Recent economic headlines reflected what FSG’s research reports have indicated around the world. Ranging from the economic implications of the Syrian civil war to Argentina’s controversial elections and Estee Lauder’s successful EM portfolio, here are a few articles that our analysts read this week pertaining to emerging markets:
Estee Lauder reported big success in emerging markets via MSN Money online Emerging markets drive Estee Lauder’s profit growth:
“Not surprising that the Asia Pacific region was the largest contributor to Estee Lauder’s sales growth. From a global perspective, we are noticing an uptick in consumer goods companies that are prioritizing the strong consumer environments available throughout the region.”
-Sam Osborn, Senior Analyst
The Financial Times’ Beyondbrics blog, centered on emerging market news, posted an interesting entry about Vote buying in Latin America:
“The numbers validate FSG’s view that Hugo Chavez essentially bought his reelection in 2012 with huge increases in public spending, for which the country is now suffering a hangover. This article highlights other countries with a strong propensity to inflate the economy prior to elections, of relevance in 2013 to the growth outlook in Ecuador and Argentina in particular.”
-Clinton Carter, Head of Latin America Research
The Washington Post reported Syrian business exodus gains pace:
“Syrian businessmen are shifting their investments, operations, and focus abroad amid increasing chaos of the civil war. FSG mentioned how this impacts Jordan and Lebanon in the recently released MENA regional overview. This article also cites examples involving Egypt and the UAE.”
- Matthew Spivack, Practice Leader for the Middle East and North Africa
*Post compiled by Hal Olson
While Argentina may be doomed to ignore the lessons of history and again plunge into recession or even economic free fall, investors are not obliged to follow blindly. For investors focused on the consumer products segment, previous crises offer ample clues to how consumers may behave in future crisis. Understanding these clues will be critical to crafting an effective strategy for mitigating risk and capturing opportunity in the consumer space should Argentina again march over the precipice.
Frontier Strategy Group works primarily with large multinationals operating and expanding in emerging markets. In an effort to inform strategy for clients with exposure to the consumer segment in Argentina, Frontier Strategy Group shared insights gleaned from experts and leading executives who weathered the past two crises in the country, namely the hyperinflation of the 1980s and the 2001 debt default and ensuing chaos. While the macroeconomic imbalances that precipitated those crises are different than those driving the country towards recession now, the conditions they produced for the average Argentine consumer could be similar: loss of purchasing power, evaporation of savings, inflation, shortages of goods, and unemployment.
Faced with these conditions in past crises, Argentine consumers responded with dramatic purchasing changes, as well as lifestyle alterations, and increased reliance on community. Practically speaking, this meant consumers reduced consumption of food and non-food consumer staples, substituted regular brands for cheaper alternatives, switched to cheaper transportation options, and were forced to prioritize between food and non-food consumer staples and other essentials such as medicines. Some significant lifestyle observed were consumers moving back from big cities to rural areas, home production of food, selling belongings, living off savings, and sharing housing and resources with many more members of family and community.
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Weaker regional growth in the first half of the year has driven multinationals to reevaluate their growth targets for 2012 as Argentina’s business landscape grows increasingly unnerving, Brazil’s economy slows, and devaluation risks in Venezuela swell as President Chavez drives up fiscal spending as part of his reelection campaign. However, many regional executives are looking towards new opportunities in Mexico as higher labor costs in China and election of business friendly Enrique Peña Nieto leads executives to believe the new administration will be able to implement structural reforms aimed at boosting higher and sustainable long-term economic growth. Meanwhile, many multinationals are undeterred by the weaker first half growth as they continue to invest in Brazil, hoping that government stimulus measures to revive consumer spending and industrial production in Brazil in the second half of 2012.
Argentina: Multinationals are dealing with an increasingly dire business environment by decreasing investments and lowering growth expectations
Brazil: Foreign investors shake off short-term woes as some multinationals position themselves for the long-term rewards that Brazil offers
Chile: The forecast is upbeat as production, consumption, and high consumer sentiment all point to a favorable economic outlook for 2012
Colombia: Colombia’s economy will continue to be a growth leader in 2012, but sluggish retail and falling industrial production dim its prospects
Mexico: Multinationals remain bullish on Mexico’s growth prospects as a new administration offers hope for necessary structural reforms
Venezuela: Multinationals remain cautious as ballooning fiscal spending contributes to rising currency devaluation risks for the beginning of 2013
Antonio Martinez and Erick Soto contributed to this piece.
The recent imposition of additional trade restrictions coupled with economic policy uncertainties in Argentina continue to cast doubt onto the country’s economic outlook for 2012. Our clients and experts expect operational conditions to further deteriorate as surging government spending and minimal political opposition allows President Kirchner’s administration to continue on this volatile path. This volatility is leading many MNC executives to adopt a “wait-and-see” approach when conducting operations in Argentina. Indeed, 57% of FSG advisors reported being concerned about economic stability in Argentina, while 59% of clients believe in a likely economic crisis within the next 18 months.
Argentina’s troubles stem from high government spending, which has eliminated previous years of budget surplus while pushing upwards pressure on inflation. An appreciating peso has been boosting imports at the expense of the trade balance and further contributing to the budget deficit. The increase in non-automatic import licenses and the Argentine government’s demand for import pre-approvals has further complicated multinational operations in an already challenging economic environment. Judging by the positive Argentine public response to the nationalization of YPF it is hard to expect the Argentina government will adjust its restrictive course and instead apply economic austerity programs.
Despite increased restrictions, import strategies like engaging in government relationship building or increasing local production can potentially reward companies willing to take the risks. Finding locally produced products to export (or countertrading) can help companies come in line with Argentine government demands.
There are two likely scenarios to consider over the next 18 months: economic crisis or economic rebalancing. Under a worst-case scenario, Argentina will continue to muddle through with the current policies it has in place until the economic imbalances worsen to the point where a crisis ensues. A more positive scenario envisions Argentina enacting politically difficult austerity and a gradual devaluation of the peso that would set the economy on track for long-term economic growth and stability. At this point it is difficult to say which of these scenarios will likely prevail, but the fact that improvement will require Argentina to endure near term pain to achieve long-term gain does not bode well for multinationals.
*Erick Soto contributed to this piece
Multinationals are taking note of the strength of the Andean economies of Colombia and Peru, but the increasingly negative outlook in Argentina and Brazil is weighing down growth in the region. Stagnating industrial output and diminishing consumer demand in Brazil led economists to trim economic growth expectations to less than 3% for 2012. The race for the Mexican presidency heats up as PRI candidate Enrique Peña Nieto maintains a steady lead heading into the July election. Meanwhile, the race for Venezuela’s presidency in October is underway contributing to market uncertainty as president Chavez registers to run for a third term despite his poor health.
For a more detailed insight on key trends in Latin America, here are the analyst headlines for our key markets:
- Argentina:A thriving black market for dollars and widespread withdrawals from local banks signal a growing belief that boom times are over
- Brazil: Multinationals are facing increasing headwinds as the effectiveness of government stimulus falls short of expectations and credit markets soften
- Chile: Higher-than-expected export growth is keeping Chile’s economy buoyant, but protests continue to mar President Piñera’s government
- Colombia:Colombia’s potential is no longer a secret, but popularity brings a pricey peso that is eroding competitiveness
- Mexico: Multinationals look to Mexico as a safe haven to weather the European storm
- Peru: Stellar performance is only somewhat dimmed by concern over tax reform increasing the cost of doing business in Peru
- Venezuela: Oil-fueled spending is succeeding at supporting higher growth this year, but Chavez’s poor health is creating political uncertainty
*Erick Soto contributed to this piece.
Frontier Strategy Group’s clients are revising growth forecasts for Latin America’s major economies upwards as the outlook for the global economy begins to stabilize. Growth leaders are emerging in the Andean region, and we expect that Chile, Colombia, and Peru will contend for the highest growth rate in Latin America in 2012. Strong fundamentals are keeping the Mexican economy remarkably stable while Brazil continues to miss the mark. Finally Argentina and Venezuela’s risk profile is increasing significantly, forcing MNCs to reconsider whether the potential rewards warrant the blood, sweat, and tears.
For a more detailed insight on key trends in Latin America, here are the analyst headlines for our key markets:
- Argentina: The nationalization of YPF has become the clearest indication of the Fernandez Administration’s hostility to investor concerns
- Brazil: The Brazilian government remains committed to revitalizing the economy, but it has not yet had a discernible impact on industry
- Chile: Strengthening domestic demand, higher copper prices and an improving international outlook point to continued strength for Chile’s economy
- Colombia: Strong growth in an uncertain global environment is forcing Colombia to deal with an appreciating currency and rising wages
- Mexico: Economic prospects appear to be stabilizing, but drug war violence sustains tension
- Peru: Growing pains in spite of robust consumer spending
- Venezuela: Chávez looks to foreign patronage to offset the deleterious effects of economic domination by decree
*Melissa Pegus, Senior Analyst – Latin America contributed to this piece
2011 year-end growth figures and new forecasts for 2012 demonstrate continued, but slower, growth, and the emergence of new risks and opportunities in LATAM. Brazil’s growth will subdued, by recent standards, and Argentina is preparing for a potentially painful economic restructuring. While larger regional economies slow, robust Chile, Peru, and Colombia increase in relative importance.
- Argentina: High inflation and a yawning budget deficit are forcing Argentina to lower spending, but trade and capital restrictions remain in place
- Brazil: Brazil faces a rapidly slowing economy, and government authorities are pushing for monetary easing and higher government spending
- Chile: The Piñera administration faces political and economic headwinds going into 2012 but Chile’s fundamentals continue to shine
- Colombia: Growing recognition of the long-term potential of the Colombian economy is quickly eclipsing investor fears of violence and instability
- Costa Rica: Fragile public finances and a weakening economy have led the government to raise taxes, imperiling future foreign direct investment
- Dominican Republic: Economic decline in Europe and new immigration laws will have adverse effects on the tourism, agriculture, and mining industries
- Ecuador: Government spending and stable commodity prices will support growth in 2012, but overexposure to oil continues to present risks
- Mexico: Mexico enters 2012 with confidence earned from economic resilience and hopes for a smooth political transition in July
- Panama: Panama’s economy boosted by trade agreement with the US, but political uncertainty clouds the prospects for Martinelli’s reform agenda
- Paraguay: Contrary to previous expectations, Paraguay will see lackluster growth due to weakening external demand and supply shocks at home
- Peru: Protests are hurting President Humala’s political standing, but the economy remains strong despite growing political uncertainty
- Uruguay: Uruguay is at the mercy of economic developments in Argentina and Brazil, with current trends pointing to a slowdown in 2012
- Venezuela: New socialist legislation makes it harder to turn a profit and easier to run afoul of the law in Venezuela
Original article in MarketWatch
“Over the past few quarters in Brazil, we have seen the emergence of a two-speed economy, with manufacturers, agricultural goods, and industrials suffering from a decline in external demand and increased internal competition from exports,” said Clinton Carter, director for Latin America at Frontier Strategy Group. Even so, “both employment and wages have remained high, so consumer sectors have performed relatively well. he said.
Now, “we see a slightly improved outlook for capital intensive industries, as the cost of capital has fallen with recent interest rate cuts, and a cheaper local currency has improved the competitiveness of domestic manufacturers in the short-run,” he said.
Country and regional heads at Frontier Strategy Group client companies are increasingly turning their attention to their government engagement function, and for good reason. It is evident that government decisions often hold the key to significant risks and opportunities, from regulatory issues to government sales, that can deeply impact the bottom line.
Clients express that they are wrestling with a variety of questions when it comes to running successful government engagement functions. These questions can be broken down into three principle challenges:
- Ensure the company invests the right amount in government engagement. MNCs struggle to quantify the function’s contribution to business objectives, which often leads to a crisis-response approach to investment.
- Generate positive engagement when government actors are initially unreceptive. This is particularly challenging because governments typically hold all the power in any given interaction and the panoply of government actor interests is much more diverse and complex than the typical business partner’s interest in increasing profitability.
- Capitalize on the abilities of third parties without putting the company at risk. This is particularly challenging because the same reasons that lead government engagement offices to turn to third parties – lack of internal staff presence on the ground, expertise, or connectedness – are the very elements that make it difficult to monitor third parties and make sure they are not engaging in wasteful or unethical practices on one’s behalf.
In response to these challenges, the government engagement function often resorts to a reactive, problem-solving approach. However, Frontier Strategy Group’s cross-industry research reveals that to succeed, the government engagement function should reframe traditional ROI evaluations to embrace the broader goals of government engagement, thus creating a proactive decision framework. This new ROI approach applies to each of the three major challenges companies face:
- Justify Your Investment – First understand how to tailor your investments to the realities presented by each country’s business and political environment. Then size up the “R” in ROI by taking a value at stake approach to determining which issues the government engagement function should prioritize, well in advance of the development of serious problems.
- Earn Your Influence – Make sure you time the “I” well in ROI. Provide direct value to key contacts in government before you need their assistance, for instance by offering research on a topic where your company has expertise or by partnering to help a government sector operate more efficiently. Build political support by building domestic companies into your supply chain.
- Discipline Your Delegates – Do not take short cuts with third parties. A low “I” does not guarantee high ROI if the “R” turns out to be negative. If you decide to hire a consultant, lobbying agency, or legal firm, you must first invest in sufficient due diligence to be sure they will not indirectly involve you in a scandal by association with other clients, or by hiring unauthorized fourth parties. Second, invest in helping third parties to really understand your industry so that they can better serve you.
Argentina’s economy is at a crossroads with high inflation, an overvalued currency and an increasingly unfriendly policy regime. The greatest risks to the business environment come from capital controls, trade restrictions, and currency devaluation. The situation is unsustainable, making a reckoning likely in 2012.
Signposts for a Reckoning:
- President Fernandez’s selection for Economic Minister
- Inability of the government to reign in spending
- Labor unrest and discord between the unions and government
- Worsening capital flight
According to Frontier Strategy Group’s on-the-ground advisers, the majority believe that the business environment will worsen during President Fernandez’s second term. They also feel that trade restrictions, capital controls, and currency depreciation are of top concern for multinational corporations operating in Argentina.