Baker McKenzie expects merger and acquisition activity in Latin America to slow next year as political shifts in the region compound global economic uncertainty and curb investor appetite for deals.

The firm's fifth annual Global Transactions Forecast, produced in conjunction with Oxford Economics, projects that M&A volume in Latin America will decline to $77 billion from $90 billion in 2019, at 17% a  less severe drop than the 25% decline expected for M&A activity globally.

"Make no mistake, deals are getting done, but the current slowdown is inevitable considering the continuing uncertainty around trade and regulation," said Ai Ai Wong, head of Baker McKenzie's global transactions group.

Businesses in Latin America face the additional hurdle of comparably sluggish economic growth. The International Monetary Fund predicts regional growth of just 0.6% for Latin America this year versus 3.2% expansion for the global economy. The region's two biggest economies — Brazil and Mexico — account for much of that drag in output. The IMF targets improved 2.3% growth for Latin America in 2020.

Around the world, Wong said many investors and companies have capital on the sidelines, waiting to move forward with domestic and cross-border deals. The hunt for acquisitions will continue despite an adverse climate as companies seek to adapt to technology disruption, face pressure from activist investors to offload noncore assets and private equity investors unleash capital in a buyers' market, she said.

Baker McKenzie is a leading transactional firm, closing about three deals a day around the globe.

In Latin America, the firm projected gradual growth in M&A activity in 2019 based on the expected resolution of trade deals such as the U.S.-Mexico-Canada agreement as well as strengthened macroeconomic conditions. However, it said external factors stemming from trade wars and an exceptionally strong U.S. dollar dampened those expectations, and a strong return to form is not seen for at least another two years.

Political upheaval also limits investor interest. The region's two biggest economies have new presidents who represent a sharp shift from their predecessors, while the leaders of several smaller Latin American countries grapple with street protests demanding their resignations.

Mexican President Andrés Manuel López Obrador took office in the region's second-biggest economy Dec. 1, and Jair Bolsonaro assumed the presidency in Brazil, Latin America's largest economy, on Jan. 1. Argentina, meanwhile, has become a no-man's land for investors as it leans toward a return to Peronism in the Oct. 27 presidential election.

"Although Latin America's political volatility has contributed to the regional decline in M&A activity, once the region reaches its equilibrium from the results of the 2018 and 2019 elections, we can expect an economic bounceback," said Jaime Trujillo, chairman of the Latin America region at Baker McKenzie.

"We're cautious of what 2020 will bring but optimistic about the region's future," he added.

Cross-border deals are the bread and butter of Latin America M&A, representing twice the deal value of domestic transactions in any given year. Baker McKenzie predicts cross-border deal value will fall 17% in 2020 to $52 billion after a 24% drop in 2019.

Brazil is the region's powerhouse for M&A deals, followed by Chile and Mexico.

In Brazil, Baker McKenzie said investor-friendly policy reforms have driven a "healthy" level of M&A activity. The firm expects $37 billion worth of deals next year after $40.4 billion in 2019.

A slowing economy in Chile is seen as likely to reduce deal activity next year to $7.8 billion from $8.9 billion in 2019.

In Mexico, the firm forecasts $4.9 billion of deals in 2020, down from $7.3 billion in 2019. The U.S. has yet to ratify the new North American trade deal reached in 2018, while continuing to threaten Mexico with punitive tariffs and even border closings. At the same time, investors have been increasingly wary as López Obrador seeks to completely transform the country and do away with decades of market-friendly, neoliberal policy.

The market for initial public offerings also has been muted in Latin America with just $3 billion of IPOs this year. The Mexican market for IPOs "stalled completely" in the first half of the year, Baker McKenzie reported, "as companies sought clarity on the policies of the country's new populist leadership."

Baker McKenzie expects $2.3 billion in IPOs next year, with a recovery to $4.4 billion in 2021 amid a hopefully more stable political climate in Latin America.

Amy Guthrie is Law.com International's Latin America correspondent based in Mexico City. She covers legal and business issues, including law firms, in-house counsel and regulatory matters across Latin America. Contact her at [email protected].