Mexican Economy Plunges the Most on Record on Virus Lockdown and More…

Mexican Economy Plunges the Most on Record on Virus Lockdown and More…

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July 3, 2020

Mexican Economy Plunges the Most on Record on Virus Lockdown

Mexico’s IGAE economic indicator, a proxy for gross domestic product, fell 19.9% in April from a year earlier, the nation’s statistics institute reported Friday. That compares with a 22% median forecast from economists and is almost double the previous record 11% drop registered during the global financial crisis in 2009.

Mexico’s economy contracted the most on record after the majority of activity was shut down to prevent the spread of the coronavirus.

Graphic Courtesy of Bloomberg

                                              Graphic Courtesy of Bloomberg

As reported by Bloomberg, Latin America’s second-largest economy, which has had several economic crises and currency devaluations in its history, is facing its worst recession since the 1930s.  

Mexico has been among the countries hardest hit by the coronavirus pandemic due to the fall in trade with the U.S. and the crash in oil prices, while more than 12 million citizens lost or were suspended from their jobs in April. The data is consistent with the view that Mexico’s economy will shrink 10% or more this year, said Carlos Capistran, an economist at Bank of America in New York.

“It is not only the result of COVID-19 and the lockdown, but the lack of vigorous policies to help the economy…The latter and a virus that is still on the loose in Mexico will continue to keep economic activity in contraction territory for many more months,” Capistran said. “However, despite the large contraction in activity, inflation is above Banxico’s target,” which limits the central bank’s room to cut its interest rate further.

The central bank cut borrowing costs to the lowest level in almost four years on Thursday. Mexico’s economy will shrink 10.5% this year, more than peers such as Brazil, Russia, South Africa and India, according to the International Monetary Fund.

A separate report showed that Mexico had a $3.5 billion trade deficit in May, surprising economists who expected the country to bounce back to a $1.3 billion surplus, based on the median forecast of a Bloomberg survey.

Exports fell roughly 57% and imports dropped 47% from a year earlier, following drops of 41% and 31%, respectively, in April, indicating a continued collapse in trade. Automotive exports plunged 90%, leading a decline in manufacturing as plants halted production and U.S. demand crumbled.

“On the import side, it was mostly a sharper decline in imports of intermediate goods that explained most of the sharper contraction…The result is consistent with weaker manufacturing activity in Mexico,” said Felipe Hernandez, a Latin America economist at Bloomberg Economics.

Why Government Funding Won’t Solve the Critical Situation of MSEs in Brazil

The Brazilian government recently announced the Provisional Measure 972, which released $3M (R$15.9B) to support the Pronampe (National Support Program for Micro and Small Enterprises).

According to LatAm List, through Pronampe, a company can borrow up to 30% of its 2019 gross revenue, with a limit of $33.7K USD (R$180K) for micro-companies reporting an annual turnover of up to $67K USD (R$360K). Small companies with an annual turnover of up to $900K USD (R$4.8M) will be able to borrow up to $262K USD (R$1.4M).

MSEs (micro and small enterprises) welcomed this initiative, which brought optimism for entrepreneurs who- pressured by the COVID-19 pandemic- urgently need credit to fulfill their obligations and maintain cash flow. The Brazilian’s government financial support of Pronampe is  one of the most positive measures adopted so far, with the government acting as a guarantor of up to 85% of the debt. However, although positive, this measure poses obstacles that can prevent this credit from reaching those who really need it and further complicate the situation of small entrepreneurs.

The Obstacles

Primarily, the methodology adopted for credit approval – based on the company’s balance sheet and credit analysis – has inherent problems.

“It means that the ability to pay the neighborhood grocery has been evaluated by the same criteria as the credit for corporations such as Petrobras or Vale. This orthodox methodology is neither fair nor applicable to small businesses” (LatAm List).

Another obstacle is the 36-month period for the payment of loans. A micro or small company is not typically prepared nor has financial education to assume such long terms, leading to a more complicated situation. For example, with a shorter term of six months, an entrepreneur would be better prepared to plan the debt payment.

The Alternatives

However, criticizing without offering alternatives is not a good idea. According to LatAm List,

“The most logical solution necessarily involves expanding the channels used by Pronampe to grant loans, which would increase the level of capillarity. Today, Pronampe uses the traditional system, that is, the four large banks – Banco do Brasil, Caixa, Itaú, and Bradesco – which historically are not popular among MSEs, as this segment is mainly served by fintech, factoring, securitization, and direct credit companies.”

These alternative channels provide MSEs with access to private credit and, likewise, could facilitate access to public credit as well. Some fintechs, for example, connect entrepreneurs and financial institutions through a 100% digital platform, without bureaucracy and a centralized registration, offering broader capillarity and more agility.

In fact, a digital platform was also the channel chosen by Estímulo 2020, a very interesting initiative through which citizens, entrepreneurs, executives, and third sector organizations can support micro and small companies during the COVID-19 crisis.

The idea is to raise private funds and offer fast and cheap credit to MSEs without access to the banking system. Instead of an orthodox analysis, the loan utilization is monitored, which, in the end, acts as first-rate business consultancy.

Marketplace Carflix Raises US$2.7M Series A through BV bank

Brazilian Carflix closed its Series A for R$15 million (~US$2.7 million) in an investment round led by BV bank. The startup will use the funds for tech development and to grow its operations.

“The used car business asks you to be in more than one place,” says Fábio Pinto, Carflix’s Co-Founder. “It is difficult to sell a used vehicle from Salvador to São Paulo.”

Through its platform, users can safely buy a used car. Carflix inspects the vehicle and handles the negotiation process before a transaction is completed, therefore saving buyers the unpleasant surprise of falling prey to fraudulent schemes.

As reported by Contxto, the startup’s vehicle inspection process is currently carried out in person, and sellers schedule an appointment on the platform. However, the startup has some interesting tech-related plans in the works to change that.

“The customer will take pictures of the car and we [would] complete a remote analysis through artificial intelligence,” explains Pinto.

This move is huge for the startup in terms of scalability, as it would remove some of its geographical limitations for accessing the used car market. Additionally, it cuts down the need for staff to go and personally check the car.

Facebook, Cielo Ask Brazil's Antitrust Watchdog to Reverse Decision on Payments Deal

Facebook Inc. and card acquirer Cielo SA have asked Brazil’s antitrust watchdog Cade to reverse the suspension of an agreement they struck paving the way for WhatsApp to roll out a new payments system, according to a document.

As reported by Reuters, both companies argued that their agreement was not exclusive and allowed rival card acquirers to forge deals with Facebook’s WhatsApp messaging system. They also said they did not operate in the same business and had merely entered a financial services agreement, saying that meant the partnership would not offer risks in terms of market concentration.

“Facebook and WhatsApp will just offer an additional channel for payments transaction between consumers and merchants,” both companies said in the document sent to Cade, which was filed on Friday but became public on Monday.

Brazil’s central bank and antitrust watchdog suspended WhatsApp’s newly launched payments service last week, warning about potential damage in the areas of competition, efficiency and data privacy. The regulators blocked WhatsApp partnerships with Visa Inc, Mastercard Inc and Cielo SA.

Rappi Founder and Softbank Partner Join with Entrepreneurs for LatAm COVID-19 Fund, IMPACTO

Latin America is currently the epicenter of the COVID-19 pandemic, as Mexico and Brazil now report more daily deaths than any other country in the world except the United States.

Understanding the gravity of the situation, startups have already stepped up  to make up for lacking services—and lost time—in efforts of saving as many people as possible.

On Tuesday June 30, a diverse group of leading entrepreneurs and senior business executives from across Latin America have announced the launch of a new non-profit organization to source, partner, and fund Latin American initiatives to fight the novel coronavirus.

As reported by Contxto, the group’s mission statement is well labeled on the new organization’s name, IMPACTO, and it will support efforts in testing, medical equipment, and meals to patients and front-line workers.

IMPACTO Director, Laura Gaviria Halaby, told Contxto that the nonprofit was legally established in May and the past few weeks have been spent gathering strategic partners amongst the ecosystem, government institutions, and NGOs. Now, they are reaching out to the broader public for help in funds as well as in volunteering. While IMPACTO as an organization is new, the group is institutionalizing what these startups and founders were previously doing.

The non-profit was founded by Sebastian Mejia, President and co-Founder of Rappi, and Ralf Wenzel, Managing Partner at SoftBank Group International. These people were already very much involved in the COVID relief efforts.

“Today we are initially launching IMPACTO through an initiative in alliance with Frubana [a B2B fresh produce distributor] in Colombia. Next month we’ll be starting our next initiative which will be focused on Brazil,” said Laura Gaviria Halaby, Director of IMPACTO.

As shown in the graphic below, The Economist has published sobering data demonstrating the progression of the disease by region. Latin America now leads the world in cases. Worst of all, the region has a particularly bad testing record, and the situation is only getting worse. Poor access to healthcare and basic services means that there is a big gap that IMPACTO will be needing to fill.

Graphic Courtesy of The Economist

                                               Graphic Courtesy of The Economist

Contxto reports that the health crisis may not be the biggest problem in the near future. The crisis is compounded by the tough choice of having to choose between exposing people to the virus if they go out or exposing them to poverty if they stay away from work.

So, the question is: Will IMPACTO have to pivot again once the health catastrophe becomes an economic crisis?

Gaviria Halaby says that, for now, IMPACTO’s guidelines are clear and relevant to the crisis at hand, and yet, “If the needs stemming from the crisis change, IMPACTO will support the solutions most needed at that moment.”

Airports, Toll Roads, Taxi Services Move Towards Restructurings in Latin America

Many airports and toll roads in Latin America may have to restructure their debts as the travel industry struggles to recover from the COVID-19 pandemic, although some might be able to cushion the blow for a few years, sources told LatinFinance.

“Roads have been badly affected, and airports more so. It will take quite some time for them to recover pre-COVID-19 levels,” said Mikel Peña, Head of Project Finance in the Americas for Spanish bank BBVA.

A couple of airport operators – Aeropuertos Argentina 2000 (AA2000) and ACI Airport SudAmérica – carried out bond swaps in May, offering higher yields for longer maturities, while toll roads are feeling the pinch from travel and trade restrictions during the pandemic.

Other airports will likely follow suit, looking for ways to delay their debt obligations as earnings remain below levels from before the coronavirus pandemic, although they may be able to hold out until things get back to normal.

“If the asset was fine before the crisis, then one, two, or three years from now, normalcy could return, so that is a way by which these assets can be restructured,” said a project finance banker in New York.

According to Peña, whether a company decides to restructure its debt will depend on where it is in the investment cycle, not just on how much cash or how much debt it has. To handle the liquidity crunch, however, borrowers have drawn down from revolving credit lines and lined up short-term funding, he added.

“On the corporate side, so far liquidity in the bank market has been very healthy and robust. Banks are still deploying financial solutions, though it might be pricier and more short-term,” Peña said.

In the electricity market, many banks took a conservative approach to non-regulated power contracts, but projects with offtake agreements with clients in the commercial and industrial sectors will feel increasing pressure, sources said.

“Projects that just entered the commercial stage may also be especially vulnerable. We are already witnessing legal challenges around force majeure,” said a second project finance banker in New York.

In the telecommunications sector, however, the outlook is more positive. Mexican telecom América Móvil took advantage of that investor confidence in the middle of the pandemic when it sold $1 billion in new 10-year bonds and repurchased €1.32 billion ($1.48 billion) in convertible notes in early May.

“TMT names, such as data centers, tower companies and fiber networks will do very well. It’s amazing how people are running systems from their homes, clearly a system that stands to benefit from what is happening,” said Willem Sutherland, head of wholesale banking for Latin America at Dutch lender ING.

Argentina Reached ‘An Understanding’ with One Creditor Group, Says Guzmán

Argentina reached an understanding – but not an agreement – with one group of creditors to restructure US$65 billion in overseas debt while major differences remain with another key group, Economy Minister Martín Guzmán said last Thursday.

“We’re in conversations with two major groups. With one of them we have managed to reach an understanding on a number of important issues…“With the other group, it’s called the Ad Hoc Group, there have been bigger differences,” Guzmán told Bloomberg’s Stephanie Flanders at the Emerging & Frontier Forum 2020 (Buenos Aires Times).

Guzmán did not say Argentina had reached a formal agreement with any creditor groups.

The contrast in bondholders’ positions shows the complexity of Argentina’s debt negotiations, which stalled last week after failing to reach a deal after successive deadline extensions. The government has now extended talks until July 24.

Creditors say Argentina rejected what they consider “sustainable offers”. In turn, Guzmán said the ad Hoc bondholders- which include BlackRock Inc.- sought changes to the collective action clauses, known as CACs, in the contracts of new bonds the country would sell that weren’t fair in the government’s view.

“One of the proposals we received asked Argentina to go back in time and undo the progress that has been done over the last few years,” Guzmán said, referring to enhanced CACs.

Collective action clauses set a threshold for creditors to accept an agreement from a debtor. If a certain percentage of bondholders accept the offer, then all must accept it.

“Securities issued under the 2005 bond contracts require at least 85 percent of bondholders to sign off on any new restructuring, versus the two-thirds or 75 percent threshold on securities issued more recently, making them more appealing to some bondholders” (Buenos Aires Times).

Guzman added that Argentina’s fiscal deficit is contained despite a major plunge in tax revenue and, conversely, a significant increase in government spending. With no access to credit, the government has turned to Argentina’s central bank to finance its fiscal stimulus, a move that raised concerns about a potential jump in inflation later this year. So far, inflation remains low with millions of Argentines still under quarantine.

“We are making sure the fiscal deficit stays under control, especially given the circumstances we face…We managed to contain the effects of the increases in central bank financing,” Guzmán said.

Brazil-focused SPAC HPX Files for a $200M IPO

Last Friday, PX, a blank check company targeting a business in Brazil, filed with the SEC to raise up to $200 million in an initial public offering.

As reported by NASDAQ, PX plans to raise $200 million by offering 20 million units at a price of $10. Each unit consists of one share and one-half of a warrant, exercisable at $11.50. At the proposed deal size, HPX would command a market value of $250 million.

The company is led by CEO, CFO, and Director Carlos Piani, a current executive at Kraft Heinz, and Co-Chairmen Bernardo Hees and Rodrigo Xavier, who previously served as CEO of Kraft Heinz and BofA Merrill Lynch Brazil, respectively.

The Wilmington, DE-based company was founded in 2020 and plans to list on the NYSE under the symbol HPX.U. HPX filed confidentially on April 15, 2020. Credit Suisse is the sole bookrunner on the deal.

LatAm List Podcast: Four Acquisitions During a Pandemic: OmniLatAm, PSL, Fliper, DM10

Four Acquisitions During a Pandemic: OmniLatam, PSL, Fliper, DM10, Ep 2 - LatamList

Four Acquisitions During a Pandemic: OmniLatam, PSL, Fliper, DM10, Ep 2 - LatamList

Rodrigo Sánchez-Ríos, Founder and President of La Haus, shares his insights on the proptech market in Latin America pre and post-COVID-19.  •  Share

LatAm’s ecosystem saw a series of acquisitions and investments take place despite the global crisis. Kaszek Ventures and XP Inc. were active players in venture capital this week. Rodrigo Sánchez-Ríos, Founder and President of La Haus, makes an appearance on the podcast to share his insights on the proptech market in Latin America pre and post-COVID-19.

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