Latin Finance - September/October 2014 - 18

Multilateral lending

BRICS rising

For all the talk of falling commodity prices and slowing Asian
growth, China remains a major creditor to Latin America,
and an important alternative to international bond markets
or the IMF. Now, there are forces that could bring new
alternative sources of funding and further push back against
any tilt toward pragmatic economic policymaking.
The most high-profile of these was apparent during a tour
by leaders of the BRICS - Brazil, Russia, India, China and
South Africa - ahead of a mid-July summit in Brazil. Shots
of Brazilian President Dilma Rousseff at the football World
Cup with Vladimir Putin, Russia's president, captured the
attention of many.
But Putin's visit was more than symbolic. In the days
before the five presidents met, Russia announced it had
written off 90% of the $32.5 billion of outstanding loans from
the Soviet Union to Cuba. Shortly after the BRICS summit,
Russian oil company Rosneft agreed a joint venture with
its Venezuelan counterpart, PDVSA, to provide services to
five combined production projects in the South American
country.
In addition to the bilateral agreements, the leaders
advanced plans for what they hope will be a powerful new
force in global politics: the BRICS' own lending institution,
the New Development Bank. The launch came amid
criticism by the BRICS of the IMF's governance structure -
that the Fund needs to better reflect the weight of emerging
markets in the global economy.
New alternatives
NDB will start with $50 billion in capital, with scope from
the outset to double that. The bank will be headquartered
in Shanghai. Its first president will be from India, with a
Russian first to chair the board of governors and a Brazilian
first to lead the board of directors.
"The bank represents an alternative for the infrastructure
financing needs of developing countries, absorbing
and compensating for the lack of credit from the main
international financial institutions," Rousseff said at the
summit.
The capital earmarked is still much lower than China's
investments overseas. The China Development Bank alone
has lent 1.14 trillion renminbi ($185 billion) abroad, which
makes up just 15.92% of the institution's total lending.
Yet both institutions highlight the multitude of sources
of funding available to Latin America - regardless of a
changing US monetary cycle and softening commodities
prices. They may yet militate against any wholesale shift
towards economic pragmatism, in particular by Latin
American governments that have, in recent years, opted for
ideology over foreign capital. LF

18 L ATINFINA NCE.COM - September/October 2014

For some, it also represents the fruits of deeper political reform.
"Now [investors] see political stability," says Miguel Zaldivar,
partner at Hogan Lovells. "They see that the rules of the game are
settled."
Zaldivar points to new legislation on public finances as an
example: "There's a clear set of rules that have significantly
diminished the fears of people who thought their debts could be
declared illegal. There was deep reform of the judiciary. There
have also been social programs that have brought social stability."
Not everyone agrees that Ecuador has dealt with investors'
concerns as thoroughly as it might have, however. For some, it was
a case of taking advantage of markets while they were available.
"Ecuador's return is a function of search for yield," says Stuart
Culverhouse, chief economist at frontier markets investment bank
Exotix. "One can point to technical reasons, too, to explain why
this government was able to issue despite its 2008 default, but I
don't think there has been any improvement in policy strength."
Whatever the reality, efforts to reengage have paid off for
the sovereign, reestablishing its presence in international debt
markets.
In for the long term
Despite the improbability of Argentina's return to the bond
markets before next year's general elections, many investors still
see long-term potential in the country. Some that are already
involved are riding out the volatility.
Norway-based global fertilizer company Yara is a case in point.
It has operated across the region for over four decades, including
in Argentina, Brazil and Ecuador. Egil Hogna, Yara's head of
downstream, says the risks in Argentina are "significant". But the
company still sees value there, as it does in other Latin American
countries.
"What we've learnt over the last decade is that there are risks in
all markets," he says. "It's very much true that we've faced quite a
bit of volatility in Latin America. There have been years that have
been very good, and years that have been correspondingly poor."
Hogna points to Brazil. The country is out of favor with many
investors, but with average annual growth in the fertilizer industry
of 6%, Brazil shows the long-term opportunities available for
companies that are prepared to sit out cyclical swings.
He notes that the company works with a series of limits on
exposure to countries, currencies and customers. "However, we
are in Argentina for the long run," Hogna tells LatinFinance. "We
are paying particular attention to risk management in Argentina
for the time being. We have experienced the situation becoming
more difficult, but at the same time our experience is that
agriculture and fertilizers are two of the sectors which are well
understood by the government."
Specialists in mergers and acquisitions say strategic investors are
keen to return to Argentina once the economic prospects improve.
Similarly, portfolio investors are lining up to reenter.
"Argentina is like looking at a company with great assets and
poor management and the management is about to be fired,"
says Diego Ferro, co-chief investment officer at Greylock Capital.
"There is a similar situation in Venezuela," he adds, though he
says a change in government could be further away in Venezuela.
Hector Martínez, managing director of Abraaj's Peru office, did not
rule out the private equity investor taking a stake in an Argentine
or Ecuadorean company in the long run - but there would first
have to be "changes in political and economic policy", he says.
http://www.LATINFINANCE.COM
Latin Finance - September/October 2014

Table of Contents for the Digital Edition of Latin Finance - September/October 2014
