LATIN AMERICA TRADE & INVESTMENT Nick Robson Credit, Political - - PowerPoint PPT Presentation

LATIN AMERICA TRADE & INVESTMENT

Nick Robson Credit, Political & Security Risks

LATIN AMERICA TRADE & INVESTMENT - IDENTIFYING RISK CHALLENGES AND REALISING OPPORTUNITY

A huge subject - in a short space of time. No Crystal Ball – but there are credible indicators:

• Key Trends
• Risk Triggers & Outcomes
• Understanding Risk
• Managing Risk - Realising Opportunity
• Distributing Risk – Securing Opportunity
• Conclusions

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AGENDA

1. End of commodity super cycle 2. Vocal middle class/ ‘Failure’ of Chavismo 3. Terrorism/War on Drugs 4. End of cheap money 5. Institutional Corruption

IN A VOLATILE RISK ENVIRONMENT STUDYING TRENDS AND RISK TRIGGERS IS A HELPFUL FORM OF NAVIGATION

LATIN AMERICAN RISK TRENDS

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• 1. END OF THE COMMODITY SUPER-CYCLE

The end (?) of commodity super cycle has placed Latin American countries with an

• ver-reliance on extractive industries under immense strain as reduced revenues

have left holes in public finances.

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• 1. END OF THE COMMODITY SUPER-CYCLE

Countries that rely on soft commodities, metals or oil to underpin their budget face heightened economic volatility causing governments to make spending cuts with impact on infrastructure and living standards… Investors will face a less stable operating environment. Spending cuts may ignite civil commotion, pressure on government finance heightens credit and cancellation risk.

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VENEZUELA

• Oil 95% of government’s budget.

For every $1 fall in

• il

price, Venezuela “loses” USD700m of revenue.

• Venezuela budget based on a USD140+ oil

price => economic

• utlook

extremely negative.

• As election approaches Maduro will continue

to deflect criticism onto ‘external enemies’ and the political opposition.

• Risks

for investors include expropriation, licence cancellation or repudiation, changes to tax and royalty regimes.

• The government will need to address its

budgetary shortfall which could mean cuts in spending that prompt civil disorder => heightened physical damage, personnel security and trade disruption risk.

• Maduro unlikely to change economic course;

lenders / traders should expect continued unrest, currency risks and non-payment risks.

Venezuela June 15 Strikes, Riots & Civil Commotion 7 Terrorism 3 War and Civil War 4 Country Economic Risk 9 Currency Inconvertibility & Transfer Risk 9 Sovereign Credit Risk 9 Expropriation 9 Contractual Agreement Repudiation 8 Legal & Regulatory Risk 7 Countries are rated between 1 and 10. 1=Low Risk, 10=High

• Risk. = Under Review

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• 2. VOCAL MIDDLE CLASS / ‘FAILURE’ OF

CHAVISMO

A rising middle class brings new challenges for governments:

• A growing, vocal (critical) political opposition
• Greater political accountability on electoral promises
• Public expectations of a certain standard of living rise
• More urgency for governments to deliver solid,

sustainable economic growth

• Corruption and opaque political infrastructure tolerated

less

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• 2. VOCAL MIDDLE CLASS

Arguably we have seen the ‘failure’ of Chavismo as Latin American governments recognise that it is economically unsustainable for governments that are over dependant

• n commodities that are subject to international price swings to provide generous state

subsidies, increased public sector wages and pro-worker labour policies in tough times. Latin American governments are now having to walk a fine line between meeting electoral promises which benefit the people, and the realities of economic cycles. The protests seen across South America 2012-2014 are likely to reignite.

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BRAZIL

• Under Lula 29m Brazilians became

‘middle class’.

• Under Rousseff’s government GDP

growth slowed and inflation soared.

• Despite government commitment to the

working classes, Rousseff has been forced to cut public spending to rein in the deficit.

• The FIFA World Cup and the Olympic

Games have prompted protests as living standards deteriorate. Other grievances include poor public services, police brutality and corruption.

• The Petrobras corruption scandal has

further seen public anger directed against Rousseff.

• Rousseff must now further cut

government spending, whilst trying not to upset her union supporters.

• Increased risk of business disruption,

repudiation of agreements and the broader credit environment.

Brazil June 15 Strikes, Riots & Civil Commotion 4 Terrorism 3 War and Civil War 2 Country Economic Risk 5 Currency Inconvertibility & Transfer Risk 4 Sovereign Credit Risk 5 Expropriation 3 Contractual Agreement Repudiation 6 Legal & Regulatory Risk 6 Countries are rated between 1 and 10. 1=Low Risk, 10=High Risk. = Under Review

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• 3. TERRORISM/ WAR ON DRUGS
• In 2015 terrorism in Latin America is largely limited to the actions of the FARC in

Colombia

• However, it is challenging to separate the influence of drug and criminal gangs from

terrorism funding.

• The war on drugs particularly in Mexico has caused great volatility as the government

struggles to contain the influence of gangs.

• With drug money passing through Latin America into West Africa and MENA and into

the hands of terrorist groups, governments are required to continue to crackdown on drug trafficking.

• Central American governments, such as Guatemala, continue to have negative

economic outlooks as the cost of controlling these gangs weighs on government finances.

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COLOMBIA

• Terrorist activity from the FARC and ELN

has continued to plague the operating environment in Colombia.

• Risks include kidnapping of employees,

property damage, and business interruption.

• Peace talks between the government and

the FARC are continuing but are repeatedly derailed by both continued FARC attacks and government aerial bombings.

• If a peace deal is signed, funding for post-

conflict investment is expected to cost USD40bn, weighing on already strained government finances.

• As such, concerns are growing that

government funding may be diverted away from core infrastructure projects to help ex-rebels reintegrate to society.

• This could anger the public, leading the

potential protests.

Colombia June 15 Strikes, Riots & Civil Commotion 3 Terrorism 4 War and Civil War 4 Country Economic Risk 5 Currency Inconvertibility & Transfer Risk 5 Sovereign Credit Risk 5 Expropriation 3 Contractual Agreement Repudiation 5 Legal & Regulatory Risk 4 Countries are rated between 1 and 10. 1=Low Risk, 10=High Risk. = Under Review

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• 4. END OF CHEAP MONEY
• US Federal Reserve prepares to raise interest rates, era of cheap money coming to an end.
• Issue for Latin American countries that have already been hard hit by the end of the commodity

super cycle

• Bond yields and debt servicing costs will rise
• More challenging for governments to offset slower growth from reduced commodities revenues

with lower taxes and/or increased spending.

• Currency risks, inflationary / credit risks and risks to local banking markets could develop.

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MEXICO

• Mexico’s economic health relies heavily
• n the health of the US.
• Positive economic figures from the US

bodes well for Mexico.

• However, Mexico has major challenges

ahead including power shortages, the continued drug gang war, the need to attract energy investors when prices are low and the need to develop the manufacturing industry.

• The end of QE in the US has

repercussions for Mexico’s economic

• utlook.
• There is a risk that US capital may exit

Mexico, with a knock on effect on the value of the currency.

• Initially this may help manufacturing

revenue, however there could be inflationary risks and pressures on the local banking system leading to heightened credit risk.

Mexico June 15 Strikes, Riots & Civil Commotion 3 Terrorism 4 War and Civil War 4 Country Economic Risk 4 Currency Inconvertibility & Transfer Risk 5 Sovereign Credit Risk 4 Expropriation 4 Contractual Agreement Repudiation 5 Legal & Regulatory Risk 5 Countries are rated between 1 and 10. 1=Low Risk, 10=High Risk. = Under Review

• 5. CORRUPTION

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Petrobras Scandal Alberto Nisman Scandal

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• 5. CORRUPTION

PETROBRAS SCANDAL

• President Rousseff’s involvement in the

Petrobras scandal tainted her reputation resulting in a drop in public support.

• Foreign investors contracting with

Petrobras projects remain at heightened risk as the company cuts investment to weather the corruption scandal.

• The government will take a tough line on

any foreign investor corruption with risks of contract cancellation and/or penalties.

DEATH OF ALBERTO NISMAN

• Protests erupted following Nisman’s

death criticising Kirchner’s influence

• ver the judicial process damaging

Kirchner’s popularity ratings.

• Opposition leader Mauricio Macri has

been given a boost following the poor handling of the investigation into the death of Nisman.

• Foreign investors have been given a

stark reminder of the politicisation of the Argentine judiciary and the impact that this could have in the case of a dispute with the host government.

The operating environment in Latin America remains plagued by government corruption that continues to deter foreign investment. Corruption scandals are toxic and can have knock on effects for investors operating in the region.

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• There is rarely a ‘good’ or ‘bad’ country, just ‘good’ or ‘bad’ risk.
• Be granular –political risk has clear and distinct perils - a risk profile for any given

country at any point in time will not be linear.

• Consider your role: victim or participant in the creation of risk ?
• Understand the trends, consider "triggers" e.g. El Nino causes agri commodity price

rises in authoritarian food import dependent countries in 2015 – how may this impact your transaction? – consider unexpected correlations.

• Maintain a consistent measure for perils and look both at country aggregates and peril

aggregates across all countries. Agree a benchmark in risk and value that demands a response.

• Risk issues should be seen as indicators of OPPORTUNITY
• Risk Management & Distribution secures OPPORTUNITY

MANAGING LATAM RISK

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REALISING OPPORTUNITY

Threat and risk studies

To determine exposure to people, asset, data, contract and brand.

Probable maximum loss studies (PML)

To underpin risk transfer across a range of perils, particularly terrorism.

Peril awareness

Online information solutions and training packages to deconstruct perils.

Country risk analysis

Bespoke research to inform decision-making.

Strategic security consulting

Organisation resilience reviews, and for senior executives.

Safe travel management plans

Design of solutions to meet duty of care

• bligations.

Crisis management planning

Preparing contingency plans and training people.

World Risk Review Sunstone™ Frontier

UNDERSTANDING RISK

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WORLD RISK REVIEW COUNTRY RATINGS

Security Environment Trading Environment Investment Environment Country Strikes, Riots & Civil Commotion Terrorism War & Civil War Country Economic Risk Currency Convertibility Sovereign Credit Risk Expropriation Contract Repudiation Legal & Regulatory Risk Argentina 5 3 2 7 8 10 7 7 6 Bolivia 5 2 3 5 8 6 8 8 8 Brazil 4 3 2 5 4 5 3 6 6 Chile 3 2 2 4 2 3 2 3 2 Colombia 3 4 4 5 5 5 3 5 4 Costa Rica 2 1 2 5 4 5 3 5 4 Ecuador 4 2 3 5 7 7 7 8 8 El Salvador 3 3 4 6 3 6 5 6 5 Guatemala 4 3 4 5 6 6 5 6 6 Honduras 3 3 3 6 7 7 7 7 6 Mexico 3 4 4 4 5 4 4 5 5 Nicaragua 3 2 3 6 6 7 7 7 6 Panama 3 2 2 5 3 4 4 6 5 Paraguay 3 3 3 6 7 7 6 6 6 Peru 4 3 3 5 5 5 4 6 5 Uruguay 2 1 1 5 4 5 3 4 3 Venezuela 7 3 4 9 9 9 9 8 7 Risk Scale Key LOW MEDIUM HIGH Under Review 1 2 3 4 5 6 7 8 9 10 

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2015 2016 2017 2018 2019 Argentina Presidential Legislature Bolivia Presidential Brazil Presidential Chile Presidential Legislature Colombia Presidential Costa Rica Presidential Ecuador Presidential Legislature El Salvador Legislature Presidential Guatemala Presidential Legislature Honduras President Legislature Mexico President Legislature Nicaragua President Panama Presidential Paraguay Presidential Legislature Peru President Legislature Uruguay President Venezuela Legislature President

RISK TRIGGERS – ELECTIONS

Source: International Foundation for Electoral Systems

1. Structure & Partners 2. Commercial Terms & Contracts 3. Extra Contractual (BITS and MITS) 4. Distribution

– CDS - challenge of basis risk – Bank Syndication - likely to shrink – Non Bank Investors - growing – Insurance - growing

• Political Risk Insurance
• Structured Credit Insurance
• Trade Disruption Piracy
• Political Violence Insurance
• Kidnap and Ransom, Piracy

– ESSENTIAL THAT YOU TAILOR AND STRUCTURE WORDING TO RISK

REALISING OPPORTUNITY

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MANAGING RISK

• Active public sector coupled with a growing commercial global market.
• The market’s reliability was robustly proven during the financial crisis.
• The market is maturing post-financial crisis and new participants joined in

2014; increasing to over 50 specialist (re)insurers.

• Existing underwriters have increased and broadened capabilities
• Soft market conditions set to continue as more capital enters the market.
• The number of enquiries from established users and new buyers increases

as Political Risks hit the headlines.

C&P INSURANCE RISK DISTRIBUTION

WE ARE OPERATING IN ONE OF THE MOST VOLATILE GLOBAL RISK ENVIRONMENTS SEEN IN DECADES, BUT THE MARKET FOR RISK DISTRIBUTION IS EXPANDING…

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C&P INSURANCE MARKET EVOLUTION

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• Approximately 50 private insurers in the market, largely London based, to

write Political and Structured Credit Risk, who accept risk on a stand alone

• r subscription / syndicated basis.
• C&P market is now bigger than at any time before - theoretical capacity

has reached in excess of USD 2bn for some risks.

Tenor Potential Private Market Capacity Contract Frustration (USDm) Comprehensive Credit (USDm) Investment Risks (USDm) Up to 1 year

• approx. 2,239
• approx. 1,877
• approx. 2,370

1 to 3 years

• approx. 2,289
• approx. 1,824
• approx. 2,370

3 to 5 years

• approx. 2,263
• approx. 1,470
• approx. 2,350

5 to 7 years

• approx. 1,948
• approx. 1,163
• approx. 2,040

7 to 10 years

• approx. 1,462
• approx. 502
• approx. 1,625

10 to 15 years

• approx. 750
• approx. 50
• approx. 800

GROWTH OF C&P MARKET CAPACITY

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Hong Kong:

Cover for Credit and Political risks still mainly flows to Singapore, but capability on Political Violence covers.

Singapore:

Max theoretical available capacity is USD962m for Credit and USD 1.24bn for CF/PRI.

Sao Paulo:

Capacity increasing as new players enter the

• market. The

challenge of regulation slows progress.

Dubai:

6 players established or setting up. Trade Credit now but will move toward Structured Credit and PRI in time.

NEED FOR GLOBAL RISK SYNDICATION, CLEAR UNDERSTANDING OF REGIONAL VARIATION SELECTION OF RIGHT ENTRY POINT - NOT NECESSARILY THE ONE ON YOUR DOORSTEP.

Mature markets New markets

New York:

Established market but seeing second surge of capacity and interest in line with the US economic outlook.

REGIONALISATION OF THE C&P MARKET

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• Low commodity prices - drive diversification with medium term

negative premium impact.

• Change in the risk environment

– Commodities - heightened economic and credit risk – Return of Geopolitics – Increased localised political risk – Emergence of non state actors

• Influx of capital - Softening market
• Increase in non trade business
• Liquidity - particularly in short term trade
• Bank and Insurance Regulation
• Sanctions

C&P MARKET CHALLENGES

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• Transactional risk will increase in certain territories as a consequence of

current trends and foreseeable triggers.

• The nature of the risk is likely to be Civil Disorder disrupting trade and

increasing security risk, heightened credit risk, government renegotiation / repudiation in resources and infrastructure contracts.

• Risk management can be effective for credit and country risk if understanding

is granular – country risk is not a linear single peril issue and we need to learn to expect unexpected correlations!

• Risk distribution and sharing options are growing - longer tenors, higher

capacity, greater flexibility.

• Critical to have thoughtful risk distribution strategy – risk analysis, selection of

underwriting partners, selection of entry point, tailored documentation.

• Significant opportunity to grow in adversity and secure higher return
• pportunities with Understanding, Analysis, Management and Distribution.

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CONCLUSIONS

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Nick Robson CEO Credit, Political & Security Risk JLT Specialty Tel: +44 20 7558 3643 Nick_Robson@ljtgroup.com

Our Specialist understanding of credit, political and security risks Enables

• ur clients to secure Growth and deliver enhanced Results to their

stakeholders.

THANK YOU