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José Luis López de Silanes |
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The Spanish have invested heavily in Latin America over the past decade, pumping in around $80 billion, and show no signs of pulling out. And why should they with the region expected to grow between 4.1% and 4.5% next year and huge unexploited markets such as mobile phones in Brazil ripe for the picking?
The big Spanish companies that have plunged into Latin America, many over a decade ago, have no doubts about their long-term commitment to the region. “We are not tourists in the countries in which we are present; we are there permanently,” says Santander Central Hispano (SCH) chairman Emilio Botín. “The medium to long-term scope for growth and development is enormous.”
SCH has invested a total of $16 billion in the region and its Latin American activities account for 40% of the bank’s EBITDA compared with around 50% for telecoms company Telefónica, 53% for oil company Repsol YPF and 39% for energy company Endesa. But despite these hefty exposures, results for the first half of 2001 were good across the board, suggesting that Spanish investments have been left unaffected by the Argentine crisis and general economic slowdown. Banco Bilbao Vizcaya Argentaria (BBVA), for example, reported a rise of 39% in net profits from its Argentine subsidiary Banco Francés in the first six months of the year.
But shrinking loan portfolios and falling deposits over the past few months tell a different story. “Deposits with the banks in Argentina over the last two months have declined 14% so reserves are also falling,” says Citibank economist José Luis Martinez. “These companies will keep on investing but their results will be affected,” he adds. Collectively BBVA and SCH through their subsidiaries Banco Francés and Banco Río have reduced their loan portfolios in Argentina by Ptas175 billion ($935 million) since September 2000, according to Spain’s news agency Efe.
Specific investment plans have also been delayed this year because of poor market conditions. In July, BBVA was set to acquire the 32% of Banco Francés that it did not already own. But it had to pull back because the Merval index fell by more than the stipulated 35%.
Weak Latin American currencies may pose no real threat to such companies as Repsol YPF whose products are dollarized, but for the banks there is hefty currency risk. “With the banks there is more of a risk because their investments are not hedged. So a 35% depreciation of the real must be written off on the books. It’s not a real loss but it’s still painful,” explains Robert Hulme, a Latin American analyst at Skandia Asset Management.
BBVA has made a provision of $66 million against unspecified risks. “We take positions all over the world in dollars to diversify risk and compensate for adverse movements in Argentina or anywhere else,” says its CEO, Pedro Luis Uriarte. “Whatever happens in Argentina the bank can stand it.” Uriarte says work will begin on acquiring the remaining 32% when the economy has re-established itself. He adds that BBVA saved $450 million by not going through with the deal because of the fall in the subsidiary’s share price.
Although Latin America continued to be the region with the highest rate of growth for Telefónica during the third quarter, adding more than 1.1 million customers to the group, it suffered heavily from negative exchange rate movements. Revenue growth from Telefónica Latinoamericana was 1% in Q3 compared with the last year, but excluding exchange rate effects it would have been 9.8%.
Total investment in the region began to slow last year. Spanish investment in Latin America declined 38% from Ptas5,834 billion in 1999 to Ptas3,634 billion in 2000, according to the economy ministry. This is largely explained by Repsol’s one-off investment in Argentina’s YPF of $14 billion in 1999. Banking and telecoms investments were significantly higher in 2000.
The figures aren’t yet available for 2001 but according to the Spanish Chamber of Commerce, Spanish companies’ investments in the region fell 25% in the first half of 2001 compared with the same period in 2000. “In the second half of the year these investments can be expected to fall even further following the terrorist attacks on the US and the worsening economic climate,” says Javier Sánchez, Latin American specialist at the chamber of commerce.
In the short term, investment has stalled. But debt troubles in Argentina are not the only explanation. “The big numbers are driven by investments in privatizations and concessions,” says Sánchez and the largest of these projects are complete.
There are important projects set to begin in 2002 and next year could see an improvement in FDI, particularly in Brazil. Telefónica, for example, will expand operations there, having reached an agreement with Portugal Telecom. Building the largest telecoms company in Latin America – with the new holding valued at $10 billion – will start in 2002 and Telefónica calculates that there will be 58 million mobile phone users there by 2004.
Iñigo de Oriol, chairman of electricity company Iberdrola, also favours Brazil: “We want to take a significant position in Brazil and Mexico and maintain our position in Bolivia and central America through our investments in Guatemala.”
Gas Natural has plans in the region, aiming to increase its client base from 3.4 million to 5.5 million by 2005, and double sales. “Despite the crisis in Argentina and slowdown in other Latin American countries, we plan to continue growing,” says CEO José Luis López de Silanes. “We still see gaps to be filled. Around e600 million to e650 million is the investment needed to reach these levels of growth by 2005.” Investment won’t grow in Argentina but not because of the crisis. “In Argentina there is 70% penetration of natural gas, so we are close to reaching a saturation point. Mexico is an emerging market because little piped gas is used, so we expect significant client growth, and Brazil will be an important source of volume growth in 2002,” he says.
“Investments have definitely slowed down this year and companies are gernerally less bullish on Latin America, but they are not selling their assets,” says Hulme. “This could be because no-one wants to buy them but it could also be that they believe the region has good long-term growth prospects.”
