Venezuela is collapsing, Brazil is a political and economic mess, and most other Latin American nations are at the very least volatile, so what are multinationals eyeing growth in that region to do?
From a credit standpoint, Coface offers several other points to consider. The corporate-default-risk insurance provider’s country risk assessment rating ranks Venezuela dead last, unsurprising given its extreme political unrest and collapsing economy. Chile remains at the top of ranking, meaning MNCs selling to corporate customers there face the least risk in receiving payment.
“We would not recommend selling to corporates in Venezuela unless the seller receives payments in advance,” said Patricia Krause, the Coface economist covering Latin America.
Ms. Krause noted that since many LatAm economies are powered by commodities, significant shifts in commodity prices will likely impact exchange rates and thus pay a significant role in counterparty credit.
“If you give a corporate customer six months to pay you back, they may not have the money later on because of volatile exchange rates,” she said, adding that political instability can also impact exchange rates. “So a country’s political stability is another important point to keep in mind.”
Political instability often coincides with poor economic performance; Brazil, for example, impeached President Dilma Rousseff in August 2016, and former Lower House Speaker Eduardo Cunha was recently sentenced to more than 15 years in prison for corruption. Meanwhile, the Brazilian economy shrank 7.4% over the last two years. Ms. Krause said its critical to ask for the balance sheets of corporate clients in such situations, since weaker balance sheets could deteriorate quickly if a shrinking economy depresses revenues. “When economies are in recession, banks become more restrictive as well, so those clients may not be able to get sufficient financing,” she said.
More generally, when MNCs seek to do business in developing markets, commercial disputes can arise. Ms. Krause said it’s important to understand how potential disputes are treated locally: How long it typically takes to resolve those disputes, and how much it will cost. In general, it takes far longer to resolve such disputes in LatAm countries than OECD countries—749 days is the regional average, compared to 543 days for OECD countries, according to World Bank data. Ms. Krause noted that it can take 1288 cays to resolve commercial disputes in Colombian courts.
The cost to resolve such disputes is also important to review, since if that cost is a high percentage of the claim value, it simply may not be worth pursuing the dispute. In Colombia, Ms. Krause said, the bureaucracy to resolve disputes is formidable, resulting in an average cost of approximately 46% of the claim value. In Mexico, instead, the resolution period is 340 days on average and the cost is 33%. “Lower, but still high compared to OECD countries, where the average cost is 21%,” she said.
Similarly, MNCs should consider how long it typically takes to recover assets from companies that have become insolvent, given the cost that implies. Ms. Krause said that Coface measures companies in Brazil typically remaining in bankruptcy protection for more than eight years, compared to 1.5 years in the U.S. and 3.2 years in Chile.
“[Bankruptcy protection] has become very common because of the crisis the country has faced over the last two years. Lots of companies are in Chapter 11,” Ms. Krause said. “We have seen even big companies that you wouldn’t expect to file for Chapter 11 do so, because they had no other option.”