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Wednesday, December 21, 2011
Analysis

Latin America Business 2011: Best & Worst

IMPRESSES Brazilian President Dilma Rousseff impressed local and foreign investors. (Photo: Roberto Stuckert Filho/PR)
EARLY PREDICTION Latin Trade magazine's cover story with the headline Why Dilma Will be Better Than Lula.
SURPRISES Peruvian President Ollanta Humala surprised investors. (Photo: Antonio Cruz/Agencia Brasil)
CONTROVERSIAL OUSTER Roger Agnelli steered Vale to record profits and revenues, but was forced to resign by the Brazilian government. (Photo: Agencia Vale)

The best and worst events of 2011 for Latin American business.

 

BY LBC STAFF

 

Latin Business Chronicle highlights the best and worst events impacting business in Latin America in 2011.

 

BEST EVENTS

 

Dilma Does Well

In her first year as president of Brazil, Dilma Rousseff has impressed local and foreign investors with her pragmatic, can-do style. Building on the success of her predecessor, Luiz Inácio Lula da Silva, she has tried to boost public efficiency through cost-cutting measures, privatizations of airport terminals (to better prepare for the 2014 World Cup and 2016 Olympics) and an aggressive stand against corruption. Six of her ministers this year had to resign amidst corruption scandals.  While she still has to face criticism for protectionism (see below) and burdensome tax regulations (the worst in Latin America), she has positively surprised many previous critics. Why Dilma Will be Better Than Lula was the headline in Latin Trade magazine’s March/April  2011 issueA New Iron Lady: Why Dilma Is Brazil’s Best Bet to Revive Its Economy adds Tim Padgett, Time magazine’s Latin America correspondent. Roussef's policies have an enormous impact on Latin America and the world. Brazil is Latin America's largest economy (its GDP is twice as large as that of Mexico) and the world's seventh-largest economy (after surpassing Italy's GDP last year).

 

Humala Does Well

Although he has faced serious challenges like protests against mining, Peru’s president Ollanta Humala has surprised both Peruvian and foreign business executives by his moderate economic policies, becoming a new Lula rather than a new Hugo Chavez.  He won high marks for appointing several pro-business ministers in his new cabinet in July and then keeping key ones like Finance Minister Miguel Castilla and Foreign Trade Minister Jose Silva after a cabinet reshuffle on December 12. Even under Humala, Peru continues to be one of Latin America’s leading stars for foreign investors and another success story for the “Lula Way” (combining pragmatic economic policies with increased social focus and spending).

 

Approval of Latin FTAs
After significant delays, the US Congress on October 12 – Columbus Day no less -- passed free trade agreements with Colombia and Panama.  The Colombia FTA was concluded in February 2006 and signed in November 2006. But when then-President George W Bush formally sent it to Congress in April 2008, then-Speaker Nancy Pelosi blocked a vote. First after January 2011, when free trade supporter William Daley become chief of staff for US President Barack Obama, did The White House start moving on the Latin FTA’s. However, after much talk back and forth it again faced a series of delays until it was finally sent to Congress by Obama and approved.  The Latin America Trade Coalition estimates that U.S. companies have paid $4 billion in tariffs to Colombia since the US-Colombia FTA was signed in November 2006. It is expected to be implemented in 2012. Colombia is the fourth-largest trading partner in Latin America for the United States, according to a Latin Business Chronicle analysis of data from the U.S. Census Bureau. The US-Panama FTA was signed in June 2007. Panama is the 13th-largest trading partner in Latin America for the United States, according to a Latin Business Chronicle analysis of data from the U.S. Census Bureau. 

 

CAFTA Turns Five

The Central America-United States Free Trade Agreement (CAFTA) turned five this year. Originally negotiated in 2004, it formally entered into force in 2006 for four of the signatories (El Salvador, Guatemala, Honduras, and Nicaragua), with the other two (Dominican Republic and Costa Rica) following suit in 2007 and 2009, respectively. It enabled Central America to have a competitive advantage over Colombia, Peru and Panama – countries that all had to wait for their free trade agreements with the United States. It also helped Central America reach an FTA with the European Union. While CAFTA’s five years have partly coincided with the economic crisis in the United States (2008 and on), experts say it has helped Central America become more attractive for US and foreign investors, while consumers in the CAFTA block are benefiting from cheaper prices on goods from the United States.

 

WORST EVENTS

 

Ouster of Vale CEO
The April ouster of Roger Agnelli, CEO of Brazilian mining giant Vale, shocked foreign investors and sent a negative signal about state intervention in the economy. “I think this is just another example in the long line of events like this [showing government meddling],” says Emily Leveille, a Senior Analyst for Latin America at Frontier Strategy Group. “What’s interesting about this particular event is that up until then {President] Dilma [Rousseff] had not given an indication of how she would manage the state intervention in the economy.”

 

Although Vale was privatized 14 years ago – in May 1997 – the government maintained so called golden shares in the company, giving it veto power over certain decisions. Meanwhile, it maintained control through Valepar, which owns 52.7 percent of the shares and another 8.7 percent stake by Brazil’s development bank BNDES (through BNDESPAR). Valepar is in turn owned 49 percent by Litel Participações (majority owned by state bank Banco do Brasil) and BNDESPAR.  Agnelli, who became CEO ten years ago, had often clashed with government officials over Vale’s investments. The government wanted Vale to invest more in Brazil, while Agnelli aggressively pushed for international expansion and investments. Last year, international revenues accounted for 82 percent of Vale’s revenues, according to a Latin Business Chronicle analysis.

By any business standard, Agnelli’s strategy has paid off. It became the world’s second-largest miner by market value.  Vale was the star of the Multilatina Index from Latin Business Chronicle in 2010,
but has since Agnelli’s ouster slowed down its growth pace.  The ouster is just another example of how Brazil keeps shooting itself in the foot despite so many other positives the country has to offer.

 

Ecuador Verdict Against Chevron
In February, a court in Ecuador issued a verdict against Chevron accusing it of environmental damages in the country and asking for $8 billion in compensation. Chevron has denied wrongdoing and has charged that the case has been marred by fraud, gross errors and conflict of interest. In a letter to Galo Chiriboga, Ecuador's Prosecutor General, Chevron documents the evidence and called on Ecuadorian authorities to investigate the misconduct of the plaintiffs' lawyers and the presiding judge, Nicholas Zambrano, in the drafting of the judgment. One expert says it’s a case of “greed and deceit.” 


More Protectionism in Argentina and Brazil
Argentina and Brazil both marked the year imposing several protectionist measures that were harshly criticized by foreign investors. New rules in Brazil require companies to place at least 40 percent of their reinsurance business with Brazilian companies while Argentina has imposed tighter restrictions to control foreign placement of reinsurance – measures criticized by industry officials. Meanwhile, Brazil imposed a 30 percent tax hike on cars with imported content – a measure criticized by Korean auto officials.
Argentina's government is using import substitution policies to turn the South American nation into "one of the world's most protectionist countries," The Wall Street Journal reports. "No country implemented more protectionist measures in the third quarter of 2011 than Argentina," Simon Evenett, an economics professor at the University of St. Gallen in Switzerland, told the newspaper.

 

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