New Work on Chile’s Stalled Torre Costanera Project May Be Sign of Economic Revival

As far as economic indicators go, Chile’s stalled Costanera Center, the unfinished 984 foot tall tower in the heart of Santiago’s gleaming financial district, is harder to ignore than most. Construction of the tower, part of a US$600 million commercial real estate development overseen by Chile’s Cencosud S.A. (Santiago Stock Exchange: CENCO), stopped in January, 2009. However, a sign hanging in front of the empty, half-finished building still announces that the project is an “icon of Latin American development.”

At its inception the vast project was an indication of Chile’s economic strength and solid prospects. As work stopped and the tower has languished, unfinished, it has served as a reminder that Chile’s upward trajectory has been rocked off course by the world-wide financial crisis. As rumors swirl about the country’s future prospects the Costanera tower will continue serve as a highly visible indicator of Chile’s economic health. Any new construction will be seen as evidence that the country’s economy is emerging from recession.

Chile, Latin America’s fifth largest economy, has long been viewed as a model of successful growth. Thomas Trebat, the former Head of Latin America Research at Citigroup, currently the Executive Director of the Institute of Latin American Studies at Columbia University in New York, explained in a recent interview that “from 1990 until 2007 Chile led the region with 17 years of solid growth.”

When the Costanera project broke ground in 2006, it was seen as a testament to the country’s successful track record and high expectations for its own future. The 7.5 million square foot project was slated to include a 12 screen cinema, a world-class hotel, and more than 300 retail stores, catering to the middle and upper income segments of Santiago’s five million residents as well as the estimated 2 million foreign tourists who visit Chile every year. The tower was a visual reminder of Chile’s goal to be classified as a developed country by 2020.

However, as is often the case with countries that are recognized as models of growth and development; some of the awkward details of Chile’s economic health tend to get pushed out of the diagnosis. For all its success, Chile still has a long way to go.

Like many other countries in the region, Chile had its development plans put on hold by the 2008 financial crisis. On January 28, 2009 Cencosud filed a report with Chile’s securities market regulator, the SVS, stating that the company would resume construction on the project “once the economic uncertainty is overcome.”

In 2009 reports of positive economic data have been few and far between. According to data from Chile’s Central Bank, unemployment increased by a third, from 7.6% in April 2008 to 10.2% in September, 2009. Data from basemetals.com, a U.K. based research group, shows that prices for copper, Chile’s main export, fell by two-thirds between April and October, 2008. As earnings from copper exports fell, the country experienced its worst recession in a decade, with GDP contracting by 2% in the fourth quarter of 2008.

With weakened world demand for Chilean copper and investments, the exchange rate between Chile’s currency, the peso, and the U.S. dollar fell 31.8% from 638.2 on April 4, 2008 to 435.5 on November 21, 2008.

As long as Chile’s economic indicators remained bleak, it was unlikely that any new work would be completed on the Costanera tower. Contacted by telephone this week, Alfredo Merlet, a market risk analyst at Rabobank Chile, which is located in Santiago’s financial district, next to the Costanera project said, “I walk past there every day and haven't seen anything new.” According to Merlet, even though “recent growth in Chile has been better than elsewhere in Latin America, it’s still slow, and even with low interest rates and low inflation, Chile still suffers from high unemployment.” Still, Merlet believes that as soon as managers at Cencosud think the economy is recovering and there is sufficient demand to justify the investment work will re-start at the Costanera project.

In recent weeks as mixed economic data have coincided with rumors and uncertainty about plans to restart work on the project, the tower continued to serve as an indication of the country’s still uncertain future. Although Chile reported third quarter growth of 1.1%, full year growth for 2009 is likely to fall short of the 5.1% growth rate reported in 2008. Data from EPFR Global, a Cambridge, Massachusetts consultancy shows that after falling sharply in late 2008, portfolio fund flows to Chile have recovered, but have remained flat since the end of the second quarter of 2009, and actually fell by 0.5% in October.

According to data from Chile’s National Statistics Institute, consumer prices fell by 2.3% in November, the worst bout of deflation the country has experienced since 1934.

Soledad Covarrubias, 30, a life-long resident of Santiago, contacted by telephone this week said that she views the Costanera project as being “too ambitious.” She added, “it might also be too ambitious for us to say that Chile should be classified as a developed country.” To some observers, the tower may similar to Transantiago, the city’s new public transportation system which was implemented with great fanfare, but has been plagued by delays, disruptions, and reports of corruption. According to Covarrubias, “this type of project is too ambitious for a country with a low minimum wage, too many low paying jobs, and a high level of unemployment.”

Chile has an unemployment rate of 10.2% and according to data from the World Bank ranks as one of the most unequal countries in the world. Even though the Chile has been acclaimed for its region-leading efforts to improve social indicators, according to official estimates, more than one fifth of the country’s residents still live below the poverty line. Furthermore, even though Chile has been more successful than other countries in the region at diversifying its export base, its economy is still vulnerable to disruptions the revenues it earns from exporting copper, its principal export. According to data from J.P. Morgan, the investment bank, exports account for over two fifths of Chile’s GDP. Furthermore, metals and agricultural products still account for over 77% of the country’s total exports.

Alfredo Merlet, the market risk analyst, explained that Chile’s economic troubles this year should serve as a reminder that despite the country’s advancements in many areas, its “economic health still depends greatly on the price of copper.”

In a recent note Cameron Brandt, Senior Global Markets Analyst at EPFR explained that even though in recent months Chile has experienced net portfolio outflows, recent quarter on quarter GDP growth, a new upswing in copper prices, and signs of new investment activity, are all indications that “Chile’s economy will resume above trend growth during 2010.” In a recent presentation in New York, Luis Oganes, Head of Latin America Research at J.P. Morgan said that he expects that Chile will report annual GDP growth of 5% in 2010. So far for the year, Chile’s IPSA index has jumped 48%. Oganes explained “a year after the worst crisis the region has experienced in decades, it’s nice to see a bounce back in this manner.”

According to Chilean press sources, on December 5, 2009 Horst Paulmann, Cencosud’s chairman, told close associates that he is ready to re-start contstruction on the Costanera tower. The project could employ as many as 3,000 construction workers by March, 2010. Although Cencosud has yet to file any official statements regarding the project’s future, according to statements filed with Chile’s SVS, Paulmann, who together with other members of his family already controls 28% of Cencosud’s shares, is seeking to acquire an additional 2.8% stake, 49.8 million, shares, for an estimated US$200 million, a sign that bodes well for the company’s future, and the future of the Costanera project.

Thomas Trebat, the former head of Latin America research at Citigroup, explained even though “like all Latin American countries Chile was hit hard by the deterioration in commodity prices and decline in trade in late 2008, the country’s economy is ready to emerge from the crisis.”

Chile has come a long way in recent decades. More or less, the country has successfully weathered the storm of the 2008 financial crisis. In most respects Chile is an icon of Latin American economic development. However, even as construction begins again, the unfinished Costanera tower should serve as a reminder that in some areas the country still has work to do.

Moves by Central Bank Unlikely to Stop Peso’s Rise as Investor Funds Flow into Colombia

On October 23, 2009 Colombia’s peso slid 1% relative to the dollar, capping off a week that saw the peso fall by 3.9%, the largest decline since June. In recent sessions, the value of the peso dropped as traders speculated that Banco de la Republica, Colombia’s central bank, which is responsible for actively managing the country’s exchange rate policy, would attempt to weaken the peso.

In line with market expectations, on October, 23 the central bank announced that it would take steps to limit the rise of the peso, which has appreciated nominally against the dollar by 30% since March, 2009. Jose Ocampo, a former governor of the Banco de la Republica, who is currently a Professor of Professional Practice in International and Public Affairs at Columbia University in New York, explained that “the bank is intervening because the exchange rate is clearly overvalued for most Colombian exports.” Some economists, however, warn that any short-term exchange market action by the central bank is unlikely to have a significant effect on the peso’s long-term value.

Like many currencies, the Colombian peso has appreciated after sliding sharply following the collapse of Lehman Brothers and the outset of the 2008 financial crisis. On October 13, 2009, the Colombian peso was the strongest it has been, relative to the dollar, since August, 2008.

Marc Hoffstetter, a PhD economist from Colombia’s Universidad de los Andes, who specializes in international macro-economics and monetary policy, explained during a recent telephone call that “what happened in 2008 was exceptional.” According to Professor Hoffstetter, at the outset of the 2008 financial crisis “investors viewed the U.S. dollar as a safe haven, and large amounts of money flowed out of Latin America and other developing countries to the U.S.” As investors herded into what they perceived to be safe bets on dollar-denominated assets, countries across the globe, including Colombia, experienced sharp currency depreciations.

The value of the Colombian peso relative to the U.S. dollar plunged by 46% between August 1, 2008 and February 20, 2009, as peso-denominated assets were cashed out for dollars. More broadly, the U.S. Dollar Index, an instrument measured by the New York Board of Trade, that calculates the value of the dollar relative to a basket of currencies, increased by 3.5% between October and mid-November, 2008, as the dollar appreciated.

However, according to Simon Ringrose, Managing Director at Emerging Portfolio Fund Research Global (EPFR), a Cambridge, Massachusetts based consultancy, who was contacted by telephone this week, “there has been a complete reversal this year, after the massive outflows of ’08.” According to EPFR data, funds focused on emerging markets such as Colombia have received inflows worth US$50 billion so far in 2009. Colombia’s IGBC index climbed 36% since April, 30, 2009 as companies like Ecopetrol S.A., Bancolombia, and ISA caught the attention of investors.

In addition to attracting fund flows, Colombia has also been a target for direct investment. After falling sharply in the first quarter of 2008, foreign direct investment (FDI) and short-term capital flows have poured back into Colombia. According to data from Proexport Colombia, the country’s trade promotion agency, FDI in Colombia is expected to exceed US$9 billion by the end of 2009, a return to the pre-crisis investment level.

According to Professor Hoffstetter “what has happened in the past six months is a return to the previous trend” of peso appreciation. The recent inflow of foreign capital has corresponded with a rise in the peso’s value, relative to the dollar, of nearly a third, a rebound from the decline in late 2008. The exchange rate between the peso and the dollar closed at 1917, on October, 23 roughly the same level that was typical between June, 2006 and August, 2008, before the outset of the financial crisis.

With so many forces pushing the peso’s value up, intervention by the central bank is not likely to stop the peso's rise. According to a press release on Banco de la Republica’s website, the central bank plans to spend as much as 3 trillion pesos (US$1.6 billion) to buy U.S. dollars and government-issued peso bonds, but both Professor Hoffstetter and Mr. Ringrose, the portfolio fund specialist, view the move by the central bank to be unlikely to have a significant effect on Colombia’s exchange rate. Mr. Ringrose said, “there will be some short-term devaluation, but it’s not expected to sharply affect the situation” in the longer term. Professor Hoffstetter said that since about US$5 billion is exchanged for Colombian pesos every week, a short term action plan by the central bank “is not likely to have much of an impact."

Latin American Lens: New Developments

Latin American Lens is now launching Latin American Lens: Daily Updates, a sister service that will provide readers with short updates on Latin American corporate, financial, and political breaking news. Up to date news is now available at http://www.latamupdates.blogspot.com/.

Latin American Lens is excited to announce a new partnership with Emerginvest.com that will provide readers with access to content. Latin American Lens content is now available at http://www.emerginvest.com/.

Foreign Firms Eye Mexico's Family-Owned Brewers

One of Mexico’s two major family-owned beer producers, long protected from foreign takeover by a vigilant controlling shareholder, may finally cede ownership to SABMiller, a U.K. based company that owns a large and diverse portfolio of brands from Europe, Asia, and Africa, according to industry insiders. If negotiations are successful, it will be the first time a foreign firm gets a taste of this lucrative segment of Mexico’s economy that has, until now, been dominated by local bottlers.

Fomento Economico Mexicano, S.A.B. de C.V., a holding company which controls the largest beer and soda producing operation in Latin America, may see its beer business acquired by a foreign bidder, as part of a larger trend of consolidation within the industry. On October 1, 2009 Femsa, as the company is known locally, filed a late-day report with the BMV, Mexico’s main stock market, disclosing that it is “engaging in conversations with various businesses, exploring opportunities involving its beer business.” Following the announcement, the company’s U.S.-traded ADR jumped by 20% from (US) $37.07 to $44.40.

Although Femsa has not named the companies involved in the talks, press sources including the Financial Times and the Wall Street Journal have cited sources close to the company stating that SABMiller and Heineken are engaged in the negotiations. Olly Wehring, an analyst for just-drinks.com, a U.K. based beverage industry market research group, said that the top candidate for a deal is “likely to be SABMiller.” He explained that “because [SABMiller] has not made any big transactions recently, they’ve got the money, and they’ve got the familiarity with the region” that would make a deal work.

Founded in 1890, Femsa emerged as one of Mexico’s major independent industrial giants, achieving success through the popularity of its Cuauhtémoc beer, named after a well-known Aztec leader, which is still sold today under the Indio label. According to Femsa’s most recent annual report, filed with the U.S. Securities and Exchange Commission, members of the Garza family, one of the company’s original founders, and several of their associates currently control just under three-quarters of Femsa’s Class B voting shares and are able to unilaterally block unsolicited takeover bids from outsiders. Until very recently, the Garza family has been unwilling to allow the company to be drawn under the umbrella a large multinational brewer. However, since Mexico is now being viewed as a primary target for multinational brewers, the time may be right for a deal.

Lauren Torres, a New York-based analyst who covers Femsa for HSBC, said “while the older generation in the family trust may have been slow to walk away, the younger generation has a different mindset.” Given the pressure for consolidation within the beer industry, even if the family had been reluctant to sell in the past, it is now likely to be willing to cash out while still the company is still doing well.

With popular beer brands like DosEquis, Sol and Tecate Femsa controls 40% of the Mexican beer market and earned a net profit of (US) $671 million in 2008, but still lags behind the industry’s giants. According to Michael Esterheld of Plunkett Research Ltd., a Houston-based market research firm that publishes the Food, Beverage, and Tobacco Industry Almanac, Femsa’s annual sales have been “smaller than a company like Anheuser-Bush Inbev’s.” For example, in 2008 Anheuser-Bush Inbev, the world’s leading beer conglomerate, reported total revenues of (US) $23 billion, almost ten times the sales generated during the year by Femsa’s beer division.

A foreign firm with experience managing a diverse, global brand portfolio could help boost Femsa’s international sales. Olly Wehring, of just-drinks.com, said “there’s loads of potential [for Femsa’s brands] in the U.S. and also in other beer markets where people are looking for something new, something different.” According to Lauren Torres, the HSBC analyst, Femsa brands like DosEquis have “not yet reached full market penetration, and are not as far-reaching as they could be.” In 2008 Femsa exported about one-tenth as much beer it sold in Mexico. Femsa’s Mexican beers, it seems, are still mostly consumed by Mexicans. After convincing the Garza family that the time is right to sell, a new owner would have the opportunity to try and convince more U.S. and global consumers that the time is right to give one of Femsa’s brands a try.

New Trends in Latin American Corporate Governance

In his opening remarks at the September 8, 2009 book launch for the new Practical Guide to Corporate Governance: Experiences from the Latin American Companies Circle, held at the Council of the Americas’ Manhattan location, Ira Millstein, of the Yale School of Management, commented that “the statistics show that in developing countries [corporate governance] makes a big difference, a significant difference” and explained that such an in depth project on corporate governance had “never been done before” by a group of Latin American companies. He explained that “this is raw material that you will not get anyplace else.” Stephen Davis, of David Global Advisors, opened the discussion with representatives from the Companies Circle firms by telling the audience that the Guide “is important because it touches on the process of transformation” and helps explain how family owned firms can transition into global competitors with full access to capital markets.

The book, published jointly by the International Finance Corporation, the OECD, and the Global Corporate Governance Forum, is the result of an ongoing project by the Companies Circle, a group of 14 Latin American companies, was founded in 2005 upon the recommendation of the Latin American Corporate Governance Roundtable. The Companies Circle includes 14 major firms, including Colombia's Cementos Argos (Bogota Stock Exchange: CEMARGOS) and Interconexion Electrica S.A. (Bogota Stock Exchange:ISA), Peru’s Compania de Minas Buenaventura S.A. (Lima Stock Exchange: BVN), Mexico’s Desarrolladora Homex S.A. de C.V. (BMV: HOMEX), and Brazilian firms Companhia de Concessoes Rodoviarias (BOVESPA: CCR) CPFL Energia S.A. (BOVESPA: CPFE3), Embraer - Empresa Brasileira de Aeronautica S.A. (BOVESPA: EMBR3), Natura Cosmeticos S.A. (BOVESPA: NATU3), Net Servicos de Communicacao S.A. (BOVESPA: NETC4), Suzano Papel E Celulose S.A. (BOVESPA: SUZB6), and Ultrapar Participacoes S.A. (BOVESPA: UGPA4).

The book summarizes and analyzes the experiences that member companies had when making improvements to their own governance policies, and highlights the unique challenges of applying globally recognized best practices within the Latin American context.

The Guide includes a chapter that highlights the tangible benefits of good governance. For example, quantitative studies by the group showed that in the short term, public announcements of governance improvements were followed by an immediate 8 percent average increase in share value. Further analyses of the Companies Circle participants to a broad basket of Latin American companies.

In recent years, numerous studies have identified links between improvements to corporate governance and higher shareholder returns and lower cost of capital. The book includes a comparison between the 14 Companies Circle members, who are generally regarded as Corporate Governance leaders, and a broad basket of 1,078 listed Latin American companies (LAC). The study found that the Companies Circle group had an average Return on Equity (ROE) of 21.7%, compared to 16.7% for the peer group of LAC companies. Furthermore, the study showed that “Companies Circle members destroyed less value when macroeconomic conditions in Latin America were more turbulent until 2004, [and] created more value when the region became a more stable economic and business environment during the boom period of 2005-2007.” The study also found that on average, shares of Companies Circle firms trade at 21 times earnings per share (EPS), compared to only 16 times EPS for the LAC peer group.

Perhaps the most interesting result of the study, however, was that positive changes to governance frameworks, the types of changes that tend to enhance long-term value, were associated with strong boosts to firm value. The study found that firms reporting a governance improvements experienced “abnormal” positive returns of about 8%.

The book can be downloaded, free of charge, here.

Turbulent Times: Chilean Presidential Candidate Sebastian Piñera Attracts Attention from Rivals

Since the financial crisis erupted in September of 2008, across the world the line between politics and business has become increasingly blurred. In Chile this phenomenon has become particularly pronounced as national political leaders juggle the tasks of keeping their country’s economy on track while also jockeying for position in upcoming presidential elections.

Sebastian Piñera, one of Chile’s wealthiest businessmen who is part of LAN Airlines S.A.’s (Santiago Stock Exchange: LAN) controlling coalition, is the current front-runner in the country’s 2009 presidential race. In recent months he has been the subject of particular attention from the media and political rivals. This past week Mr. Piñera became the subject of attack after press sources revealed that through an investment firm he owns, he controls a small stake in Farmacias Ahumada (Fara), one of several major Chilean retail pharmacies recently accused of involvement in a high-profile price collusion scandal.

Piñera acknowledged to local Spanish-language press sources that through his Santa Cecilia investment fund he controls a small stake in Fara, just “like millions of Chilean [investors] and individuals whose pension funds hold stakes in the company.”

He added that attempts to assert that he “holds some responsibility for what happened with the pharmacies” are an unfortunate “abuse of power” by his political rivals.

Chilean press sources have reported that left-of-center candidate Eduardo Frei, Piñera’s primary competition in the upcoming presidential election, has seized the issue, and has, on national radio, expressed his belief that the Chilean public “is contemplating with astonishment [the fact that Piñera] is a shareholder in Farmacias Ahumada,” a company that has defrauded Chileans out of money spent on healthcare and pharmaceuticals.

Michelle Bachelet, Chile’s popular incumbent left-of-center president told press sources that her government would not tolerate “unscrupulous practices in any sector” and added that healthcare is one area in particular where “people should not play games.”

In recent months as presidential campaign tensions have heightened, Piñera, whose estimated net worth is over US$1 billion, has faced numerous threats of politically motivated investigations and mounting pressure to sell his holdings, which include a 27% stake in LAN Airlines, as well as minor stakes in numerous other companies. A conflict of interest law passed earlier this month forces asset-owning candidates like Mr. Piñera to liquidate their holdings.

Press sources have reported that Piñera is negotiating with LAN’s other main controlling shareholder, the Cueto family, over the eventual sale of his stake in the company. LAN has not published any official statements on its corporate website and has not filed any relevant documents with Chile’s securities market regulator, the SVS.