by A.W. Berry

Created on: June 11, 2009

Investing in Latin-American businesses involves the same due diligence that is required for investment in any business. In the case of Latin-America however, the investment environment has its own nuances, risks, pitfalls and potential. Thus, a part of the due diligence required for investment in Latin-American businesses is identifying these investment risks.

Latin-America consists of several countries as far North as Mexico and as far South as Argentina. The business, legal, and economic environments for all these countries varies considerably, enough so to warrant individual research for each country prior to investing in them.

Generally speaking, Latin-America is susceptible to certain risks that other countries' businesses may not be. These risks include 1) inflation or deflation risk, 2) political risk, 3) sovereign risk, and 4) economic growth/demand risk. This article will review these potential investment risks facing existing and potential investors in Latin America.

INFLATION OR DEFLATION RISK:

According to the Center for Economic Policy Research, several Latin American countries in 2009 are either subject to inflationary or deflationary pressures. Economically, there are many other potential risks, however for Latin-America inflation and deflation is one of them in addition to demand risk which will be discussed in the following section. Inflation above 4-5% is fairly high and deflation is indicative of shrunken or shrinking economy. Several of the following countries have inflation values bordering on, or in excess of high or low inflationary and deflationary values. Headline inflation indicates overall annualized inflation rates whereas core inflation refers to a specific group of inflation measured products.

* Venezuela: 24% headline inflation, 20% core inflation
* Chile: -2% headline deflation, 5% core inflation
* Brazil: 4% headline and core inflation
* Colombia: 4% headline inflation, 4% core inflation
* Mexico: 10% headline inflation, 4% core inflation
* Dominican Republic: -20% headline deflation, 2% core inflation
* Peru: 5% headline and core inflation
* Ecuador: 0% headline inflation, 2.5% core inflation
* Bolivia: 2.5% headline inflation, 5% core inflation
* Guatemala: 0% headline inflation, 5% core inflation

In the short-term, deflation is a factor for stable economies with low inflation, whereas inflation is a risk for those Latin-American companies subject to either an over liquid money supply, and/or rising prices of goods and services. The above

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