During the 1990s, Spanish companies began expanding internationally, especially in Latin America, taking advantage of Spain's historical and cultural ties with the region. Spain eventually became the second-largest source of foreign direct investment (FDI) in Latin America, surpassed only by the United States.
In 2011, three of the five largest Spanish companies earned higher profits in Latin America than in Spain itself. For telecommunications provider Telefonica, Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA), the first, second and fourth largest Spanish companies in terms of capitalization, respectively, Latin America became the main source of profits.
Spanish investment has mainly targeted a relatively limited group of sectors, primarily telecommunications, banking, public utilities and energy. Investment has also come from a relatively small number of Spanish companies. According to the Bank of Spain, only 20 percent of Spanish companies invest abroad. The main firms and sectors have been Telefonica in telecommunications; BBVA and Banco Santander in banking; Iberdrola, Union Fenosa and Endesa (now Italian-owned) in public utilities; and Repsol YPF in oil and natural gas.
The first phase of the expansion of Spanish companies in Latin America was concentrated in the largest markets: Mexico, Brazil and Argentina. Later, Spanish companies began spreading across the rest of Central America and South America. Recently, Spanish companies have begun to purchase assets in smaller markets such as Peru, Colombia and Venezuela.
The Economic Crisis
Investment by Spanish companies in Latin America has decreased since 2008 as a result of the international financial crisis. As a source of FDI in Latin America, Spain fell from second to fourth place behind the United States, the Netherlands and China.
At the same time, however, many Spanish companies began using Latin America to compensate for losses at home. A study conducted by the Autonomous University of Madrid revealed that Spanish companies in the Ibex 35 stock index that operate in Latin America have improved their profits on average since the beginning of the crisis, while the remainder have faced losses.
In 2011, Banco Santander earned more than half its profits in Latin America, with Brazil, Mexico and Chile as its biggest sources of business. Telefonica also made more than half its profits in the region, mostly through operations in Brazil, Argentina and Chile. Finally, BBVA earned two-thirds of its profits from former Iberian colonies. In Mexico alone, the bank made more money than it did in Spain.
Latin American economies are growing at high rates despite the crisis, especially compared to Europe. According to the International Monetary Fund, the region is expected to grow by an average of 3.7 percent in 2012 and 4.1 percent in 2013. Though the region could suffer from a reduction of exports to Europe, demand for its agromineral commodities remains strong in other markets, especially Asia. On the contrary, Spain is facing recession and record unemployment, which have resulted in low economic activity, poor consumption and high risk for banks. A survey by the IE Business School in Madrid found that, by 2015, most of the 30 largest Spanish companies with operations in Latin America expect revenues from the region to exceed those obtained at home.
The main sectors in Latin America where Spanish companies operate — banking, telecommunications and energy — are expected to grow in the coming years.
The already strong presence of Spanish banks in Latin America is exemplified by BBVA, which, in terms of total deposits, is the largest bank in Mexico, the fourth-largest in Argentina and the sixth-largest in Chile. Meanwhile, Banco Santander is the largest bank in Chile, the third-largest in Mexico and Argentina, and the sixth-largest in Brazil.
Latin America is becoming increasingly attractive for banks. Since a wave of financial crises hit the region in the late 1990s and early 2000s, financial systems in Latin America have gained strength, depth and diversity. Household debt-to-income levels are relatively low in the region, standing at around 40 percent in Brazil and Argentina and close to 70 percent in Chile, as opposed to 128 percent in Spain. Moreover, Latin American banks on average have capital-to-asset ratios of 13 percent, higher than the 9 percent average in Spain. They also have a relatively low nonperforming loans ratio between 2.6 percent and 3.4 percent in Mexico, Argentina and Brazil, compared to the 5.27 percent average in Spain.
The region has relatively low levels of bank usage, leaving much room for expansion in the sector. In some countries, including Chile, Brazil and Uruguay, between 40 and 60 percent of the adult population has access to banking services. In countries like Mexico and Argentina, just 20-30 percent of the adult population uses banking services. And in the least developed countries, such as Bolivia and Nicaragua, less than 15 percent of adults have access to banks.
Latin America's telecommunications sector also offers growth opportunities. According to industry reports, during the next few years the sector will be characterized by strong region-wide growth in the broadband and mobile voice and data sectors, offsetting the continuing decline in the fixed voice market.
This expansion will require investment and expertise. The know-how of major players, such as Telefonica, that have considerable experience in the European telecom markets will greatly facilitate this process. These opportunities will be available to global telecom players as well, including several Latin American companies, putting the Spanish under pressure to maintain their competitive advantage.
The energy sector will also present business opportunities in the coming years due to strong electricity and oil consumption in Latin America.
Opportunities aside, Spanish companies in Latin America will face economic and political risks. While Latin American economies are still growing, the international financial crisis may affect the region more than expected. Growth in Argentina, for example, likely will fall by half between 2011 and 2012, while Chile, Colombia and Mexico are expected to face small reductions in their growth rates in the next two years. Even so, the region will continue to outpace Europe.
Spanish companies also will have to deal with a shifting Latin American political landscape. The risks this environment will pose include limits on capital movement and possible nationalizations. Some countries, such as Brazil and Chile, have taken steps to handle a surge in dollar inflows that has raised concerns about economic overheating and export competitiveness. Others, such as Argentina and Venezuela, have implemented capital controls to prevent capital flight. If Spanish companies are constrained in their ability to move capital, their scope for action in the region will be reduced. Recent nationalizations in Venezuela and Bolivia, as well as the April expropriation of Repsol YPF's Argentine operations, also highlight Latin America's political risks.
Spanish companies also will suffer further consequences from the European crisis. The crisis is far from over in Spain, and firms may face domestic losses outstripping their gains in Latin America. This could force companies to liquidate their Latin American operations just to compensate for losses at home. Contracting credit in Europe will also limit companies' investment capacities. This could put Spanish companies in the middle of a political tug-of-war if Madrid pushes them to invest Latin American profits in Spain to create jobs at home while Latin American governments push the companies to reinvest profits where they were earned. As long as Latin America remains an attractive investment destination, regional governments will have the upper hand when bargaining with Spanish companies. If Spanish companies decide to favor their Latin American operations, Spain will not benefit as substantially from the presence of its companies abroad.
Still, Spanish companies will try to increase investments in relatively properous Latin America in the face of declining opportunities in Europe. Latin America will continue to be the main source of revenue for some Spanish companies, particularly the larger ones.
Spanish firms will give preference to Latin American countries with relatively high growth rates, robust domestic markets and friendly business climates. Thus, Brazil and Mexico will continue to be the main destination for Spanish FDI. Smaller emerging markets, such as Uruguay, Chile, Peru and Colombia, may replace countries where the business climate is not considered favorable, such as Argentina, as destinations for FDI. As long as Latin America remains an attractive investment destination, however, Spanish companies will be willing to tolerate even unstable business environments.