The Mexican peso crisis sent investment levels in Latin America into freefall. But just over two years later, confidence is returning to the region – and lawyers are reporting an upturn in business.
“The region is turning the corner,” observes Beatriz Pessoa de Araujo, the partner heading the Latin American desk at Baker & McKenzie's London office. The process of deregulation and liberalisation which began in the late 1980s is starting to pay off and, most importantly, creating a stable and durable environment for investment.
But Pessoa de Araujo stresses that different countries are moving at different speeds. Chile and Argentina lie at one end of the spectrum, where reforms have been far-reaching. Many industries have been privatised, exchange controls have been removed and the tax environment has improved. Large swathes of the economy have been opened to foreign ownership. Indigenous capital markets have emerged and become more sophisticated.
Meanwhile, innovative solutions have been found to common problems. In Chile, for example, most pension fund provision has been turned over to the private sector – a model adopted by Argentina and being carefully examined by some western European countries.
The poorer Latin American countries, such as Bolivia, are far less developed economically, but Pessoa de Araujo says even these have become more outward looking and are making tentative steps towards market-oriented reforms.
Fortunately, most countries are following the pack leaders. Although Mexico was hard hit by the peso crisis, with numerous deals put on hold as foreign investors got cold feet, the economy has been stabilised and investment is rising.
Brazil has also undergone a remarkable economic turnaround. London resident partner of Brazilian firm Noronha Advogados, Eliana Filippozzi, reports that, since President Cardoso took office, rampant inflation has been contained while liberalisation of some sectors of the economy, such as insurance and banking, has taken place.
Privatisation is also gathering pace with the imminent sale of the state mining complex, CVRD, the largest privatisation in Latin America to date. “It is a good moment for investors,” insists Filippozzi.
The country's change of fortunes could have more widespread implications. When the Mercusor treaty was signed at the start of the decade to create a free trade area between Brazil, Argentina, Uruguay and Paraguay (Chile later joined as an associate member), it was, argues Filippozzi, unable to reach its potential because of continuing economic problems, such as hyperinflation in its largest member Brazil. With these problems now under control, Mercusor has been given a boost. “It has become a reality for people and they have started investing,” she says.
Unfortunately, from the outside, the region is still seen as unstable and the reforms are viewed as short-term – a fear compounded not only by the peso crisis, but also by political upheaval in countries such as Venezuela and Mexico.
But this perception, Pessoa de Araujo argues, has been reduced. Developments have been moving in the right direction, democracy has supplanted military dictatorships, closed economies suspicious of foreign participation have given way to market-oriented reforms, and in some countries, notably Chile and Argentina, the reforms appear to be permanent.
The effect has been to generate enormous interest from companies beyond the traditional US multinational investors. Spanish companies have been active, while Pessoa de Araujo reports an increasing interest from UK-based financial institutions. “People are looking at Latin America more seriously,” she says.
Predictably, these advances have instigated an upturn in business for firms across the board, which are now adding practice areas such as competition law, capital markets, project finance and telecoms to their portfolios. Yet, in spite of growing foreign investment, few of the major international firms have ventured into the region.
This is not to say that Latin American work has not increased – the problem is that, generally, the work has not required a permanent presence on the ground.
Anthony Clare, resident partner at the London office of Brazilian firm Pinheiro Neto, says much of the premium transactional work that has emerged recently was sourced outside Latin America and that firms did not need a local presence to tap into it.
Most eurobond financings for Latin American issuers, for example, are carried out from London and New York, and, although many firms involved in this area, which include UK firms Clifford Chance and Linklaters & Paines, have taken on Spanish and Portuguese-speakers, they are employed in offices in London and New York.
However, a few intrepid firms have taken the plunge. Baker & McKenzie's interest in the region dates back several decades and it is expanding its operations. Last year, the firm took over one of Chile's largest practices, Cruzat Mackenna Ortuzar, bringing the number of countries in Latin America covered by Baker & McKenzie to five. Of UK-based firms, Clyde & Co is the largest to have established in Latin America with an office in Sao Paulo, Brazil.
Many lawyers in the region predict that other international firms will set up offices. “Not much has happened yet by way of establishment of foreign law firms in Brazil, but it is on the horizon,” says Clare. Rumours have circulated for some time that Clifford Chance is considering its options
Any move is likely to be cautious. When the North America Free Trade Agreement came into force, it marked a resurgence of interest in Mexico and US lawyers, particularly those based in Texas, were quick to take advantage of new foreign investment rules that facilitated the establishment of foreign lawyers in the country. The experience was short-lived for some. Dallas-based Vinson & Elkins shut down its Mexico City office in the wake of the peso crisis, a potent reminder of the dangers of operating in the Latin American market.
But such setbacks are unlikely to prevent further penetration by foreign lawyers and also by accountancy firms, which are looking to expand into legal services across the region. And some of the firms that are setting up have made ambitious appointments to match their determination to crack the market. In Mexico City, for example, US firm White & Case lured key lawyers to its new operation from the well-known commercial firm Ritch Heather y Muellar and Baker & McKenzie's office in the city.
These developments are likely to increase pressures on local lawyers, which over the years have been insulated from competition. Small partnerships often dominated by one or two individuals are still the norm.
Moves towards larger partnership structures are hampered by a culture of lawyers splitting off to set up on their own. Baker & McKenzie, for example, recently suffered departures from its Rio de Janeiro office.
But larger entities – firms with more than 60 lawyers – are emerging, albeit slowly. Although some of its lawyers have gone their own way to set up spin-off practices, Brazil's Pinheiro Neto now has 160 lawyers, of whom 55 are partners. It has also adopted modern practice management habits.
Marvall O'Farell & Mairal, a leading commercial firm in Buenos Aires, has trodden a similar path, but such firms are still rare. This could change as the market demands greater specialisation, and foreign competition increases.
Already the number of firms pitching for international work has increased – they are often founded by ambitious lawyers educated abroad and in tune with the demands of international commercial culture. This is giving rise to competition among local firms and, in time, may see them grow and adapt to hone their competitive edges.