May 17, 2018 – This post was written by Pablo Gonzalez, Director for Latin America Research, and Alejandro Valerio, Senior Analyst, Andean Region.
Colombia is going through a key political transition after the end of a 53-year conflict with the FARC. A few years ago Colombia was perceived as Latin America’s poster child given its pro-business stance and vast array of growth opportunities for multinationals; however, market sentiment started to change rapidly after the 2014 global oil shock. Colombia’s economy has underperformed vis-à-vis market potential and expectations since then. As executives wrap up H1 of 2018, many questions remain as to whether Colombia GM’s will be able to hit sales targets this year in an anemic growth environment, and amid political uncertainty driven by this month’s presidential elections.
On May 9, FSG moderated a discussion in Bogotá among 17 country managers and regional executives on how they perceive the challenges facing the economy, the different economic scenarios that can be expected after the elections, and the strategies that they should implement to sustain both top-line and bottom-line performance in Colombia. Watch the short video from FSG’s Director for Latin America research, Pablo Gonzalez, or continue reading below for key takeaways from the discussion.
Key takeaway 1: Most executives considered that it has been harder to attract corporate resources into Colombia in 2018
69% of executives surveyed stated that it has been harder to make the case to attract corporate resources into Colombia. The economic prospect of the peace dividends was oversold by the Santos administration, generating a wave of optimism regarding Colombia’s economy that unfortunately never translated into higher growth; and 2018 looks no different. That, and the fact that most countries in Latin America will grow at a faster pace than Colombia, has encouraged corporate centers to reshuffle resources away from Colombia and into bigger and faster-growing markets such as Brazil, Mexico, and Argentina.
Key takeaway 2: Iván Duque is the preferred presidential candidate by FSG clients as it pertains to how favorable his administration would be for doing business in Colombia
63% of executives surveyed stated that Iván Duque will become Colombia’s next president in agreement with FSG’s base case. Furthermore, 73% of FSG clients considered that Duque would be the most beneficial candidate for their business and the economy overall. But there was also the realization that Colombia will not be able to return to earlier highs of economic growth even with a Duque administration. This is because of the difficulty of fully addressing Colombia’s structural challenges in the short run, namely the country’s reliance on the oil sector in an environment of low, although volatile oil prices, and rising fiscal deficits, which will constrain investment and the ability of the government to engage in counter cyclical policies to reignite growth.
Key takeaway 3: MNCs will have to recalibrate their strategies in Colombia in an environment of weak domestic demand and high margin pressures
Understanding market dynamics in a volatile electoral year and assessing market potential in Colombia after the elections will be key for local teams and corporate centers to align on a winning strategy for the market. MNCs should expect muted demand in Colombia for at least the next 18 months, keeping price sensitivity and margin pressures high. As such multinationals will have to adopt a threefold approach to stay profitable in Colombia: (i) exploit pockets of opportunity, whether at the industry, customer segment or subnational levels; (ii) finetune go-to-market strategy to maintain top-line growth; and (iii) seek efficiency and productivity gains to protect long-term profitability.
Key takeaway 4: Weak economic environments bring about opportunities for those companies that are willing to invest
Although Colombia’s growth has been disappointing for MNCs in the last few years, the country’s long-term fundamentals and expectations for economic policy continuity under a new administration should allow Colombia to remain relatively attractive for multinationals. As such, companies will have to carefully analyze which investments they need to make today to capture growth tomorrow. Colombia’s anemic growth environment will offer very attractive opportunities for those companies that can manage to convince corporate centers to make certain CAPEX investments or engage in inorganic growth. As a matter of fact, M&A valuations have declined on the back of economic slowdown and the peso remains very weak relative to historic levels. Most companies will feel compelled to focus on containing pricing and cost pressures, and they would be right to do so, but the name of the game for the next two years will be to strike the right balance between cost-cutting and growth investments. This idea was validated by almost 80% of the executives at FSG’s Bogotá event last week, who stated that their companies would lose competitiveness in Colombia if they did not make the right investments today.