Will Nationalization in LatAm Affect Investments

As nationalization proceeds in Venezuela, following similar moves in Ecuador and Bolivia last year, will it cause foreign investors to pull back because they're worried about the trend spreading to other Latin American countries? Standard & Poor's Ratings Services believes that even though nationalization has significant historical precedent in Latin America, all nations in the region aren't marching in lockstep.

The climate for foreign investment in Latin America will continue to vary widely, largely dependent on the national administration in each country.

Venezuela's actions to date haven't been as hostile as some observers had feared. The government has negotiated buyouts in the electricity and telecommunications sectors, and is expected to offer compensation to foreign investors in heavy oil projects when it assumes majority control by May 1, as previously announced. Nonetheless, "nationalization will provoke second thoughts by foreign corporations that want to invest in Venezuela," observed Jose Coballasi, credit analyst and director in Standard & Poor's Mexico office who follows international industrial companies.

The rest of Latin America presents a mixed picture, explained Lisa Schineller, director who covers Ecuador and Bolivia in Sovereign Ratings at Standard & Poor's. Changes to its hydrocarbons law and the termination of an agreement with a major oil company are likely to limit Ecuador's foreign investment. Nationalization of the oil and gas industry in Bolivia last year has clouded that country's investment prospects, although it has moderated its stance when renegotiating contracts.

Other nations in the area are more receptive to private and foreign participation in the oil and gas sector, including Mexico, Colombia, and Trinidad and Tobago. "In Mexico, for example, President Felipe Calderon has highlighted the need to establish strategic alliances with foreign players to gain access to state-of-the-art technology," reported Mr. Coballasi.

Brazil presents a stark contrast to other countries in the region. "The rules of the game and the framework for foreign investment in the hydrocarbons sector have remained stable under Brazil's pragmatic President Luiz Inacio Lula da Silva," stressed Ms. Schineller. "However, other factors that limit the attractiveness of investing in Brazil in general include an extremely complex and heavy tax burden and the so-called 'custo Brasil' the bureaucratic, high cost of doing business."

Although headlines about Venezuela, Bolivia, and Ecuador raise concerns about the business environment in Latin America, the cyclical nature of government intervention and the region's need for foreign investors' technical and financial resources favor continued investment, despite the nationalistic rhetoric."

Posted to the site on 13th April 2007