Risk Factors and Risk Management in Latin America

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Risk Management for Globally Interconnected
Enterprises
Risk Factors and Risk Management in Latin America
José Guimarães Monforte jgmonforte_at_pragmapatrimon
io.com.br
Dallas October 1st, 2008
Sixth Annual National Corporate Governance
Conference IECG
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Agenda

• Dimensions
• LATAM Risk Overview
• LATAM Segmented by Competitiveness
• Main Risk Factors

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Dimensions

• Geography
• Social
• Political
• Economy

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Dimensions of LATAM

• 3rd biggest Area
• 3rd more populated
• 4th nominal GDP
• External debt, total ( of GNI) 25.8
• GDP (current US) (billions) 2,948.5
• GNI per capita (current US) 4,756
• Life expectancy at birth, total (years) 73
• Population, total (millions) 556.1
• Population growth (annual ) 1.3
• School enrollment, primary ( net) 93.9
• Surface area (sq. km) (thousands) 20,421.0

Source World Bank
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Dimensions of LATAM

• Argentina, Bahamas , Barbados , Belize, Bolivia ,
  Brazil, Chile, Colombia, Costa Rica, Cuba,
  Dominican Republic, Ecuador, El Salvador, French
  Guyana, Guatemala, Guyana, Haiti, Honduras,
  Jamaica, Martinica, Mexico, Nicaragua, Panama,
  Paraguay, Peru, Porto Rico, Suriname, Uruguay,
  Venezuela
• Latin America is a group of 21 independent
  countries and 9 dependencies that show distinct
  features between them

French dependencies
Netherlands dependencies
United States dependency
Independent Countries
French Guiana
Argentina
Cuba
Mexico
Puerto Rico
Aruba
Dominican Republic
Belize
Nicaragua
Gualalope
Netherlands Antiles
Bolivia
Panama
Ecuador
Martinique
El Salvador
Paraguay
Brazil
Saint Barthélemy
Peru
Guatemala
Chile
Saint Martin
Uruguay
Colombia
Haiti
Saint Pierre and Miguelon
Venezuela
Honduras
Costa Rica
Discuss risk factors and risk management in Latin
America considering these dimensions and
diversity is a huge challenge...
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Political risk is a consequence of three
dimensions war, expropriation and transfer risk

Related to statization
Related to statization
Related to FARC
the highlight is on transfer risk, a consequence
of economic volatility
Source Infrastructure Private Investment
Attractiveness Index - World Economic Forum
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Considering different stages of average growth
and volatility
the conclusion is that LATAM is very diverse
Source Infrastructure Private Investment
Attractiveness Index - World Economic Forum
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The infrastructure sector shows enormous gaps
and consequently there are clear opportunities.
Source Infrastructure Private Investment
Attractiveness Index - World Economic Forum
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In the financial assets distribution, the State
Sector still uses a large portion of resources
and in stable countries the Corporate Sector is
more representative.
Source Infrastructure Private Investment
Attractiveness Index - World Economic Forum
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LATAM - Brighter than at any time in the past
quarter century

• Robust global demand for the regions
  agricultural, energy and mining export helped its
  economies expand by more than 5 percent in 2006
  the fourth consecutive year of GDP growth. Since
  2003 GDP per capita has risen 12 percent, a sharp
  contrast with the regions previously moribund
  economic perfomance.
• Encouragingly most governments in Latin America
  are responding to todays auspicious conditions
  with sounds policies. As a result, macroeconomic
  stability is returning. Inflation a perennial
  scourge fell to a 40-year low. Governments
  across Latin America have used windfall export
  revenues to balance their books.
• Still, the hope of prosperity and opportunity
  eludes many Latin America. The region has the
  worlds most unequal income distribution.
• While access to education is improving,
  educational quality is poor.
• Moreover, weak institutions and regulatory
  burdens are partly responsible for a business
  environment that stifles entrepreneurship and for
  the persistence of poverty and unemployment.
• Latin America has seen its booms go bust before.
  But addressing the problems now. While growth is
  strong, would further improve the regions
  economies and the lives of its people.

Source By Roberto Fantoni, McKinsey Mar, 24
2007
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• There is not ONE LATAM
• When trying to assess risk for the region

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LATAM Segmented Competitiveness

• Defined by competitiveness
• Stage of development of countries
• LATAM Clusters

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• Competitiveness is one frame to segment LATAM and
  measure of the
• potential prosperity of a society / country

Competitiveness is the fundamental underpinning
of prosperity essential to allow sound macro
policies to be sustained fundamental in a
evolving globalized world focused on the
macroeconomic, political, legal, and social
circumstances that underpin a successful economy,
progress in these areas is necessary but not
sufficient
Risk Management is a profound analysis of the
macro-environment, and the local financial
market is a continuous monitoring of the
geopolitical and legal dimensions as well as
social developments helps us to identify
balanced opportunities
Its fundamental to evaluate main risk factors
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List of countries / economies at each stage of
development
Factor-driven
Efficiency-driven
Innovation-driven
Source The Global Competitiveness Index - World
Economic Forum
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Pillars which reflect aspects of the complex
reality that impact competitiveness

• Basic requirements
• Institutions
• Insfrastrutcture
• Macroeconomic stability
• Health and primary education

Key for Factor-driven Economies

• Efficiency enhancers
• Higher education and training
• Labor market efficiency
• Financial market sophistication
• Technological readiness
• Market size

Key for Efficiency-driven Economies
Key for Innovation-driven Economies

• Innovation and sophistication
• Business sophistication
• Innovation

Source The Global Competitiveness Index - World
Economic Forum
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Comparison on LATAM with advanced countries shows
that there are important gaps as in
infrastructure
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Cluster I These countries are classified in the
FACTOR DRIVEN stage of development
Cluster I Bolívia, Guyana, Honduras, Nicaragua,
Paraguay

• These countries share similarities in terms of
  poor quality of infrastructure, the lack of
  strong institutions and a predictable regulatory
  framework, overregulated markets, and poor
  educational standards.

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Cluster II These countries are in between the
FACTOR-DRIVEN and the efficiency-driven stages
Cluster II Colombia, Ecuador, El Salvador,
Guatemala, Venezuela

• The most representative of this cluster is
  Venezuela where the increase in government
  spending lead to a high inflation rate. Besides
  the discretionary intervention of the government
  on the economy leads to gaps in the efficiency of
  its goods, labor and financial markets.

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Cluster III These countries are in the
EFFICIENCY-FACTOR stage of development
Cluster III Argentina, Brazil, Chile, Costa
Rica, Dominican Republic, Jamaica, Mexico,
Panama, Peru, Suriname, Uruguay

• These countries present a vast potential and
  endowed with rich physical and human resources.
  However, public governance, security levels and
  educational system still require efforts to
  attain world-class levels.

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Cluster III Chile is more developed than the
rest of LATAM, in macro stability Chile is better
than USA
Source The Global Competitiveness Index - World
Economic Forum
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Main Risk Factors

• Challenges Opportunities
• The Brazils' Opportunity

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LATAM - Main risk factors
(X) Lower than LATAM (X) Close to LATAM () Close
to Developed Countries

• Huge challenges opportunities
• Lack of education and specialized labor force
• Infrastructure
• Legal framework
• In some countries overregulated markets

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Brazil possibly is the greatest opportunity
because

• There is not Only One Brazil

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Thank you! Ill be glad to come back to talk
about The Several Brazils
José Guimarães Monforte jgmonforte_at_pragmapatrimon
io.com.br
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anexos
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1st pillar Institutions The institutional
environment forms the framework within which
private individuals, firms, and governments
interact to generate income and wealth in the
economy.
back
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2nd pillar Infrastructure The existence of
high-quality infrastructure is critical for
ensuring the efficient functioning of the economy
back
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3rd pillar Macroeconomy The stability of the
macroeconomic environment
back
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4th pillar Health and primary education A
healthy workforce is vital to a countrys
competitiveness and productivity.
back
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5th pillar Higher education and
training Quality higher education and training
back
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6th pillar Labor market efficiency The
efficiency and flexibility of the labor market
back
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7th pillar Financial market sophistication An
efficient financial sector is needed to allocate
the resources saved by a nations citizens to its
most productive uses.
back
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8th pillar Technological readiness This pillar
measures the agility with which an economy adopts
existing technologies to enhance the productivity
of its industries.
back
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9th pillar Market size The size of the market
affects productivity because large markets allow
firms to exploit economies of scale.
back
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10th pillar Business sophistication Business
sophistication is conducive to higher efficiency
in the production of goods and services
back
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11th pillar Innovation The last pillar of
competitiveness is technological innovation
back
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In the first stage factor-driven The economy is
factor-driven and countries compete based on
their factor endowments, primarily unskilled
labor and natural resources. Companies compete on
the basis of price and sell basic products or
commodities, with their low productivity
reflected in low wages. Maintaining
competitiveness at this stage of development
hinges primarily on well-functioning public and
private institutions (pillar 1), appropriate
infrastructure (pillar 2), a stable macroeconomic
framework (pillar 3), and a healthy and literate
workforce (pillar 4).
back
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In the second stage efficiency-driven As wages
rise with advancing development, countries move
into the efficiency-driven stage of development,
when they must begin to develop more efficient
production processes and increase product
quality. At this point competitiveness is
increasingly driven by higher education and
training (pillar 5), efficient goods markets
(pillar 6),well-functioning labor markets (pillar
7), sophisticated financial markets (pillar 8), a
large domestic or foreign market (pillar 9), and
the ability to harness the benefits of existing
technologies (pillar 10).
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In the third stage innovation-driven Finally,
as countries move into the innovation-driven
stage, they are able to sustain higher wages and
the associated standard of living only if their
businesses are able to compete with new and
unique products. At this stage, companies must
compete through innovation (pillar 12), producing
new and different goods using the most
sophisticated production processes (pillar 11).
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