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As Latin America swoons, the electricity sector holds on tight.

Fortnightly Magazine - November 15 2002

Fighting to Privatize

As Latin America swoons, the electricity sector holds on tight.

The International Monetary Fund's (IMF) World Economic Outlook September 2002 gives a fragile outlook in the short-term for Latin America. In 2002, regional output contracted by 2.5 percent in the first quarter (compared with the final quarter of 2001) and is expected to fall in 2002 as a whole, according to the IMF. This contraction has caused bond spreads to widen significantly in the first half of 2002 (including sharp increases in Brazil, Ecuador, Venezuela, Argentina, and Uruguay), most currencies to weaken substantially against the U.S. dollar, and debt markets to remain closed to all but investment-grade issuers, such as Chile and Mexico.

Moreover, the economic crisis in Argentina and its spillover into neighboring countries, as well as the international market's reaction to political uncertainty in Brazil, have exposed investors to the underlying vulnerabilities that persist in the region. In particular, the IMF appears nervous about interactions between domestic political uncertainties and economic weaknesses, including high debt levels, large external financing requirements, and fragile banking systems. In the future, global economic growth probably will provide some support for regional economic expansion, but in all likelihood short-term risks still will hold the region back. The IMF believes that any return to confidence will be heavily contingent on the abatement of current political, economic, and financial market uncertainties.

In the 2002 Platts Latin America Power Guide, the above economic realities were analyzed against each Latin American country's potential for growth in private power investment. Two areas of interest for the near future include Central America and Mexico, which are taking advantage of access to the United States and the building of transmission interconnections to encourage private investment, as they strive to meet a growing indigenous demand for power.

Central America

Privatization of electricity assets-primarily distribution and some generation-has been reasonably successful in Central America, and private participation in the sector continues to be encouraged. Government regulatory bodies were established in many of the countries in the mid- to late-1990s and have assumed the role of planning and setting prices. Wholesale power markets have been established in some countries, but have seen little activity due to the fact that most power is still bought and sold through long-term power purchase agreements (PPAs). It is expected that trading will take off once the region becomes more interconnected.

All of the six countries in Central America have transmission lines connecting to at least one other country. However, a super-power interconnection project is in development that aims to create a competitive, regional wholesale electricity market. The Sistema de Interconexion Electrica para los Paises de America Central, or SIEPAC, is envisioned as a 1,830-kilometer (1,134-mile) long, 230-kV grid that will connect 16 substations from Guatemala to Panama.

Mexico

In May 2001, President Vicente Fox issued a decree increasing the amount of excess energy that an independent power producer (IPP) could sell back to the Federal Electricity Commission (CFE). Unfortunately, Fox's political opposition balked at the plan, fearing a rise in private participation would lead to the complete privatization of the sector. Mexico's Supreme Court agreed, ruling that the law was unconstitutional, and that the president had overstepped his authority.

President Fox would like to allow more private investment in the power industry, as he is aware that the government can in no way pay the bill on its own. However, he faces strong resistance to any efforts to further liberalize the sector from the opposition Institutional Revolutionary Party (PRI) and the leftist Democratic Revolutionary Party (PRD). Any reforms based on increasing private investment in the sector would require the passing of a constitutional amendment by two-thirds of Congress.

Nevertheless, demand for electricity is increasing an average of six to seven percent per year, and Energy Minister Ernesto Martens has said that projects currently under development will only guarantee enough supply for Mexico through 2006. Mexico's total installed capacity is 38,500 MW, with thermo power accounting for about 74 percent of generation, hydropower for 18 percent, nuclear for five percent, and renewable sources making up the remaining three percent of generation.

The Future

Economic forecasters remain wary about Latin America's outlook. UBS Warburg expects gross domestic product (GDP) for the region to increase only 2.9 percent in 2003, due to weaker currencies, slower growth, and ongoing constraints in external financing and lower capital flows into the region.

However, the news is not all bad. The United Nations Conference on Trade and Development, in its World Investment Report 2002, explains that last year, of the 24 economies in Latin America, 16 saw foreign direct investment (FDI) inflows that exceeded their shares of global GDP. In particular, FDI to Mexico in 2001 was up $10 billion, a 68 percent increase over 2000. Proportionally, Ecuador recorded the largest increase, receiving $1.3 billion, or an 83 percent increase over FDI in 2000. Peru also had a sharp increase relative to the previous year, rising 59 percent, and Chile was up 48 percent.


 

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