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Notes 9-21-2010

Notes 9-21-2010 - COMM 4559-501 Emerging Markets Notes(A7...

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COMM 4559-501: Emerging Markets Notes 9-21-2010 (A7) Note on Country Risk & Competitive Advantage in Latin America Political risks o Declining, putting more focus on economic risks Is this true? Selectively Populists have been elected recently in Venezuela, Bolivia, and Ecuador All are pursuing nationalist, anti-capitalist policies and abandoning free markets Economic risks o Foreign exchange rate movements o Government debt repayment (note that since this article, Argentina defaulted on its sovereign debt. Other states have negotiated extended repayment schedules.) o Devaluation crisis cycles and high inflation o President of Brazil maintained economic system Invested more in the poor 1999 – article foresees this o “However, the relatively recent acceptance of a diminished role for government is likely to encounter periodic opposition from populist demagogues, and changing social forces are likely to support renewed government intervention in the economy from time to time. Latin America’s extreme polarization of income and wealth will not always fit comfortably with its new faith in democracy.” (Pg. 2, top) Latin America Ranks o Poorly in international competitiveness despite the advantage of low wages o But in some ways, it may not be any worse than Canada due to Quebec secession issues Aboriginal rights claims on natural resources Dealing with risk and uncertainty
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o Time of investments – wait for foreign exchange rate equilibrium o Borrow locally – reduces losses due to foreign exchange exposure o Overweight risk of devaluation in risk assessments o Focus on business activity with lower capital requirements o Spread out capital flows to balance exposure How does a business manage? o Accelerate collection of receivables o Delay payables o Link pricing to a fixed exchange rate o Barter for critical inputs o Overprice intercompany transfers or purchased raw materials (usually paid in hard currency) o
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Notes 9-21-2010 - COMM 4559-501 Emerging Markets Notes(A7...

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