TFG spoke to the managing partner of one of Brazil’s top law firms about the risks and opportunities of doing business in emerging and developing markets.
First there was COVID, then political turmoil with the Russia-Ukraine war, followed by the commodities superstorm––all of which have made the current global trading environment increasingly challenging.
However, along with rising inflation and increased volatility have come opportunities to do business in new and emerging markets, including South American countries like Brazil.
At ITFA 2022, Trade Finance Global (TFG) spoke to Lucio Lopez, managing partner of one of Brazil’s leading commercial law firms, about how businesses looking to expand into emerging and developing markets like Asia, Africa, or Latin America.
Lopez said, “Although COVID was bad for the world, in terms of trade for Brazil, it has been very positive––particularly within the commodity sector.”
This is due to the fact that Brazil has become a major producer and exporter of soft and hard commodities over the past ten years, in turn bringing major advantages for companies in Brazil as they now have better balance sheets. Additionally, companies are more liquid and willing to do more trade.
Having acted as legal counsel to many foreign investors looking to do business in Brazil, Lopez has identified four key points that, if observed, aid companies succeed in Latin America.
- Carry out a risk assessment: Generally speaking, traders that face problems when doing business in a new country fail to conduct a thorough risk assessment or have a ‘plan B’ to follow if challenges arise.
- Do your due diligence: Once one has risk-assessed a particular sector, company, or product that fits into a certain market, due diligence needs to be conducted––one needs to research that country or company properly.
- Understand the entire business cycle: The entire cycle or process surrounding sourcing, production, transportation, and financing of a product or service needs to be identified. Following this, make sure that the necessary collateral and paperwork fit around that cycle.
- Observe and survey: Once the lender hits the send button and wires payment for an export/import transaction or to finance a company in Brazil or in Latin America, it’s important to pay attention regularly to both positive and adverse events, e.g., political changes, wars, or natural disasters, throughout the term of the facility so that the risk of doing business in that country is reduced.
According to Lopez, Brazil is a good example of an emerging market that has responded well to the changes set in motion by the pandemic. Having made significant changes to their labour laws and introduced some reforms that dramatically reduced agribusiness losses, the country is now more trade- and business-friendly than it used to be.
Lopez said, “There was a major labour reform back in 2016. Before that, Brazil accounted for around 90% of the total number of labour lawsuits worldwide. So this labour reform dramatically reduced the number of lawsuits––which, in turn, reduced costs.”
In addition, Brazil also added some new debt-collection instruments for foreign lenders doing business in the country, making it less of a credit risk.
On top of that, a raft of new debt and capital market securities were introduced into the finance sector, enabling companies to issue and raise funds more easily, making them more liquid.
Moreover, the Brazilian central bank chose to deregulate the market. Before that, it was very monopolised by the four or five biggest banks in Brazil.
Now, the country is experiencing a wave of new fintechs entering the market, some of whom offer trade finance, all of which is helping to open up access to Latin American markets, including Brazil, which is currently responsible for generating around 50% of total gross domestic product (GDP).
However, as with everything, there is still a lot of room for improvement. For Lopez, the biggest challenge is that of logistics, especially with regard to local infrastructure.
However, Lopez believes that tech innovations like digitalisation will ultimately help to solve many of these problems.
Lopez said, “So, if you talk about day-to-day business and transactions, you see digital impacting positively––documentation being signed digitally, and [digitalisation of] trade documents used in export and shipping. That speeds up the whole process. And we have seen this process being adopted throughout Latin America and in Brazil.”
Although much still remains to be done, the high inflation, strong dollar environment in many developed economies does offer increased opportunities for those traders and financial institutions (FIs) willing to leave their comfort zones and venture into new and emerging markets.
By heeding the advice of experienced professionals like Lopez, many of the risks associated with expanding into these new markets can be avoided.
In the end, it all comes down to research and careful risk mitigation.