How Latin America’s Biggest Economies are Supporting Companies, LAVCA’s Annual Review of Tech Investment in Latin America, Brazil's Natura Sees COVID-19 Slamming Latin American Business While Other Regions Start to Rebound, and more...
Other featured stories include: Avianca, one of Latin America’s largest airlines, files for bankruptcy; Colombia’s easing of lockdown could get 70% of economy back to work, according to Commerce Minister; Softbank sees consolidation in Latin America food delivery; and Colombia to look into TikTok’s treatment of children’s data.
How Latin America’s Biggest Economies are Supporting Companies
Governments across the region have demonstrated mixed policy responses to the coronavirus pandemic in regards to business support and social distancing.
As reported by BNAmericas, officials are battling away on various fronts: to control the spread of the virus while gauging social tensions and helping companies stay afloat as revenues shrivel up. Notably, countries with high rates of labor informality and flimsy social safety nets are feeling the most pressure.
Mexico, home to a large informal economy, has come under fire for their government’s perceived delayed response to the crisis. Conversely, Argentina and Paraguay have been praised for their rapid action.
Iván Chavéz, Executive Vice President of Mexican holiday resort group Vidanta, told a webcast hosted by U.S. policy forum the Wilson Center that an early, strict lockdown may have pushed many Mexicans deeper into poverty.
“Mexico’s been criticized, unfairly, I think, for shutting down too late… It’s easy to say that from an outsider perspective. When you look at the news, they’re interviewing people on the streets and they’re saying ‘Are you worried about the virus?’ and the response is ‘I’m worried that I am not going to have anything to eat is my first concern,’” Chavéz said.
Chavéz’s remarks echo the International Labor Organization’s stark warning, which stated that informal workers “face an almost unsolvable dilemma: to die from hunger or from the virus.”
Financial services company Moody’s said that packages implemented by the region’s six biggest economies – Argentina, Brazil, Chile, Colombia, Mexico and Peru – will mitigate economic fallout but not fend off recession.
“The packages vary widely by size, scope and degree of permanence, and while they will broadly help reduce some of the negative effects of the crisis, they will not offset rising recessionary momentum for most sectors,” the agency said in a coronavirus report.
Amid weak demand and damaged commodity prices, all major economies in Latin America are forecast to slide into recession this year and bounce back in 2021 – but many with much higher debt.
According to BNAmericas,
“Multilaterals have stepped into the breach to help, with both IDB and CAF issuing debt – US $4.25 billion and US$800 million, respectively – to help underpin short- and long-term government support efforts.”
Business-focused measures implemented by governments across the region include soft loans, tax relief and payroll support. However, these measures tend to focus on SMEs – key job creators in Latin America – rather than large company bailouts. This is particularly true of Colombia, Mexico and Argentina.
Bailouts of major firms have not been reported, although in Brazil state development bank BNDES has announced loan aid for airlines.
Chavéz is against major government intervention such as bailouts and believes companies will emerge from the crisis with a different philosophy.
“We don’t think it’s the governments’ role to solve that for companies. This crisis, I think, will change for the better how companies are run in the future. I think that companies in the future will run their business like people run their own finances. People are not expecting to be bailed out, by anybody,” he stated.
In addition, Chavéz added, “big companies, in particular, are so used to [the situation where] if they run into a huge problem there is the possibility of being bailed out because of their importance, because of the jobs.”
After the crisis, however, “people running these companies will re-evaluate and have a rainy [day] fund, just like people do. That is not to say that what governments are doing is admirable…nobody was prepared for this. We just have to adjust.”
Business Support in Latin America’s Biggest Economies
Fiscal stimulus package: 6.75% of GDP
Latin America’s number one economy – which like Mexico has come under fire for its handling of the health crisis – has introduced tax and social-contribution relief and loan schemes. BNDES loan aid for airlines, among others, would be delivered in partnership with private banks.
President Andrés Manuel López Obrador has been adamant in his refusal to rack up debt, and the little support he has offered comes in the form of loans of around US $1,000.
Moody believes economic support will increase despite the government’s reluctance. But this support “is unlikely to exceed 1% of GDP,” the agency added.
Fiscal stimulus package: 3.5% of GDP
The cash-strapped country has unveiled measures including a 60-day ban on layoffs, reduced social security contributions, soft working capital loans and absorption of salary costs, Moody’s said in the report.
Fiscal stimulus package: 4.7% of GDP
Measures include tax and social security contribution relief, along with a guaranteed loan scheme and a program that amends rules governing access to unemployment insurance, easing the wage burden on companies.
Fiscal stimulus package: Over 1.3% of GDP
Colombia has announced guaranteed loans, a scheme that does not encompass large firms, Moody’s said.
Fiscal stimulus package: 8% of GDP
Measures include income tax relief, working capital loans and other liquidity support.
LAVCA’s Annual Review of Tech Investment in Latin America
LAVCA, the Association for Private Capital Investment in Latin America, has released their annual tech investment in Latin America report.
According to the report, venture investment in Latin America has more than doubled (by USD) every year from 2016 to 2019, tracing a steady growth trajectory that will certainly be interrupted by the 2020 COVID-19 global health pandemic in ways foreseen and unforeseen. As venture investors encourage their portfolios to shift to survival mode, the era of “growth at all costs” popularized in Silicon Valley and China appears to have ended for the time being.
2019 was a record year for venture capital funding in Latin America, with $1.08B in partial and final fund closes.
As shown in the figure below, venture capital funding in the region has grown substantially in the past three years. Top fundraising activity include KaszeK Ventures’ $600 million fundraise across two funds, Canary Ventures’ close on a $75 million fund to invest in about 50 early-stage startups operating primarily in Brazil, and Softbank’s commitments in funds from KaszeK Ventures and Valor Capital.
The report also maps out the major markets in the region, as shown in the figure below.
According to LAVCA, 2019 was a record year for private equity and venture capital investment in the IT sector, representing 58% of dollars deployed, and 82% of the year’s deals.
Brazil's Natura sees COVID-19 Slamming Latin American Business, while other Regions Start to Rebound
Brazilian cosmetics maker Natura & Co Holding SA (NTCO3.SA) has seen some recovery at its Asian and European operations as stores begin to gradually reopen after coronavirus-related lockdowns, executives said last Friday, adding the pandemic is likely to hit its Latin American operations harder going forward.
“The environment continues to be challenging, with social distancing and lockdown measures still having an impact on our business, particularly in Latin America,” Chief Executive Roberto Marques told analysts on a conference call to discuss quarterly earnings.
Natura & Co, which owns Natura, Avon, The Body Shop and Aesop brands, has decided to scrap 2022 forecasts, although Marques sought to reassure analysts and investors that the company has a solid financial position to navigate the ongoing crisis.
As reported by Reuters, in addition to its cash position of 4.6 billion reais ($800 million) at the end of March, the cosmetics maker has secured a 750 million-real financing line and plans to raise up to 2 billion reais in a private equity placement priced at 32 reais per share.
“It gives us confidence in case the scenario deteriorates and, in case it actually improves, we can use the money to invest earlier in strategic areas where we want to accelerate growth,” Marques told Reuters in a separate interview.
One of those areas is digital initiatives, an area which Natura & Co is “doubling down efforts” after total online sales increased by more than 250% during the outbreak. Natura and Avon e-commerce sales rose 150% in recent weeks, while The Body Shop spiked more than 300%, and Aesop more than 500%.
“Even as we reopen stores in Asia and some countries in Europe, the response to our e-commerce has been amazing and we don’t expect online sales to go back to what it was before the crisis,” the CEO said.
Shares of Natura & Co were down 0.6% at 36.25 reais last Friday afternoon, after rising nearly 3% earlier in the session.
According to Reuters,
“Natura & Co raised total expected synergies to be realized gradually until 2024 to between $300 million and $400 million on an annual recurring basis from $200 million-$300 million in January. One-time costs to achieve such synergies are now projected at $190 million, up from $125 million.”
Avianca, One of Latin America's Largest Airlines, Files for Bankruptcy
On Sunday, Colombian airline Avianca (AVH) filed for Chapter 11 bankruptcy in the U.S. Southern District of New York.
As reported by CNN, the airline blamed its collapse on the “unforeseeable impact of the COVID-19 pandemic,” according to a company statement. It will continue to operate during the bankruptcy process.
Founded in 1919, Avianca claims to be the world’s second-oldest continuously running airline. According to Euromonitor, as of the end of last year, it was the third-largest airline in Latin America based on market share; trailing behind Chile’s LATAM Airlines (LTM) and Brazil’s GOL Linhas Aéreas (GOL).
Avianca is the latest major airline to succumb to the loss of business from the pandemic, which has caused carriers to rip up their flight schedules, ground planes and put staff on unpaid leave.
According to CNN,
“The Colombian airline carrier said it was hit hard by lockdowns around the world as the pandemic worsened. Of the countries where Avianca currently operates, 88% are under total or partial travel restrictions.”
Avianca directly employs 21,000 people throughout Latin America, including more than 14,000 in Colombia, where it serves as the country’s national carrier.
The decision to file for bankruptcy was made with the intention to “protect and preserve operations” as the outbreak continues, the company said. In addition to pursuing bankruptcy protection, Avianca plans to shut down its business in Peru to cut costs and “renew its focus on core markets.”
“Avianca is facing the most challenging crisis in our 100-year history as we navigate the effects of the COVID-19 pandemic… We believe that a reorganization under Chapter 11 is the best path forward to protect the essential air travel and air transport services that we provide across Colombia and other markets throughout Latin America,” CEO Anko van der Werff said in a statement.
Analysts note that the airline was already struggling last year. Last summer, Avianca was "in a period of upheaval,” the Sydney-based Centre for Aviation wrote in a research report.
The company was “fighting negative credit ratings, undergoing a sudden change in board control and naming a new CEO after its previous chief executive abruptly left the airline,” the report added.
Colombia's Easing of Lockdown Could get 70% of Economy Back to Work, According to Commerce Minister
New exceptions to Colombia’s two-month coronavirus quarantine will revive between 60% and 70% of economic activity, Commerce Minister Jose Manuel Restrepo said last Friday, though a return to normality will take until the end of the year.
Reuters reports that last week, Colombia’s government extended its lockdown until May 25, but will allow new sectors including auto repairs, wholesale furniture, laundries and book shops to gradually re-open from Monday. Many will operate via deliveries. Manufacturing and construction have already been allowed to apply to re-open.
“We will have 60% to 70% of gross domestic product functioning when all those (additional) businesses reactivate… Still pending is tourism, some retail and some service sectors,” Restrepo told Reuters in a phone interview.
Business leaders have complained that the country’s re-opening permitting process is too slow.
“There may be situations where a bit more agility is required, but we must be careful this doesn’t mean in any way the non-compliance with biosecurity protocols,” Restrepo said.
About 21,000 manufacturing businesses, some 35% of the sector, have requested permission to re-open, Restrepo said. So far, about half have been approved.
Re-opening is key to avoiding further damage to Latin America’s fourth-largest economy, the minister said. The finance ministry has predicted Colombia’s economy will contract by some 5.5% this year.
“It must happen with all prudence and progressiveness, but it is indispensable that we do it, otherwise we will end up in a pandemic of hunger, of poverty and destruction of employment that would be more serious,” he said.
According to Restrepo, the government is preparing an arsenal of measures to increase aid for businesses under a second state of emergency declared this week.
The measures- to be announced in the coming weeks- will include aid for the retail, commerce and tourism sectors, rent reduction, credit guarantees, cuts in social security payments by employers, and bankruptcy help.
Last Wednesday, the Colombian government said it will subsidize workers’ pay to the tune of 40% of the minimum wage for companies whose turnover has fallen by at least 20% due to the outbreak and delay payment of income tax by businesses.
“In this new emergency, the second one, the center of worry is the business sector…The most important emphasis is the future of businesses,” the minister said.
Spending on the health sector, social programs and business aid reached between 16 trillion and 20 trillion pesos ($4 billion to $5 billion) during the first state of emergency, Restrepo added.
Softbank Sees Consolidation in Latin America Food Delivery
Japan’s SoftBank Group Corp., a shareholder in some of Latin America’s largest food delivery companies, expects consolidation in most markets, a senior executive said on Wednesday.
“It’s difficult to have more than two players in the food delivery area, there will be global consolidation”, Paulo Passoni, Managing Investment Partner in Softbank’s Latin America Fund, said in a webcast hosted by Brazilian digital broker XP Inc.
SoftBank’s Latin America Fund is also a shareholder in Colombia-founded Rappi. Softbank is also a shareholder in Chinese ride hailing company Didi, whose Didi Food unit has had high growth in Mexico, Passoni added.
Passoni said the coronavirus pandemic has made him “more comfortable” with SoftBank’s portfolio in Latin America, as most of its stakeholdings are experiencing higher demand due to social distancing measures and increasing digitalization of Latin American economies.
Passoni noted that digital wallets and online banks are booming because most e-commerce and delivery companies do not accept cash. SoftBank’s Latin America fund also has a stake in Brazilian digital bank Banco Inter SA.
Colombia to Look Into TikTok's Treatment of Children's Data
On Tuesday, Colombia’s commerce regulator said it would look into whether Chinese-owned social media app TikTok complies with laws on the collection and treatment of children’s and adolescents’ personal data.
As reported by Reuters, this move comes amid growing U.S. scrutiny of the app and a similar investigation announced last week by the Netherlands’ privacy watchdog. TikTok allows users to create and share short videos with millions of people worldwide.
“The superintendency is seeking to establish if TikTok Pte Ltd. has demonstrably implemented the principle of responsibility in the treatment of data from Colombian citizens who use its services,” the Superintendency of Industry and Commerce said in a statement posted on its website.
Colombia’s constitution orders special protections for minors, who are the app’s principal users, the statement added.
TikTok - owned by Chinese company ByteDance - first gained popularity in Asia, but now has a massive global following. The app has an estimated 500 million to 1 billion users.