CHAPTER 13

Central America and Mexico

Central America has been emerging as long as I have been investing. That’s not a particularly good thing. The big kahuna is Mexico by a long shot. Then you have various smaller republics, some of the banana variety, like Nicaragua, Honduras, Panama, El Salvador, and Costa Rica.

Central America, with the exception of Mexico, presents little in the way of investment opportunity from a stock investor’s perspective. But, opportunity does exist, especially for real estate and for retirement. Retirement is an investment just as day-to-day living is an investment. What Central America offers is a way for Americans to be close to home while living in large expatriate communities for relatively low cost versus the United States.

Countries like Costa Rica and Panama offer the higher end of the scale for retirees, while places like Nicaragua and Honduras allow for a much less expensive lifestyle but with fewer amenities. El Salvador offers little in terms of established communities for retirees looking to replicate some semblance of life “back home.”

Real estate is by far the biggest draw in these countries. Land is easily accessible and prime real estate is within reach of most middle class Americans willing to do some legwork. Gone are the days when you could buy an oceanfront lot for US$25,000 but lots of opportunity still exists for those willing to look in the $100,000 to $150,000 range for a complete home close to and maybe even on the ocean. The real estate crisis in the United States, combined with massive losses in the financial markets, has resulted in a glut of properties.

Retirement in many of the countries can be enjoyed quite reasonably when you consider cheap health care, cheap labor, and cheap food costs. In places like Nicaragua one can live very comfortably on less than US$1,500 per month and still maintain a lifestyle that involves activities. One development, Rancho Santana, about a three-hour drive from Managua, offers a private residential compound that is fully developed to American standards. It’s a 2,700-acre property with two miles of coastline and comes with amenities such as a restaurant, clubhouse, and nearby shopping. Lots in the development today can be had for less than $50,000 with ocean views. Turnkey homes can be purchased or built for less than $200,000. You can get more information at www.ranchosantananicaragua.com/.

It takes a certain type of individual to make an investment in property in Nicaragua and for that matter, anywhere in Central America. You must be the type who can stomach bouts of political risk, sometimes-poor infrastructure, overdevelopment, incorrect title searches, and the obvious cultural barriers. While an oceanfront lot for $40,000 sounds like a great bargain, and for many it is, there are other considerations. Places like Rancho Santana are more than happy to host you for a few days to give you a feel for what it is like to buy and live in the area. While most people fly into Managua to get to Rancho, a better bet is to fly into Liberia in Costa Rica and cross the border that way—it’s shorter and prettier. If you have never been to Managua, I can only describe it as a pit. Just to give you a feel, I stay at the best hotel in town, the Intercontinental Managua, when I am visiting Nicaragua. It’s in the center of town. Outside my window I had great views of a strip joint and a Texaco station. Nicaragua is the poorest country in Central America, torn apart by civil war in the 1980s and 1990s. It is safer today, but as an investor you must be prepared to always have an exit plan.

Costa Rica

Costa Rica is the destination of choice for more and more Americans every year. Beautiful coastlines, superb restaurants, low cost of living, and a great health care system are all attractions. But, in recent years, crime in places like San Jose has also picked up, and not crime of the petty variety. I have spoken to many people in recent years who have left Costa Rica, primarily San Jose, because they became disenchanted with the increasing level of criminal activity. However, once outside the capital, there are few places in Central America that can compare with the country for beauty and quality of life. That quality of life, while still relatively inexpensive by American and European standards, is not so cheap anymore.

Oceanfront lots can easily set you back more than $250,000 in the better locations. Inland and in the mountains, you can still pick up bargain condos for under $100,000 . . . but it’s the ocean that everyone wants. It’s not uncommon to see homes priced as high as you would find in some southeastern U.S. coastal communities, which makes one wonder about valuations. Of course, owning real estate in a foreign country like Costa Rica, which is the most stable of Latin American countries, does present the opportunity to diversify assets abroad. For now, however, Costa Rican real estate is overvalued and a correction is in the offing. Prices are coming down as overbuilding is taking its toll. A sample of properties in Costa Rica can be found here: http://propertiesincostarica.com/listings.html.

San Jose has one of the best airports I have been to in Central America. Besides the free high-speed Internet access, it is clean, modern, and easy to navigate. It’s best, however, to stay in the outskirts when visiting and maybe just do a quick afternoon trip to explore some of its colonial history. Restaurants are found everywhere and the food, especially the fresh fruit, is incredible. Costa Rica also boasts a new cruise port, and that brings in a lot of tourists who want to navigate through the Panama Canal. The country offers little in the way of investment opportunity other than real estate.

Panama

Panama is the destination of choice of many seeking a stable destination with a more cosmopolitan air. My first visit there was a little shocking, however. The journey from Tocumen International Airport into the city was quite eye opening as we drove through what seemed like a never-ending shantytown. Once in town, we went to a great seafood restaurant that had guards with shotguns patrolling the parking lot. The shantytowns are still there, but there are fewer guards.

Panama has always been a sort of financial center of the lower Americas. Drug money found its way to Panamanian banks by the boatload during the reign of Manuel Noriega, the long-since ousted dictator. Nowadays Panama is still a major financial center, but the days of money laundering in the open have gone by the wayside and the dealings are less conspicuous. The influx of foreigners buying up properties, particularly condos, and moving there en masse has lent an air of respectability to the country. The economy has been booming and Panama offers a free-trade zone, the cash-generating canal, and, of course, oodles of waterfront real estate. Panama does have a reputation, as does Costa Rica to some extent, as a destination for those enamored of the sex trade . . . a Bangkok of the Americas of sorts, but without the Buddhas.

Real estate in Panama is also becoming pricey, but its stability, banking system, and ties to the United States have made it a popular place to invest offshore with less risk than the other countries in the region. As with the other Central American countries, Mexico excluded, Panama should be viewed strictly as a real estate investment destination.

Honduras

Honduras is an up-and-coming destination for those seeking a cheap retirement. It’s not the easiest place to get to, but if you are looking for an alternative to Nicaragua with similar price points and a better atmosphere, Honduras is the place to go.

If you are planning to invest in property in a Central American country, be sure to get an excellent real estate attorney. Do not take what the real estate agent has to say at face value. The legal systems and title verification systems are antiquated at best, especially if you are purchasing from a local and not in an established development. Know that the cost of building a home, while inexpensive if you use locally made products and construction techniques, can quickly get out of hand if your tastes run closer to what you are used to in the United States or Europe. For most people I know, purchasing a property in Central America is a second home or a future retirement home. It’s also a way to get money out of the United States and diversify assets.

Central America in general is fairly safe. But, the region is prone to political instability and in some cases natural disasters. Living there is not for everybody. It requires the ability to adapt to a totally different type of lifestyle, sometimes isolated. Local residents are, for the most part, extremely friendly but also extremely poor, and that can sometimes lead to uncomfortable situations for people not used to seeing extreme poverty in the Western hemisphere. If you do your homework and work with the right contacts and definitely rent before you buy, you will likely find yourself among the growing crowd that has made Central America their home away from home.

The Thailand of the Americas

I have often felt that Thailand enjoyed its position as a perpetual emerging market. It’s been one for as long as I can remember and the dress fits well. I feel similarly about Mexico. One would think that a country so close to the world’s largest economy, for more than five decades now, would be a shining star. I mean, 50 years and still an emerging market by global standards? Mexico is a moneymaker for investors who have money to begin with. If not, then it’s just another emerging market clinging to hopes of a better tomorrow for its people.

Mexico’s problems stem from its elitist society, dysfunctional government, monopolistic business practices, and a massive drug trafficking problem. Ten years ago, you could have said the same thing, and 20 years ago, too. But, for all of its problems, the country does provide investors with opportunities in sectors such as real estate, telecom, and infrastructure.

Things are better today than 20 years ago for sure. Then, more than 20 percent of homes had bare earth floors; that number is less than 6 percent today. Nearly every household has a TV, but fewer have refrigerators. Annual per capita income for Mexicans tops US$10,000, putting the country in the top 60 in the world for income. China’s less than half that amount and the United States is almost five times that amount. Yet, if you were to spend a week in China, you would feel it was much better off than Mexico. The Mexican government is not known for its ambitious public works projects. Wander just a few miles outside most cities and beside the major highway, you will find mainly dirt roads.

Most people who visit Mexico today end up at one of its resorts such as Playa del Carmen, Cancun, Acapulco, Cabo San Lucas, or Puerto Vallarta on the various coasts of the country. Some end up in the interior at places like Mexico City, but that’s usually a jumping off point or for business. Others, looking to retire, end up inland at Lake Chapala near Guadalajara.

Dependency Issues

Mexico sends fully 80 percent of its exports to one country: the United States. Only China and Canada export more to the United States in total dollar terms. This makes Mexico a virtual dependent of the United States. The advent of the North American Free Trade Agreement in 1994 allowed Mexico to move up the economic ladder more quickly. Imports by the United States from Mexico have almost doubled in dollar value since 1994, and imports to Canada have doubled. Mexico sports a trillion-dollar economy, yet it is half the size of Brazil, a country that it once was ahead of. Much of Mexico’s early wealth was derived from its huge oil reserves, which have been dwindling. New discoveries have shrunk due to poor technology and lack of spending on trying to find new reserves. Meanwhile, countries like Brazil have tripled their expected oil production thanks to new discoveries.

Mexico does have a wild card in energy, however. It has massive access to the Gulf of Mexico, an area of significant oil reserves. The problem has been the government’s hold on Pemex, the Mexican oil company. It is a monopoly that is government owned and, as such, is subject to the whims of an inefficient government program on expansion. What the government needs to do is to privatize or semiprivatize Pemex, much like the Brazilians did with Petrobras, and allow the company to both modernize its drilling program and exploit offshore reserves. But that costs money, a lot of money, and the Mexican government does not have that—even more reason to float the company to the open market. As the second largest supplier of oil to the United States in the past decade, Mexico has an easy and needy client to its north.

One of the greatest criticisms I have of Mexico is the lack of economic foresight that has plagued government after government. Corruption in Mexico’s government has few bounds. Perhaps the biggest problem that faces the government today is narco-trafficking, an issue that cannot be resolved until and unless the government purges its ranks of individuals who profit from this multibillion dollar industry. Local and federal employees are complicit in this booming industry and not until very recently has the entire Mexican state faced the reality of the problem as it has made front-page news with mass killings and violent executions of innocent civilians caught in the crossfire. The equation for these corrupt politicians is quite easy. Pad their pockets with millions in cash or subsist on a meager salary.

Mexico is quite a paradox economically. While more than 40 percent of its population lives in poverty, the world’s richest man hails from within its borders. Carlos Slim Helu, a Mexican of Lebanese descent, has amassed a fortune of some U$75 billion as the chieftain of Mexico’s telecommunication industry. Through his holdings of America Movil and Telmex (formerly a government-owned enterprise) Slim has near monopolistic control of Mexico’s telecom, mobile, and landline industries. Real wealth in the country is concentrated in the hands of a few, like Slim, which gives Mexico a type of Russian oligarchical economic system. In Mexico, wealth and politics are quite comfortable bedfellows.

Buying Mexico

Besides the obvious real estate investment opportunity in a country very close to the United States, Mexico offers a wealth of market opportunities, as well. While tied to the fortunes of its richer neighbor to the north, Mexico also enjoys an enviable position as a country that straddles two major global economic regions—North America and South America—with access to both via land and sea, with ports on the Pacific and the Atlantic/Caribbean/Gulf of Mexico. It’s a position that has yet to be exploited fully. Mexico can profit from the long-term stability offered by the United States and Canada, despite recent cyclical headwinds, and also participate in the emerging growth of South America.

One of the top plays in the region is CEMEX (NYSE:CX), a multibillion dollar company and the world’s largest supplier of ready-mix concrete. For speculators, CEMEX may prove to be a major win in the years ahead. The shares have been decimated thanks to overexpansion at a time when the United States and much of the world were engaged in a building boom that lasted from 1995 to 2007. When real estate in the United States, Europe, and the Middle East crashed, so did CEMEX’s share price, currently trading around $3.50, down from almost $37 in 2007. Much of the decline can be traced to the company’s heavy debt burden that was accumulated during the boom to fuel expansion into markets like Europe and the Middle East. If the company can withstand the real estate crash, it stands to be one of the bigger winners on the way out. A strong global distribution network and the very likely boom in construction that lays ahead for emerging markets could pave the way to triple-digit profits from this play. On the flipside, a protracted downturn or a crash in emerging markets would likely result in receivership for this Mexican giant—hence the label of “speculative.”

Mexico offers a wide array of local market plays, as well. Telephony has always been an attractive sector thanks to the monopolistic nature of the country’s telephone providers. The big player in mobile telephony is America Movil (NYSE:AMX), majority owned by Carlos Slim Helu. The company offers access not only to the vast Mexican market where it holds majority share, but also into the Latin and South American markets. While competition within Mexico is virtually nonexistent for America Movil, it does face stiff competition in places like Brazil, Argentina, and Chile. Still, it is a high-growth business and mobile and Internet telephony show little signs of going the way of fixed lines.

Perhaps the most steady investment play coming out of Mexico is that of shares of Wal-Mart de Mexico, a $28 billion company with over 220,000 employees in Mexico and Latin America. The company has been growing steadily since the early 1990s when it entered the space in a big way. Investors can trade it in the United States under the symbol WMMVY on the over-the-counter market.

Promises, Promises

Mexico should be the world’s top emerging market story. It’s not. It has every possible advantage in terms of proximity to growth; proximity to technology; outstanding topography; a generally good primary education system; strong linguistic and social ties to the Hispanic and Anglo world; a huge population of expatriates; a massive, young population base; and wealth in natural resources. Yet, the country can’t seem to get its act together, preferring to endure the cycle of boom, bust, and bailouts that is the hallmark of poorly managed emerging markets. With over a trillion dollars in GDP, an accomplishment that puts it in the top 20 globally, one can’t get away from the fact that a visit to Mexico is no different than a visit to a third-world country in Asia.

Mexico has not delivered on its promise, but that does not mean that it can’t in the future. But, to get there from here, the country needs serious political reform, a serious plan to combat narco-terrorism, a plan to revitalize its flagging oil industry, and massive investment in education and social reforms that keep its residents within its borders. Mexico is in the enviable position of having an ideal location for trade with the world. Cheap labor, low environmental barriers, an excellent transportation infrastructure, great tourist locales, a friendly population—these are all foundations that can build the country into a powerhouse economy of Latin and South America, along the lines of Brazil (although Brazil also has its share of problems). The issue is leadership and apparently that is something than money can buy in Mexico . . . to its detriment.

Strengths

Location. The region’s proximity to the world’s single largest economic power—the United States—and its proximity to the biggest trade zone in the world—North and South America—are big advantages. The region has a young population, low cost of labor, and a strong tourism base. It is an attractive destination for retirees. It has strong cultural ties to the highest growth population group in the United States. Economies are dollarized for the most part making trade easy.

Weaknesses

The region is plagued by political weakness and widespread corruption. It has poor central planning, weak infrastructure, especially water purification, and inadequate education spending. Class-based systems are not discouraged. It is dependent on the United States for growth. There are pockets of high crime related to the drug trade. The region has a lack of investment opportunities not related to real estate or tourism.

Opportunities

The region is close to the world’s single largest trade zone (North and South America). It has strong cultural and linguistic ties to a strong emerging market region in South America. Continued development of its tourism infrastructure bodes well. In the case of Mexico, continued growth in exports to emerging markets, further modernization of oil infrastructure, and exploration.

Threats

Political disintegration. Countries like Nicaragua could easily fall backward into dictatorial rule, which could impact the investor opinion of the region. Narco-terrorism in Mexico poses significant headline risk and could potentially destabilize the government. Deaths are measured in the thousands annually and gruesome images continue to dominate media reports. A protracted downturn in the U.S. economy would negatively impact all countries in the region. Lack of reform of Mexico’s oligarchical economic system, which tends to favor a wealthy few, could lead to Russian-style anger and despair within the population base. Natural disaster could disable one or more countries for years as few in the region have the financial reserves required for a major rebuilding effort.