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, a slightly 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," commented Ai Ai Wong, head of Baker McKenzie's global transactional group.

Businesses in Latin America face the additional hurdle of comparably sluggish economic growth. The International Monetary Fund (IMF) predicts regional growth of just 0.6% for Latin America this year, versus a 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 2.3% growth for Latin America in 2020.

Wong said that around the world, 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 non-core assets, and as 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, the firm says.

Ai Ai Wong/courtesy photo

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

Political upheaval has also limited 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 on December 1, while Jair Bolsonaro assumed the presidency in Brazil, Latin America's largest economy, on January 1. Argentina, meanwhile, has become a no-man's land for investors as it leans toward a return to Peronism in its upcoming October 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 for 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 that cross-border deal value will fall 17% on the year in 2020, to $52 billion, after a 24% drop in 2019.

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

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

A slowing economy in Chile is seen as likely to reduce deal activity there 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 has also been muted in Latin America, with just $3 billion of IPOs this year. The Mexican market for IPOs "stalled completely" during the first half of 2019, 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.