Latin America and Country Commitment: The Upside of Staying the Course When Times are Tough

06 Apr 2014

In thinking about investor reactions to the recent Brazilian sovereign debt downgrade, the protests in Venezuela and the continuing issues in Argentina, I learned two things today that I probably should have known but didn't. 

The first thing is that Citibank has been present in Argentina for more than 100 years. The second is that on December 24, 1927, Citibank's headquarters in Buenos Aires were bombed by the Italian anarchist Severino di Giovanni. 

If you think about it, Citibank has witnessed close up essentially all of what is considered modern Argentine history: the first national elections in 1916; the "Infamous Decade" between 1930 and 1943; the rise of Peronism; the Revolucion Argentina; the Menem years; the Argentine 1999-2002 crisis and the post-2000 Kirchner governments. 

While Citibank of course is not the only financial institution to have remained present in a high risk country for a long time, having the nerve and commitment to stand firm while a country goes on a century long political and economic roller coaster ride is not common. 

From my vantage point in Latin America, what I have seen more frequently is that investors come when country prospects seem relatively bright and then quickly head for the door when the country picture starts to look bleak. This dynamic has been greatly amplified by international investment agreements, the profileration of investment products which allow country investments to be made from afar and a financial system which allows capital to be invested and withdrawn instantly. 

Looking at this from one perspective, withdrawing capital when an investment becomes riskier makes financial sense. Investors make investment decisions based on risk and return and as risk rises and the prospect of hitting a targeted return falls many investors will seek to reallocate investment capital to markets which better fit their investment requirements. This is why liquidity is valuable. 

On the other hand, leaving a country when it is going through a rough period of time also has negative investment consequences, many of which are intangible in the short term. Investors coming in and out of countries based on good or bad news often means that you are coming in too late and leaving too early. 

More importantly, government and companies are run by people and being able to say that you stood firm even when times were rough creates a lot of investment, economic and human value. This value goes far beyond simply having a better understanding of risk and being better positioned to capture opportunities when conditions start to improve. It creates good will, a base of shared experiences and a history of facing shared challenges. This puts foreign investors in the position of not only reacting to investment conditions in a country that is thousands of miles 
away - it allows them to directly participate in leading the creation of investment opportunity regardless of country conditions.