Frontier Strategy Group convened a group of multinational executives in Buenos Aires on May 17 for our first Argentina Executive Workshop. The discussion centered on the short-term outlook for multinationals in Argentina, the long-term drivers of growth and business opportunities, and on the key strategies for capturing upside potential once demand starts to accelerate
These are the key takeaways from the session:
Argentina’s operational challenges have not disappeared
- Argentina has not yet put cyclical problems behind it: Only 26% of executives feel confident that Argentina will be able to avoid another recession within the next ten years, with 40% of them reporting that “it could go either way” and 27% of executives expressing very serious doubts as to Argentina’s ability to sustain growth. However, this skepticism should not be surprising; since 1980 the Argentine economy has not been able to post more than four consecutive years of positive growth
- FX dynamics are a serious concern: When asked about which external factor posed the greatest risk to their business, FX volatility (44%) and a strong dollar (19%) concentrated most client responses. Since Macri’s government allowed the peso to float against the US dollar in December of 2015, the Argentine currency has shown an accumulated depreciation of nearly 40%, and the market consensus calls for continued depreciation over the next few years, although at a declining rate as inflation eases. With most multinationals relying on imports to renew their product portfolios in Argentina, companies will face an inevitable trade-off between growing market share– if they decide to absorb higher import costs to compete with cheaper local and Asian players – and profitability – if they don’t
- Salary negotiations remain an unresolved issue: When asked about domestic factors that could affect their business in Argentina, 42% of executives surveyed during the session expressed concerns with regards to salary renegotiations and social unrest. Both problems stem from stubbornly high inflation as well as deriving from the Macri administration measures to control fiscal deficits, which included cuts to consumer subsidies and other cash transfers. The concern is that, not only could labor unions disrupt supply chains if they choose to double down on strikes, or erode profitability if they manage to negotiate salary increases above inflation, but they could also mobilize social discontent against the current administration. The latter outcome would diminish the ability of the political coalition that is supporting Macri to gain additional seats in Congress during October’s mid-term election, potentially interrupting the reform impetus in the country. Macri’s ability to maintain his political capital was chosen as a top concern by 12% of executives in the room, although 64% of executives in the room feel optimistic about Macri’s prospects in October’s elections
Multinationals are not yet experiencing a strong market rebound
- Sales performance has been weak so far in 2017: Despite high market expectations for Argentina, multinationals have yet to see higher demand coming from this market. Only 16% of companies surveyed experienced a significant or moderate improvement in the first quarter relative to the same quarter last year. Likewise, only 46% of executives reported an improved Q1 in US dollar terms. More interestingly, when asked when they expected demand for their products to accelerate, none of the executives in the room pointed to Q2, which suggests that as of May domestic demand has not yet picked up in Argentina. Clients remain fairly optimistic, however, with 29% of executives expecting sales volumes to pick up in Q3, 36% in Q4 and 29% only in 2018.
- Business performance does vary by industry: Given the nature and timing of Argentina’s recovery, which is being led by private investment in a few key sectors – including energy, mining, and telecoms – and by public investment in healthcare and infrastructure, it is not surprising that healthcare and industrial companies are reporting better top-line performance than their peers in the consumer goods space. B2C companies will have to wait for inflation to subside and for jobs to be created in the services sector and in key cities, items for which the Argentine labor market rigidity does not bode well. As a matter of fact, only 23% of executives in the room reported that they will increase headcount in 2017, choosing rather to wait for a more sustained recovery.
- Volume versus price dynamics could point to an imminent market recovery in Argentina: High-inflation can be operationally and commercially challenging, but it can also distort business performance when looking at sales numbers in value terms. As a matter of fact, 35% of executives reported price increases as being more important than volume growth to explain their Q1 performance. However, 43% of executives already report volume growth having outweighed price increases in the first quarter, which suggests that demand for products and services could be turning the corner.
Argentina’s recovery remains vulnerable to political and economic turmoil in Brazil
Less than a week after FSG hosted its event in Buenos Aires, Brazil’s interim president Michel Temer was caught in political misdeeds and bribery accusations, which has prompted FSG to revise down expectations for the Brazil market, and by extension also for Argentina.
You can access our special report on Brazil’s political crisis and forecast revisions by clicking here.
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