The Outlook for Political Risk in Latin America

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The Outlook for Political Risk in Latin
America Carlos Caicedo
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WHO WE ARE

• Strategic intelligence company that forecasts
  violent and political risk
• 200 analysts and 1,200 specialist sources
  worldwide with a London-based analysis team.
• Compile Global Indexes, including Lloyds Cargo
  Watch List and a Global Marine Watch List.

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INTELLIGENCE INFRASTRUCTURE
FORECASTS INDICES BESPOKE REPORTS
Products and Services
Assessments and Forecasts
External Review
Executive Review
70 Risk Indicators
15,000 Media Sources
Global Intelligence Centre
Current Intelligence Feed
200 Regional Analysts
800 Strategically placed Sources
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1,200 SOURCES
Europe 21
N. America 7
Asia 23
S C America 19
Middle East 14
Africa 16
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STRATEGIC INTELLIGENCE SOLUTIONS
Country Risk Evaluation and Assessment Model
(CREAM)
Weekly Global Risk ForecastIntelligence
Bulletins Energy, Aviation, Money
Laundering,Marine/Offshore, Regional Editions
Bespoke Services Asset Specific Reports
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WHAT A DIFFERENCE FIVE YEARS MAKES

• 2002
• Argentina defaulted on its debt Brazil was on
  the brink of following suit
• Bond spreads stood above 1000 basis points
• Current account deficit was widening
• Fragile fiscal position and commodity prices
  depressed

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COPPER PRICE
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GOLD PRICE 2000 - PRESENT
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SILVER PRICE 2000 - PRESENT
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SIGNIFICANT TURNAROUND

• 2007
• Fastest rate of growth in more than two decades
• Sound macroeconomic indicators
• Foreign debt burden declining
• Region will post current account and primary
  fiscal surpluses
• Inflation and interest rates are on a downward
  trend
• Improved terms of trade
• FDI expected to be robust

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BALANCE OF PAYMENTS
Source IMF staff estimates.1/ Refers to LAC
region as a whole2/ Includes grants
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LATIN AMERICAN BOND SPREADS - 9 YR TREND
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LATIN AMERICAN BOND SPREADS - 1 YR TREND
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MAIN THREATS TO THE OUTLOOK

• Possible increased risk aversion in emerging
  markets
• Sudden decline in price of key export commodities
• Slowdown of US and Chinese economies
• Fiscal rigidities
• Fractured politics frustrating structural reforms

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CHINAS THREAT Chinas share of LA Exports
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RELATIONS WITH THE US
Key Judgment Despite Bushs neglect and Chávez
active oil diplomacy, Latin America will be open
for business.

• Chávez anti-US agenda has had limited success
• CAFTA-DR will bring Central America closer to the
  US
• Even Nicaraguas Sandinistas will need to toe the
  line
• Support for bi-lateral FTA negotiations with the
  US are strong US Congress unlikely to approve
  FTA pacts
• Brazil and US cooperation on ethanol will deepen
  relations

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ASSET NATIONALISATION
Key Judgment Radical nationalism has proven to
have limited appeal nationalisation of assets
is unlikely to become a regional trend.

• Private Public Partnership schemes are becoming
  popular
• State meddling in Argentina is a concern, but is
  unlikely to follow with radical nationalism
• Ecuador will likely seek modification of
  royalties and taxation, but not outright
  nationalisation
• Mexico, Colombia, Peru and Brazil are likely to
  support pro-business policies

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RESOURCE NATIONALISM
Key Judgment Resource nationalism is a global
trend that is unlikely to abate however, in
Latin America the threat is constrained to a few
countries.

• Some governments have concluded the best way to
  move citizens out of poverty is by nationalising
  the energy industries
• High oil prices scarcity of exploration
  opportunities is giving the upper hand to oil
  producing countries
• State-run oil firms poor financial position,
  lack of know-how need for fresh capital will
  still offer opportunities to private oil
  multinationals
• Risks in the energy industry will be geared
  towards changes in royalties and taxes rather
  than outright nationalisation

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RESOURCE NATIONALISM cont.
Key Judgment Resource nationalism is a global
trend that is unlikely to abate however, in
Latin America the threat is constrained to a few
countries.

• Neglect of local communities and environmental
  unrest will continue to threaten investment in
  natural resource-based industries
• Badly handled energy windfalls are conducive to
  serious macroeconomic imbalances
• Dwindling oil production in some countries or the
  need to develop the gas industry in others has
  resulted in attractive contractual conditions

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ECONOMIC POLICY OUTLOOK
Key Judgment With few exceptions, most
governments in the region remain committed to
sound economic policies.

• Peru and Brazil appear certain to maintain
  pro-market policies
• Conditions to pursue economic reform in Mexico
  have improved
• Improved security and economic policies will
  underpin growth in Colombia
• Inflation, price controls and contractual
  ambiguity in Argentina will continue to affect
  investors confidence
• Drives for economic nationalism in Venezuela,
  Bolivia and to a less extent Ecuador will likely
  scare foreign investment

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POLITICAL INSTABILITY
Key Judgment A lack of political inclusion, weak
institutions social exclusion poses a threat to
regime stability in several countries.

• Politically motivated unrest in Bolivia and
  Ecuador threatens
• stability
• Marginalisation of high land communities and
  the lack of
• political party credibility in Peru are
  concerns
• Lack of a credible opposition in Venezuela and
  Argentina
• facilitates authoritarian tendencies
• Inability of the state to address social
  exclusion and economic
• hardship exacerbates criminality in Central
  America

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MAIN CHALLENGES GOING FORWARD

• Poverty and inequality will continue to be
  sources of instability
• Political and structural reforms are unlikely
  to be addressed
• Corruption, lack of transparency and weak
  judiciary undermine
• the business environment drug trafficking,
  criminality and
• violence undermine security
• Labour rigidities pose significant hurdles to
  job growth
• Fiscal position is excessively dependent on
  commodity windfall

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CASE STUDY How Political Risk is perceived

• Venezuela
• Increased contractual instability
• Renewed drive for economic nationalism is
  scaring investors
• Institutional weaknesses
• Poor checks and balances
• Unreliable economic policies
• Declining FDI

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CASE STUDY How Political Risk is perceived

• Colombia
• Stable contractual regime
• Strong institutions
• Checks and balances in place
• Vibrant opposition
• Sound economic policies
• Armed conflict is a concern, but security has
  improved
• FDI has tripled over the last two years

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POLITICAL RISK RATINGS OF SELECTED COUNTIRES
12/07 Correas election raises risk of oil
contract renegotiation and debt restructuring
07/05 Venezuela is stepping up tax disputes with
oil companies
03/06 Nationalist candidate Humala leads Opinion
polls
08/06 Electoral Court likely to confirm Calderon
as President
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ARGENTINA
11/06 Provincial governments seek control over
hydrocarbons and mining

09/06 Banks being forced to subsidise mortgages
07/05 Debt outlook improves, first sovereign
bond issued
02/06 Inflation price controls threaten
macroeconomic stability
Merval Index
Risk Indicator
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BRAZIL
01/06 pre-payment of outstanding debt is risk
positive
07/05 Corruption scandal will hamper structural
reforms and hurt Lulas re-election
4/06 new Finance Minister may lack commitment to
sound fiscal policies
BOVESPA Index
Risk Indicator
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COLOMBIA
3/06 Congressional landslide victory suggest
Uribe will be re-elected
02/05 Uribe likely to secure re-election
9/06 Military scandals could harm Uribes
security policies
IGBC
Risk Indicator
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ECUADOR
06/04 opposition admitted it did not have enough
votes to remove president from office
5/06 US Occidentals oil concession is annulled
12/06 plans advancing on restructuring debt, and
renegotiating oil contracts
10/05 President Palacio rapidly loosing grip on
power
ECUINDEX
Risk Indicator
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MEXICO
07/06 fractured Congress and unclear Presidential
winner
02/06 Privatization of GAP, conglomerate that
runs airports in 12 cities
01/07 President Calderon vowed to address
Mexicos business monopolies
IPC
Risk Indicator
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PERU
06/06 defeat of Humala by Alan Garcia defuses
nationalization concerns
4/06 Ultranationalist candidate Humala leads
polls and likely to win elections
12/05 radical support for radical candidate
Humala undermines pro-business parties
IGBVL
Risk Indicator
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VENEZUELA
10/06 expropriation likely to spread from rural
to urban businesses
04/06 Takeover of Total and ENIs oil fields
undermines business outlook
07/05 Venezuela is stepping up tax disputes with
foreign oil companies
01/07 Chavez to nationalize CANTV and other
utilities
IBC
Risk Indicator