Publication Date: 22-04-2019
Increasingly, Latin America (LATAM) markets are becoming important engines of global growth, the local power sector is poised for a clear growth in 2019, but economic openness is a challenge for countries aiming to grow their energy industries over the long term; in this regards, corporate governance is a crucial factor in making investment decisions. As deeply explore in the bellow lines, there’s exist an essential duality and strong connections between better governance and firm market value in the energy industry; in this regards, the investment decisions of foreign investors are connected to governance concerns. Energy companies must develop good governance practices in order to operate in a fair and ethical way. Those companies should address issues around pay, including executive compensation, minimum wage and pay equality and must have policies in place to prevent bribery and avoid corruption.
Global Growth in Latam
According to the International Monetary Fund (IMF), global growth is projected to reach 3.9 percent in 2018 and 2019, in line with the forecast of the April 2018 World Economic Outlook (WEO), but the expansion is becoming less even, and risks to the outlook are mounting. The rate of expansion appears to have peaked in some major economies and growth has become less synchronized. In the United States, near-term momentum is strengthening in line with the April WEO forecast, and the US dollar has appreciated by around 5 percent in recent weeks. Growth projections have been revised down for the euro area, Japan, and the United Kingdom, reflecting negative surprises to activity in early 2018. Among emerging market and developing economies, growth prospects are also becoming more uneven, amid rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals. Growth projections have been revised down for Argentina, Brazil, and India, while the outlook for some oil exporters has strengthened.
Table 1. Global growth 3.8 vs 3.9 Inter American Development Bank
The slight economic growth experienced by the LATAM region in 2018 from the rise in the price of oil allowed South American countries to slightly recover. However, addressing uncertainties remains critical to achieving the stability needed to take action on new issues that are priorities at the global level, especially those related to the use of technology, new business models, digitalization and innovation.
Energy Industry Outlook
In 2018, Latin America and the Caribbean countries (LAC) signed the Escazú Agreement. The objective of this important agreement is for protection of the right of every person of present and future generations to live in a healthy environment. The agreement, adopted on March 4, 2018 in Escazú, Costa Rica, by 24 of the region's countries, including Mexico, aims to guarantee the full and effective implementation in LAC of the rights of access to environmental information, public participation in the environmental decision-making process and access to justice in environmental matters.
The LAC region has large endowments of hydrocarbons reserves, a massive hydroelectric potential, as well as wind and solar energy potential. The strong sunshine in Bolivia, Peru and Chile, with the latter’s 38,000 square mile-Atacama Desert, provides huge solar potential. Meanwhile, Brazil has major wind capacity at night that could perfectly complement its Andean neighbors’ daytime sunshine, potentially providing vast quantities of free energy for all four countries on a 24-hour basis the necessary international transmission lines were available. This comparative advantage allows the countries in the region to utilize available resources, transforming the energy mix and incorporate new technologies for the development of renewable energies. On the other hand, the LAC region is still dealing with the fluctuation in commodity prices as it is shown in the last two years’ Issues Monitor Maps. This uncertainty and dependence on the oil price highly affects national budgets and investments. Further consequences include instability, inflation, devaluation and rising unemployment.
Table 2. Latam World Energy Issues Monitor 2019
As showed on Table 1 Corporate Governance issues and corruption continues to be a critical uncertainty and is undermining the economic growth and generating political instability. Stemming from this, corruption is the lack of legal security which delays the development of large energy projects, interrupting discussions and discouraging investments that directly affect local markets, and therefore regional growth. On a larger scale, corruption is undermining public institutions.
As expressed in the above paragraphs, the energy sector is crucial to the sustainable success of the global and LATAM economy. In order to guarantee a sustainable success of the industry, corporate governance plays a major roll; Boards are responsible for ensuring that a energy company is ready enough to respond to changing market conditions, by taking advantage of opportunities and managing risks. One of the key roles of directors is to develop with a glocal vision the company´s strategy direction to scrutinize key financial risks and to ensure effective management of risk and compliance. In this regards, the Organization for Economic Co-operation and Development (OECD), whose mission is to promote policies that improve the economic and social well-being of people around the world set that good corporate governance helps to build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.
In connection therewith, one of the last OECD´s Meeting of the Latin American Corporate Governance Roundtable remarks that it is not enough for the boards to build well thought-out corporate governance frameworks (e.g., effective whistle-blower mechanisms, ethics codes, and an independent auditing committee) if directors do not lead by example. Moreover, it was said that it is not sufficient to have boards aware of the importance of business integrity and knowledgeable on the best corporate governance practices if we do not have directors who have the courage to clash with other executives and relevant shareholders’ interests when needed. Efforts to improve board composition, including board diversity and independence, can help, as well as an increased focus on board evaluation, including both self-evaluation and external evaluation.
Growth in energy demand in the LATAM region, especially in Mexico has historically been aligned with Gross Demand Product (GDP) growth. Therefore, we can assume that electricity and gas demand in LATAM will be in line with or slightly below GDP growth for each country (Mexico, Brazil, Colombia and Peru).Although it is expected by S&P Global a economic growth to be in the single digits across the region next year, electricity demand has continued to expand, fueled by a growing middle class, and the company believe that it could represent an attractive investment opportunity for local and international players in the sector.
In this regards, governance plays a huge roll in order to ensure the basic responsibility of the directors that consist in exercise their business judgment to act in what they reasonably believe to be in the best interests of a energy company and its shareholders. In discharging that obligation, directors are entitled to rely on the honesty and integrity of the energy companies’ senior executives and its outside advisors and auditors.
COMEXI Member. Rodolfo has worked as a lawyer and advisor in energy and transactional matters (among others) for the main companies that lead the Fortune 500. Master's degree in Business Administration - with a specialization in energy and business - from the ICADE Business School at Universidad Pontificia de Comillas (Spain) and Master's degree in Business Administration from Stratchlyde University Business School (Scotland).