Why Are Spanish Companies Beating a Retreat from Latin America?

Latin America helped transform Spanish firms into global ones. But conditions are changing and some are getting cold feet.

A few months ago, El País ran a curiously titled article, “Las promesas incumplidas de América Latina”, which more or less translates as “The Broken Promises of Latin America.” In it the author lays out how and why Latin America is no longer delivering the goods for big Spanish corporations. For the past 30 years the region has provided huge money-making opportunities for many of those companies. It has also served as a giant springboard for international expansion as well as a highly lucrative home from home during Spain’s sovereign debt crisis. But in the face of deteriorating economic conditions and rising political uncertainty in the region, some firms are now getting cold feet.

“Latin America is Bleeding”

That’s how the El País article starts, somewhat graphically. It goes on:

“‘As if its chronic problems were not enough, Covid has struck a blow that threatens to condemn the region to a lost decade economically and at least two lost decades socially,’ says Rebeca Grynspan, Secretary General of the Ibero-American Summit.”

Even before Covid made its first official appearance in Latin America, big cracks were already showing in the region’s economy. Both Chile and Colombia had been rocked by massive social protests over economic inequality. Argentina was waiting for yet another restructuring of its vast debt mountain. The largest economy, Brazil, had barely recovered from its longest recession in history (2014-2017). The second largest, Mexico, had effectively stalled, having experienced three quarters in a row of gently declining annual GDP.

Things are a lot worse today. The region accounts for around 30% of all Covid-19 deaths despite having just 8% of the world’s population. Poverty has soared back to 1990 levels. Inflation is surging in many countries, including Brazil and Mexico, despite repeated interest rate hikes. Unlike more advanced economies, most of the region’s cash-strapped governments with weak currencies couldn’t afford to provide the sort of financial support programs being rolled out in more advanced economies. The fiscal response in Latin America has added just 28 cents of extra deficit spending for every dollar of lost output. By contrast, governments of more advanced economies have boosted their spending by a dollar for every dollar of lost output.”

“Twenty-twenty was the worst year for the region’s economy since records began,” says Grynspan.

Bad Timing

As conditions deteriorate, Spanish companies are packing their bags, although many of them will not be leaving any time soon. First, they have to find a buyer for all their assets. In many cases those assets are spread over multiple borders, if not throughout the entire region. And now is not exactly a good time to sell businesses in Latin America.

In November 2019, the over-indebted telecom giant Telefonica announced it was selling off most of its assets, with the exception of those in Brazil. It needed the money to pay down its debt in order to avoid losing its investment grade rating. In 2019, it divested its operations in Panama and Nicaragua. In 2020, it offloaded its Costa Rican subsidiary. In January this year, it sold its mobile phone masts in Europe and Latin America to American Towers for €7.7 billion. But many other assets are still up for sale.

Earlier this year the utility company Naturgy announced a partial withdrawal from the region. The company will reduce its operations by a third and in future will focus on countries with stronger currencies after suffering “a significant depreciation [in its revenues] in key Latin American countries” last year. The company also plans to sell its electric grids in Chile to the Chinese state-owned utility China State Grid, for €2.57 billion.

As companies gradually retreat from certain markets, Spanish direct investment in Latin America is falling. In 2019, it fell by 38% to €6.6 billion euros. Between January and September 2020, the latest period for which data is available, it plunged by a further 58% year over year, to €3.2 billion. 

Depreciating currencies is an oft-cited reason for why Spanish companies are reducing their footprint in Latin America. Telefonica made a $2.2 billion write-down to its accounts last year, which it largely blamed on the collapsing value of the real against the euro. In its presentation of its financial results for 2020 Grupo Santander acknowledged that slumping exchange rates in Latin America had led to a 7-8 percentage point decrease in its revenues.

Another reason is that politics in the region is getting more complicated, meaning that fiscally challenged, left-leaning governments are beginning to demand a higher price for their natural resources.

“The business climate is no longer favorable,” says Alfredo Arahuetes, a professor of international economics at ICADE School of Business and Economics, in Madrid. “The most striking example is Andrés Manuel López Obrador in México,” whom Arahuates describes as a “super-interventionist”.

As NC has previously reported, AMLO has not exactly endeared himself to US and European multinationals over the last year, after, among other things, banning GMO corn and the toxic weed killer glyphosate; strong-arming global corporations into finally settling their decades-long tax debts with the Mexican state; passing one of the strictest food labeling laws on the planet, in a desperate bit to halt Mexico’s obesity epidemic; and most recently announcing that Mexico will no longer sell its crude oil abroad.

Yet even as AMLO’s government intervenes more in the economy, overseas companies continue to bet big on Mexico. In 2020, it was one of just six countries in Latin America and the Caribbean that saw an increase in foreign direct investment. The country has, however, lost some of its shine for Spanish energy giants, as AMLO has sought to reverse privatisation of the energy sector. Iberdrola, the main private electricity generator in Mexico whom AMLO recently accused of corruption and price gouging, has ruled out new investments until the regulatory framework is clarified. 

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