Recent Nationalizations do not Raise Latin America's Political Risk
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On Wednesday, Bolivian President Evo Morales revoked Swiss mining company Glencore’s (LON: GLEN) control of the Colquiri tin mine. In April, Argentinean President Cristina Kirchner re-nationalized oil company YPF. And in May President Morales completed the nationalization of the utility Red Electrica. The moves sent shivers through investors, raised hackles in Europe and have filled my inbox with articles on heightened political risk from an alleged resurgence of resource nationalism. These concerns are well-founded but exaggerated; less flighty investors can find excellent values in the region.
Bolivia and Argentina are Outliers
Bolivia has an illustrious record of nationalizations, starting with a miners’ rebellion-turned-revolution in 1952, which ended with complete nationalization of the country’s mines. Upon taking office in 2006, President Morales nationalized oil and gas operations, mostly from the Brazilian parastatal Petrobras (NYSE: PBR), and has continued to nationalize smaller operations deemed to serve the national interest, such as utilities. Bolivia also holds the world record for coups and in the 1980s set world records for runaway inflation.
In comparison, the tenure of President Morales has been remarkably stable: he was fairly elected and reelected, has stayed in office for six years and has overseen macroeconomic stability, including stable growth. However, Bolivia is still a textbook case of political and social risk, a tiny market, and not a regional vanguard or thermometer.
Latin American experts alternately regard Argentina as an outlier, a basket case or a country that defies the rules. The country maintains an antiquated federalist system with a weak central government that is forced to constantly pander to regional interests. In the debt crisis of the 1980s, Argentina, along with Mexico, played brinkmanship with international banks while the rest of the region followed orthodox adjustment plans. In 2001, Argentina defaulted on its debt instead of adopting orthodox austerity measures, and then proceeded to grow almost 10% a year for the next decade. No other country in Latin America has followed suit. In sum, Argentina is politically risky and a regional outlier politically and economically.
Resource Nationalism is not Resurging
The nationalizations of Glencore, Red Electrica, and YPF made headlines, but they are isolated incidents that held specific domestic political advantages, not harbingers of a trend. These nationalizations do not resemble the wave of nationalizations in the early and mid-2000s, when electorates brought self-identified socialist presidents to power on promises of nationalizations and redistribution. As Mark Weisbrot of the Center for Economic and Policy Research and Benjamin Dangl of the University of Vermont claim, many of these nationalizations rejected the terms of poorly designed privatization projects, not private property or capitalism.
Brazil, Mexico, Peru, and Chile not at Risk
Presidents Morales and Kirschner nationalized very specific projects for calculated domestic political gain. However, the leaders of the biggest markets in the region are pursuing orthodox economic policies. Brazil’s President Dilma Rousseff – a former Marxist guerilla – has pursued comprehensive and conventional policies such as lowering the interest rate to stimulate growth, preserving successful anti-poverty programs and strengthening environmental and labor regulations. Brazil’s mining giant Vale (NYSE: VALE) is suffering from a slowing China and heightened political risk fears that show little chance of becoming reality. In Mexico, the leading presidential candidate hails from a party that historically derived power from massive parastatals, but he has called for partial privatization of the state oil company. While Peru’s President Ollanta Humala used fiery resource nationalism rhetoric against mining companies on the campaign trail, he has made no specific moves or threats and has left economic policy in the hands of moderate, U.S.-trained economists. The risks associated with Rio Tinto’s (NYSE: RIO) La Granja copper mine appear to be run-of-the-mill development risks, not political ones. Similarly, in Chile, BHP Billiton’s (NYSE: BHP) extensive copper operations have continued through political transitions and widespread student protests practically undisturbed.
The Bottom Line
Investors should do a double take and reassess their investments’ political risks when presidents start nationalizing. The recent nationalizations heighten Argentina’s and Bolivia’s already considerable political risk, but not that of the larger economies in Latin America. The governments of Brazil, Mexico, Chile and Peru have followed and continue to follow conventional economic policy in the pursuit of stable growth and participation in international markets. Natural resource companies in these countries do face considerable risks, but political risk is not at the top of the list.
CallaMarie owns shares of Companhia Vale Ads and Petroleo Brasileiro S.A. (ADR). The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
