Home' Trinidad and Tobago Guardian : September 26th 2013 Contents Today, we at Bourse, will be
covering the recent activity
within developing economies
in Latin America. We highlight
our outlook for several attrac-
tive, but often less-heralded
investment destinations throughout Latin
America and opportunities available to the
Latin America has grown rapidly relative to
most other global regions and is expected to
continue this trend. It is a region characterised
by a very young average population, providing
an accommodative environment for investment
and growth. These positive demographics
translate into a growing consumer population,
the eventual driving force behind increases in
Coupled with growth in domestic demand
is the capacity for debt financing to meet
growth needs. Latin American countries boast
of lower debt-to-GDP ratios relative to devel-
oped nations. Unlike the United States, which
has debt-to-GDP ratio of about 100 per cent,
the majority of Latin American growth
economies possess lower debt-to-GDP ratios.
For example, Mexico has a debt-to-GDP of
approximately 43 per cent, while Chile main-
tains a very low 12 per cent (as at July 2013).
Table 1 provides more examples of Latam s
These debt ratios are supported by strong
national accounts, general fiscal responsibility,
commodity resource wealth and positive demo-
graphic trends. According to the IMF, the
aggregate ratio of debt-to-GDP for advanced
economies has risen from around 46 per cent
in 2007 to more than 70 per cent in 2011. This
number is expected to expand to 80 per cent
by 2016. For emerging markets, on the other
hand, the debt-to-GDP is currently at 21 per
cent, leaving significant capacity to expand
and fuel growth.
We highlight a few of the less-popular Latin
American nations as investment destinations.
Mexico is the 14th largest economy in the
world and second largest in Latin America.
By 2050, Goldman Sachs forecasts that Mexico
could become the fifth largest economy in the
world, above countries like the UK. Mexico
has recovered from the financial crisis of 2008-
2009 posting growth of 5.3 per cent in 2010.
Subsequently, the economy has returned to
around three per cent annual growth which
is expected to increase in 2014 to 3.2 per cent.
It is a manufacturing-oriented economy, with
80 per cent of its exports in manufacturing,
a key driver of growth. The cost of manufac-
turing in Mexico is competitive with China,
while its close proximity to the US and sub-
sequent lower shipping costs has made it the
location of choice for many multinationals
production facilities. Mexican financial asset
values have come under pressure, as have most
other EM assets, in anticipation of the US
Federal Reserve s changing policy stance.
Chile is ranked as the most-creditworthy
economy in Latin America and, indeed, one
of the more-creditworthy nations among
emerging economies worldwide. Its sustained
economic growth and social progress have
been highlighted by different international
organisations and in 2010 it became the first
South American country to join the Organ-
isation for Economic Co-operation and Devel-
Chile s GDP growth since the turn of the
century has consistently been above four per
cent (an exception being during the financial
crisis of 2008-2009). An investment and retail
sales boom has helped maintain its economic
growth above four per cent in the second
quarter of 2013, while the country has managed
to control its current account deficit at 2.4
per cent of GDP in the second quarter, little
changed from the 2.5 per cent last year.
The country s central bank continues to
demonstrate responsible monetary policy. In
August 2013, Chile s central bank kept bor-
rowing costs unchanged at five per cent for
a 19th consecutive month, as policy makers
work to balance the opposing pressures of a
consumer spending boom with muted man-
On August 20, 2013, the S&P increased Peru
to BBB+, three levels above speculative-grade,
from BBB, with a stable outlook. The upgrade
makes Peru the second highest rated major
Latin American economy after Chile, which
is four levels higher at AA- (Brazil and Mexico
are one notch lower at BBB).
Peru s economic growth---among the highest
in the region at six per cent---has allowed its
government to boost savings and cut debt,
making the country less vulnerable to a drop
in export prices and other external shocks.
The country is also succeeding in diversifying
both its products and markets. As country
continues on its growth and economic devel-
opment trajectory, its creditworthiness and
ability to insulate itself from global economic
downturns should improve.
Opportunity against an uncertain backdrop
The Federal Reserve s inevitable tapering of
stimulus measures has sparked a knee-jerk
reaction of exit from emerging markets.
Investors have withdrawn US$44 billion from
emerging-market bond and stock funds since
the end of May (according to data provider
EPFR Global) on concern the Fed will reduce
its US$85 billion of monthly bond purchases
as soon as this month.
This has resulted in an opportunity for
investors to accumulate portfolio positions at
With the Fed s infusion of liquidity having
distorted financial market valuations, the
removal of the same should bring financial
asset valuations back in-line with economic
reality. In other words, a return to fundamental
valuation should occur. With this in mind, the
medium- to long-term investor should be
ready to capitalise on broad market correc-
Last week, however, The Federal Open Mar-
ket Committee stated it wants more evidence
of an economic recovery before paring its
US$85 billion-a-month bond-buying pro-
gramme, surprising global markets which had
priced-in a reduction in the policy. The signal
to markets that quantitative easing will remain
in place for the foreseeable future is a positive
development for investors who can capitalise
on lower asset prices.
The investor should be well positioned to
accumulate USD denominated bonds in Latin
American gems such as Mexico, Chile and
Peru. A portfolio of investment grade corporate
Latin American bonds with a medium term
can achieve a yield of five to six per cent.
There are also opportunities in Latin American
equities, with many Latam markets trading
below their five year average price multiples.
For the investor who would prefer not to take
specific country risk positions, a diversified
approach may be more suited.
Accordingly, Latam-focused balanced mutual
funds may prove the ideal investment vehicle.
As always, investors are advised to seek con-
sultation from a qualified investment advisor
like Bourse before undertaking any investment
ventures, in order to help make the best invest-
ment decision(s) possible.
SEPTEMBER 2013 • WEEK FOUR www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG23
Bourse Securities Ltd
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Bourse does not guarantee the accuracy or com-
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are given with respect thereto.
Finding new gems
in Latin America
Malaysian oil company Petronas said it is exiting one of
the biggest petroleum projects in Venezuela s Orinoco belt,
after what sources close to the venture and within the firm
said were disagreements with Venezuelan authorities and
The flagship project, called Petrocarabobo, has planned
investments of about US$20 billion over 25 years and calls
for building a 200,000 barrel per day upgrader to convert
heavy crude into light crude oil.
When the venture was formed in 2010, Venezuela touted
it as a sign that oil companies were willing to put up with
demanding fiscal conditions in exchange for access to the
world s largest oil reserves.
Petroleos de Venezuela (PDVSA) has 60 percent of the
project. Petronas belongs to a consortium that holds 40
per cent. Its other partners are Spain s Repsol, India s ONGC
and two smaller Indian firms, Oil India and Indian Oil Cor-
poration. Petronas holds an 11 per cent stake.
Sources close to ONGC and Oil India said on Wednesday
they were unlikely to buy the stake being shed by Petronas.
Petronas confirmed on September 17 Reuters report that
it was withdrawing from the project, saying that the decision
had been conveyed to Venezuela s government on August
27. Petronas sources later told Reuters the move was part
of its strategic review of global assets.
Venezuela s Petroleum Minister Rafael Ramirez declined
to address the issue on Monday and urged reporters in
Caracas to consult Petronas.
A Petronas company source in Kuala Lumpur said the
withdrawal was due to unspecified problems in dealing with
Venezuelan authorities and because the state giant preferred
to "play it a bit more safe" by focusing on established
markets such as Canada and Australia.
"This should not come as a surprise. We have not been
excited about this project for the past two years because
of the dealings with the government," said the source, who
requested not to be identified as he was not authorized to
speak to media.
"We have run in to quite a few roadblocks when it comes
to South America."
Petronas entered Venezuela s oil sector in 2010, three
years after an expanded nationalisation in the oil industry
under socialist leader Hugo Chavez, who died in March.
The Petrocarabobo project started production in late 2012
and has a capacity to produce 400,000 barrels per day
One source close to the project told Reuters that frequent
changes in the fiscal framework, disagreements with the
government of Chavez s successor - Nicolas Maduro - about
the business terms, and long delays led to the decision to
Petronas planned to feed a new US$19 billion refinery
and petrochemical complex in southern Malaysia with
Venezuelan crude produced at its joint venture, but company
sources said that project would not be further delayed by
Petronas confirms withdrawal from Venezuela project
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