Despite some countries in Latin America experiencing a surge in social unrest and political instability over the past year, the region’s M&A market has been left relatively unscathed and deal volumes have remained high.
Latin Lawyer brought together a panel of leading M&A practitioners to discuss the political situation in some of Latin America’s largest markets, as well as the impact of uncertainty on dealmaking in the region. The roundtable was moderated by Paola Lozano of Skadden, Arps, Slate, Meagher & Flom LLP and features contributions from Jaime Robledo of Brigard Urrutia, Pablo Guerrero Valenzuela of Barros & Errázuriz Abogados, Iván Delgado González of Pérez-Llorca, Ignacio Pesqueira Taunton of Galicia Abogados, Estanislao Olmos of Bruchou, Fernández Madero & Lombardi, Luciana Cossermelli Tornovsky from Demarest Advogados and Jean Paul Chabaneix of Rodrigo, Elías & Medrano Abogados.
The following is an edited transcript. Since the roundtable, significant events may have occurred.
Paola Lozano: Various countries across Latin America seem to be experiencing increased polarisation, severe social unrest and some political instability. This roundtable gives us an opportunity to have a conversation about dealmaking in the current environment in the region.
Of course, each country in Latin America is unique. They each have their own issues, and their own paths to finding solutions, or to evolution. Let’s start by describing the current situation in each of the large markets in Latin America. We will then move onto how that environment actually impacts M&A dealmaking. Afterwards, we’ll get into the specifics of some regulatory changes that derive from the current environment, and then we will attempt to look into the future.
Let’s start with Peru. Jean-Paul, can you give us a sense of the potentially dramatic changes occurring in terms of the political situation and social environment?
Jean Paul Chabaneix: Clearly the last year and a half has been full of surprises The government decided to shut down the economy completely for three months, which didn’t help control the pandemic. Our economy suffered significantly as a result of that shutdown. Following that, we elected a radical left-wing president, which has created a lot of uncertainty as to the future of private activity in Peru – and in particular, M&A-related activity, which is one of the areas where we are already seeing an impact.
This is a government that has had links with terrorist movements in Peru back in the 1980s and 1990s, which basically aims to change the whole economic structure of the country by amending the Constitution. Their proposal is that the state should have a much larger role than it has had so far, which of course, in the case of Peru, is a road that we already went down in the 1960s and 1970s, with terrible results. The economy suffered precisely as a consequence of the government not managing things properly back then, so there is once again a lot of uncertainty, and a lot of fear too.
How far can the new government go in terms of impacting an environment for business? Clearly, as a result of the level of uncertainty, we have already seen a number of scenarios which we thought we had left in the past. We have been downgraded by at least one of the main risk-rating agencies, the exchange rate has surged significantly in the last two months – basically from 3.7 soles for a dollar to 4.2. There is no clarity as to where this is going to take us. In addition to that, the government is not showing any signs of rectifying the situation. It’s keeping silent, and there is a party behind President Castillo that seems to be running the show. The outlook at this point is not the best one, to say the least, and this is going to adversely impact our activity.
Lozano: Let’s switch to Mexico. A few years ago, with the election of Andrés Manuel López Obrador (AMLO), the markets were preparing to see something somewhat similar, but it doesn’t appear to have gotten to the same dramatic results as people are seeing in Peru.
Ignacio Pesqueira Taunton: Unfortunately, Mexico has not been spared from the polarisation trend. We are three years into this new government, with many concerns. I would say that there’s a huge, unprecedented lack of trust, in particular by Mexican investors. People in Mexico are really not willing to invest in the country at this stage and there is a significantly negative sentiment in that respect. Despite this, we are seeing a number of Mexican companies and high net worth individuals capitalising on efforts by private equity funds, and large corporations trying to buy into the market, so there’s a lot of activity. As a general rule, it’s predominantly Mexicans selling.
Lozano: We’re curious to understand if there is an expectation of change in the political environment in the near future. Is AMLO continuing to have the support he needs to stay in control, and is that going to perpetuate the polarisation? Or is there any foreseeable change?
Pesqueira: I don’t think there is any foreseeable change. We had a recent election – AMLO’s party lost some power in Congress. He doesn’t have the ability to change laws any more, and that’s a big plus. He doesn’t have the ability to change the Constitution – he was eight votes shy in his prior term. There is another vote early next year, but I think that he will continue to stay in power, and everybody is thinking about what’s going to happen in three years. A lot of people are seeing this as a countdown – we just want to wait and see. Until then, it’s most likely going to be business as usual – that’s at least the positive expectation. As you know the currency exchange has been stable, which is very relevant, in Mexico at least. This government has been austere, and they have not engaged in much debt, which is what you would typically see in politically like-minded governments. So that’s positive if you look at things in the long run.
Lozano: Clearly some challenges. But I think the perception from the outside is that the financial impact could have been a lot worse given the political environment, while realising the country is still deeply polarised. There seems to be some status quo for most of the industries (other than energy), and some understanding that at least some basic rules of a market economy are being kept.
Pesqueira: Yes, and people from the outside have a better perspective, I think. People inside Mexico are very disappointed, very negative, and what we’re seeing is people from the outside taking advantage of opportunities inside.
Let me just share very three very specific points with respect to social unrest and political instability in Mexico. One is, there is no social unrest in Mexico right now. People who usually would be the centrepiece of social unrest currently feel represented by the existing government, so there is a big division in the country, but no social unrest. It would have been different, of course, if another party had won the last election.
Number two, federal courts have mostly proven to have done their jobs, in terms of being able to generate the checks and balances that a government like Mexico requires. And that is very relevant because a number of changes in laws were held back by the courts, and that is very positive because we were sceptical about that when this ordeal started.
The last thing is that, strangely, after the election, the process to appoint the new president started very early. There is a lot going on, and that shifts a lot of the attention to the political scene, which is one of the reasons we think there will not be that many changes just yet.
Lozano: Let’s switch to Chile. I think Chile is now at a little bit of a crossroads. We have to see what’s going to happen and which of the potential two paths it might take – or maybe a better path altogether. Pablo, tell us your view of the political environment and social situation in the country.
Pablo Guerrero Valenzuela: As you know we’ve experienced some tough times in Chile since October 2019. We had a country that we thought was very stable – the exception in the region – and we woke up from this dream to something we have not seen in 30 years. Social unrest and political violence. This was all ignited by an increase in the metro fare of 30 Chilean pesos – in US dollars that’s less than five cents.
After that, we had two months of political violence, and social unrest. Nobody saw that coming, both from the political spectrum as well as the private sector. The country realised at some point that even though all data showed Chile was one of the less unequal countries in the region – it had reduced poverty substantially in the last 30 years, it had a stable economy and rule of law – this was not enough. Not only for low-income sectors of the country, but especially for the middle class. There was a big section of the middle class that had substantially improved its living standards in the last few decades, but the country was not growing any more and there was a lot of debt. There was much more inequality and segregation than was acknowledged. Added to this, there was a heightened perception of corruption across the country, even though we tend to think that Chile is not a corrupt country. There is a great mistrust in all kinds of institutions – private and public institutions, political parties – and in the last years there have been a number of big scandals in the public sector, illegal financing of political campaigns, cartels, insider trading scandals, etc, which the people felt were not sanctioned the way they should be. This created an environment for change.
What came out of it? A big social agenda in terms of governmental spending – we’ll see how it ends up – and more importantly, an agreement to draft a new Constitution, which has created significant uncertainty. We had a referendum: 80 per cent of the country approved the proposal to draft a new Constitution. In addition to this, we have had the election of the Constitutional convention that leans to the left in a way nobody expected. The radical left, in some way, took control of this convention, and we’ll see what will come out of it. I think that’s one of the greatest concerns that we currently have. On top of that, we have a presidential election in November and December. Fortunately, I think the primaries showed an electorate moving more towards the centre, calling for more moderation, but we’re still waiting to see what the results will be.
Lozano: The case of Chile is a very interesting case study, in particular for Colombia, where we recently started to see a very strong return of political and social unrest in the big cities. Some of us outside were immediately reminded of Chile, and what had happened with the metro price hike. Some of us were a bit disappointed that Colombian institutions were not more prepared, having seen what had happened in Chile: the violent protests in the street, and how they led to some very dangerous activity against the respect of institutions and the rule of law. Jaime, tell us how that has evolved in Colombia.
Jaime Robledo: I think there are a lot of common points we share both with Mexico and Chile, and I think that is true throughout Latin America. I was looking at a survey on the Ipsos Broken System index, where they ask the general public certain questions like: ‘Is my country deteriorating? Am I poorer than before? Is there a perception of corruption?’ And when you take a look at that, you see that in most cases you find Chile, Mexico, Colombia and Peru score the lowest in the region.
The perception that exists in our countries is, therefore, one of the things making it so difficult to change the trend. Colombia was experiencing very good rebounding economic activity in January 2020. The markets were very happy with the economic performance, but covid-19 came and our economy went down in terms of GDP by around 6 per cent.
Then during the beginning of this year, around March or April, we started seeing another recovery, which was impressive. We saw months of growth – of 8 per cent, 9 per cent – but then came this social unrest. The social unrest was originally sparked by the proposal of a tax reform – very poorly managed by the government when it was presented, and very opportunistically taken advantage of by the opposition.
When you look at the tax reform, it proposed three things. The first was to broaden the taxpayer base to make the tax system more redistributive. It was not a regressive tax reform – for the first time in a long time, we had a structural tax reform. Even the people that were being affected in the base, middle class people, had relatively high income, from a Colombian perspective. The second thing that was outlined in the reform was the higher taxation on high net worth individuals. The third was ultimately taxation on dividends. Therefore, when you take a look at those three changes presented by the government in that tax reform, they were all in favour of redistributing wealth and creating more equality.
The opposition used the reform to fuel the poorer classes, however, and they went out to the streets motivated by the sentiment that there is a lot of corruption and a lot of inequality. When you look at the numbers from 20 years ago to today, Colombia is substantially better off than it was was then, but there is significant dissatisfaction with the fact that although the lower-income and middle-income people are better off, the high net worth individuals are much better off. There’s a lot of indignation about that.
This point of contention was being used by the candidates of the opposition, to rally support for the presidential elections next year. However, while the social unrest was terrible during May and June, paradoxically, it created a boomerang effect on the opposition. People started seeing that left-wing candidates were supporting blockages, shortages in supply and the slow-down of economic activity. People that earn their living on a day-to-day basis started saying, ‘This is not the guy that’s really helping me, I’m not getting any food on my table.’ What we’re seeing in the latest surveys of voting intent, and the polls, is that candidates that came from the left – particularly one of them – are losing support. The problem now is that we don’t have a candidate that is sufficiently robust or strong.
In economic terms, what we have seen in the last two months is another rebound. We’ve seen growth, and we see a lot of activity. I think we’re going to continue to see a yo-yo effect from now until the elections, in the sense that the left is going to try to destabilise the country with blockages, riots and strikes. The industrial class and the entrepreneurial class – which is surprisingly being seen in a much more positive light– are trying to make everybody see that if we keep on working, we’re going to get out of this.
Lozano: I agree that there is polarisation, fuelled by inequality. We have to work on that, but also the disinformation that comes with it is extremely dangerous. When I think about polarisation with disinformation, in addition to thinking about the US elections, I immediately go to Brazil. It makes me think about how politics has become a media war in terms of who can best handle social media, and how many use the anger of the lower classes to fuel what in some places – including the US – becomes a real force of destabilisation and sadly, in some cases, could lead to breakages in democratic institutions. Luciana, tell us how you’re seeing things in Brazil in this regard.
Luciana Cossermelli Tornovsky: Current alignment among Brazilian government branches, public administration bodies and representatives of the Brazilian Supreme Court is considered to be in the most fragile state since the beginning of President Bolsonaro’s mandate. We have been facing a huge dispute between our President and members of the Supreme Court that can put the Brazilian democracy at risk.
On 7 September, a date on which we celebrate Independence Day, Bolsonaro’s supporters organised several protests in a number of Brazilian states claiming the removal of certain members of the Supreme Court from office. Bolsonaro was present at two of these protests and gave speeches that were heavily condemned by several key members of the political establishment, including the Presidents of the Supreme Court, the Senate and the House of Representatives, which all highlighted Brazil’s strong commitment to democracy and respect to democratic institutions.
The backlash was definitely felt by the Bolsonaro administration, which faces its lowest popularity rates since the beginning of his mandate in view of a poorly effective policy adopted for fighting the covid-19 pandemic and its impact on the Brazilian economy, which already shows signs of high unemployment, inflation and indebtedness. Given that the heavy criticism highlighted the instability of the current administration and even chances for the setting up of an impeachment process, President Bolsonaro released an official letter to the Brazilian people ensuring his commitment to democracy and demonstrating signs of regret on some statements made on 7 September.
As Presidential elections approach in 2022 and the polarisation of society increases, the Brazilian political climate seems to be on the edge, which certainly reflects in several pushbacks for the current administration’s liberal economic agenda, including the privatisation of large state-owned companies and the de-bureaucratisation of the Brazilian tax system.
Lozano: We have to say, some of it looks like a borrowed playbook from the Trump administration, including some of the claims that were made and the dangers of attacking democracy as a way to win elections.
Estanislao, Argentina might be, for the first time in a while, a little bit of a shining star, in the sense that it appears that the democratic process is working, and the discontent with the populist government has grown at least enough to make an impact on the polls. Tell us about Argentina.
Estanislao Olmos: Argentina entered into the covid-19 crisis amid a change of government that couldn’t manage to generate trust, so the economy continued to suffer. The economic crisis is more a political economic crisis and was not settled by the previous government – it is even less settled by the current administration. The results of the primary elections in August 2019 doomed the chances of President Macri’s re-election amid a poor economic performance. That led to Kirchner’s return to power. Their campaign speech showed more moderation – a more balanced intention. However, very rapidly, it became clear that they were not sticking to the campaign pledge. The change of direction spread pessimism, but with some level of overreaction.
Inflation continues to be very high, driven by, among other factors, the printing of money and a high tax deficit that essentially eroded all the relevant effort made by the previous administration at the end of its term.
Covid-19 made matters even worse for the current administration. They made serious mistakes in their vaccination strategy, resorting only to mandatory lockdowns, which lasted too long. Now the population is fed up, angry – and the economy got worse. It’s showing signs of recovery, but there is still a long way to get back to early 2020 levels. On the other hand, although presidential elections are still far away – in 2023 – the results of the elections would certainly provide a context for a more rational debate and reduce the risk of a radical unorthodox agenda.
Also, it may be evidenced that the agenda push by President Macri to strengthen institutions, to make the state more efficient, was actually appreciated by the population. Note that…
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