Embotelladora Andina SA (AKO.A) Risk Analysis

Brazil has historically experienced high rates of inflation, including periods of hyperinflation before 1995. Several measures have been implemented by the Brazilian government in an effort to curb rising inflation, but we cannot predict whether these policies will be effective. According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or "IPCA"), published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, "IBGE"), Brazilian annual rates of inflation for consumer prices were 6.3% in 2016, 3.0% in 2017, 3.8% in 2018, 4.3% in 2019, and 4.5% in 2020. Inflationary pressures may result in governmental interventions in the economy, including policies that could adversely affect the general performance of the Brazilian economy, which, in turn, could adversely affect our business operations in Brazil. Inflation may also increase our costs and expenses, and we may be unable to transfer such costs to our customers, reducing our profit margins and net income. In addition, inflation could also affect us indirectly, as our customers may also be affected and have their financial capacity reduced. Any decrease in our net sales or net income, as well as any reduction in our financial performance, may also result in a reduction in our net operating margin. Our customers and suppliers may be affected by high inflation rates and such effects on our customers and suppliers may adversely affect us.

Brazil's political environment has historically influenced, and continues to influence, the performance of the country's economy. Political crisis have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration. Economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as "Operação Lava Jato," have negatively impacted the Brazilian economy and political environment. The potential outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy. We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new allegations against government officials and/or executives of private companies will arise in the future. Jair Bolsonaro was elected as the President of Brazil in October 2018. His election led to a market recovery and the recovery of the value of the local stock market. However, we cannot assure that this confidence in the market will remain, nor that the policies promoted by this government will be beneficial to the economy or our business. A failure by the Brazilian government to implement necessary reforms may result in diminished confidence in the Brazilian government's fiscal condition and budget, which could result in downgrades of Brazil's sovereign foreign credit rating by credit rating agencies, negatively impact Brazil's economy, lead to further depreciation of the real and an increase in inflation and interest rates, adversely affecting our business, financial condition and results of operations.

Argentina has experienced high levels of inflation in recent decades. Argentina's historically high rates of inflation resulted mainly from its lack of control over fiscal policy and the money supply. Argentina continues to face high inflationary pressures. The INDEC in 2017 reported that the consumer price index (índice de precios al consumidor or "CPI") increased 24.8%, while the wholesale price index (índice de precios internos al por mayor or "WPI") increased 18.8%. In 2018, the INDEC registered a variation in the CPI of 47.6% and an increase in WPI of 73.5%. In 2019, the INDEC registered an increase in CPI of 53.7%, while the WPI increased 58.5%. In 2020, the INDEC registered an increase in CPI of 42.0%, while the WPI increased 35.4%. During 2018, 2019 and 2020, Argentina met the criteria to be considered a hyperinflationary economy as provided by IAS 29 guidelines, which include, among other characteristics, a cumulative inflation rate over three years that approaches or exceeds 100%. Accordingly, IAS 29 must be applied for financial statements for fiscal years ending on or after July 1, 2018. IAS 29 requires non-monetary assets and liabilities, shareholders' equity and comprehensive income to be restated in terms of a measuring unit current at the period end. IAS 29 also requires the use of a general price index to reflect changes in purchasing power. As a result, since July 2018, we began to apply IAS 29 in the preparation of our financial statements and report the results of our operations in Argentina as if this economy was hyperinflationary from January 1, 2018. In addition, by application of IAS 29, we had to translate figures in Argentine pesos to Chilean pesos using the period closing exchange rate (and not the average exchange rate), thus reducing our results of operations and net earnings. We cannot predict for how long Argentina will be considered a hyperinflationary economy and we will have to apply IAS 29 to the preparation of our financial statements. In the past, inflation has materially undermined the Argentine economy and the government's ability to generate conditions that foster economic growth. High inflation or a high level of price instability may materially and adversely affect the business volume of the financial system. This result, in turn, could adversely affect the level of economic activity and employment in the country. High inflation would also undermine Argentina's foreign competitiveness and adversely affect economic activity, employment, real salaries, consumption and interest rates, thereby materially and adversely affecting economic activity and consumers' income and their purchasing power, all of which could have a material adverse effect on our financial condition and operating results. Between 2007 and 2015, the INDEC, which is the only institution in Argentina with the statutory authority to produce official national statistics, experienced significant institutional and methodological changes that gave rise to controversy regarding the reliability of the information that it produces, including inflation, GDP and unemployment data, resulting in allegations that the inflation rate in Argentina and the other rates calculated by INDEC could be substantially different than as indicated in official reports. While the previous administration undertook reforms and the credibility of the national statistics systems has since been restored, we cannot assure you that the new or future administrations will not implement policies that may affect the national statistics system undermining consumer and investor confidence, which ultimately could affect our business, results of operations and financial condition.

Argentina has a history of political and economic instability that often results in abrupt changes in government policies. Argentine governments have pursued different, and often contradictory, policies to those of preceding administrations. In recent decades, succeeding administrations have implemented interventionist policies, which included nationalization, debt renegotiation, price controls, and exchange restrictions, as well as market-friendly policies, such as export tax reductions, elimination of currency controls, deregulation of utility prices, negotiation of free trade agreements and implementation of pro-investor initiatives. In October 2019, Argentine presidential, legislative and certain provincial and municipal governments elections were held and Alberto Fernández was elected president. The new administration took office in December 2019. Certain members of the current government coalition, including president Alberto Fernández and vice president Cristina Fernández de Kirchner, were part of administrations which in the past were characterized by high levels of government intervention and policies at times disadvantageous to investors and the private sector. As a result, there is uncertainty regarding the policies and changes in regulation that the current Argentine government will implement. In December 2019, the government passed a law granting emergency powers to the executive branch, among other measures. We cannot predict what policies this government will implement under these emergency powers. We cannot provide assurance that the Argentine government will not adopt policies, over which we have no control, that adversely affect the Argentine economy and impair our Argentine operations and our business, financial condition or results of operations.

Our operations in Argentina represented 10.1% and 8.8% of our assets as of December 31, 2019 and December 31, 2020, respectively, and 22.2% and 18.8% of our net sales for 2019 and 2020, respectively. Developments in economic, political, regulatory and social conditions in Argentina, and measures taken by the Argentine government, have had and are expected to continue to have an impact on our business, results of operations and financial condition. Historically, the Argentine economy has experienced periods of high levels of instability and volatility, low or negative economic growth and high and variable inflation and devaluation levels. According to the National Statistics and Census Institute (Instituto Nacional de Estadísticas y Censos, or "INDEC"), Argentine GDP contracted in real terms by 2.1% in 2016, grew by 2.8% in 2017 and contracted by 2.6% and 2.1% in 2018 and 2019, respectively. During 2020, Argentine GDP decreased by 9.9% compared to the previous year according to the INDEC. Argentine economic conditions are dependent on a variety of factors, including the following: - domestic production, international demand and prices for Argentina's principal commodity exports;- the competitiveness and efficiency of domestic industries and services;- the stability and competitiveness of the Argentine peso against foreign currencies;- the rate of inflation;- the government's fiscal deficits;- the government's public debt levels;- government restrictions in response to the COVID-19 pandemic and the capacity of authorities to keep the pandemic under control;- foreign and domestic investment and financing; and - governmental policies and the legal and regulatory environment. Government policies and regulation-which at times have been implemented through informal measures and have been subject to radical shifts-that have had a significant impact on the Argentine economy in the past have included, among others: monetary policy, including exchange controls, capital controls, high interest rates and a variety of measures to curb inflation, restrictions on exports and imports, price controls, mandatory wage increases, taxation and government intervention in the private sector. We cannot assure you that the future development of the Argentine economy will not impair our ability to successfully carry out our business plan or materially adversely affect our business, financial condition or results of operations.

Although inflation in Paraguay has remained stable at around 4% over the last five years, we cannot assure that inflation in Paraguay will not increase significantly. An increase in inflation in Paraguay could decrease the purchasing power of our consumers in the country, which could adversely affect our volumes and impact our sales income.

Our operations in Paraguay represented 12.1% and 11.1% of our assets as of December 31, 2019 and December 31, 2020, respectively, and 8.9% and 9.3% of our net sales for 2019 and 2020, respectively. Because demand for soft drinks and beverage products is generally related to the economic conditions prevailing in the local market which, in turn, depend on the macroeconomic and political conditions of the country, our financial situation and our results of operations could be adversely affected by changes in these factors over which we have no control. Paraguay has a history of economic and political instability, exchange controls, frequent changes in regulatory policies, corruption and weak judicial security. Paraguayan GDP grew by 4%, 5%, 3% and in 2016, 2017 and 2018, respectively; did not grow in 2019 and contracted 1% in 2020, according to the Paraguayan Central Bank. Paraguayan GDP is closely tied to the performance of Paraguay's agricultural sector, which can be volatile. The situation of the Paraguayan economy is also strongly influenced by the economic situation in Argentina and Brazil. A deterioration in the economic situation of these countries could adversely affect the Paraguayan economy and, in turn, our financial condition and operating results.

In recent decades, Argentina has experienced significant social and political turmoil, including civil unrest, riots, looting, nationwide protests, strikes and street demonstrations. Social and political tension and high levels of poverty and unemployment continue. Unions frequently stage nationwide strikes and protests, and riots and lootings of shops and supermarkets in cities around the country have taken place at times of social turmoil. Future government policies to preempt, or in response to, social unrest may include expropriation, nationalization, forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors' rights, new taxation policies and changes in laws and policies affecting foreign trade and investment. Such policies could destabilize the country and adversely and materially affect the Argentine economy, and thereby our business, results of operations and financial condition.

Beginning in October 2019, widespread protests have taken place in Chile. This began with the government's announcement of an increase in subway fares in Santiago and quickly grew into broader unrest over economic inequality in the country. Demonstrations spread across the country and resulted in violent and, sometimes, fatal acts, as well as significant damage to public and private property. The Congress of Chile, as a measure to address the protests, agreed to submit to the general public the approval of a potential reform to the Constitution. On October, 2020, Chile held a referendum whereby nearly 80% of voters opted to replace the Constitution and to have a new constitution drafted by a special constitutional convention comprised of 155 citizens to be elected in April 2021 solely for that task. Upon its drafting and approval by two-thirds of the constitutional convention's members, the final draft of the new constitution will be submitted to a further public referendum expected to be held during 2022 for its approval or rejection by absolute majority vote. During 2020 the country was affected by the COVID-19 pandemic, resulting in countless fatalities and an economic crisis caused, in part, by government restrictions aimed at continuing the spread of the virus. Significant measures have been taken to support households and businesses, both tax incentives and social assistance contributions were made, and a 10% two-time withdrawal of pension plan savings was approved. However, developments in the economy during the last quarter of 2020 were less favorable than projected due to new health restrictions and a slow recovery in the sectors most affected, which has negatively impacted the dynamism of the economic recovery and is expected to have a significant effect on consumption and trade-related activities in 2021. At the same time, government fiscal stimulus is expected to continue, in line with the approved budget, and Chile's economy is expected to receive a significant external boost, with copper price averaging increasing significantly. We cannot predict the extent to which Chile's economy will be affected by civil unrest, the uncertainty of a new Constitution, or the effects of the pandemic and government restrictions to contain the spread of the virus, nor can we predict whether government policies enacted in response to these situations will have a negative impact on Chilean economy. Despite looting at our distribution center in Puente Alto, our operations have not been affected by the protests and vandalism in any material respect to date. Additionally, despite the imposition of the changes and our operations to mitigate the potential spread of the virus, and changes in consumption patterns, our financial results have not been significally impacted. We cannot assure these or similar future developments will not affect our production and logistics infrastructure in the future.

Our operations in Chile represented 37.7% and 47.8% of our assets as of December 31, 2019 and December 31, 2020, respectively, and 34.2% and 38.0% of our net sales for 2019 and 2020, respectively. Accordingly, our business, financial condition, and results of operations depend, to a considerable extent, upon economic conditions in Chile. International and local economic conditions may adversely affect the Chilean economy, and unfavorable general economic conditions could negatively affect the affordability of and demand for some of our products in the country. In difficult economic conditions, consumers may seek to reduce discretionary spending by forgoing purchases of our products or buying low cost brands offered by competitors. Any of these events could have an adverse effect on our business, financial condition and results of operations. According to data published by the Central Bank, the Chilean economy grew at a rate of 1.3% in 2016, 1.5% in 2017, 4.0% in 2018 and 1.1% in 2019and in 2020 it contracted 5.8%, as a result of the impact of the COVID-19 pandemic. Our financial condition and results of operations could also be adversely affected by changes over which we have no control, including, without limitation: - political or economic developments in or affecting Chile;- the economic or other policies of the Chilean government, which has a substantial influence over many aspects of the private sector;- tax rates and policies;- regulatory changes or administrative practices of Chilean authorities;- the Chilean constitutional process, and the impact of a new Chilean Constitution, if approved;- government restrictions in response to the COVID-19 pandemic and authorities, capacity to keep the pandemic under control;- inflation and governmental policies to combat inflation;- currency exchange movements; and - global and regional economic conditions. We cannot assure you that the future development of the Chilean economy will not impair our ability to successfully carry out our business plan or materially adversely affect our business, financial condition or results of operations.

Our operations in Brazil represented 40.1% and 32.4% of our assets as of December 31, 2019 and December 31, 2020, respectively, and 34.8% and 34.2% of our net sales for 2019 and 2020, respectively. Because demand for soft drinks and beverage products is usually correlated to economic conditions prevailing in the relevant local market, developments in economic conditions in Brazil, and measures taken by the Brazilian government, have had and are expected to continue to have an impact on our business, results of operations and financial condition. The Brazilian economy has historically been characterized by unstable economic cycles and interventions by the Brazilian government. Brazilian GDP contracted by 3.3% in 2016, grew by 1.3%, 1.8% and 1.4% in 2017, 2018 and 2019, respectively, according to the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatistica). According to the Brazilian Institute of Geography and Statistics, the Brazilian GDP contracted by 4.1% in 2020. The Brazilian government has often changed monetary, taxation and other policies to influence the course of Brazil's economy. Our business, results of operations and financial condition may be adversely affected by, among others, the following factors: - expansion or contraction of the Brazilian economy;- exchange rate fluctuations;- high inflation rates;- changes in fiscal or tax policies;- changes in monetary policy, including an increase in interest rates;- exchange control policies and restrictions on remittances abroad;- investment levels;- liquidity of domestic capital and credit markets;- employment levels and labor and social security regulations;- energy or water shortages or rationalization;- changes in environmental regulation;- government restrictions in response to the COVID-19 pandemic and the capacity of authorities to keep the pandemic under control;- social and political instability; and - other developments in or affecting Brazil. The Brazilian economy is also affected by international economic and market conditions in general, especially economic and market conditions in the United States, the European Union and China.