WASHINGTON-The old adage maintains it’s all about location, that the success of an investment depends on locale. And Latin America has been the locale of choice for investors looking for incredible growth rates and high demand for service. With several countries in the region opening up their markets to competition, local and foreign investors have stepped up in recent years to fill in this demand for service and reap the benefits of an unripe market.
Well, it may be important now to add a good measure of timing to the formula about location. Although not as badly as the Asian market, the region has been considerably affected by the international financial crisis, jeopardizing investments and growth rates. Latin America, after all, still is considered an emerging market, and as such particularly vulnerable to the whims of the financial world.
The first casualty was the new PCS (Personal Communications Services) licensees in Mexico. With a rapidly approaching deadline of 30 September when the remaining 80 percent of their licenses had to be paid, Unefon (Sistemas Profesionales de Comunicacion S.A. de C.V.) and Midicel S.A. de C.V. requested extensions from Cofetel, Mexico’s regulatory agency. Faced with the option of default, Cofetel extended the deadline by 180 days, imposing interest rates and delays on granting the concession titles. All other licensees met the deadline.
Unefon later indicated it was looking for private-investor partners to help pay for the licenses.
In Chile, CTC (controlled by Telefonica de Espana) announced investments for 1998, valued up to US$150 million, were being postponed because of concerns about the international financial crisis.
Most recently, Brazil delayed from 2 December until 15 January the sale of the “mirror” fixed-telephone licenses to compete with the newly privatized Telebr s companies, reportedly to give investors more time to analyze the economic system in the country.
“This financial crisis obviously affects [Latin America] more adversely than it affects the U.S. telecom market,” said Sanjay K. Jindal, communications industry specialist at Houlihan Lokey Howard & Zukin, an investment banking firm headquartered in Los Angeles. “Valuation of the telecom sector in Latin America is almost half of the equivalent stock in the United States, and the reason is because investors are more comfortable with the United States and Europe.”
Placido Valdes, vice president for international operations at MasTec International, a Miami-based company with numerous investments in the region, agreed: “Those investors that got hit hard with Telmex four years ago learned with their mistakes. There is nothing telling us that it won’t happen again.”
Nevertheless, MasTec is betting on the potential of the region. “The benefits [of investing in the region] far exceed the risk, especially in Brazil,” Valdes asserted. With the magnitude of the projects being considered in the region, he explained, the area cannot be ignored. “There are the PCS projects in Mexico and the mirror companies in Brazil. There is not such kind of projects in the United States.”
Most analysts are cautious in their predictions. Investors, equipment manufacturers and operators are waiting to see where this will lead.
“Until September, it looked like Latin America was going to be spared, but with the tremendous outflow of capital, the crisis has had a significant affect [on the region],” said Glenn S. Gerstell, partner and head of the Global Telecom Group at Washington-based Milbank, Tweed, Hadley & McCloy.
Brazil has been particularly vulnerable to capital flight, depleting the country’s reserves. The liquidity crunch has led the government to offer the new Telebr s owners advantageous deals for advance payment of the licenses, bringing currency into the country.
The situation in Brazil is troublesome because of the weight the country pulls in the region. “Brazil will drag down the Latin American growth average” in the next few months, said Jindal. Analysts also were cautious because of the uncertainty related to the general elections that took place in October. Although very few had doubts President Fernando Henrique Cardoso would be reelected, all the pressure did little to alleviate market insecurities.
But, as Michael Krier, director for Latin America at the Washington-based The Strategis Group pointed out, one needs to remember that “Brazil is not Russia; it won’t fall apart. There will be problems with investments, but it is more of a short-term nature. In the medium- and long-term, it will correct itself out.”
Because of the liquidity crunch, those companies with deep pockets or linked to foreign operators will be better off in the near future. So far, there have not been major changes in strategic planning in Latin America. Although a slowdown in the growth of wireless services is expected, companies are keeping up with their deployment and expansion plans.
“There have always been ups and downs in the market. BellSouth is a long-term player who believes in the potential and strength of the market [in Latin America],” remarked John Price, spokesman for BellSouth International. BellSouth’s operations in Brazil signed up more than half a million subscribers since introducing service in May.
Stan Koziol, president and chief executive officer of New York-based Movilpage Communications Inc., also is betting on the region. “We are well aware of the crisis in Latin America. We still have plans of moving into that market, and [Movilpage has not adopted] a slowdown strategy yet, but recent news [about Brazil] may make us revisit our plans.” Movilpage currently is building out a paging network in Argentina.
Equipment manufacturers are still optimistic. In Brazil, companies are expecting high sales to B-band operators, new A-band owners and soon mirror companies’ licensees.
“There is competition in the wireless sector in Brazil. [A-Band operators] are in excellent financial condition, able to leverage new investments. If B-band operators decide to limit investments, they will have a hard time meeting [regulatory agency] Anatel’s obligations, and will also lose out to the A-band operators,” explained Jo
