Latin America Offers Mildly Optimistic Outlook
By Maria Velez de Berliner
It is useful to remember that Brazil was the country most responsible last year for the belief that Latin America was recovering economically. Cautious optimism that Brazil was back on track contributed to an increase in foreign direct investment (FDI) in the region during 2003, a marked improvement from a decrease of 10 percent in 2002. Such an improved FDI environment should provide an incentive for the satellite industry to invest in markets whose need for secure and reliable wireless communications and data transmission is on the rise.
This is why news of a slight weakening of the Brazilian economy in mid-March is a concern. According to Instituto de Pesquisa Economica Aplicada (IPEA), gross domestic product (GDP) for the country will be 3.4 percent in 2004, compared with the previous estimate of 3.6 percent. However, a consumer demand drop of 3.6 percent in 2003, combined with forecasts of mild economic improvement this year and the release of pent-up demand from last year’s austere spending patterns, could give a bit of a lift to consumer spending for connectivity and telephony services.
Pressure on profit margins will continue as service providers compete for market share. In addition, the basic interest rate (SELIC) of 16.25 percent will deter certain investors who lack the ready cash of Grupo Carso, Carlos Slim Helu’s family group. The family company is the new controlling owner of Empresa Brasileira de Telecomunicacoes S.A. (Embratel) through Slim’s Teléfonos de Mexico (Telmex). StarOne, owned by Embratel, is likely to benefit from Slim’s apparent commitment to expand the business-sector applications of his telecommunications holdings.
Despite having one of the world’s highest effective interest rates, Brazil’s Agencia Nacional de Telecomunicacoes (ANATEL) estimates telecommunications investments in Brazil will total $64 billion by 2005. Such technologies as Excel’s Converged Services Platform (CSP) that offer multi-service capabilities and programming flexibility are ideally suited to the needs of the region. Companies that can provide open-architecture solutions will do well in the area, particularly in the corporate-services sector. It would be wise to follow ANATEL’s regulatory decisions, particularly the one regarding Slim’s acquisition of Embratel, as an indicator of how Brazilian regulators view companies that would offer telecom and satellite services together.
In what may come as a surprise, Colombia’s economy is projected to grow at 4 percent this year. Colombia’s FDI grew by 11 percent in 2003, with Spanish companies contributing $123 million. The Uribe government is considering the creation of controls over foreign speculative capital (fondos golondrina) similar to the controls used in Chile at the beginning of its economic opening. The credibility enjoyed by the Uribe government, in Colombia and abroad, and the possible completion of negotiations towards a free-trade agreement with the United States by the end of 2004 are credited as the key factors in the Colombian recovery.
The International Monetary Fund (IMF) also has helped. IMF’s backing of Uribe’s economic policy is strengthening investors’ perceptions of Colombia. However, if plans to amend the constitution to allow the re-election of Uribe to another four-year term falter, as they did in 2003, uncertainty regarding Colombia is likely to increase, possibly affecting the entire Andean region. The stability of the Andean region replays a key role in analysts’ views of Latin America. A stable Colombia calms concerns about political risk and aids in attracting FDI into the region. In addition, Colombia’s security needs present good opportunities for the military-intelligence applications offered by the satellite industry.
Peru projects growth of 4.8 percent, despite a public approval rating of just 6 percent for President Toledo. An interesting aspect of Peru is that, despite frequent changes in cabinet and policies, the country has been able to keep its economy on a reliable path. The high price of oil and gold might be important contributors to economic growth, albeit lower than the average growth of 6.5 percent for the last three years. Peru is a market where satellite companies will do well in the creation of wireless hubs as the government continues to interconnect the countryside.
The Venezuelan Presidential Revocatory referendum, scheduled for Aug. 19, may not take place. President Chavez claims the referendum is illegal. Let’s hope Chavez and Coordinadora Democractica, the umbrella opposition group, come to a peaceful agreement to solve the continued political and economic crisis in Venezuela. The country has too much wealth – in human, industrial and natural-resources capital — to experience contraction similar to its 9 percent in 2002 and 10 percent in 2003. It also plays a pivotal role in the stability of the Andean region, as foreign investors have a tendency to extrapolate trouble from one country to the next, even when it is unwarranted. The Andean region offers potential for telecommunications companies and their mobile satellite service (MSS) counterparts to partner. International security concerns in the region will demand more mobile capabilities that offer a high level of reliability at reasonable costs. Demand for low-cost solutions will put pressure on margins but the reward for early entrants will be enlarged market share.
Argentina will continue with a robust recovery of 7 percent. However, we need to remember that agricultural exports are fueling the economy; the industrial sector is just beginning to recover from a contraction of 20 percent in the 2001-2002 time frame. It is encouraging to see the IMF and the Kirchner government come to an agreement, aided by Argentina taking steps to fulfill its obligations to the fund. However, Argentina must resolve its dispute with bondholders who were damaged by the country’s default on its obligations. It is a good sign that Italy is willing to initiate negotiations that might lead to a mutually acceptable settlement on the disputed bonds held by Italians. Such a settlement will go a long way in reestablishing needed international credibility for Argentina. Given the prominence of agriculture in Argentina’s economy, MSS systems would be ideal for monitoring plantations and tracking overland cargo.
And while there are doubts and hopes here and there in the region from México to Argentina, Chile continues to perform well politically and economically. Its free-trade agreement with South Korea will present good opportunities, particularly as the two countries share research and resources in information technology and agriculture. The potential use of mini-satellites and MSS in agriculture opens the road for creative applications of technology and data warehousing and transmission, but this should apply not only to Chile. Brazil and Argentina also are profitable markets for similar satellite applications.
Some areas to watch are:
- Cross-border security concerns and threats, particularly within the Andean region and on the northern border of Brazil and its Amazonian Panhandle.
- The successful campaigns that heretofore neglected groups have carried out against privatizations, as in Peru, and against the building infrastructure projects in Bolivia and México.
- Hints by Argentina of reversing some of the privatizations of the 1990s in utilities and public services.
But despite these concerns, Latin America can’t do without security and telecommunications. Biometrics, wireless and cellular, data warehousing and management, communications security, anti-terrorist applications, Wi-Fi, satellite TV and television programming telecast to ethnic communities in foreign countries present the best growth opportunities.
To lead the investment in Latin American telecommunications in 2004, Telmex purchased 19.26-percent of the total capital and 51.79- percent of voting capital of Embratel from MCI for $360 million. In February, Telmex owner Slim purchased AT&T Latin America for $207 million and, on March 22, he bought 9.1 percent of Global Crossing. In addition, Slim controls America Movil, the largest mobile communications company in Latin America. These acquisitions, added to Slim’s own private funds, make him a leading player in wireless communications and data management in Latin America, posing a significant challenge to Telefonica de Espana, the telecommunications leader in the region.
In conclusion, despite recent questions about Brazil’s economy and its direction, Latin America is an underserved telecom market with ample pent-up demand, and an area where international security threats and concerns are likely to increase. If the satellite industry acts in a proactive way, predicting rather than following the market, it will do well. But it would be wise to keep a close eye on the economic and political risks inherent in the region. Slim’s proved investment savvy tells us it is time to invest there, and it would be smart to follow his telecom investment strategy. Look for consolidation of Latin America’s telecom and satellite industries in 2004 and beyond.
Maria Velez de Berliner is president of Latin Trade Solutions in Gibsonia, Pa. She can be reached at 724/625-8510, or by e-mail, email@example.com.