Latin America bleeds poverty. As if its chronic problems were not enough, Covid has struck a hard blow that threatens to cause a lost decade in its economies and two lost decades in its society.
The region has taken the hardest blows since January 2020, with about 30% of COVID deaths, and where poverty has gone back to 1990 levels.
The year of 2020 has been the worst year in the region since records are kept. Wealth ratios similar to 2019 levels won´t be back until 2023, and recovery of per capita income levels will be seen by 2025 at the earliest.
Although the agency forecasts an advance in Latin American GDP up to 4.1% for this year, it will be costly to overcome the burden of the past, when it fell by 7.1% and the pandemic dragged the region into the greatest economic recession since the Great Depression.
Multinationals who once were sources of employment and investment have already fled the region, taking their cash to more profitable markets.
Multinational behaviour is driven by safety and profit, so that is why the new strategy is the same old strategy: now they are concentrated only in the most profitable markets and with greater projection.
This reorganization also responds to the fact that many companies need to reduce debt in the current economic situation and they take advantage of the good moment of liquidity that the markets are experiencing.
Companies reduce their operations in Latin America and focus on countries with strong currencies after suffering what they say is a significant depreciation in key Latin American countries in 2020.
An example of this outwards movement is Banco Santander in 2019, when it sold its businesses in Puerto Rico to First Bank for around 1 billion euros, Then BBVA decided to get rid of its US subsidiary and transferred it to PNC for around 9,7 billion euros.
The reasons that explain the Latin American withdrawal respond to the shift in business strategies towards the geographic concentration and activities in the most profitable countries, and to the impact of Covid, which has led to the return of low incomes and poverty to the region,
In the absence of powerful fiscal umbrellas such as those deployed in Europe, the withdrawal for the moment affects large corporations, but it will end up impacting the others.
Multinationals see Latin America as a burden. They have lived many cycles there and now there is enormous uncertainty about when the Covid will end, in addition to great legal uncertainty.
The Santander Group recognized in the presentation of its 2020 accounts that the negative impact of exchange rates has led to a decrease in the result of 7 or 8 percentage points and Mapfre estimated at 1.6 billion euros the effects of the depreciation of the main currencies Latin America.
The situation is very complicated. The climate in the region is not conducive to business.
In Latin America there appear to be two situations: on the one hand, there is less direct investment, with a collapse of 58%, or up to 3,2 billion.
In the case of Argentina no one wants to buy their assets. The companies are condemned to remain in a country without reserves in dollars.
The withdrawal of multinational companies in Latin America is reflected in the Ibex 35, from which 23% of their income currently comes.
Latin America is no longer a catalyst for large companies. It has not penalized their results, but it has not benefited them like other years.
The region’s problem is its low growth, based on debt and deficits, and its need for structural reforms that are not being made.
This, together with the populist governments that have been proliferating in recent years, lead to the perfect cocktail for the change of direction of corporate strategy, as companies move back to Europe, the United States and Asia.
If left-wing populism is reproduced in Brazil and Ecuador, Bolivia and Venezuela join the agreement between Argentina and Mexico, this could lead to a growth in debt in the region.
Politicians are the Highest Risk
One of the main risks in the Latin America territory is political, and 2021 several countries will start a two-year electoral supercycle, in which six of the largest nations in the region will hold elections. That always brings uncertainty.
Covid has exacerbated the underlying problems: unemployment, social inequality, informality in employment. It also has impacted the mood of citizens, which helps create social movements such as the ones seen in 2019.
Times of crisis and especially of weak local currencies for companies that consolidate in euros or dollars generate a lot of insecurity, which together with economic uncertainty, leads to withdrawal.
The Caribbean, including Mexico, and South America, present numerous challenges due to the succession of positive and negative cycles that compromise not only the income statement of companies, but often entail effects at the level of inflation and exchange rates.
The Latin American adventure is turning around. From a brutal success to not seeing great returns or contributing to growth … It is no longer the winning bet of the past. So companies will seek new markets in their expansion. Asia, the United States and Europe are the destinations with the greatest projection.
In any case, the era of the great Latin American privatizations of the 90s of the 20th century will not return. Possibly neither will times like the period 2007-2012, where companies accumulated profits worth 81 billion euros in the region.
Although it is difficult for Latin America to experience another international investment boom like those, most of the experts consulted believe, of course, China, which is advancing by leaps and bounds in the area, will push even harder now. In fact, China had established itself as a strong partner in nations where left-wing populism was strong. As western multinationals flee Latin America, China will have free reign to conquer this market with its typical bribery schemes including free goodies and aggressive militarization of like-minded political and social groups.
Ultimately, as the US now walks back towards being a Chinese pet country, the Asian giant will have little or no resistance to become the new colonial power in the region.