Bank of America Merrill Lynch White Paper
Spotlight on Latin America:
Economic Considerations
When Expanding to Brazil
and Mexico
July 2014
Executive summary
Contents
Global expansion is rapidly becoming the new norm of a successful, thriving business.
Latin America today.. . . . . . . . . 2
Today, companies of all sizes are looking beyond domestic operations and setting their
Brazil — an economic
powerhouse. . . . . . . . . . . . . . . . . 2
sights on future growth opportunities overseas. But what they’re looking for may be
even closer to the U.S. — and better aligned with their goals. This article shares the
Mexico — a country
on the rise . . . . . . . . . . . . . . . . . 3
most up-to-date economic insights for Brazil and Mexico, both of which are gaining
Conclusion. . . . . . . . . . . . . . . . . . 4
unprecedented traction in cost-effective global expansion and investment.
SPOTLIGHT ON LATIN AMERICA: ECONOMIC CONSIDERATIONS WHEN EXPANDING TO BRAZIL AND MEXICO | 2
Latin America today
The progress Latin America as a whole has made in the past 20 years is remarkable. 77% of the
population now resides in major cities.1 Brazil and Mexico represent 60% of Latin America’s GDP.2
And the influx of investment from banks and multinationals expanding to the region has left many
investors hungry for more stock exchanges.
Important initiatives like the Pacific Alliance, which includes Chile, Peru, Colombia, Mexico and
Costa Rica, open the door to incredible opportunities for companies looking to invest in Latin
America. Another vital initiative spurring investor confidence is The Integrated Latin Market,
Latin America’s first stock market combination. MILA integrates the exchanges of Chile, Colombia,
Peru and Mexico into one influential stronghold.
Brazil — an economic powerhouse
There’s no doubt that Brazil is South America’s leading economic power and regional leader.
It was one of the first in the area to recover from the 2008 recession, and in 2010, Brazil’s GDP
growth reached 7.5%, the highest rate in the past 25 years.3 Although many areas are still plagued
by high-income inequality, crime, drugs and border disputes, Brazil continues to outweigh all other
South American countries with its expanding middle class, growing domestic market (eighth in the
world) and untapped natural resources.
Brazil’s steady determination to expand its presence in world markets makes it one of the
most important destinations for foreign direct investments (FDI) particularly attracting Chinese
investment in energy and metals. Infrastructure projects like the recent 2014 World Cup and
the upcoming 2016 Olympics in Rio de Janeiro have also become strong contributors to Brazil’s
thriving economy.
Taxes
Brazil has a three-tiered taxation system that levies taxes at the federal, state and municipal levels.
Some taxes are levied on in-country investment and loan transactions within Brazil. Companies
should also be aware that the 6% financial transaction tax (FTT) imposed on international fixed
income transactions was abolished June 2013.4
Payment systems and regulations
In contrast to Mexico’s fully convertible currency, Brazil’s BRL is highly regulated by the Central
Bank of Brazil, making cross-border transactions more complex than local payments. FX spot
transactions must be registered and comply with Central Bank rules. Companies must have
supporting documentation to prove the cross-border payment is legal. Brazil also uses the
Boleto, electronically issued by the bank on behalf of a corporate customer and represents a
debt to be paid, similar to an invoice.
Liquidity management
Sweeping or physical cash concentration within the same local entity is allowed in Brazil but
not permitted between different resident entities. Zero-balancing is commonly used among
the subsidiaries of the same resident entities.
SPOTLIGHT ON LATIN AMERICA: ECONOMIC CONSIDERATIONS WHEN EXPANDING TO BRAZIL AND MEXICO | 3
Commercial spending
Many Brazilian companies in the mining and energy sectors have begun to expand globally either
through the acquisition of foreign firms or organic growth. This growth has resulted in a parallel
increase in commercial spending across a wide range of categories from raw materials to travel and
entertainment expenses and even office supplies. Datamonitor predicts that, by 2015, Brazilian travel
spend could reach more than $30 billion.5
Brazil at a glance:6
Population: 202,656,788 (July 2014 est.)
GDP: U.S. $2.416 trillion (2013 est.)
Currency: Brazilian Real (BRL)
Exchange rates: 2.153 reals (BRL) per U.S. dollar (2013 est.)
Exports: $244.8 billion (2013 est.)
Imports: $241.4 billion (2013 est.)
Mexico — a country on the rise
In the 20 years since the North American Free Trade Agreement (NAFTA), Mexico has risen to
become the United States’ second largest export market and third largest source of imports.
In 2012, Mexico formally joined the Pacific Alliance with Peru, Colombia and Chile, creating a
vast network of investment opportunities. In 2013, two-way merchandise trade between the
U.S. and Mexico reached $507 billion.7
The current government, led by President Enrique Peña Nieto, is working to counteract Mexico’s
organized crime and put the focus back on political and economic reform. The three-party,
“Pact for Mexico” reform agenda aims to improve competiveness and economic growth across the
Mexican economy. Accelerated credit to private sectors and low unit labor costs compared with Asian
countries in the U.S. market are also adding to Mexico’s macroeconomic and political stability.
The influx of new FDI focused on manufacturing has had a significant contribution to Mexico’s
growth as rising labor costs in Asia prompt more U.S. companies to consider moving operations
closer to their consumer markets. Mexico’s banking requirements are much more liberal,
making it even more attractive to interested parties looking for simpler investment options.
Payment systems
Mexico has two ways to process Mexican peso (MXN) transactions. Sistema de Pagos Electronicos
Interbancarios (SPEI) is a real-time gross settlement system similar to the U.S.’s Fedwire. Camara de
Compensacíon Electronica (CCE), or Cecoban, is a next-day electronic funds transfer (TEF) similar to
the U.S’s Automated Clearing House (ACH). There are no specific minimum or maximum amounts
for either clearing system.
Liquidity management
According to the Bank for International Settlement, MXN is the most liquid emerging market
currency, accounting for 1.3% of global foreign exchange turnover.8 It’s also the only deliverable
currency in Latin America, making it a preferred currency for speculative investors.
SPOTLIGHT ON LATIN AMERICA: ECONOMIC CONSIDERATIONS WHEN EXPANDING TO BRAZIL AND MEXICO | 4
Mexican regulations allow accounts in any currency. However, the only foreign currency that it is
possible to execute electronic transactions in is U.S. dollars. Besides a deliverable currency, Mexico
is open to foreign flows of capital in and out of the country, and there are no restrictions on local
lending for foreign institutions as long as the funding is abroad. But keep in mind, foreign investors
are not allowed to collect deposits locally. Resident companies are also permitted to hold offshore
accounts. Onshore accounts are not restricted to local currency and can bear interest.
Taxes
Residents are taxed on worldwide income and non-residents are taxed on Mexican-sourced
income. The income tax rate is currently 30% and is scheduled to reduce to 28% in 2015.9
Mexico at a glance:10
Population: 120,286,655 (July 2014 est.)
GDP: U.S. $1.845 trillion (2013 est.)
Currency: Mexican Peso (MXN)
Exchange rates: 12.76 pesos (MXN) per U.S. dollar (2013 est.)
Exports: $370.9 billion (2013 est.)
Imports: $370.7 billion (2013 est.)
Conclusion
Brazil, Mexico and Latin America, as a whole, are becoming increasingly attractive to investors.
In order to take advantage of these opportunities, companies need to understand the nature
of the Latin American market and the differences within each region. It’s essential to work with
a bank with global expertise and local, on-the-ground knowledge — only then will companies
be able to take full advantage of all the possibilities Latin America has to offer.
1
FX-MM, “A Bright Future for Brazil,” Nov. 2013 (Cuevas 39)
2 Strategic Treasury for Latin America, “Latin America Rising for Trade and Investment,” 2013 (Dubois 10)
3
CIA World Factbook, “Brazil Economy–Overview,” May 29, 2014
4 Strategic Treasury for Latin America, “Navigating Latin America’s Liquidity Landscape,” 2013 (Moussalli 19)
5
Strategic Treasury for Latin America, “A Bright Future for Commercial Cards in Latin America,” 2013 (Phalen 23)
6 CIA World Factbook, “Brazil Economy,” May 29, 2014
7 CIA World Factbook, “Mexico Economy–Overview,” May 29, 2014
8 Bank of America Merrill Lynch white paper, Making the Most of Mexico and Brazil: Foundations in Payments and FX, July 2013 (Junca, Fu 2)
9 Global Transaction Services: The Power of Global Connections, “Mexico,” 2013 (Cuevas 22-23)
10
CIA World Factbook, “Mexico Economy,” May 29, 2014
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