MNCs act to mitigate the impacts of natural disasters in Latin America

The earthquakes that took place in Mexico (September 7 and September 19) and the hurricanes that afflicted several islands in the Caribbean throughout the month of September have taken a considerable humanitarian toll, but have also affected business operations of multinationals operating in those markets. At FSG, we wanted to help our clients understand the impacts of these natural disasters, how other companies have tried to minimize damage to local operations, and what type of help was provided to local communities. To that end, we polled our clients during the month of October. Here are the key highlights from that analysis.

The impact of hurricanes in the Caribbean to local operations was much greater than Mexico’s earthquakes

  • Hurricanes in the Caribbean were much more disruptive to local operations than Mexico’s earthquakes. Approximately 77% of executives reported little or no impact on their operations due to Mexico’s earthquakes, while 69% of executives reported high impact from Hurricanes Irma and María. These differences can be explained by the magnitude of the hurricanes, the size of the affected area (i.e. entire islands versus greater Mexico City), and the state of infrastructure before the events

  • Damages to infrastructure impacted local customers, supplier, and employees more than corporate capacity. In Puerto Rico, this was because of heavy damage to transportation and utility infrastructure (approximately 70% of the island is still without electricity). One executive pointed out that the damage to the power grid was “significant” and would remain their top concern in the short-term. In Mexico, the psychological impact of the earthquake could have impacted consumer morale.

Multinationals operating in Puerto Rico are much more likely to change their commercial targets than those operating in Mexico

  • Most multinationals in Mexico did not see a drop in product demand. In fact, product demand actually increased for 17% of respondents. Natural disasters can lead to a temporary bump in consumer spending as consumers replace lost or damaged goods – as long as market infrastructure remains adequate. One healthcare executive mentioned that additional healthcare spending may have been linked to treatment for injuries or a need to restock medical supplies following the earthquakes.

  • The hurricanes had a much more significant impact on commercial targets in the Caribbean. Over 80% of MNCs reported that they were considering changing their commercial targets in Puerto Rico as a response to the hurricanes. In Mexico, this number was only 25%.

Most multinationals in both markets assisted their local communities  

  • MNCs operating in Mexico conducted most (67%) of their local assistance using their company brand, almost twice as many as in Puerto Rico (31%). The contrast between Mexico and Puerto Rico of companies using their brand possibly has to do with the fact that companies have less resources at their disposal after the hurricanes in Puerto Rico, or a smaller local footprint on the island

  • Almost all the companies who are assisting local communities are allowing or encouraging employees to take time off to take care of personal issues. One multinational in Puerto Rico commented that they were even providing emergency products to employees to help mitigate personal financial costs. Other multinationals are giving donations to organizations such as Red Cross.

  • Multinationals operating in Puerto Rico are taking measures to mitigate the impact to local operations. This took shape in several forms. Many executives, for example, highlighted shipping products to partners and/or customers from alternative locations. Others asked for payment deferrals to suppliers and providers. In Mexico, executives were not taking many actions to mitigate the impact, as their logistics capacities were not severely impacted.

FSG forecast revisions of Mexico and Puerto Rico

The revisions made to Mexico’s GDP forecast were not nearly as great as those of Puerto Rico:

  • FSG revised Mexico’s GDP growth down 0.1 percentage point from 2.0% to 1.9% for 2017. This was mostly due to a reduction in investment of 0.5 percentage points. Conversely, FSG increased government consumption for 2017 by 0.5 percentage points due to spending on reconstruction efforts.
  • FSG cut Puerto’s Rico’s GDP growth from -1.6% to -2.8% for 2017. This was due to a huge downward revision of gross domestic investment, from -2.4% to -6.5%. Consumer spending and export growth were also revised downward. For 2018, FSG revised upward its GDP forecast from -1.1% to -0.8% due to increases in consumer spending, exports, and gross domestic investment. All of these indicators would be growing from a very low base in 2017. It is important to note that these revisions were made on the base case that the US government will enact at least one additional disaster relief package within the next two months. The power grid must also be returned to 90% capacity by the end of Q1 2018.

If you have any questions about this poll or our forecast revisions, clients can contact their Client Relationship Director to arrange a briefing.

Not a client? Please contact us for more information.

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