Latin America Risk/Reward Ratings Q213

Regional Variety
Latin America Telecoms Ratings Q213

Overall, industry rewards ratings in the Latin American region have gone up, resulting in a higher average than for Q113, at 46.7 up from 45.5. The average score for other categories stayed the same, with only a slight increase for overall telecoms ratings from 53.2 to 53.8 as a result of the increased industry rewards scores. The countries in the middle of the table have maintained their positions, with no movement up or down. Instead the major moves have come from the top and bottom parts of the table.

At the top, Brazil and Chile stayed number one and two and we expect them to remain this way for the long term because of their strong country and industry ratings. One important development is Argentina switching places with Mexico, up from 4th into 3rd place. Argentina's improved industry rewards score, from 50.0 to 52.5, allowed it to just edge out Mexico overall, by 0.2 points in our ratings. The reason for the increase in ratings was due to growth in ARPU levels for Q312 among the major operators and a strong growth of more than 1mn subscribers. Mexico did improve its country risks score, as we have turned increasingly optimistic toward the country 's long-term growth outlook, raising our average real GDP growth forecast for 2012-2022 from 3.3% to 4.0% , due to increasingly strong private consumer and favourable demographics. However, the methodology for our Risk/Reward Ratings provides a stronger weighting for industry rewards, so, although both Mexico and Argentina saw overall improvements, Argentina's better performance in the industry rewards section is of greater significance. Argentina and Mexico switch positions in our ratings frequently, and their scores remain close. We expect this to continue due to the upside potential of Mexico's market were it to become more competitive, and we see downside potential for Argentina with the proposed entry of the government as an operator.

Monthly Blended ARPU For Latin America (US$)

There was also movement at the bottom of the table, with Nicaragua moving up two places from 14th to 12th place. This was helped by a large boost in its industry rewards score, a 10-point increase from 27.5 to 37.5. BMI recently revised its forecasts significantly for Nicaragua, based on new data from Telefónica. Also, data from the ITU showed that the market returned to strong growth in 2011, and BMI expects this to have continued throughout 2012. While new competition has not yet entered the market, we believe the opening of a tender for two new players will concern Movistar and market leader Claro , stimulating competition . BMI maintains healthy forecasts for the mobile market for our forecast period to 2017, but we believe there is upside potential to growth as new investors are announced.

Among its Central American peers, Nicaragua is the only market that is expected to show any significant fixed-line growth over our forecast period, as penetration is so low. Nevertheless, we forecast a decline before the end of 2016, as demand will be effectively wiped away by greater availability of mobile services across the country.

Consequently, Honduras and Belize both fell one spot, Honduras into 13th and Belize to the bottom of the table at 14th. This was mostly due to Nicaragua's move up because Honduras' quarter-to-quarter score remained unchanged. News that state-owned operator Hondutel has announced a tender for a 49% minority stake is unlikely to have any effect on these scores, BMI believes.

Belize's country risks score did go down slightly, from 60.4 to 59.6, as the government is suffering from cash flow problems. The government still owes compensation of around US$200mn to the former owners of BTL and electricity company BEL. BMI believes the government will struggle to pay this back and an agreement on compensation will need to be reached in order to allay accusations of expropriation and to maintain investor confidence in Belize. However, as long as the country's external debt remains high, and if BTL's revenue streams have taken a serious hit through the loss of 87,000 subscribers, this may prove difficult, BMI believes.

Large Gap Between The Top And Bottom
Brazil And Belize Risk/Reward Ratings

Other positions remained the same as Q113, but noticeable developments include increases in industry rewards for both Colombia and Guatemala. Colombia's score went up from 50.0 to 52.5 as a result of its proactive regulatory authority initiating several positive developments for the market. The decision to implement asymmetric mobile termination rates for Claro as well as excluding it from one of the 4G auctions should allow for greater competition in the market. Colombia's mobile market is a dynamic one, with new technologies - such as LTE trials in the 700MHz bandwidth and a 4G spectrum auction - poised to boost market growth further. Mobile forecasts were upgraded slightly as operators posted another quarter of strong net additions, particularly from Movistar and Claro. Mobile internet continues to outpace growth in wireline broadband connections. ETB's entry in this market, planned for 2013, will boost growth further.

Guatemala's industry rewards score rose from 45.0 to 47.5 for this quarter, above the regional average, bringing its telecoms rating within 0.4 of Costa Rica. Guatemala's large population is the primary factor behind its strong position in the market, compared with its Central American peers, while continued growth suggests that there are still new customers yet to enter the market. Guatemala has seen strong growth in its 3G sector and is to remain the country with the most 3G subscribers in the Central America region throughout our forecast period to 2017, when we estimate it will have around 6.1mn 3G subscribers, or almost a quarter of the Guatemalan mobile market.

There has been no change in scores or positions in the middle of the table among Peru, Venezuela and Panama. Despite plenty of growth potential, Peru remains held back by its low country rewards score based on low purchasing power. With the ongoing health issues surrounding Hugo Chávez, Venezuela's country risks score remain among the lowest in the region with no sign of improvement. El Salvador experienced a decline in its country risk score, as BMI believes its fiscal position will remain weak in coming years, forecasting for nominal fiscal deficits of 3.4% for 2013 (revised from 3.2%). A high public wage bill and weak revenue growth hinder attempts at fiscal consolidation.

Conversely, Costa Rica's political stability has seen a slight increase in its country risks score from 55.0 to 56.8. Costa Rica's climb up the table since the introduction of competition in the telecoms market in Q411 is an example that other countries would do well to follow.

Q213 Risk/Reward Ratings
Rewards Risks
Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% and Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60%. The 'Rewards' rating evaluates the size and growth potential of a telecoms market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry-specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns. Source: BMI
Country Industry Rewards Country Rewards Industry Risks Country Risks Telecoms Rating Rank Previous Rank
Brazil 61.8 66.7 65.0 62.7 63.6 1 1
Chile 47.5 70.0 90.0 69.1 62.6 2 2
Argentina 52.5 70.0 70.0 52.2 59.4 3 4
Mexico 55.0 66.7 54.0 64.8 59.2 4 3
Colombia 52.5 53.0 70.0 62.8 56.8 5 5
Costa Rica 50.0 56.7 70.0 56.8 55.7 6 6
Guatemala 47.5 56.7 80.0 52.0 55.3 7 7
El Salvador 42.5 60.0 80.0 48.9 53.4 8 8
Peru 45.0 53.0 60.0 66.9 52.5 9 9
Venezuela 47.5 69.0 40.0 35.2 49.8 10 10
Panama 40.0 60.0 60.0 43.9 48.5 11 11
Nicaragua 37.5 56.7 70.0 39.7 47.4 12 14
Honduras 42.5 50.0 50.0 42.0 45.4 13 12
Belize 32.5 56.7 40.0 59.6 43.6 14 13
Average 46.7 60.4 64.2 54.0 53.8

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