enter the ranks of the middle class. This trend adds a new growth driver to the region, domestic consumer demand.

Overall, approximately 56 million new individuals earned middle class status since 1999.83 From 2005-2010 alone, the overall percentage of homes in Brazil that earned over US$25,000 in disposable income increased from 21.7% to 30.1%. In Argentina, the proportion of households with said income increased from 33.5% to 44.8%.

Similar statistics in other Latin American countries are not uncommon, particularly in Chile, Venezuela, and Peru.84 The OECD’s definition of middle class includes anyone whose income is within 50% of the median in either direction. Such a definition categorized nearly half of the population of Latin America as middle class in 2006. 85 Rising living standards as a product of increased spending couples the rapid flow from poverty to middle class. For example, a tripling of home loans in Mexico between 1998 and 2006 suggests many more families can afford homes of their own, also proven by the fact that more than 7 million additional Mexican homes were built this past decade. Falling prices and smaller average family sizes also contribute to rising living standards, as family income buys more. 86

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Highlights Nearly 56 million Latin Americans joined the middle class in 10 years.

Brazilian homes earning over US$25,000 a year rose from 21.7% to 30.1% of households in five years.

Nearly half the population of Latin America qualified as middle class in 2006.

7 million new homes were built in Mexico over the past decade.

Both naturally improving living standards and generously funded programs strengthen the trend away from poverty.

Organizations and governments take direct action to award families middle class stature.

The Inter-American Development Bank funded a number of successful endeavors, loaning US$220 million to programs that help poverty stricken families in Colombia afford higher living standards, including better health care, education, and nutrition.87 In addition President Lula of Brazil managed to implement government programs that brought 30 million individuals from lower to middle class.88 Lula’s achievements in Brazil contributed to income rises that surpass minimal middle class conditions. In fact, a total of 38 million Brazilians who used to suffer from poverty now enjoy income exceeding four times the poverty line. The transition of those individuals occurred entirely in the last decade.89 A number of democracies in the region implement conditional cash-transfer programs to combat poverty. In essence, the government offers monetary incentives to ensure children receive an education and adequate health care. Mothers receive monthly, per child checks if they ensure such activity. Such programs prove quite successful, with noticeable direct effects in Mexico and Brazil in particular. Not only do families receive monetary aid, but the public benefits from a more educated, healthier community of citizens.90

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As an increasing number of citizens gain wealth, purchases increase and businesses perform better. In essence, the transition generates an entirely new consumer market that demands quality goods, food products, electronics, better healthcare, and more valuable education. Such a population may reduce the region’s typical dependence on foreign demand for exports, offering additional growth and economic stability to the region.

Recent success of pet product distributors and pet healthcare providers serves as an example of beneficial consumer spending. Pet healthcare saw an increase in sales from US$69.4 million to US$119.1 million in the past half-decade. A 36% increase in pet fashion accessory sales was also observed.91 Such growth may be attributed to the fact that an increasing number of families in Latin America have enough wealth to participate in these markets. Many other businesses benefit from such participation as well.

The transition likely benefits political systems as well. Middle class citizens often push for responsible governance and hold political figures accountable for their actions.

Such individuals demand spending and tax schemes that combat income inequality, as some past policies inflicted the poor far more than the wealthy. For example, governments’ past heavy reliance on consumption taxes burdened the less fortunate significantly more than the well off.92 In addition, reduction in poverty offers additional tax revenue that the government may use to fight crime, building infrastructure and further stimulate the economy.

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Political Risk

50 Latin America Outlook

Political Risk The Political – Economic Bond Although the Latin American political situation is not the most stable or virtuous in the world, it improved significantly in recent times. Political changes often accompany economic shifts. Policy changes may impact the greater economy, or difficult times may lead to changes in public sentiment. A prime example of such a relationship is the “lost half-decade” of 1998-2002.

Economists and historians often refer to 19982002 as the “lost half-decade” on account of poor economic performance. Prior to this period, right wing political figures dominated country governments. The public criticized these leaders and held them responsible for a substantial rise in poverty and fall in GDP.93 Thus, citizens granted left wing candidates the privilege of power, with hopes of change.

Many candidates originally spoke out against the IMF, U.S. and free market reforms. However, once elected, leaders often maintained policies of reform and free market economics, especially in Brazil and Chile. This may be attributed to the fact that prior reforms lowered inflation, made it easier to seek credit, and benefited the middle class.94 Observed advantages provoked leaders to maintain similar policies.

Leaders Emerging from the Lost Half Decade What they said

What they did

•Oppose free market reforms •Reject the IMF •Reject U.S. policies

•Free market economics •Reform

51 Latin America Outlook

The years of 2003-2008 offered quite the opposite economic situation as did the previous half decade. GDP grew at approximately 5% annually for six years in a row, while unemployment and poverty fell. The extravagant 2003-2008 boom permitted rises in government spending and coinciding falls in fiscal debt. Such lasting growth made this era one of the most economically stable and profitable in the region’s modern history.95 Naturally, the public credited the left leaning political leaders with the dramatic improvements. However, experts do not associate the success with official left leaning policies. Rather, success may be attributed to free market reforms and capitalistic policies that led to tremendous commodity performance.96 Still, the positive atmosphere produced lasting positive sentiment towards the left.

Progress The recent recession burdened the entire world economy. In Latin America, it ended the 6 year continuous trend of extravagant growth. Fortunately, Latin America as a whole was less devastated than many nations around the globe.

Interestingly, the public was hesitant to blame political leaders for poor economic conditions during the latest recession. Past recessions prompted wide scale protests and political demands. The most recent downturn prompted a much different response. In fact, the start of the recent recession coincided with an observed rise in support for democracy. Polls show that democratic satisfaction in Latin America increased to 44% from 37% at that time. It seems popular sentiment credits democracy with the changes that led to the tremendous growth of 2003-2008, and that has not been forgotten. Additionally, lack of turmoil may be due in part by leaders’ abilities to blame the global recession on the rest of the world.97

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Differences between past and recent reactions to economic cycles suggest increased stability and satisfaction in the region.

Past Downturns

Recent Recession

Protests

Support for democracy

Political demands

Support for current regimes

Instability

Satisfaction may partially be attributed to the ability of governments to pass productive legislation. Colombia offers a recent example of such productivity.

Leadership in Colombia maintains a congressional majority, allowing the country to push through legislation without much trouble. Such an environment permits positive change and economic growth. Although in theory such ease of reform may lead to abuse of power, effective Colombian institutional checks are in place for protection.98 The achievements of former President Lula de Silva of Brazil offer additional prime examples of why the public may view the government with greater approval. Lula successfully practiced fiscal restraint. Such behavior reduced the overshadowing burden of debt, diminishing investment risk in the region. The country enjoyed several generous fiscal surpluses during Lula’s presidency on account of such restraint and fair economic conditions.

Lula's Achievements Repeat fiscal surpluses

30 million individuals entered middle class from poverty

A less cooperative Congress burdened Lula’s 2006-2010 term as the Workers’ Party lost influence. Still, his government managed to implement programs that brought 30 53 Latin America Outlook

million individuals from lower to middle class.99 Naturally, public support followed such obvious success. Dilma Rousseff, who began his Presidency in 2011, attempts to continue Lula’s legacy.

Evolution of populism and the social democratic left also benefits the economy and reduces political risk. Populism, which supports grass roots organizations and the underrepresented, has seen some success in the region. This movement gained particular popularity in Venezuela, Bolivia, Ecuador, and partly in Argentina. Classic populism often used to result in uncontrolled short term spending that, while temporarily beneficial, harmed the nation in the long run. Fortunately, more recent populist governments act to promote long run economic stability.100 The social-democratic left contrasts the sentiment of Modern Classic Populism the populist movement.

Populism Supporting views are more Extravagant short popular under regimes with term spending better established public Increasing emphasis on long institutions, as is the case in term stability Brazil and Uruguay. Leaders Long term issues that share social-democratic opinions widely promote market friendly reforms, foreign investment, and social programming. Such policies implemented by Lula helped reduce inequality in Brazil in particular. These governments are usually supportive of, and supported by, the IMF and the United States. Lula established particularly close ties with the Obama administration, although Lula’s relationship with Iran and Venezuela apply recent strain.101 The Obama Administration attempted to strengthen ties with Latin American governments. Overall, regional governments cooperated with these efforts, yet there was tension in some areas. For example, Colombia’s relationship with the U.S. military and their joint fight against guerilla attacks caused problems between Colombia and Venezuela. In addition, member nations of the Bolivarian Alliance for the Peoples of Our America maintain an alliance with Iran that is strongly opposed by the United States.102

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Risk In spite of progress, political stability should not be taken for granted in all of Latin America. A 2009 military coup in Honduras offers an example of instability and dissatisfaction. Still, this was the first military coup in Latin America since democracy began to spread over 30 years ago.103 Colombia faces major issues with organize crime and guerrilla warfare. The Revolutionary Armed Forces of Colombia (FARC), a guerrilla organization that violently attempts to represent the poor, had an estimated 17,000 members in 2008.

FARC continues to promote violence and kidnappings in recent years in order to oppose the government’s lack of focus on poverty. This is in spite of the fact that poverty fell 10% to 45.5% during Uribe’s presidential term. The government fights such crime with substantial effort, taking military and diplomatic measures to achieve success. Current President Juan Manuel Santos is still trying to make peace with FARC.104 Organized crime continues to draw government attention and resources away from other important issues. Such crime tends to make investors weary of the region.105 To illustrate, military forces deployed by the Mexican government in order to fight organized crime amount to 45,000 individuals. In spite of these efforts, drug cartels remain active. Activity is confirmed by the recent discovery of 35 graves, suggesting the issue is worse than previously predicted.106 Other than crime, corruption also interferes in Mexico. Transparencia Mexicana’s 2010 index of good governance and corruption showed poor results for the country.

According to the organization, corruption plagued 10.3% of public service transactions, and the number of corrupt actions amounted to over 200 million occurrences. Lastly, the organization discovered that bribes averaged MXN$165 in 2010, up from MXN$138 in 2007. Unfortunately, such findings might reduce President Calderon’s chances of reelection.107 Failure to reelect President Calderon of the National Action Party would be unfortunate, as he advocates favorable reform that may better the country’s prospects. Unfortunately, Mexican congress prevented changes that would have proven quite beneficial for the economy. President Calderon pushed through some, but was unable to convince Congress to privatize the oil industry, for example. 108 55 Latin America Outlook

Overall, Latin American governments are not always blessed with profound institutional strength. To illustrate, 14 elected Presidents in the region were prematurely removed from office in the past 18 years. Such occurrences are less common in stronger, more developed democracies.109

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M&A and Credit Outlook

57 Latin America Outlook

M&A and Credit Outlook M&A The outlook for M&A activity in Latin America is very optimistic. 2010 marked a year of tremendous growth as multinational corporations and investors aggressively bought up the region, doubling the yearly value of mergers and acquisitions to US$220 billion. Even during the recession, Latin America suffered only a 10% decrease in deal values, while the rest of the world saw reductions averaging 27%.110 United States firms increasingly target the region to satisfy their emerging market interests. In fact, more than 40% of emerging market acquisitions by U.S. companies focused on Latin America in the second half of 2010. Of all emerging market purchases worldwide by U.S. companies at that time, 18.1%, or 21 deals, targeted Brazilian companies, 14.7% involved Central American and Caribbean firms, and an additional 8.6% focused on companies in other areas of Latin America. Such behavior proves that Latin American firms compete well with other classic emerging markets, such as India and China.111 In addition to multinational interest in the region, many Latin American companies acquire others, following a global trend of that nature. In 2010, 250 emerging markets companies acquired a portion or whole of other emerging firms. 132 of those deals occurred in the second half of the year, illustrating a rising trend in such activity.112

58 Latin America Outlook

Credit The credit outlook for Latin America is quite positive. Optimism stems from overall robust economic growth and a promised effort by governments to apply more conservative fiscal and monetary policies. Changes in regional credit ratings by Moody’s exemplify enthusiasm.

Data Source: Moody’s Investor Service

In 2010, Latin America’s ratings improved more than any other region’s in the world, represented by a net notch increase of +12. Never before has Moody’s allotted such a high net rating increase for any global region. In comparison, the Middle East, Africa, and Asia all earned recent +2 net notch increases, while Europe experienced a -15 loss. It should be noted that Europe’s tremendous downgrade was largely the fault of poor conditions in Greece and Ireland.113 National debt in the region is far less of an issue than it was several years ago. The government debt to GDP ratio will likely hover near 30%, compared to a more dangerous 2002 metric of above 55%.114

59 Latin America Outlook

External debt ratios show the same downward trend as those of overall national debt. The following representation of external debt as a percentage of GDP exhibits steady foreign debt reduction since the late 1990s:

Source: Ocampo, 2011

The decreasing proportion of external debt suggests a decreasing burden on future generations. Fewer foreign obligations that hinder growth and pose default risks will exist.

Strong domestic policies and economic trends encourage a positive credit outlook.

However, foreign troubles may affect Latin America’s performance. For example, experts predict that Chinese growth may slow in the coming years. Such an occurrence could harm some Latin American industries that export to China. In addition, the U.S. economy shows signs of a slowing recovery, harming areas that rely heavily on U.S. demand, such as Manufacturing in Mexico.115 Still, the overall credit outlook for Latin America exhibits signs of stability and continued improvement.

60 Latin America Outlook

Currency Exchange

Currency Exchange Trends

The following section offers statistical insight into currencies of interest in Latin America.

USD/MXN 6 Month Trend

Source: exchangerates.org.uk

61 Latin America Outlook

USD/MXN 2 Year Trend

Source: Yahoo Finance

Latin America Currency Forecasts Currency USD/MXN USD/BRL USD/CLP

8/2010 12.718 1.7688 509.65

Q3 ‘10 12.600 1.8000 540.00

Q4 ‘10 12.600 1.7500 560.00

Q1 ‘11 12.600 1.7000 580.00

Q2 ‘11 12.600 1.7200 600.00

Q3 ‘11 12.800 1.7400 615.00

Q4 ‘11 13.000 1.7500 625.00

Data Source: currency-forecasts.com

HSBC USD/MXN Forecast Changes 1Q10(f) 2Q10(f) 3Q10(f) 4Q10(f)

Old Forecast 12.90 12.90 12.90 12.90

New Forecast 12.65 12.45 12.25 12.25

Data Source: research.hsbc.com

62 Latin America Outlook

USD/COP 6 Month Trend

Source: exchangerates.org.uk; bulltick.com

USD/COP 2 Year Trendvii

Source: Yahoo Finance

vii

BullTick Capital Markets forecasts USD:COP currency exchange rate to trade at $1750 by the end of 2011.

63 Latin America Outlook

470 Atlantic Ave. 4th Floor Boston MA 02211, USA

T (1) 617.275.8960 F (1) 617.292.2300

Š 2011 Beamonte Investments, Inc. 64 Latin America Outlook

1

Ilzeski, E., & Vegh, C. A. (2008). Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?

University of Maryland. p. 1 2 Ocampo, J. A. (2011). Latin America's Economics Renaissance: Is it Sustainable?

3 Gutierrez, M., & Revilla, J. E. (2010). Building Countercyclical Fiscal Policies in Latin America: The International Experience. The World Bank, Southern Africa Poverty Reduction and Econonmics Management Unit. p. 3 4 Buchanan, R. (2011, February 2). Mergers & Acquisitions: Burst of M&A Activity Keeps Bankers Busy.

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99 Oxford Economics, 2011 p. 10 100 Panizza, 2011 101 Panizza, 2011 102 Riggirozzi, P. (2010). Resilience and Transformation: Latin America in the Global Financial Crisis.

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