Even in times of relative stability, IR professionals in Latin America must be able to give investors an accurate, detailed picture of how potential changes in their country’s political and economic landscape could affect their stocks. That’s why keeping up with current events and politics is central to the IR role in emerging markets. In addition to being up to speed with regular IR duties, these communications professionals must become quasi-economists and political analysts.
‘There is a very clear correlation between investors’ political expectations and the price of our stock,’ notes Gustavo Antonetti, head of investor relations and director of strategic planning at Venezuela’s CanTV. ‘When political unrest becomes evident to investors, the stock tends to go down.’ As Antonetti points out, when it comes to Latin America, a country’s politics are usually part of a fund manager’s investment criteria.
‘We look at the political developments [in a given country] and try to assess whether they are going to hamper economic performance,’ explains a New York-based analyst who covers Latin American banks.
Right now Venezuela and Argentina have the highest inflation rates in the region, following the worst political and economic crises in recent Latin American history. IROs working in these countries quickly learned to address issues of currency devaluation, double-digit inflation rates and political chaos in order to keep investors on board.
Argentina’s collapse
Argentina’s economy pretty much collapsed at the end of 2001. As a result, President Fernando de la Rua resigned and was succeeded by several presidents in a short period of time. New economic policies were implemented, including freezing tariffs and the abandonment of the convertibility program that pegged the peso to the dollar.
Naturally, Argentina’s economic and political mayhem had a direct effect on corporate balance sheets. Telecom Argentina’s ADR, which trades on the New York Stock Exchange, suffered a 90 percent decline, going from $6.51 in December 2001 to $0.60 in June 2002, according to Pedro Insussarry, the company’s head of IR. In addition, the rapid devaluation of the peso tripled the company’s debt, which is almost entirely denominated in foreign currency, forcing the company into a debt restructuring process that started in April 2002.
‘Last year was very challenging for us,’ notes Insussarry. ‘First we had to deal with the effects of a very volatile local crisis. At one point, the foreign exchange rate rose to over four pesos per dollar, and we didn’t know if we were going to have a new president. We were also dealing with the enforcement of Sarbanes-Oxley and uncertainties about how that would impact on our corporate governance policies.’
Telecom Argentina is still in a reconstruction phase but the light at the end of the tunnel is much closer than it was a year ago. ‘There is definitely life after the debt restructuring process,’ says Insussarry. ‘There is potential for recovery in terms of the economy and this will positively impact on our business. After we complete the restructuring process, the company will have a very good chance for growth.’ Just like other countries – including Mexico and Russia – that have suffered fiscal crises, Argentina will also survive, he adds.
Insussarry says the trick to weathering an economic storm is to be transparent about issues hitting the company. That strategy helped rebuild trust with Telecom Argentina’s investors and the firm’s ADR has since risen to its original level, trading at $6-6.50 as of October 2003. ‘Investors are now more concerned with regulatory issues, potential tariff increases and the debt restructuring process than the company’s basic operations,’ he says. In light of this, he now opens investor meetings with a detailed description of the context in which the company operates, including the country’s economic and political scheme dating from late 2001 to the present.
Venezuela’s predicament
Venezuelan IROs are also finding creative ways to cope with political and economic instability. The most pressing current issue in Venezuela is a lack of access to foreign currency, says Antonetti. In February 2003 President Hugo Chavez pegged the Venezuelan currency to the US dollar and implemented new limits on purchasing foreign currency.
For CanTV, the only Venezuelan company that trades on the NYSE, controls on foreign currency have created even more work for the corporation’s IR team. Paying dividends to foreign investors has been a particularly excruciating process, for example, because US dollars are only available via Cadivi, a government agency that controls access to foreign currency.
While CanTV is under no obligation to pay dividends in dollars, to keep investors interested in the stock it took on the heavy burden of filling requests for American currency through Cadivi. Working with the government agency has been a slow process – Cadivi is famous for its tardiness in processing requests and, as a result, the company’s investors have had to wait months to get their dollar dividends. Nevertheless, CanTV has managed to get 85 percent of the dollars it has requested from the government.
High inflation and the devaluation of the bolivar have also complicated matters for Venezuelan IROs. ‘Volatility in our economy and, specifically, devaluation and inflation make it very difficult for us to reasonably predict results for the year,’ explains Antonetti. CanTV usually releases its annual guidelines a week prior to releasing first quarter earnings, which is much later than other Latin American companies. ‘We do this so we can make better predictions of what will happen during the year,’ Antonetti says.
Brazil’s recovery
Before the Argentinean economic collapse, Brazil’s economy went through a similar currency crisis. In 1999 the government released the real from the dollar and devaluation swiftly followed. As exchange rates between the real and the dollar widened, Brazilian companies found their foreign debt multiplying quickly, according to José Marcos Treiger, director of IR at Brazil’s Braskem and vice president of Ibri, Brazil’s IR association.
Back in 1999 Treiger was doing IR for Compania Siderurgica Nacional (CSN), which was affected by the Brazilian economic slump. To appease investors, he decided to increase the company’s presence abroad. ‘In the specific case of CSN, instead of deviating from the foreign market, we increased our participation in events abroad,’ he recounts. ‘We focused our efforts on attracting analysts to conference calls, so we could explain the effect the economy was having on us.’
Different companies adopted different measures to deal with the issue, he says. ‘Some tried to defer payments but this was not well perceived by foreign investors, at first,’ he notes. Treiger’s IR strategy proved to be successful: CSN maintained its strong reputation with foreign investors and has since increased productivity by 3 percent.
Staying visible
What these three IROs have in common is their decision to stay visible during troubled times. They were all proactive in keeping Wall Street informed and therefore managed to keep their company’s image intact. ‘Being honest and keeping the Street up-to-date with the country’s political developments is the best way to handle a crisis situation,’ says a New York-based analyst.
‘What we always ask from IROs is that they keep us informed, in a very straightforward manner, of what’s going on in the country and what is going to affect them,’ she adds. ‘It allows us to do a better comparison of companies going through that same economic crisis.’
Analysts are basically trying to determine whether any given company will be able to survive whatever economic or political situation is affecting its home market. According to this analyst, investors want answers to basic questions like how operations might be affected and whether a company’s cash flow or reserves will be sufficient to allow it to ride out any tough times.
When tackling these questions, analysts often call a company’s IR contact for an inside scoop. As this analyst notes, ‘They are in the country, they read the local press and they talk about this in business and social circles, so their perspective is invaluable.’
Mexico’s small tremors
Mexico has not suffered a massive economic crisis since 1995, but the Street is still watching its politics like a hawk. Mexican companies have benefited from a fairly sound economy in the past, says Javier Trevino, vice president of corporate communications at Monterrey-based Cemex. But the inability of different political forces in Congress and the administration to reach a consensus on structural reforms that will encourage foreign investment in Mexican companies is a prominent concern among investors, he adds.
‘[The best way to address this issue is] by helping investors understand the regulatory environment companies are operating in, and how government policies are being designed and put forth, so they can make better informed decisions,’ Trevino advises.
