Energy
Not GRE-at
The energy and extractive sectors are highly strategic for Latin American governments and many of the largest sector constituents are state-owned companies, or Government Related Entities (GREs).
Latin American GREs, in general, have gained a reputation for bad management, corruption and nepotism. A Peruvian economist comments, “Pemex used to produce 3 million barrels per day at a cost of USD 6 and a price of USD 40, today it produces 1 million at a cost of USD 40 and a price of USD 25. Petrobras and Vale were also doing fine until Dilma Rousseff took to power. All of these companies have had corruption scandals. GREs get filled with political appointees, and in some cases, such as Sedapal [the water utility], the positions are inherited!”
“GREs get filled with political appointees, and in some cases, such as Sedapal [water utility]__, the positions are inherited!”
Peruvian economist
There are some brighter spots, such as Ecopetrol, that is generally considered to be well run, but even these suffer from political issues. A Colombian portfolio manager recalled, “In 2014, Ecopetrol wanted to sell a stake of shares to improve liquidity but the government refused because they believed the share price was going to climb, instead it fell by a third.”
Codelco, the copper mining company, is 100% owned by the Chilean state and stands ahead of other GREs in the region for its size and success. Although state-ownership is enshrined in the 1980 constitution, rumours of a potential listing begin to swirl every time Codelco has a good year or the government's budgets are being squeezed. Perhaps now?
This makes life challenging for the average equity investor who is concerned with political risk, corporate governance, management, nationalisation, environmental risks, etc.
“It’s like buying sovereign bonds but with higher yields as the government can’t let those companies fail.”
Head of Research, Mexican investment firm
On the other hand, a fixed-income investor needs to understand cashflow and if the company will pay the debt or not, there is no long-term relationship. The head of research for a Mexican investment firm prefers being a lender to an owner, “It’s like buying sovereign bonds but with higher yields as the government can’t let those companies fail, they are flagships of the country. In contrast, I would not invest a dollar in GRE equity, especially not in Latin America.”
What about the outlook for GREs? Head of Research at a Peruvian pension fund tells us, “GREs will persist until the governments can no longer squeeze cash from them. The wave of populism sweeping Latin America could accelerate this as short-term cashflow to fulfil government promises becomes more important than a long-term investment.”
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