Europe and Latin America’s Investment Relationship & Sovereign Wealth Funds

1. Europe and Latin America’s Investment Relationship & Sovereign Wealth Funds Prof. Javier Santiso Vice President, ESADEgeo Professor of Economics, ESADE Business School 1

2. 2015 A.T. Kearney FDI Confidence Index Country ranking on how political, economic, and regulatory changes are likely to affect foreign direct investment (FDI) inflows in the coming years

3. European Countries Represented

4. Lesson Road Map • Investment Relationship between Europe and Latin America • Sovereign Wealth Funds (SWFs) • Introduction to SWFs • European perspective on SWFs • The Paradox of Plenty: Norway vs. Venezuela • Opportunities for Europe • Writing exercise on today’s lesson • Conclusion

5. European Investment Outward stocks of FDI, EU-27, end 2012 Latin America = 16% of the pie Source: Eurostat

6. European Investment in Latin America Students: what’s in the news?

7. Which two European countries are the largest investors in Latin America? • Netherlands • Spain Source: UN ECLAC

8. The Case of Spain • 2nd largest investor in Latin America among European countries • Spain continues to be highly committed to the region Source: Invest in Spain

9. Spain as a Gateway to Latin America • Common historical, cultural, and linguistic roots. Institutional network relationships. • Strong economic and business ties: Spanish companies have invested in strategic sectors in Latin America. • Good communications: Spain is a major connecting hub for airlines. • Latin American multinational companies are choosing Spain for their European headquarters. • Multinational companies are increasingly choosing Spain for their Latin American headquarters. Why is Spain an attractive hub for doing business in Latin America?

10. Managing Operations from Spain The following multinational companies are managing operations in Latin America or the EU from Spain. Source: Invest in Spain

11. Latin American Investment Destinations • Shifting away from the US and toward Europe • Latin American FDI flows towards the EU • 2006-2009: between $2 billion and $2.5 billion • 2010: $12 billion • Approximate investment between 2006-2010: • Brazil (71%) • Colombia (18%) • Chile (11%)

12. Latin American Investment in Spain Companies from Latin America (especially from Mexico, Brazil, and Colombia) are increasingly interested in investing in Spain Source: Invest in Spain

13. The 5 Ws of Sovereign Wealth Funds (SWFs)

14. What are SWFs? Source: The Global Context

15. When were SWFs created? 1816 1953 2005

16. Where do SWFs come from? Europe is one of the major SWF investment destinations

17. Why are there SWFs? • “Dutch disease” vs. Source: Offshore Technology Source: Rediff SWFs can play the role of insulating the domestic economy from large sources of wealth, which might otherwise cause a distortion in the economy

18. Who are SWFs? Q1: __________ (how much money (US$)?) are in the hands of around __________ (how many?) different SWFs. A1: $7 trillion; 80 Q2: The top ten SWFs manage __________ (what percentage?) of the $7 trillion? A2: 80%

19. How do SWFs invest? Top 4 Investment Sectors: • Financial Services • Real Estate & Construction • Commodities • Infrastructure

20. European Perspective on SWFs Group 1 (Pros): Discuss the benefits of SWF investment in Europe from the European perspective Group 2 (Cons): Discuss the drawbacks/concerns of SWF investment in Europe from the European perspective Pros vs. Cons

21. The Paradox of Plenty: Norway vs. Venezuela

22. Two natural paradises…

23. “Blessed” by nature…

24. With very different outcomes

25. Key Indicators

26. Norway’s Resources • Largest holder of crude oil and natural gas reserves in Europe (U.S. EIA) • 3rd largest oil-exporting nation in Europe (Norway) • World’s 3rd largest natural gas exporter in 2014 (after Russia and Qatar) (BP) • Supplies around 20% of Western Europe’s gas needs (Norway) Source: U.S. EIA

27. Venezuela’s Resources • Contains some of the largest oil and natural gas proven reserves in the world (U.S. EIA) • Owned 25% of OPEC proven oil resources in 2014 (OPEC) • 3rd largest exporter of crude oil to the United States in 2013 (U.S. EIA) • World’s 9th largest exporter and 12th largest producer of petroleum and other liquids in 2013 (U.S. EIA) • Venezuela’s oil revenues account for about 95% of export earnings. The oil and gas sector is around 25% of GDP. (OPEC) • 2nd largest natural gas reserves in the Americas, behind the United States. Much of the natural gas is used to bolster production in its mature oil fields. (U.S. EIA) Source: OPEC

28. The SWFs Norway Venezuela Macroeconomic Stabilization Fund (FEM) Market value of about $1 billion In 2003, the government withdrew $6 billion to cover the fiscal budget • Government Pension Fund Global (GPFG) • Market value of about $900 billion • Owns 1.3% of the world’s listed companies • Taken a deliberate decision to give preference to investments in European companies and to penalize stakes in North American, especially U.S., companies • One of the world’s most transparent SWFs and with the best corporate governance

29. Differences in Outcomes Source: Invest in Spain

30. Opportunities for Europe Groups: • Real Estate • Infrastructure • Private Equities • Human Capital Brainstorm: What are Europe’s potential opportunities (related to SWF investment) in each of these fields? Note: the information on the following four slides comes from: López, Diego. "The Major Role of Sovereign Investors in the Global Economy: A European Perspective." In The Global Context: How Politics, Investment, and Institutions Impact European Businesses, edited by Javier Solana and Angel Saz-Carranza, 86-109. Barcelona, Spain: ESADEgeo, 2015.

31. Real Estate • “Since the mid-70s, sovereign investors have poured over $65 billion into the European property markets” • Largest investors: • ADIA • Qatar Investment Authority (QIA) • Kuwait Investment Authority (KIA) • Government of Singapore Investment Corporation (CIC) • SAFE • Eyeing European secondary cities Opportunity for “European financial institutions holding large portfolios of non-core real estate assets and/or those in need of liquidity”

32. Infrastructure • Previously, foreign investors were banned from acquiring European airports, ports, and highways • The financial crisis changed it all • Non-European sovereign entities now own (but do not operate) some of the main European structural assets, including: • Airports • Power & utilities conglomerates • Nuclear energy companies • Highway operators • Telecoms Source: The Global Context “Opportunity for European governments, not only to raise money from the privatization of established companies, but also from developing infrastructure project where the financial muscle of sovereign investors and the operational expertise of their partners can add an even greater value”

33. Private Equities • Generally associated with Small and Medium Enterprises (SMEs), i.e., the backbone of the European economy (European Commission) • 99 out of every 100 non-financial businesses in Europe are SMEs • 2 of every 3 employees are employed at SMEs • 58 cents in every euro of value added are produced by SMEs “The acquisitions of sovereign investors in European healthcare…could be one of the main industries of focus in the next few years, in addition to the always-preferred industrial products and consumer-related European companies.”

34. Human Capital • Thousands of skilled professionals—especially young graduates—have left the continent since 2008 • “This brain drain may be a blessing in disguise for Europe if, as in the case of China and Russia, it is reversed, luring executives back to their home countries after having gained an invaluable experience investing in the global markets.” “The new focus of sovereign investors on direct investments, alternative assets, and new geographies can represent an opportunity for European economies.” Source: European Commission

35. Three-minute Paper Please write for 3 minutes about what you have learned in today’s session and why the information is important for EU businesses.

36. Conclusion Questions? This powerpoint presentation and the matching teaching plan were developed as a part of the Jean Monnet project MEKBiz (Mainstreaming EU Knowledge in Business Studies and Strategy), hosted by ESADEgeo – Center for Global Economy and Geopolitics and partially funded by the European Commission. “The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”