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July 19, 2019

Didi’s Latin American Expansion Invigorates Regional Competition with Uber, Brazilian Pension Reform “Has Markets Feeling Downright Celebratory”, Nubank surpasses 10 million Brazilian Clients, and more….

Didi’s Latin American Expansion Invigorates Regional Competition with Uber

Chinese mobility company Didi Chuxing has launched new financial services in Brazil and Mexico, battling Uber Technologies Inc. in Latin America.

Didi announced it will partner with financial institutions to offer drivers in Mexico and Brazil a bank card allowing them to receive income from daily rides, as well as withdraw cash or make purchases. Riders in Mexico will be able to top up their Didi balances with cash at the country’s largest convenience store chain, Oxxo (Bloomberg).

According to Zheng Bu, Head of Didi’s International Business Technology division,

“In Brazil... there are many people who can drive but they’re not able to become Didi drivers mainly because they’re unbanked. So we went ahead and started to offer banking services to them.”

As Didi’s home market of China slows, the privately-held company- last valued at $56 billion- has been increasingly focused on international expansion efforts. Earlier this year, Bloomberg News reported that the company was planning to eliminate about 2,000 jobs, accounting for about 15% of its workforce.

Despite pushing Uber out of China in 2016, both companies are now looking to expand in Latin America, Japan and Australia.

“Yes we look at competition, but if you ask me what’s the most important, it’s serving our users,” said Zheng.

In effort of winning over new markets, Didi has been dedicated to catering to local needs. In Japan, for example, the company launched voice-activated controls in the Japanese version of its app.

Didi, whose platform facilitates 30 million rides a day, has “invested in technology and people” in efforts of improving the company’s safety measures in China, and all over the world.

According to Zheng,

“Didi is now using facial recognition to verify that the person driving the car is the same who registered with the company. It’s using geo-fencing and mapping software to flag rides that deviate from predicted routes or make unusual stops, and links with emergency responders who show up if cars stop mid-route for an extended period of time” (Bloomberg).

Uber said in a statement that the revived competition with Didi is “healthy for the industry”, despite the complicated relationship between the two companies. Didi and Uber are investors in each other, and share a common major shareholder in Softbank Group Corp.’s Masayoshi Son.

Uber CTO Thuan Pham stated in an interview last Tuesday,

“If you don’t have competition then you can become complacent because there’s no competition to challenge. This competition is definitely a very healthy thing.”

Brazilian Pension Reform “Has Markets Feeling Downright Celebratory”

Thanks to Brazil’s once unpopular pension reform bill, Brazil's Bovespa Index is now beating all of the emerging markets.

As reported by Forbes, over the last month, the iShares MSCI Brazil (EWZ) has gained 7.5% versus just 2.24% for the benchmark MSCI Emerging Markets Index. Last week, BlackRock recommended investors go overweight Brazil, saying it was better than anything in Asia due to the China effects from the trade war.

Although President Jair Bolsonaro got off to a slow start on the pension overhaul, his top economic minister, Paulo Guedes- a “Wall Street favorite” from Brazil’s BTG Pactual investment bank- finally helped pass the law through to Congress.

“Once pension reform is over with, investors should expect a ‘sell-the-news’ moment. Wall Street will be moving on to other big ticket items on Bolsonaro’s fix-it list, including tax reform and maybe interest rate cuts, should the economy remain sluggish” (Forbes).
Photo Courtesy of Bloomberg

According to Brazilian political risk firm Arko Advice, Bolsonaro’s coalition has at least 320 votes in favor; which is enough to pass the majority of the reform law as-is in the first round of voting. If the reform bill fails to pass in the first round, a second round would ensue until the end of the month (Forbes).

Earlier this month, funds dedicated to Brazil saw their sixth straight outflow; courtesy of a combination of investors cashing in on gains and growing fears that the nation’s political scandals have once again been reinvigorated.

Revelations of private conversations between prosecutors and judges recently came to light. The conversations alluded to the possibility that the Brazilian Supreme Court may overturn the jail sentence of ex-president Luiz Inácio Lula da Silva, who is currently serving a 12 year prison term for his involvement in the Petrobras Car Wash scandal.

Despite potential political turmoil, big investors still remain confident in Brazil. According to Tony DeSpirito, Director of Investments for BlackRock,

“We have turned negative on most emerging market equities because markets are pricing in too much Chinese stimulus. We see selected opportunities in Latin American markets.”

Nubank surpasses 10 million Brazilian Clients

Brazilian digital bank Nubank is now Latin America’s biggest fintech company, surpassing 10 million clients at the end of last month.

Nubank recently changed their application process, eliminating the waiting list that every new user once had to go through when requesting the service.

Vitor Olivier, VP of Consumers at Nubank, confirmed that users will no longer need to wait up to 90 days to join the bank.

In an interview with Infomoney, Oliver stated,

“At first, the credit card waiting list was necessary, but now we can offer a wider portfolio of products and services for those who want to be Nubank’s client” (LABS).

Although credit card analysis still requires a wait, users will gain access to the platform instantaneously (Lat Am List).

Valor Investe reported that in a survey conducted by Google, Nubank took the lead in searches for card issuers during 2019’s first quarter, surpassing traditional Brazilian bank Itaú.

Gustavo Souza, Head of Sales for the financial sector at Google Brazil, stated

“This is the first time that a fintech has become the most searched-for brand in Google regarding the category of financial products, and the fact that this happened first with credit cards shows that Brazilian consumers are eager for innovative experiences and offers” (Lat Am List).

Common Problems Confronting Latin America’s Struggling State-run Oil Giants

Venezuela, a nation home to some of the world’s largest proven oil reserves, has proven itself to be unprepared for the looming energy transition.

Production peaked in 1998 for Petróleos de Venezuela (PDVSA) when Hugo Chávez was elected president. In the following years, the left-wing tribune and his authoritarian successor, Nicolás Maduro, “purged PDVSA’s professional staff, strong-armed its international partners and raided its coffers” (The Economist).

Since January, when America announced tough sanctions on PDVSA, production has plunged to the lowest levels since the 1920s. Today, millions of Venezuelans lack food and basic medicine.

A survey of Latin American state-controlled energy giants (which accounts for around 10% of global oil output and 20% of proven reserves) demonstrates that this dysfunction is not detained to Venezuela, however.

“Five years after the oil price crashed, output remains depressed in much of the region, even as the industry as a whole faces unprecedented disruption” (The Economist).

States control about 90% of the world’s oil and gas reserves; but do so in different ways, as illustrated in the case of Latin America.

Although they may operate in different corporate forms, the region’s oil giants share three common problems:

1. Mismanagement of cash in good times

This mismanagement includes the common practice of pouring too much capital into government strongboxes and too little into investment for future growth.

When the oil price topped $100 a barrel in 2013, Pemex moved about half of its revenue to Mexico’s government. Despite rising crude prices, Petrobras saw its share price decline, loading up on debt and investing in too many marginal projects.

According to data from the Natural Resource Governance Institute, as oil prices plummeted, Latin American oil companies obtained long-term liabilities accounting for over $400bn, or 8.5% of their countries’ combined GDP. Petrobras accounted for almost half the total.

2. Politicians and executives used the oil companies as personal piggy banks

Petrobras, Petroecuador and Pemex, and PDVSA have all been hit with corruption scandals of substantial size.

Petrobras took a plummet when the public found out that construction firms had paid Brazilian politicians billions of dollars in bribes, receiving padded contracts to build refineries and infrastructure in return.

This revelation, in conjunction with Petrobras’ massive debt, led credit-rating agencies to downgrade the oil giant in 2015. Between August 2014 and February 2016, Petrobras’ market capitalization shrunk by $115bn, or 80%. As shown in the chart below, only some of that was down to the collapsing oil price. ExxonMobil’s stock dipped by 18% in the period.

Photo Courtesy of The Economist

3. Companies remain susceptible to political whims

This is the most vexing shared challenge.

Petrobras, the region’s biggest producer, has in fact made progress. Last year, the company agreed to pay minority shareholders $2.95bn in a class-action settlement in America. In 2016, Pedro Parente was named chief executive in 2016, and has since cut costs, sold less profitable assets, reformed pricing policy and “set about boosting production from vast resources tucked under thousands of metres of salt beneath the seabed” (The Economist).

Latin American Female Founders’ Role in VC Landscape

In 2017, a daunting statistic was released that female CEOs only receive 2.2% of VC funding globally: a number that increases significantly to 20% when the female founder is not the CEO.More disturbingly, less than 2% of that 2.2% of startups had Latin American women as founders.

According to Fortune, only 0.4% of the $400 billion in VC funding deployed between 2009 and 2017 went to Latin American women. Over the past decade, Latin American female founders raised less capital ($1.3 billion) than all women founders raised in 2017 ($1.9 billion). In comparison, all-male founding teams raised $66.9 billion in 2017, equal to 79% of the capital invested that year. (Crunchbase).

While a simple explanation might suggest that the simple reasoning behind these statistics is that Latin American women start fewer companies, the fact of the matter is that 35% of Latin American fintech startups have female founders: a metric that reaches far beyond the international average of 7% for the sector.

“Instead, this disparity arises from a variety of structural barriers that keep Latin American women out of traditional capital streams.”

According to Crunchbase, Fintech is Latin America’s most funded industry, receiving 25% of the total VC capital invested in the region in 2019, equal to more than $500 million.

Argentina purchases surveillance technology from Chinese corporation ZTE

In Argentina's remote northern province of Jujuy, Chinese telecom giant ZTE has begun installing security cameras that the local government says will help to curb street crime.

“ZTE Corp sealed a nearly US$30 million surveillance contract with Jujuy in March to provide cameras, monitoring centers, emergency services, and telecommunications infrastructure. ZTE first made its sales pitch three years ago.”

In a presentation this past May, ZTE's general manager in Argentina, Dennis Wang, and Governor Gerardo Morales described how the technology had helped cut crime rates in China. Now Jujuy can be "safe like China," the local government said in an announcement about the event.

Despite being a relatively small deal, it has raised substantial concerns for the U.S. government. Washington has increasingly warned allies about buying Chinese technology, insisting it could be used by Beijing to spy on its customers.

According to Channel News Asia, Jujuy already has close ties to China. Another Chinese company is heavily invested in lithium mining in the province. China has also provided the financing and technology for South America's largest solar farm in the region.

A spokeswoman for the U.S. State Department's Western Hemisphere Affairs Bureau said in a statement that,

“China gathers and exploits data on an unrivaled scale, and uses the information to promote corruption, support arbitrary surveillance, and silence dissent.”

Video: Brazil's Bolsonaro: What has changed six months into presidency

Despite bold promises, Jair Bolsonaro has so far done little to placate his opponents.

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