In a keynote speech during the recent Wharton Latin America Conference 2013, Antonio Quintella, a founding partner of Sao Paulo-based asset management firm Peninsula Investimentos, tackled a broad theme of interest to every attendee: Is the Latin American glass half full or half empty? To answer that complex question, Quintella analyzed economic data about Latin America’s leading economies provided by Credit Suisse, the International Monetary Fund and the World Bank. Quintella, who is also chairman of Credit Suisse Hedging-Griffo, was formerly CEO of Credit Suisse’s Americas region and CEO of the firm's Brazil operations.
The economic transformation of the region has been rapid, Quintella noted at the outset, producing several economies that are “reasonably resilient, more open and more stable. The growth rates in private consumption are impressive, although the growth in fixed investments has slowed.” To illustrate this point, Quintella presented data about a group of leading countries – Brazil, Mexico, Colombia, Chile and Peru. In that group as a whole, he noted, year-on-year GDP growth increased from only 2.2 % in 1999 to 2003, to 3.4% in 2004 to 2009, to 4.4% in 2010 to 2012.
To illustrate these five countries’ greater openness to trade, he measured the combined value of imports and exports as percentage of national GDP in those countries. That metric grew from 39.3% (from 1999 through 2003) to 41.8% (2004-2009) to 43.1% (2010-2012). To illustrate the increasing economic stability of these countries, Quintella noted that basic interest rates (per annum) declined from 15.3% to 9.9% to 6.7% during the same periods. He added that international reserves as a percentage of external debt — a measure of the countries' vulnerability to shocks — improved from 28.9% to 56.1% to 77.3% during these periods as well.
Crucially, the middle class of this group of leading Latin American countries is “a lot bigger and a lot better off” than in the past, noted Quintella. “Latin America is incredibly well endowed in natural resources, but there are also healthy consumer markets that can help sustain growth.” That trend has been facilitated not just by recent economic growth, but by improved regulatory processes which make it easier to start and manage a business. He argued that Colombia, in particular, “has done the best job of closing the gap” between Latin America and the leading industrial countries by enacting 25 institutional reforms over the past eight years.
In Brazil, recent governments have succeeded in moving millions of people out of poverty, he noted. “I think this has been a great thing,” said Quintella, not just because so many people are better off, but because these people can now purchase products from manufacturers and retailers.
From 2008 through 2012, Quintella pointed out, Brazil enacted a basic education reform; a new regime for oil extraction; reform of the pension system for public-sector workers; reform of tax regulations on small businesses; tax reform on payrolls, tax cuts on electricity bills; and the Prevention of Extreme Poverty Act. During the same period, Mexico enacted its own energy reform, tax reform, and reforms for transparency in government accounting, labor and education. For its part, Chile has enacted a new corporate governance law; higher education reform, and changes in pension fund law. Finally, Peru has reformed its mining sector and its private sector pension system. Similar reforms have been enacted in some other countries around the region.
The impact of such reforms has been reflected in the improved ratings of these leading Latin American countries in the World Bank’s “Doing Business” rankings — in particular, with respect to such indicators as “contract enforcement time” (in days), the cost of starting a business and time spent in resolving insolvency. For example, the average cost of starting a business in Brazil has dropped from 13.1% of per capita income in 2004 to only 4.8% in 2013, and in Colombia from 28% (of per capita income) in 2004 to only 7.3% in 2013.
In all but one of these five nations (Mexico), private consumption growth has accelerated over the past half-decade or so. The most dramatic growth has taken place in Brazil, where private consumption growth jumped from an average year-on-year rate of 2.4% between 2000 and 2005, to 5.4% from 2006-2012. Over the same time periods, annual private consumption growth increased in Colombia from 3.4% to 4.9%; in Chile from 5.0% to 6.1%; and in Peru from 3.6% to 6.1%. Only in the case of Mexico did the rate of consumption growth decline, from 3.9% to 2.3%.
Despite its growing importance in the global economy, the Latin American region still provides only a modest share of the world’s GDP. In 2011, just 8.9% of global GDP — $7.2 trillion of the total $80.9 trillion dollars came from the region. That amounted to nearly one-half of North America’s 18.1% share of global GDP, and only about one-third of East Asia/Pacific’s share of 28.3%. Only two countries in the Latin American region ranked among the top-ten largest economies in the world that year – Brazil ranked eighth, and Mexico ranked eleventh. Despite its glowing reputation for transparency and good governance, Chile ranked only forty-fourth globally.
The picture was far from perfect in any of these countries, noted Quintella. Despite healthy growth in consumer spending, both real GDP growth and growth in fixed investment have slowed down since the global economic crisis in each of the five countries. For example, in Brazil, annual GDP growth dropped from an average of 4.8% between 2004 and 2008 to only 2.7%, while fixed income growth dropped from a rate of 10% to 4.1% over the same period. Mexico, hit hard by the recession in the U.S. — its biggest trading partner — suffered the most: Annual real GDP growth dropped from 3.4% to 1.8%, while fixed investment growth plummeted from 7% to only 1.8%. Investment growth declines were even more dramatic than those in GDP growth — even in Colombia and Peru, which enacted free-trade pacts with the United States during the past few years. For example, annual investment growth in Colombia dropped from 13.5% to 6.5%; and in Peru, from 18.7% to 9.2%.
'Incredibly Onerous Rules'
Nevertheless, Brazil — the largest country in the region — ranks only 130th among the 185 economies ranked in the World Bank’s “Doing Business” index for 2013. That’s far below the ranking of Mexico (48), Colombia (45), Peru (43) and Chile, the region’s highest-ranking nation, at 37, he noted. Quintella added that even Cyprus ranked higher than Chile in the latest survey — coming in at 36. East Europe and Central Asia improved the most in the recent survey, he pointed out. “If Latin America doesn’t move to make improvements in making it easier to do business, we will be left further behind.”
What prevents Brazil from realizing its full potential, said Quintella, “is not private consumption, which is incredibly strong. It is private investment, which is slowing down.” A key reason why private investment is weak, he said, is Brazil’s “obsolete regulatory environment and its incredibly onerous rules. Indications are that [this situation] could be getting worse.”
He warned newcomers coming to Brazil to “beware” of the country’s poor infrastructure; its “complex and onerous tax system; its rigid, tightly regulated labor market; the shortage of skilled labor,” and the fact that “raising capital is difficult. Brazil is not a hostile environment, but it is not super-friendly. Investment is actually losing speed, and the deceleration is quite impressive.”
So why do business in Brazil? “Because the size of the Brazilian market is relatively big; institutions are well established; there are reasonably sound fiscal and monetary regimes, a solid financial system and opportunities all across the board.” Quintella cited five sectors that are particularly enticing: The country’s infrastructure, which lags behind that of major industrialized countries; both soft and hard commodities; financial services, education and real estate.
The Coming Opportunity
When it comes to financial services in Brazil, Quintella said that for many years, “there was very little demand for asset managers except for money market funds” because inflation and interest rates were high, and most savings in that country went into short-term government funds. Things started to change after 2003, as the government embarked on a stabilization program, and interest rates declined.
For the moment, asset allocation has not changed much, as 75% of savings are still going into such funds. However, he added, “I expect to see a rotation [by investors] into other sectors,” such as real estate, equities or other kinds of funds. “The wealth management business is a lifetime opportunity” for those who learn how to navigate the complexities of the Brazilian economy.
For all the progress over the past decade, noted Quintella, the Latin American region still suffers from “too many poorly designed” initiatives, and “too many obstacles” to efficiency. Throughout the region, governments “should aspire to making business conditions friendlier. While it is encouraging to see the region making reforms, this is a continuous process,” in which there is never an end to the competition. “The world is changing fast, and if you sit still, you will be left behind.”