Published: January 01, 2000
To outside companies looking to expand internationally, Latin America is a land of opportunity. In many of the region’s countries, democratic governments are currently entering their second, third or fourth elections — while Chile recently held its first ever presidential primary election. Despite the recent rioting in Brazil, by and large the political instability that was once inherent in the region has given way to longer-term governments and longer-term planning as the region’s economies continue to grow.
That said, Latin America, much like the rest of the world, continues to go through a process of adjustments and changes following the unprecedented financial crisis. The region is not immune to events in other regions, such as the economic downturn in Europe and the gradual slowdown in China. Nevertheless, the impact of these factors is generally quite limited. For example, the interdependence between Latin America and Asia is still significant, but not to the point where a slowdown in China would have a major impact on the region.
For companies considering a move into Latin America, and for those looking to operate more efficiently within the region, there are plenty of opportunities available. From shared service centres to stock exchange integration, this supplement takes a detailed look at the opportunities, challenges and variations that companies may encounter when doing business in Latin America.
In addition to continued economic growth, several events and initiatives are helping to create new opportunities in the region. In Brazil, two upcoming mega events – the 2016 Olympics in Rio de Janeiro and the 2014 FIFA World Cup – are attracting a lot of investment. Meanwhile, some larger initiatives are under way which aim to integrate the different regional markets. The creation of the Pacific Alliance is the most notable of these: initially including Chile, Peru, Colombia and Mexico, the Alliance has recently approved Costa Rica as a fifth member and could include more countries in the coming years. With over 200 million people, the population of the Alliance is now similar to that of Brazil, the region’s largest economy.
The objective of the Alliance is not to create another Eurozone – there is no need to adopt a single currency within the region since almost all trade within the region is indexed to dollars – but to open up the market by allowing the free flow of merchandise, products and services without the existence of tax barriers among the member countries. The Alliance member countries have agreed to eliminate trade tariffs for 90% of products traded within the bloc, with the remaining 10% expected to follow at a future date. By pulling down the barriers, the Alliance is bringing companies in member countries access to a market of 200 million people and significantly boosting sales opportunities.
The Integrated Latin American Market (known by its Spanish acronym MILA) is another interesting initiative. MILA is a new stock exchange which incorporates the exchanges of Chile, Colombia and Peru – with Mexico recently expressing an interest in joining. The combined stock exchange is of a comparable size to Brazil’s exchange, Bovespa, and is of particular interest to pension funds in Chile, Colombia, Peru and Mexico, which are investing heavily in stocks across the region. Luiz Carlo Couto and Moises Vidal talk about the implications of the Pacific Alliance and MILA in more detail later in this supplement.
Latin America has much to offer international companies as they expand geographically, but where in the region should companies start? In his article on trade and investment in Latin America, Dennis Dubois identifies some of the most attractive opportunities within the region and explores the factors that are driving that growth.
Given the diversity of the region, companies face a number of challenges when expanding to Latin America. For one thing, multiple languages are spoken across the different countries, including English, French, Spanish and Portuguese. This diversity also applies to local cultures and, in particular, the way in which business is conducted in different countries of the region. In Argentina, for example, a business deal might be closed over a cup of coffee; in Mexico it might be concluded over lunch, and in Brazil it might be finalised more formally in the office.
All too often companies do not have a full understanding of the nuances when they begin expanding into Latin America. Ana Diaz discusses the challenges that companies face when entering the region and highlights some of the considerations which should not be overlooked in order to navigate the markets as successfully as possible.
Companies with existing operations in Latin America may be planning to increase their scope in the region and are looking to put in place structures which can centralise processes and build a more streamlined approach. Liquidity management is a high priority for companies in Latin America, but variations across the region must be taken into account when building a liquidity management structure. In his article on liquidity management, Marcello Moussalli gives an overview of some of these variations and discusses how companies can optimise liquidity management within the region.[[[PAGE]]]
Other types of centralised structures are increasingly being leveraged by companies in Latin America, such as in-house banks and shared service centres. While companies can benefit from them in many ways, setting up these structures can be daunting anywhere in the world – but this is particularly the case in Latin America due to local tax and legal considerations. Patrick Peters-Buhler outlines how companies can benefit from setting up an in-house bank in Latin America and explains why and how the process may differ from similar structures in other regions. Additionally, Liba Saiovici explains why Latin America has become a more attractive destination for shared service centres and identifies the most suitable countries for this type of structure.
Improving efficiency within the treasury is a priority for many companies, but in many cases companies do not leverage their existing technology to its fullest potential. In his article about online banking tools, Milton Santiago talks about the opportunities companies may be missing and explains how treasurers can take action to get the most out of their systems – particularly in Latin America, where high levels of mobile technology adoption is paving the way for companies to use mobile banking technology more effectively.
Meanwhile, at an industry level there is a growing trend for banks to integrate their cash management services with a growing number of other services including custody, escrow and foreign exchange. This consolidation is giving companies within the region better real-time information on their cash and securities exposures, as Tom Avazian explains in his article on custody, securities processing and escrow services.
For Latin American corporates and financial institutions managing investment portfolios, US dollar (USD)-denominated products continue to play a critical role in executing their short-term investment strategies. Despite the low-rate environment in the US and the higher yields available from similar products denominated in Latin American currencies, Latin American investors continue to invest heavily in USD products because no locally denominated short-term debt instruments offer the same level of stability. Dallas Ebel and Michael Tafur talk about what is considered best practice on the part of Latin American companies to allocate at least a portion of their liquidity to USD-denominated products.
The global economy is increasingly driven by growth generated in emerging market countries such as Brazil and Mexico. Both countries performed well during the financial crisis. Brazil’s resilience confirmed the extent to which the country, now the world’s seventh largest economy, has advanced. Meanwhile, the accelerating pace of reform in Mexico, and its strong trade links with the US, means it is well positioned to benefit from a US recovery. Marcelo Fu and Moises Junca discuss how multinationals, eager to take advantage of the opportunities in Brazil and Mexico, are seeking to increase investment and activity in both countries.
Just as corporate card programmes are now firmly entrenched in many regions around the world, conditions are ripe for more widespread use of commercial card programmes in Latin America. Kevin Phalen and William Bonin talk about the benefits of adopting corporate cards, from managing travel and entertainment (T&E) expenses, to making payments to suppliers and incentive payments to employees. The benefits that accrue to companies taking such a step are clear and proven.
However, success in Latin America will depend on how the programme is tailored to local conditions, the level of merchant acceptance, and the extent to which the expertise of the financial institution involved is leveraged.
Until recently, large multinational companies seemed more interested than smaller companies in accessing the opportunities that Latin America has to offer – but this is changing. Following in the footsteps of larger companies which have already made the move into the region, a large number of middle market companies, predominantly from the US, have been entering Latin America over the last two years and integrating themselves with the local economies.
Bank of America Merrill Lynch has helped many companies build bridges and understand the differences between working in Latin America and other regions. While there are similarities in the types of products available in the different markets, there are some important differences in how markets approach different problems. Brazil, for example, has the Boleto payment instrument, which is one of the most advanced collection systems in the world and which allows customers to make a payment anywhere. Understanding these variations is key for any country coming into Latin America for the first time, whether large or small.
Where larger corporations are concerned, we are working to introduce products currently available in Europe and Asia into the Latin America region. In the countries in which we have full branch operations, we are leveraging technology in order to give clients a more global view over their cash.
The opportunities offered by Latin America are looking increasingly attractive to international corporations. In order to take advantage of these opportunities, and make a successful entry into the region, companies must first understand the nature of the market and the significant differences between the various countries. Many of these opportunities and variations are explored within this supplement and we hope you will find this a useful resource – whether you are taking your first steps into Latin America or looking to optimise existing operations. Bank of America Merrill Lynch is committed to supporting your continued development within this important region.
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