Set among the Andes mountain range, stretching from the Caribbean to Patagonia, in an area of breath-taking vistas, are what have become known as the ‘Andean Three’.
These three dynamic, and often overlooked, economic powerhouses – Chile, Colombia and Peru – already have a combined GDP equalling 65% of that of Mexico – and their economies are forecast to grow faster than both Mexico’s and Brazil’s over the next five years, largely because of rising foreign direct investment.
But that’s not the only reason why the Andean Three should rank high in the strategic planning of companies expanding internationally, says global consultants The Boston Consulting Group.
“Increasingly, Chile, Colombia and Peru are being viewed as an economic bloc serving as a new driver of regional dynamism in Latin America,” say the consultants.
They have already forged an alliance binding together their countries’ financial and commercial markets. They have free-trade and investment agreements, and last year their stock exchanges merged to form the Integrated Latin American Market. This bourse boasts Latin America’s second-largest market capitalisation, after Brazil’s Bovespa, and has the largest number of listed companies. The three countries are also planning to connect their electricity grids.
In addition, Chile, Colombia, and Peru all have market-friendly, fiscally prudent democracies that favour free trade and investment. Chile is ranked 11 among all nations in terms of openness to trade on the Heritage Foundation’s Index of Economic Freedom, while Colombia and Peru have moved up in ranking to 45 and 41 respectively. By contrast, Brazil ranks only 113 and Argentina 138.
“The sound macroeconomic management of the Andean Three makes them particularly appealing to investors,” says The Boston Consulting Group. The Colombian economy has expanded by an average of 4.6% annually over the past five years. Chile has averaged 5.1% annual growth and Peru 5.6%. Yet inflation has been kept in check.
The three nations posted balanced budgets or healthy surpluses from 2005 through to 2008. After running deficits in 2009 as a result of the global recession, Chile returned to a balanced budget in 2010, and Peru ran only a 1% deficit. Brazil and Venezuela, by contrast, have run significant budget deficits since 2006.
The Andean Three are considered to present much lower macroeconomic, political, labour, and foreign-trade risks than most other Latin American nations, according to rankings by the Economist Intelligence Unit. Tax rates and competition policies are also more business-friendly.
Such considerations are fundamental for companies making large, long-term ‘bets’ in major regional sectors such as mining and energy resources.
Although the Peruvian government is putting greater emphasis on social inclusion, its economic policies have mainly stayed on course. The policies of the Andean Three stand in sharp contrast to the leftist populism of Venezuela, the protectionism of Argentina, and the domestic focus of Brazil.
Investors have rewarded these policies. Foreign direct investment (FDI) as a percentage of GDP has risen since 2005 in all three nations and averages 41% for the bloc. In Brazil and Argentina, by contrast, FDI as a share of GDP has dropped to 17% and 21% respectively. In Venezuela, it plunged from 31% in 2005 to just 12% in 2010.
Capital markets in Peru are also strong, says Carlos Sandoval, UHY Sandoval Aliaga y Asociados S. Civil de R.L., Peru. “The corporate bond market in Peru grew threefold from USD 1,631 million in 2011 to USD 5,149 million in 2012,” he says. “The total Latin American region has grown 65%, with Brazil at the top of the list, but it is Peru which has grown the most.” These investments are funding infrastructure projects and financing growth companies as they expand their operations in Peru and the region. “There are many companies from the US and Europe coming to Peru to launch their operations and acquire companies in this market,” says Carlos. “We advise our clients with mergers and acquisitions, as well as capital-raising.”
The private sector is also an important factor, says Ronny Frederick, UHY CE&A Consultores y Auditores de Empresas, Chile. Chile’s LAN Airlines has its main South American hub in Lima, Peru, and plans another in Bogotá, Colombia, for example, and Chilean companies such as Abastible, Gasco, and Lipigas control half of Colombia’s USD 1 billion liquefied natural gas market.
Cross-border mergers and acquisitions within the bloc rose from 16 per year on average from 2003-2006 to 40 per year from 2007-2010. Peru’s Brescia family, whose interests include banking and mining, now owns Chile’s largest cement producer, Cementos Melón, as well as a Colombian maker of welding electrodes. CorpBanca, one of Chile’s largest commercial banks, is expected to win regulatory approval to buy the Colombian operations of Banco Santander. Meanwhile, the state-run Colombian energy group, Empresa de Energía de Bogotá, acquired 60% of Peruvian gas distributor Calidda in 2011. Mergers and acquisitions are also becoming a trend in industries such as retail, telecommunications and transportation.
Together, the Andean Three are only 35% of the size of Brazil and with less than half that nation’s population. “But the bloc is rising on the radar screen of both multinationals and local companies as a driver of Latin American growth,” says Samuel Rozo Monsalve, UHY Auditores & Consultores S.A., Colombia. Their consumer markets are at least as thriving as those in the rest of Latin America. More than 30% of Chile’s population and 25% of Peru’s population climbed out of poverty to the lower middle class between 1990 and 2010, making the Andean Three a growing market for mobile communications, consumer finance and retail.
The bloc’s strong trade links with the rapidly growing economies of Asia are another attraction. Total trade with Asia grew by 5% annually from 2005-2009 and accounts for around 10% of the three countries’ combined GDP. That is around double the level of South America’s other big economies, where trade with Asia has grown more slowly.
By seizing opportunities in the Andean Three, companies can position themselves strongly in Latin America. But, says The Boston Consulting Group, they should keep guidelines in mind:
Take advantage of the Andean Three’s economic integration. But keep in mind that there are still economic differences among Chile, Colombia and Peru. Chile’s economy is the most advanced, for example, and is in a good position to attract well-trained business talent, making it a better option for a regional headquarters. Colombia and Peru are less-developed, but that could create better opportunities for short-term gains.
Approach the Andean Three differently from other Latin American markets. The ease of doing business in Chile, Colombia and Peru, compared with much of the rest of the region, means there is less pressure on foreign companies to find local partners, cultivate government connections, and worry about capital expenditure risks.
Take advantage of the growing links between the Andean Three and Asia. Because of the Andean Three’s geographic position and openness to trade, their economies are positioned to grow as conduits for Asian–Latin American commerce.
UHY has local firms in the Andean Three countries.
UHY Macro Consultores, Santiago
Contact: Juan Marín Hernández
UHY CE&A Consultores y Auditores
de Empresas, Valparaíso
Contact: Ronny Frederick
UHY Auditores & Consultores
Contact: Samuel Rozo Monsalve
UHY Sandoval Aliaga y
Asociados S. Civil de R.L., Lima
Contact: Carlos H. Sandoval
Further details of doing business in Chile, Colombia and Peru are available on the UHY website under the publications section: www.uhy.com