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GC Powerlist: Latin America Comment

Corporate Counsel 100 > Latin America

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COMMENT: Latin America - a market overview

commentLatin America can be a challenging place for companies, with socio-economic factors at the fore, and in certain jurisdictions, a degree of political uncertainty. The Legal 500 Latin America editor, Tim Girven, picks out some of the key issues facing the region.

Latin America presents an intriguing mosaic in 2014, with an array of factors vying for the attention of those weighing up business and investment decisions. Presidential elections (which are taking place in Costa Rica, El Salvador, Panama, Colombia, Bolivia, Brazil and Uruguay in 2014) will change the complexion of the region’s political make-up, while the recent global retrenchment from emerging markets (and generally flat or declining commodity prices) have cast a shadow over the sustainability of the growth rates experienced in many countries during the last half-decade. Looking deeper, while there is an increasingly sharp divide between the economic outlook for those countries associated with the Pacific Alliance (Chile, Peru, Colombia and Mexico) as opposed to those with a more populist political (and less orthodox economic) model, most notably Argentina and Venezuela, there remains reason for optimism across much of the continent. A case in point is that the elections in Colombia and Brazil are both likely to see the political incumbents (presidents Santos and Rousseff, respectively), returned for a further mandate, offering the likelihood of continuity in economic policy.

With both Pacific and Gulf coastlines as well as proximity to the US, Mexico is blessed with a strategic location that, in conjunction with competitive labour rates, has seen it increasingly regaining a competitive advantage with Asia, from where business has been returning. Moreover, since the election of the PRI’s Enrique Peña Nieto in late 2012, the country has introduced a number of significant reforms (most notably in the oil and gas sector, but also in relation to finance, tax and regulatory matters), that are likely to both increase this competitiveness and open a new array of business opportunities. The legal market has not been slow to react, with firms seeking to augment their capabilities through the incorporation of new staff and the arrival of a number of international firms. A further positive signal was the recent agreement signed in Cartagena (February 2014) that eliminated tariffs on 92% of trade between Pacific Alliance members. This, in turn, has heightened the likelihood of Mexico’s accession to MILA, the integrated Latin American stock market, a step that would give the trading platform considerably more weight vis-à-vis Brazil’s Bovespa. (Even without Mexico’s entry, MILA’s combined market-capitalisation is currently in the region of $650bn).

Colombia also enjoys a geographically strategic position, and with port facilities on both the Pacific and Gulf coastlines it is frequently perceived as a beachhead to the rest of South America. The coming into effect of the US-Colombian FTA in 2012 is beginning to stimulate economic development beyond the capital and traditional industrial heartlands of Medellin and Cali, notably in Barranquilla. Here the re-election of President Santos (and consequent continuity of a broadly pro-business economic framework) is regarded as highly probably despite a number of thorny domestic matters, most notably the ongoing peace negotiations with the FARC guerrilla. More in question here is government’s effectiveness in terms of execution, particularly in relation to project and infrastructure concessions. Nevertheless, here too a strong local market of four or five key full service players has seen the arrival of a number of international firms, most notably Norton Rose Fulbright, Holland & Knight and Garrigues.

VENEZUELA: all bets are off

Owen Fitzpatrick /

Unfortunately it is not possible to hold the same guarded optimism with regard to neighbouring Venezuela where, a year on from the death of former President Chavez, Nicolás Maduro’s administration presides over an increasingly critical economic and political scenario. Expropriations, price and exchange-controls, and minimal juridical security are increasingly leading to a scenario in which business is almost impossible: in a country of 29 million people, 722 cars were sold during 2013 (according to Bloomberg), and so far this year three airlines have grounded flights to-and-from the country, they are jointly owed $3.3bn in foreign currency by the government. Despite the increasing sophistication and agility of leading corporate firms, especially in administrative matters, and notwithstanding the country’s enormous oil reserves, recent political protests increasingly suggest that all bets are currently off.

Further south, Brazil has also had a tempestuous time of late, at least in public relations terms, with international coverage of protest at government spending priorities – not least this summer’s World Cup. Nor have a number of political corruption scandals and the spectacular collapse of the EBX Group improved economic perceptions of a nation very much in the spotlight. Nevertheless, while growth rates have been revised down, the country remains the region’s undoubted economic powerhouse. Law firms are not only busy, but also ever more specialised and sophisticated, and have shown an increasing willingness to experiment with new forms of institutionalization so as to serve their clients better. Despite the exclusion of foreign firms from the local legal market, clients have an almost bewildering array of legal offerings, from specialist boutique to full service corporate leviathans.

The pragmatism of the centre-left Humala administration in Peru has surprised many. In a process of national economic development largely financed by tax revenues from mining and energy activity, the emergence of environmental and community issues as social flashpoints has generally been well managed, and the country continues to push on with regulatory reform and consolidation. Indeed, the arrival of Baker & Mckenzie (via its association with leading firm Estudio Echecopar), is a measure not only of the legal market’s increasing importance, but also its sophistication and maturity, as an increasing number of Peruvian businesses begin to develop operations on a regional scale.

Having been elected on a more radical program than during her first term (2006-10), the return of Michelle Bachelet to Chile’s presidency in early March 2014 leaves a question hanging over the precise political direction of the country under the new administration. Nevertheless, her first administration was marked by political pragmatism and the country’s institutional solidity, adherence to juridical norms and sophisticated legal market all point to continuing economic vibrancy. With the regulatory and tax reforms enacted by the outgoing Piñera administration (and designed to boost the relevance of MILA) likely to have an increasing effect going forward, it is probable that Chile will retain its position as among the most pro-business jurisdictions on the continent.

Argentina, by contrast, continues to suffer what many regard as largely self-inflicted economic ills. If these are rooted in the monolithic political inheritance that is Peronism, and more recently in the country’s exclusion from global financial markets following the sovereign default of 2001, the populist policies of successive Kirchner administrations have only exacerbated difficulties. The development of ever more complex, market-distorting cross-subsidies, a highly aggressive tax regime and exchange controls, have all served to further discourage investment, while the expropriation of Respol’s Argentine holdings in 2012 has only served to further crystalize distrust in juridical security. Argentine law firms have, as a result, had to prove themselves highly flexible in the face of a market largely starved of transactional activity. While the market has suffered attrition, it has also retained a marked degree of sophistication, with firms demonstrating an impressive capacity to reorient their service offering according to the demands of the moment.

LA PAZ, BOLIVIA: national economic growth at 6.5% in 2013

During the successive administrations of President Morales, Bolivia has experienced the re-nationalisation of much of the energy sector, expropriations in a number of other industries, and has also withdrawn from ICSID, the World Bank’s arbitration facility. The economy grew at 6.5% in 2013 and (in stark contrast to its more sizeable, and similarly energy rich political allies, Argentina and Venezuela), it has built up record foreign-reserves. Such has been the extent of the country’s economic stabilization that the World Bank has begun to term his administration’s economic management as ‘prudent’; certainly it would appear to embrace a degree of pragmatism not immediately apparent in the socialist rhetoric of the country’s political discourse.

Amidst the array of sizeable economies in the region, it is all too easy to overlook, or worse simply dismiss, the continent’s smaller jurisdictions. Each, however, offers a particular set of potential opportunities. One only has to reflect on the World Bank’s projection of a 13% GDP growth rate for Paraguay, to recognise that this would be an oversight. With an open economy, a relatively steady exchange rate and historically high currency reserves, the country’s law firms have increasingly sought to institutionalise themselves, so as to gear up for a period of sustained growth during the administration of Horacio Cartes, one that could prove truly transformational for the country. Dwarfed by neighbouring Argentina and Brazil, Uruguay’s centre-left administration has successfully navigated the economic turbulence to which its geographic location subjects it, consistently attracting foreign investment and (not inconsequentially) boosting the jurisdiction’s reputation for stability. In Ecuador, where President Correa (like his Bolivian counterpart), is presently in his third term in office, the ongoing overhaul of the country’s juridical framework continues (most recently with the introduction of competition legislation), and the socialist rhetoric of his early years has increasingly been replaced with a more austere (and nationalist) political orientation. The countries of Central America are, relatively speaking, economic minnows. One of the strategies to combat this reality, at least for the purposes of fostering investment, has been the attempt to present itself as a single sub-region, as institutionalised in the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). One reflection of this is the accelerating trend towards genuinely regional capability with firms such as BLP and Pacheco Coto among the latest to have begun to develop such an offering.

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