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E-Commerce: Easing Cross-Border E-Commerce BY KENT ALLEN The age of digital commerce is dawning in Latin America, with cross-border marketers looking to the 2014 World Cup and 2016 Olympics in Brazil as opportunities to connect with online shoppers. Will the region capitalize on its e-commerce potential? The cross-border e-commerce math is simple. More online traffic means more sales opportunities, especially for digitally savvy brands from the U.S. and United Kingdom. The number of Latin Americans accessing the Internet jumped 12 percent last year, and mobile traffic is on the rise too. From July 2011 to July 2012, Flurry Analytics reports that four of the 10 fastest growing iOS and Android markets, as measured by the number of active devices, were in the Americas: Chile (279 percent); Brazil (220 percent); Argentina (217 percent); and Mexico (193 percent). Federico Torres, CEO of Traetelo, a cross-border marketplace solely focused on Latin America, explained why the region’s future is digital at the June 2013 Chicago Internet Retailer Conference and Exhibition, the world’s largest e-commerce conference. According to Traetelo, Chile (27 percent growth), Mexico (19 percent) and Brazil (19 percent) were among the five fastest-growing e-commerce markets in the world last year. “Three-quarters of Latin America shoppers find the products they search for on U.S. e-commerce sites,” said Torres. Although the opportunities are alluring, the reality is that capturing online orders is one thing; getting paid is another. Consider Brazil, where establishing a local payment entity can take six months and lots of money and patience. Even after getting paid, the next challenge is transferring money out of the country, which can cost what amounts to a 25 percent extraction fee. It’s understandable why leaders of emerging markets erect barriers to stifle the outward flow of money. However, making it hard for innovative digital commerce companies to get paid discourages investment in domestic industries (e.g., technology, distribution, accounting, marketing services) poised to grow as e-commerce booms globally. Support for cross-border trade is happening elsewhere as products and payments flow more freely across borders. Today, e-commerce is growing by over 20 percent annually in the Asia-Pacific region, and by 2017, cross-border e-commerce is expected to drive over 30 percent of all e-commerce growth there. Yet in Latin America, which is experiencing the same growth rate today, cross-border e-commerce in 2017 will drive half as much growth as in the Asia-Pacific area. Barriers to cross-border trade, especially in payment facilitation, mean Latin America may lose billions of dollars as innovators invest elsewhere. Look for external and internal pressure on Latin American cross-border and e-payment policies to grow. To date, international e-tailers, defined as merchants who sell their products and services over the Internet, have primarily targeted the global tier-one shopper—the relatively wealthy, international credit card–holding consumer comfortable buying online and familiar with the English language. But to scale recent investments, digitally savvy brands are now focusing on global tier-two shoppers—namely, upwardly mobile middle-class buyers relatively new to e-commerce and e-payments and who are less comfortable making purchases in English. Internal pressure will come from these emerging middle-class shoppers. They want popular global brands that cannot be found locally, or at least not affordably. E-payment costs, coupled with costly tariffs and high markups by domestic retailers facing little external competition, means Latin American consumers often pay twice what other shoppers pay for products. Of course, it’s not just cross-border and payment-related policies and practices that can make it tough for digital commerce industries to thrive in Latin America. Personal payment preferences matter. Consider Brazil, where roughly 30 million e-consumers have come online in the past two years. Seventy percent of Brazilians’ credit cards are not accepted for international transactions—and many shoppers have low spending limits. The lack of credit card acceptance is true throughout much of Latin America, where only about 20 percent of shoppers have credit cards. But this doesn’t mean tier-two Latin American shoppers lack buying power. Most shoppers prefer to pay online in the same way that offline payments are made, and according to Torres, 60 percent want to pay cash. Others like to pay via installments or bank transfers. Brazilians prefer the Boleto Bancario, a popular bank transfer payment option that is safe and trusted by consumers. It is also well-liked by merchants, due to a lack of payment gateway commissions and lower instances of consumer fraud. Change will require continuous education and direct investment. “Technology moves very fast,” explains Mario Mello, head of PayPal for Latin America, whose company works with governments to create online experiences that comply with local needs and policies. International online retailers can nurture Latin America’s growth by investing in retail store construction and technology and distribution infrastructures. Their global reach can also help local suppliers find markets for goods and services. Working with Latin American banks is also critical. Banks are teaching customers how to shop online and providing native language customer service. For Latin America to be part of the e-commerce future, it must be made easier for global e-tailers to transact with consumers and cheaper for people to buy online. Back to top Emerging Debt Markets: Still on Strong Footing BY GORDIAN KEMEN The search for higher returns has drawn international investors in droves to emerging market debt and to Latin American debt markets, specifically during the past few years. Data collected by EPFR Global show that money flows toward emerging market bond funds quadrupled from 2011 to 2012—a trend that remained strong through May 2013. In Latin America, local currency bonds have become the main draw in recent years. Global investors are hunting for high-yield and high-quality bonds that provide room for currency and capital appreciation. However, not all countries have received the same level of attention from foreign investors. Peru has by far the highest level of foreign participation, at 57 percent. Mexico’s local bond market is in second place, with a foreign participation rate of almost 40 percent, up from 15 percent following the financial crisis of 2008–2009. With almost $120 billion, Mexico represented the region’s largest absolute increase in foreign bond holdings in the past four years. Mexico’s local market has also become a strong alternative to Brazil, where a 6 percent upfront entry tax on foreigners’ investments in fixed income securities had significantly slowed down foreign inflows into the domestic market since 2010. The largest bond market in the region, Brazil, currently has less than 15 percent foreign ownership in the local bond market, but this is likely to change dramatically on the heels of the June 4 removal of the entry tax. Government bonds in Brazil currently yield about twice as much as Mexican government bonds, and foreign investors are expected to rediscover Brazil’s local currency bond market. Other markets, such as Chile and Colombia, have figured lower on foreign investors’ targets; both have less than 10 percent of foreign investors in local bond markets. But even hard currency bonds with historically low spreads have not been shunned by investors. The corporate issuance pipeline, in particular, has been well-received this year, and many recent bond issues have attracted demand that far exceeded supply. Sovereign issuers have rarely been able to issue debt at more favorable conditions, which has often left fiscal accounts much stronger than in developed markets. This has often reinforced a virtuous debt cycle, with the share of investment-grade countries in the region never having been this high. Critics argue that the region was just in the right place, with ultra-low yields in developed markets—a function of monetary policy easing—pushing investors into Latin American bond markets. Still, global financial markets have recently worried about the tapering of the Federal Reserve Bank’s bond-buying program (quantitative easing) and the eventual end of abundant liquidity provisions. Moreover, commodity prices have been losing momentum due to slower growth in China. Less Chinese commodity demand from Latin America could mean lower growth and weaker currencies in the region. Already, emerging market bonds—in local and hard currency—have experienced significant selloffs and there have been material outflows. Does this mean the end of the success story in Latin American bond markets? Not quite. The success of the region’s investment-grade countries in attracting international investors is more than just coincidence: it’s a success story shaped by more than a decade of hard work. Starting in the mid-1990s, policymakers across Latin America set the foundation for today’s success. They improved balance sheets and implemented policies that turned a region prone to frequent debt and currency crises into a beacon of macroeconomic stability. Brazil, Mexico, Chile, Colombia, Peru, and others adopted policies that focused on inflation-targeting, fiscal responsibility and relatively free-floating currencies. Better public debt management (longer average maturities and increased reliance on local debt issuance) also helped reduce vulnerability from external shocks and foreign exchange swings. Just as important, structural shifts in the ownership of Latin American debt have helped increase the resilience of local bond markets. The shift in ownership among resident holders of domestic bonds shows a clear trend toward stronger participation of institutional money managers such as pension funds, mutual funds and insurance companies, and away from public-sector and bank holdings. This has had a stabilizing effect. Will investors exit regional markets again? Unlikely. First, the withdrawal of stimulus in the U.S. and elsewhere is not expected to be abrupt. Rather than ending easy monetary policy, what is being discussed is a future reduction in the amount of policy stimulus. Other countries are also still accommodating: the Bank of Japan’s recent decision to start a massive easing program may bring significant flows from Japan to Latin American bond markets. Second, Latin American yields should adjust to preserve the relative yield advantage. Third, a tightening in global liquidity conditions will likely follow higher growth in developed markets, and this will translate into higher growth in the region, reducing the risk premium of emerging market bonds. Finally, foreign ownership is unevenly distributed. Likely structural reforms mean the country with the highest absolute foreign participation, Mexico, is expected to further reduce its yield spread vis-à-vis U.S. rates. A close look at these trends suggests that global liquidity conditions will tighten only gradually over a relatively prolonged period. Recent market moves have added value. Markets like Brazil and Mexico will continue to attract investors, even with higher interest rates in developed markets. The bottom line: Latin American debt has been a success story that goes beyond the easing of monetary policy conditions in developed markets. Back to top Telecommunications: Mexico's New Reform BY ALEJANDRO MADRAZO On June 10, Mexican President Enrique Peña Nieto signed a constitutional amendment that transformed the government’s role in telecommunications and expanded its power to curtail media monopolies. The amendment has seismic potential for Mexico’s telecom industry and for its political future. One of two flagship reforms that emerged from the Pacto por México, an informal working group comprising government and the three major political parties, the amendment gives government three distinct roles in telecom. First, through creation of the Instituto Federal de Telecomunicaciones (Federal Telecommunications Institute—IFETEL), a regulatory agency with constitutional status, the state reasserted its role as telecom regulator. IFETEL’s mandate is to guarantee economic competition and content plurality and to encourage universal coverage, convergence, quality and, importantly, access. It has the authority to sanction or even split up companies engaged in monopolistic practices, and to establish ad hoc restrictions to minimize undue market advantages for dominant players in the industry—defined as companies that capture 50 percent market share through their number of users, capacity or network infrastructure. Unlike the existing Comisión Federal de Telecomunicaciones (Federal Communications Commission—COFETEL), IFETEL will be independent from the executive and legislative branches, and will function as the telecom sector’s exclusive anti-trust agency. IFETEL will be headed by a body appointed through a three-step process designed to be more stringent than the criteria for appointing Supreme Court justices, which involves only the Executive and the Senate. Candidate selection will involve an open, competitive process that is subject to a technical evaluations committee, which, together with higher education institutions, will submit three to five candidates to the president, from which one will be proposed to the Senate for confirmation. The telecom reform also mandates that the federal government set up a nonprofit, public service broadcast company to provide objective information and to broadcast independently produced content. It will be governed by a director advised by a citizens’ council, both of which are to be appointed by the Senate. In addition, the government will build a backbone network to ensure equal access for all carriers. What makes the reform powerful is that much of the regulation is embedded in Article 6 of the Constitution, which establishes the right to free speech. Grounding this in the Constitution underlines the fact that the new telecom reform is as much about the audience as it is about the speaker. It reinforces the government’s role in making sure smaller voices are not drowned out by power, money or bias. But the reform’s success is not ensured. The government must first reign in powerful actors. Mexico’s telecom sector is dominated by a few enormously powerful players. Carlos Slim, the richest man in the world, received the lion’s share of the telephone market when Telmex, the government’s telephone monopoly, was cheaply transferred, unaltered, into his hands in the early 1990s. The television market is split between two mass media companies: Televisa, which controls 321 of the 566 commercial frequencies, and the newer TV Azteca—built with public funds and then also cheaply privatized to a single player (Ricardo Salinas) in the 1990s. TV Azteca has roughly 211 frequencies. Together, the two companies control 94 percent of commercial TV frequencies (62 percent of all frequencies) and almost all of the market. Radio is and has long been concentrated: 80 percent of commercial stations are in the hands of only 13 groups. Internet access is dominated by either Slim’s Telmex or local cable competitors that are often Televisa subsidiaries. All of these businesses were built or acquired through privileged and opaque relationships. They thrived in a symbiotic relationship with the Partido Revolucionario Institucional (PRI) throughout the twentieth century, in which docile entrepreneurs provided political support to the party and government while receiving economic benefits and access. When the PRI was ousted from office in 2000, the roles were reversed. Industry increasingly called the shots and a docile government protected their economic ambitions. The telecom monopolists have bullied authorities into approving blatantly unconstitutional laws (Ley Televisa in 2006) and pushed them to the sidelines as they took justice into their own hands (“El Chiquihuitazo” in 2002). For years, pressure prevented the authorities from declaring Slim’s telephone monopoly a dominant player. That changed on April 18, when the Supreme Court ruled that Telmex was a dominant player—a culmination of attempts for such a ruling that started in 2007. In 2007, soon after the Supreme Court struck down the Ley Televisa law—legislation that granted private broadcasters privileges such as permanent rights over the spectrum and entry barriers to new competitors—Congress enacted a major reform aimed at preventing the interference of telecom companies in the electoral process, but otherwise left the telecom market untouched. The message sent to the telecommunications industry was clear: keep out of the political process and you can have your economic windfalls. The reform gave the electoral authorities, namely the Federal Electoral Institute (IFE), the power to prevent telecom companies from indirectly favoring a candidate by doing things such as charging campaigns different advertisement rates. But the formula did not work. Early on, the two television giants refused to follow the guidelines for transmitted campaign ads and then strong-armed electoral authorities into condoning their actions. The new IFETEL, however, will be harder to push around or cajole and will have the power to impose sanctions that affect the rights and privileges of specific telecom companies that break the law. The result: until now, television has remained Mexico’s king-maker. This benefitted Enrique Peña Nieto. When he was governor of the state of Mexico, he was television’s darling. That gave him a national platform leading up to the 2012 election. In proposing and pushing through the new telecommunications reform, he neutralizes, at least in part, the criticism that he is the product and puppet of the TV stations. More important, through this reform, he faced up to a challenge sidestepped by other leaders before him: heading off the growing efforts by media and telecom monopolies to capture government by promoting the election of favored candidates—including family members—to office.