Coronavirus Pitches Mexican Economy into Battle Against Recession, Canary Ventures’ Brazilian Startup Program, Why Brazilian Airline Shares are Hardest Hit by the Coronavirus Panic, and More from Latin America...

Other featured stories include: Brazil’s Battered Job Market Faces New Foe: Coronavirus, Trump Will Announce Strict New Border Controls in Response to Coronavirus, Brazil’s Two-Circuit-Breaker Day is One for the History Books, Colombia Says it Has $3.65B to Spend on Coronavirus Economic Measures, LATAM Airlines to Cut Pay by 50% to its 43,000 Employees, Chile Suspends Tax Payments as Coronavirus Roils Businesses, and Are APIs the Gateway to Latin America?

Coronavirus Pitches Mexican Economy into Battle Against Recession

Economic turmoil sparked by the coronavirus threatens to halt Mexican growth in 2020 and deepen a recession that started last year, analysts forecast last Friday.

Plagued by weak investment due to uncertainty over the policies of President Andres Manuel Lopez Obrador, Mexican gross domestic product (GDP) shrank by 0.1% last year, the first annual contraction in a decade (The New York Times).

On Friday, Barclays investment bank said 2020 would now be far worse than last year. The bank slashed its GDP forecast for Mexico to a contraction of 2% from a prior estimate for 0.5% growth.

“Investment is likely to decline once more, both public and private,” Barclays said in a research note.

As reported by The New York Times, Moody’s Analytics was less pessimistic but asserted that if the coronavirus pandemic accelerated - with infections peaking mid-year it would likely spark a global recession that could shave off just over 1.5% of Mexican GDP this year.

Capital Economics forecast the Mexican economy would shrink 0.5% this year.

“Economic forecasters anticipate the Bank of Mexico will cut its interest rates when its board meets later this month, especially since the U.S. Federal Reserve lowered borrowing costs by 50 basis points earlier in March” (The New York Times).

Alberto Ramos, an economist for Goldman Sachs, said the Wall Street bank was trimming its Mexico GDP forecast for 2020 by 70 basis points, and now saw a contraction of 0.1%.

“This assumes that the impact of viral outbreak peaks during the second quarter, and activity rebounds in the second half of 2020,” Ramos wrote in a research note.

Canary Ventures’ Brazilian Startup Program

Canary Ventures, an early-stage firm with more than $120 million under management, told Crunchbase News that it has launched a new program to help first-time founders graduating abroad kick off their business ideas in Brazil.

The program, dubbed JetPack, is designed to help people who live outside Brazil explore innovative ideas.

As reported by Crunchbase News, Canary closed on a $75 million fund in December to invest in about 50 early-stage startups operating primarily in Brazil.

Izabel Gallera, the Canary partner leading JetPack’s efforts, told Crunchbase News that there are “a lot of inefficiencies in Brazil that are much wider than in the U.S.”

For example, the real estate, health care and financial services sectors have a reputation for being inefficient and expensive in Brazil.

“Here we could use a lot of technology to become more efficient. Even a little bit of technology could help gain a lot of efficiencies. In Brazil, we have much more explicit opportunities of building something that can solve a real problem,” Gallera said.

Marcos Toledo, Managing Partner of Canary, said the program is being founded on the premise that Brazil is seeing a turning point where more and more talented workers “are moving away from traditional careers.”

“In Brazil, we have tons of opportunities to tackle as we have a huge number of sectors that are either fragmented or low tech,” Toledo told Crunchbase News.

Canary has invested in more than 60 companies which have raised a combined value of over $400 million in subsequent rounds. Portfolio companies include Buser, idwall, Loft, SouSmile and Hashdex.

Why Brazilian Airline Shares are Hardest Hit by the Coronavirus Panic

Brazil’s largest airline, Gol Linhas Aereas Inteligentes, (GOLL4.SA) and its smaller rival, Azul SA (AZUL.N), saw their shares fall over 30% on Thursday, a record for each. Year to date, both companies’ New York-traded shares have dropped over 70%.

Although neither airline is directly exposed to the worst travel disruptions, analysts say their negative performance is tied to Brazil’s broader economic woes and a general panic over riskier, more volatile shares (Reuters).

“You may have portfolio managers with clients who want their money back now. Emerging markets are risky, and airlines are riskier than other assets. There’s not a huge connection to their fundamentals,”  said Stephen Trent, an analyst at Citigroup.

Additionally, Brazil’s currency, the real, is the world’s fourth-worst performing so far this year. According to Reuters, this is a key pressure point for emerging market carriers who pay many fees in dollars.

“Anytime that the dollar goes up, that affects (over half) of our costs… It’s not a positive thing,” said Eduardo Sanovicz, who heads Brazil’s airline industry group ABEAR.

No major stock exchange has fallen more than Brazil’s so far this year. Refinitiv data shows that Gol and Azul have been traded more than average in recent days (Reuters).

“Gol and Azul are super liquid shares, and they are being used that way,” said Azul’s CEO John Rodgerson on Thursday.

The airlines’ negative performance also highlights that the airline business in Brazil has struggled for years to be profitable, weighed down by an uncertain economy, high labor costs, and a volatile currency.

According to Reuters, Azul reported a 2019 loss of 2.4 billion reais ($503 million) last Thursday. The company said it would have turned a profit if not for charges related to the sale of old aircraft. Gol has lost over 9 billion Reais since 2008 but emphasized that it had little exposure to cross-continental international flights during an investor presentation last Wednesday.

Brazil’s Battered Job Market Faces New Foe: Coronavirus

Hope for new automobile factory jobs was already in short supply in metropolitan São Paulo, which is now dwindling by the day amid the coronavirus outbreak. The virus is expected to inflict more damage on Brazil: a country already struggling to deliver quality employment three full years after the end of a devastating recession. Other industries have also stumbled, especially outside São Paulo.

In recent months, Brazil has seemed to be crawling towards recovery. As reported by The Washington Post, the forecast was for firmer growth, and industry verged on optimistic as newly elected President Jair Bolsonaro vowed business-friendly policies.

Ford Motor Company, which is ending local production of the model of vehicles produced at its plant in São Bernardo do Campo, announced in September it would sell the plan to a distributor of Hyundai and Chery vehicles. In January, the distributor backed out, saying it had decided to invest elsewhere in Brazil. Ford said in a statement it “remains committed to finding a buyer and that it will relocate administrative staff”.

Thousands of former Ford employees are now feeling the same despair as the country’s unemployed population of 12 million Brazilians. The nation’s unemployment rate averaged almost 12% in 2019, the least in three years, but not far from its 2017 peak.

The Washington Post reports that the main reason joblessness ticked downward is that millions of Brazilians resigned themselves to informal labor, which lacks benefits and means lower pay.

“The problem is that the more industrial jobs go to that part of the economy, the cheaper labor becomes in that sector, too, and the harder it will be for everyone to make a decent living. Brazil is losing good jobs that generate income and later pay people’s retirements. And there seems to be no plan to tackle that,” said Bárbara Castro, a labor sociology professor at Brazil’s Campinas University.

In November, Bolsonaro’s administration proposed a program to confront informality (at least among young people) as a means to reduce odds of a lost generation.

“A tax cut would aim to encourage employers to hire those who haven’t had a job before and are often drawn into low-paying informal labor. Congress has until March 20 to ratify it.”

On Monday, Brazil’s government announced it will allow companies and families to renegotiate as much as $645 billion in debt to help mitigate the effects of the outbreak. The economy ministry also presented emergency measures worth almost $30 billion, with more than one-third of which targeting job preservation.

Income inequality in the fourth quarter improved year-on-year for the first time since 2015, according to Marcelo Neri, director of the social policy center at the Getúlio Vargas Institute. Brazil created the most formal jobs since 2013, and economists forecast growth above 2% in 2020.

The Washington Post states,

“The coronavirus only adds to that cocktail of ambiguity. Automakers canceled their annual car show in São Paulo, the largest in Latin America, because of high costs to take part. Had sales been strong, they probably still would’ve had to call it off because of the virus outbreak.”

Trump Will Announce Strict New Border Controls in Response to Coronavirus

The Trump administration plans to immediately turn back all asylum seekers and other foreigners trying to cross the southwestern border illegally, four administration officials said on Tuesday. As reported by The New York Times, the officials stated they cannot risk allowing the coronavirus to spread through detention facilities and among Border Patrol agents.

The officials confirmed that ports of entry would remain open to American citizens, green card holders and some foreigners with proper documentation. The entryways will also remain open to commercial traffic.

But under the new rule (which is yet to be announced), U.S. Border Patrol agents would immediately return anyone to Mexico who tries to cross the southern border between the legal ports of entry.

As reported by The New York Times,

“Under this policy, asylum seekers would not be held for any length of time in an American facility nor would they be given due process. Once caught, they would be driven to the nearest port of entry and returned to Mexico without further detention.”

Although they advised that details of the policy could change before the official announcement, administration officials said the effort was “critical to avert an outbreak of the coronavirus inside detention facilities along the border” (The New York Times).

President Trump has suggested multiple times that he could close the border, hoping to curtail illegal immigration and put pressure on Mexico to do more to curb the northward flow of migrants.

On Tuesday, officials insisted that the new policy was not meant to achieve the President’s immigration goals, but was instead driven by the president’s health advisers and would be in effect only as long as the coronavirus remains a threat to the United States.

Another official said the administration would invoke a federal legal code that says if the Surgeon General of the United States, Dr. Jerome Adams, identifies “any communicable disease in a foreign country,” he can prohibit people from that country from entering the United States.

The new policy also applies to the northern border with Canada, which has already closed its borders to most foreigners — but not Americans — in an attempt to keep the virus at bay. Officials said President Trump would soon also take separate action to further insulate the United States from the possibility of the virus spreading from Canada (The New York Times).

Brazil’s Two-Circuit-Breaker Day is One for the History Books

Brazilian stocks tumbled almost 20% in the single worst trading day since the 1992 crisis.

Graph Courtesy of Yahoo Finance

                                                     Graph Courtesy of Yahoo Finance

As reported by Yahoo Finance,

“Back-to-back circuit breakers were triggered when the Ibovespa slumped 10% just 20 minutes into trading and then again when it hit the 15% limit down by late morning. While the benchmark index recouped some of those losses, the gauge was still off 14% as of 3:43 p.m. local time.”

Adding to the anxiety, the Brazilian government suffered a major hit in its austerity push Wednesday night. Year to date, the Ibovespa has lost half its value in dollar terms, making it the worst performer in the world.

“The government’s defeat in Congress was the final straw…It’s hard to say how long this sell-off will last,” said Jose Tovar, chief executive officer at Rio de Janeiro-based asset manager Truxt Investimentos, which manages about 13 billion Reais ($2.7 billion).

The last time Brazil’s stock market fell this much intraday was in August 1992. At the time, Fernando Collor de Mello, Brazil’s first directly elected president following the end of the military dictatorship, was fighting off accusations of corruption, while thousands of protesters demanded his removal. By the start of the next month, impeachment proceedings were underway.

“The real weakened beyond 5 per dollar for the first time ever before backtracking and trading down 0.6% to 4.8468 per dollar. The central bank stepped up support for the currency by selling dollars in the spot market. Among emerging market currencies, the real is particularly vulnerable due to its lower carry appeal after interest rates fell to a record low.”

Brazil’s stock market is the biggest by far in Latin America, and the country has the fifth-largest weighting in the heavily-tracked MSCI Emerging Markets Index. According to Yahoo Finance, the increased liquidity offered to companies in the MSCI is a blessing and a curse when global sentiment shifts suddenly.

Colombia Says it Has $3.65B to Spend on Coronavirus Economic Measures

On Wednesday, Colombia said it has 14.8 trillion pesos ($3.65 billion) to spend on emergency measures to ease the economic fallout from coronavirus, but it will not take on additional debt to finance the efforts.

“We’ve divided the use of the resources in three parts, the first is for the health system… Second, we’ll need an economy functioning as much as possible, we need to promote lines of credit and guarantees,”  Finance Minister Alberto Carrasquilla told journalists.

As reported by Financial Post, Colombia will initially spend 1 trillion pesos on the healthcare system and some 500 billion pesos on additional payments to social welfare programs for families, young people and the elderly, but can increase those figures as needed.

Colombia will also accelerate a plan to return value-added tax to the neediest Colombians from April. Most of the funding - roughly 12.1 trillion pesos - will come from the country’s savings programs.

“We will not go to the market to seek more TES (treasury bonds), the resources of 14.8 trillion pesos correspond to what the country has been saving in the Oil Stabilization Fund,” Carrasquilla said.

Colombia also has about 48 trillion pesos available to give credit guarantees to small and medium-sized businesses and households, Carrasquilla added.

On Tuesday, Colombia announced that it will reduce its TES bond auction tranche for this year by 1.5 trillion pesos ($365.8 million), while banks announced measures to ease conditions for debt repayments.

As of 10:00PM PST on Mach 19, Colombia has 128 confirmed cases of COVID-19.

Coronavirus chaos on global markets has sent Colombia’s peso to record lows against the dollar, but the government has not considered intervention in the peso, Carrasquilla said.

LATAM Airlines to Cut Pay by 50% to its 43,000 Employees

LATAM Airlines Group , the continent’s largest carrier, will cut pay to its 43,000-strong workforce by 50% for three months, a source close to the situation told Reuters on Thursday, due to the coronavirus outbreak.

Reuters reports that the paycuts will affect employees worldwide, although the airline’s operations are concentrated in Chile and Brazil. The company’s chief executive will cut his pay by 100%, the source added.

Chile Suspends Tax Payments as Coronavirus Roils Businesses

As reported by Bloomberg Tax, Chile’s government announced Thursday that it will suspend corporate income tax payments for three months as part of a broader $11.75 billion package to help businesses hit by the new coronavirus outbreak.

Other terms include:

  • The government also will stop charging stamp duty on financial transactions for credit operations for six months.
  • Other tax measures include delaying value-added tax and property tax payments for companies with annual sales of up to 10 billion Chilean pesos ($11.6 million).
  • For around 500,000 business with annual sales of less than 2.1 billion pesos, the government will also delay the deadline for filing tax returns from April to May and postpone payments of taxes owed to July
  • The country’s tax authority a day earlier said it was delaying the deadline for filling annual income returns from March 19 to March 27.

Are APIs the Gateway to Latin America?

In this article, guest author Nathan Lustig, Managing Partner at Magma Partners, discusses how the Application Programming Interfaces (API) wave is moving beyond Silicon Valley.

As the API wave sweeps Silicon Valley, Lustig argues that Latin America is next.

APIs are the building blocks that make it possible for both consumer and B2B startups to function. These APIs are increasingly essential to the infrastructure layer that supports technology businesses, especially in fintech and insurance tech” (Entrepreneur).

In the U.S., startups like Checkr, Plaid, and Stripe have become invaluable to both technology startups and traditional businesses that have realized the advantages of automatic integration of background checks, financial tools, or payments systems, without having to develop proprietary software. This year, Stripe became one of the world’s most valuable API-focused startups, worth $35 billion and backed by big-name investors like Andreesen Horowitz and Sequoia Capital.

Today, Latin America has room — and a significant need — for APIs that can meet these needs locally.

While in the U.S. there are already software-as-a-service (SaaS) and API-based products available to fulfill the back-end needs of larger companies and startups, many companies in Latin America still face challenges to get contracts signed in front of notaries, or to deposit money in physical banks.

“In Latin America, there can be hundreds of disparate data sources, many with unstructured data, that make creating these companies even harder than in the US. But those that win will likely have an outsized impact on the region.”

International investors are starting to take note of startups in Latin America that are becoming the “indispensable building blocks” for the next generation of businesses. Over the next few years, Lustig anticipates that the battle to provide back-end, API-based services for the region’s startups and traditional businesses will become increasingly valuable, particularly in the following areas:

Authentication and Identity Verification

Auth0 is one example of an authentication-as-a-service startup. The company provides a universal online identification and authentication platform for web and mobile applications and became Argentina’s fifth unicorn last May. Auth0 helps companies save time and money by “rapidly implementing dozens of authentication services, including single-sign-on, fraud detection, and universal login structures.”

Similarly, Colombia’s Truora solves identity authentication but does so offline with automated background checks.  Truora uses a smartphone to scan an ID card and provide results within minutes, creating a database that marketplaces like companies like Uber, Rappi and more can use to vet contractors and that fintechs can use as part of their loan approval process.

Processing Online Payments

Many countries in the region have locally-focused companies like Stripe, but none of them have been able to unite the entire region under a single platform. The startup that succeeds in doing so will likely win the race to become known as the “Stripe of Latin America,” but that race will be a tough one.

“Latin America is consistently one of the fastest-growing regions for e-commerce, and at least prior to the current COVID-19 crisis, economists estimated that in excess of 155 million people would shop online in Latin America in 2020. Yet many traditional payments gateways still reject international cards, use clunky authentication processes and struggle to process recurring payments. As a result, new startups are competing to streamline online payments for businesses across Latin America, but no one is dominating the region just yet.”

Improving Access to Financial Data

Lustig emphasizes that one of the other essential API building blocks for the entrepreneurial ecosystem will be a Latin America-focused service that allows consumers to connect their bank accounts to apps, like Plaid or Yodlee.

There are currently a few small players in the Latin American market. In a region where less than 50 percent of people have bank accounts, a Plaid clone will be essential to constructing the foundation for the many fintech startups that are serving Latin America’s unbanked middle class.

Bringing Business Operations Online

Many companies in Latin America still record their transactions on paper, requiring expensive and slow notaries, lawyers and accountants. Meanwhile, growth for new startups is often slowed by these expenses and barriers.

Startups will be the early adopters of APIs that can solve internal administration problems with a single click.

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