Amid many worldwide headlines, our analysts made note of the following articles impacting business in emerging markets:
Outlook for China’s Economy Just Keeps Getting Worse - CNBC
“Macroeconomic outlook in China continues to worsen. Though most economists still predict a gradual slowdown rather than a sudden deceleration, companies need to be prepared for a worse-than-expected 2013.”
-Shijie Chen, Practice Leader for Asia Pacific Research
Brazil oil licenses raise record R$2.8bn - Financial Times
“Some good news for Brazil’s long term outlook; long awaited oil license auctions went smoothly and raised $1.4bn USD. The auctions are necessary for opening vast oil fields for exploration and exploitation. The development of these fields could provide a major boost to Brazil’s long term economic outlook.”
-Clinton Carter, Director of Research and Product Development for Latin America
UAE benefits from influx of capital from emerging markets – The Economic Times
“Political stability in the UAE amid regional instability has led to increasing proportions of capital inflows compared with the rest of the MENA region.”
-Sam Osborn, Senior Analyst for Global Analytics
Here are several headlines read by FSG’s regional research teams this week with their commentary below:
Czech GSP: it gets worse - Financial Times Beyondbrics
“The Czech economy is unlikely to recover considerably until German growth picks up. The Czech Republic’s problems highlight the growing division between markets driven by domestic demand vs. by exports, with the latter likely to underperform. For more details on this trend, see FSG’s report Global Performance Drivers – Q1 2013.”
- Martina Bozadzhieva, Associate Practice Leader for Central and Eastern Europe
Joko Aims for June MRT Groundbreaking - The Jakarta Globe
“Companies should monitor the Jakarta MRT project since it will serve as a good proxy for Jokowi’s ability to get things done in the capital. If he cannot hit his self-imposed deadline for breaking ground in June or July, it will bode ill for the implementation of other difficult policies in Jakarta.”
- Adam Jarczyk, Associate Practice Leader for Asia Pacific Research
Mexico: Uphill battle joined in effort to restructure oil industry - Financial Times Beyondbrics
“This article illustrates the major hurdles president Peña Nieto faces in pushing through reforms to open the oil sector to foreign investment and private capital. Nevertheless, the article details the apparent resolve of the government to pursue the needed reforms.”
-Clinton Carter, Director of Research and Product Development for Latin America
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Sifting through a constant flow of news, our analysts have summarized the following few articles from around the world in this week’s Emerging Market View:
India Said to Plan Completing FY14 Asset Sales by December – Bloomberg
“Is this really possible? A great indicator for executives to follow closely. The Congress Government’s performance on this front will not only have an impact on the elections of 2014 but will directly impact India’s ever widening budget-deficit. Asset sales are a quick and efficient way to raise revenues.”
- Shishir Sinha, Analyst for Asia Pacific Research
Azevêdo Enfrentará Ceticismo de Ricos, Diz Consultor - Estado de Sao Paulo [Portuguese]
“FSG’s Associate Vice President for Latin America Clinton Carter argues that incoming Director-General of the WTO Roberto Azevêdo will start his mandate with skepticism from the developed world and unrealistic expectations from the developing world, given the support he received from major developing countries that have been the least receptive to stronger pushes for free trade over the last decade.”
- Antonio Martinez, Senior Analyst or Latin America Research
Turkey is Investment Magnet outpacing Emerging Market Peers – Reuters
“Investment capital is flowing into Turkey as the market remains one of the regional bright spots in Central and Eastern Europe.”
-Sam Osborn, Senior Analyst for Global Analytics
With the second quarter now well under way, Chile continues to outperform, though downside risks loom on the horizon as the outlook for copper prices weakens. Internal demand remains a key growth driver and continues to outpace top-line growth, raising fears that the economy may be on the verge of overheating. In our view, such fears are overblown at present, given that increased consumption has been driven in large part by rising real wages rather than increased borrowing.
Rising labor costs, increased potential for skilled labor shortages, and more restrictive credit conditions do, however, represent supply-side risks for multinationals already hard-hit by rising energy costs and the potential for strike-related supply chain disruptions as the electoral cycle kicks into gear.
Trend #1: Near-term Supply Chain Disruptions Likely as Election Year Politics Take Hold
- In recent weeks, strikes have broken out in a number of different sectors in Chile. Port workers have disrupted copper and fresh fruit exports, miners at the state-owned copper company Codelco demanded higher wages, preschool teachers from Fundación Integra called a 24-hour strike, and LAN airline workers have publicly protested against firings. These strikes are timed to capitalize on the electoral cycle, and while the volume is expected to decline following November’s election, multinationals may experience supply chain disruptions as a bandwagoning effect plays out across various sectors of the economy
Trend #2: A Stronger Peso Will Fuel Capital Investment Over the Near-Term
- The Chilean peso appreciated 7.8% against the US dollar in 2012, and as of mid-April, has appreciated 2.2% in 2013. The sustained real appreciation of the peso has strengthened domestic purchasing power, benefitting companies importing consumer durables and capital goods into the Chilean market, while taking a toll on commodity exporters. Multinationals with local operations and/or production are likely to face rising costs as the prices of non-tradable inputs (i.e. labor, real estate, water, and electricity) rise in USD terms, even against a backdrop of muted inflation.
- While the peso will remain strong against the dollar in historical terms, moderation is anticipated over course of 2013, given a weaker outlook for copper demand and expectations that the Fed will scale back bond purchases.
Trend #3: An Uptick in Immigration Will Offset Chile’s Increasingly Tight Labor Market
- While multinationals are concerned about the potential for shortages of skilled labor and rising labor costs as the Chilean economy approaches full employment, a recent uptick in arrivals of skilled immigrants from the distressed economies of Spain and Argentina may help fill critical capability gaps. Currently, companies with more than 25 employees can only fill 15% of positions with foreign hires. However, our expectation is that reform efforts will aim to raise this cap and streamline the visa process, while increasing inter-agency cooperation to ensure that policy is optimized to meet the country’s labor and technical needs.
FSG clients may click here to access a full report for further reading on FSG’s quarterly market view of Chile.
Our analysts are constantly speaking to clients and reading headlines from around the world to extract implications on the performance of emerging markets. Here are a few articles our top research talent has been reading in this week’s Emerging Market View:
China Recovery at Risk as Factory Growth Eases – CNBC
“China’s economic recovery is weaker than expected and companies looking for a fast rebound will be disappointed. However do not expect aggressive policy from the government as employment is still relatively stable.”
-Shijie Chen, Practice Leader for Asia Pacific Research
Emerging Markets Gain From Central Bank Reserve Shift – Financial Times
“Even traditionally risk-averse central banks are now diversifying their reserves into emerging market bonds, a trend that is expected to increase in the future.”
-Sam Osborn, Senior Analyst for Global Analytics
China Manufacturers Survive by Moving to Asian Neighbors – The Wall Street Journal
“More production moves out of China and into Southeast Asia (ASEAN) – a trend only likely to become more common as we move towards the year 2015 and the formation of the ASEAN Economic Community is completed.”
-Shishir Sinha, Analyst for Asia Pacific Research
Mexico’s economy is experiencing a pronounced slowdown across the economy, with both industrial production and consumer spending seeing more moderate growth compared to 2012. However, FSG expects growth will accelerate in the second half of 2013 as the new government’s spending plans ramp up and the US economy experiences faster growth after the one-off effects of tax increases and spending cuts work their way through the economy.
Mexico’s near-term slowdown is largely driven by short-term external factors that will lose relevance in the second half of 2013. As long as the Mexican government’s agenda remains tilted toward reform and economic growth in the United States improves, Mexico is likely to accelerate in the second half of 2013 and beyond. On the other hand, a breakdown of the reform agenda may have deleterious effects on the country’s economy over the medium term, particularly if essential fiscal and energy reforms do not pass over the next twelve months.
FSG clients have on the whole suffered tepid sales growth in the first quarter of 2013 in Mexico, as slower consumer spending, weak industrial production, and reduced government spending weigh down revenue growth. This has not translated into a reduction in interest in increasing investments in Mexico, though multinationals are increasingly cognizant of the fact that it will take time for the upside potential associated with Peña Nieto’s reform agenda to translate into real economic growth.
Trend #1: Policy Shift Toward Urbanization Is Creating Both Opportunities and Turmoil
- Financial turbulence in the housing sector has led the government to partially bail out the major builders, and will lead to weaker overall growth of the sector. Multinationals that have builders as clients will have to reorient toward the smaller, emerging players in the industry that are better prepared for the shifting market landscape. B2C companies should expect that accelerating urbanization will make it easier for them to reach consumers, and should adapt their marketing efforts to the changing living patterns of Mexican consumers.
Trend #2: Telecommunications Reform Will Create New Opportunities for Multinationals
- The gains for the economy from increased competition in the telecom sector would be widespread, but the success of the reform will require secondary reforms to be passed over the next few months, as well as the requisite votes in the state congresses. Even if the reforms only open up the two sectors to competition from the local giants in practice, this will still lead to higher mobile and broadband penetration, and lower advertising costs for companies due to increased competition among cable and broadband providers. If the reforms and their subsequent implementation attract foreign players to the telecom market in Mexico, this will lead to even more dynamism for the industry and consumers.
Trend #3: Industry Efforts to Increase Credit Are Falling Short, but Reforms May Help
- While private sector initiatives from Walmart and Santander’s alliance with Oxxo may have increased access to financial services among Mexico’s emerging middle class, this has not led to a notable increase in credit growth. In response, the Peña Nieto administration has already begun pushing for improvement in the provision of credit to consumers through a significant financial reform project that would create two state credit bureaus. This would add to the information provided by commercial banks, public lenders, and other entities, and thus reduce the information deficit that is hobbling credit provision.
U.S.-based multinational corporations lost an estimated $50 billion as a result of currency volatility in 2012. As I referenced in my previous post, FSG projects currency volatility to increase in 2013. No longer can executives only rely on corporate treasury to manage these risks as the potential impacts on profitability and performance are too great.
To better understand some of the operational strategies that executives can use to reduce currency risks, FSG turned to one of our expert advisors, Professor Gordon Bodnar:
- GB: “I encourage companies to think about structuring their operations as much as possible to have flexibility to respond to unexpected currency movement. If currency moves in our favor, can you take advantage of not just increasing dollar price and dollar revenue stream by providing additional service? Same thing for operations on the downside, how are operations structured so that over the short-term you can make adjustments to the pricing or costs structure such that you see a devalued currency by 10% your costs rise by less than 10%”
- GB: “In markets with high volatility, the goal is an options type payoff. Companies often don’t want to do this, as anytime you are creating an option there is an upfront cost. However, the point is that the payment of the premium is necessary to get the payoffs you want…you have the ability to absorb and move across the profitability curve, leading to a higher expected payout”
Larger initial local investments give executives the flexibility to respond to FX volatility with operational rather than financial strategies.
This is obviously a more risky strategy, and Professor Bodnar was kind enough to share a wide array of less risky strategies that I’ll cover in future posts.
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Gordon Bodnar is the Morris W. Offit Professor of International Finance and Director of the International Economics program at The Paul H. Nitze School of Advanced International Studies. He is presently a research associate of the Weiss Center for International Finance and also teaches in the Wharton Executive MBA program at the Wharton School at the University of Pennsylvania. Dr. Bodnar is also the associate editor of European Financial Management, Journal of Asian Economics, and Journal of International Financial Markets, Institutions and Money. He has held appointments as a Research Fellow at the National Bureau of Economic Research and the IMF. He received his Ph.D. in Economics from Princeton University.
As an FSG Expert Advisor, Professor Bodnar is available to FSG clients for consultation on many business issues with key areas of expertise including corporate and risk management. Please contact your account manager for further information or contact us at sales@frontierstrategygroup.com.
Here are a few region-specific headlines read by our research analysts this week:
Regional Assembly Now Wants Work Permit Fees Eliminated – Daily Nation
“Work permits fees for citizens from the East African community could be abolished in the medium-to-long term, making it easier for MNCs to move local staff across borders. The current feesfor work permits vary according to country and profession. But nationalist protectionist polcies of some member states, notably Tanzania, stand in the way of greater integration.”
- Anna Rosenberg, Senior Analyst for Sub-Saharan Africa Research
Chile and the Copper Price Rout – Financial Times beyondbrics
“Chile’s concern about falling copper prices is certainly warranted given that copper remains the country’s chief export. However, as we note in our most recent Quarterly Market Review, falling copper prices may bring relief for non-mineral export sectors which have been negatively impacted by currency appreciation in recent months.”
- Christine Herlihy, Analyst for Latin America Research
MP3I Will Push Growth in Eastern Indonesia: Minister – The Jakarta Post
“While Jakarta undoubtedly wants to promote growth in eastern Indonesia via the MP3EI framework, this plan is unlikely to dramatically increase private sector investment in Papua and Maluku. Instead, the real sector will continue to focus its efforts on the infrastructure in Java (and to a lesser degree Sumatra, Kalimantan, and Sulawesi) over the short to medium term.”
- Adam Jarczyk, Associate Practice Leader for Asia Pacific Research
Brazil ending a lengthy easing cycle and more nervy news for Europe’s debt round off this week’s headlines highlighted by our research analysts:
[snap]: Brazil Raises Benchmark Rate – Financial Times beyonddrics
“Brazil raised the benchmark Selic rate 25 bp to 7.5%, marking the end of a lengthy easing cycle in an effort to demonstrate that the inflationary targeting regime remains in force as prices continue to rise. While markets had begun to price in a rate hike, expectations were that the Central Bank would wait until later in the year, boding poorly for growth prospects.”
- Christine Herlihy, Analyst for Latin America Research
Putin Envoy Says Recession Should Spur Easing: Russia Overnight – Bloomberg
“Companies should watch for Russian government actions to boost growth – both rate cuts and some form of economic stimulus are likely.”
- Martina Bozadzhieva, Associate Practice Leader for Central and Eastern Europe
IMF: Euro-zone Companies Face Massive ‘Debt Overhang’ – The Washington Post
The IMF estimated that as much as a fifth of the corporate bonds and loans issued by major European companies are “unsustainable.”
– Sam Osborn, Senior Analyst for Global Analytics
