Emerging Markets View: What Our Analysts Are Reading

EM View

Emerging markets are caught between the rebound in risk appetite and an appreciating dollar, according to Business Insider. Sam Osborn, Practice Leader for FSG’s Global Analytics, agrees with the article’s sentiment.

“The catalysts of global currency volatility are primed to act. Any changes in the forward guidance from the ECB or US Federal Reserve has the potential to rattle investors and drive sharp currency swings in emerging markets.  FSG clients should read our FX Quarterly report for additional information on the operational strategies executives can employ to mitigate the effects of exchange rate fluctuation.”

In a more positive light, India’s economy likely grew at its fastest in two years according to a Reuters poll. Though this good news, it’s not an immediate result from India’s recent landmark general election.

“Economists are expecting the latest figures from India to show that the country grew at 5.3% during its April-June quarter. If achieved, this would be India’s fastest growth since Q1 2012, indicating positive investor and consumer sentiment,” says Shishir Sinha, Senior Analyst for Asia-Pacific at FSG. “Executives should keep in mind that the Modi government would have little direct impact on these figures since they officially took up the helm in June.”

Meanwhile, Argentina continues to be met with skepticism as companies fear a radical turn in Argentina, according to the Financial Times.

“While Argentina took steps to change its policy course earlier this year by devaluing the peso, cutting subsidies, and making efforts at rapprochement with the Paris Club, those efforts were stymied by the default,” according to Gabriela Mallory, senior analyst for Latin America. “Argentina has once again switched gears to even more interventionist and expansionary economic policies that make FSG’s downside scenario of a deepening recession more probable.”

FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portalNot a client? Contact us to learn more.


Emerging Markets View: What Our Analysts Are Reading

EM View

McDonald’s restaurants in Russia came under increasing pressure from the Russian authorities this week as officials closed several outlets in Moscow and inspected 435 of the fast-food chain’s restaurants across the country, according to the Wall Street Journal. The increased checks come amid heightened tensions with the West, and FSG’s Head of EMEA research, Martina Bozadzhieva, says similar actions are likely to begin affecting other western businesses in the region.

“Regulatory checks are likely to intensify across industries, especially against American companies,” says Bozadzhieva. “It is very difficult to predict who the authorities may target next and for what, and companies should be aware that problems may arise with regional as well as federal agencies. Local teams should watch their industry regulators particularly carefully to get ahead of any problems.”

Meanwhile, Argentina’s latest plan to exit default is being met with skepticism by financial markets, as bond prices slip and the black-market peso hits a record low.

“Markets are rightful to be wary with Argentina’s proposed local law debt swap, as it suggests that, contrary to initial expectations, Argentina has no intention of reaching an agreement with holdout creditors in the near term,” says Gabriela Mallory, senior analyst for Latin America.

Thailand’s military-appointed legislature nominated army chief Gen. Prayuth Chan-ocha to become prime minister on Thursday, and FSG’s senior analyst for Asia Pacific, Shishir Sinha, says it may mean increased stability for investors.

“Thailand might be able to guarantee investors with more political stability as the ruling army chief is officially moving on to the helm of the country as its newest Prime Minister. While this move will delay truly democratic elections for quite some time to come, it is likely to help with economic growth; both consumer and investor sentiment should rise due to the expectation of stability,” says Sinha.

FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client? Contact us to learn more.

Emerging Market View: What Our Analysts Are Reading

EM View

After defaulting on some of its restructured debt on July 30, Argentina has petitioned the International Court of Justice to hear a lawsuit against the U.S. According to the Wall Street Journal, the South American nation claims that decisions by the U.S. courts in the legal battle between Argentina and some of its creditors have violated its sovereignty, but FSG’s senior analyst for Latin America research says it’s merely a stalling tactic.

“Argentina’s lawsuit against the U.S. is a stalling tactic intended to bolster the Argentine government’s political rhetoric. Most likely, its main result will be a further delay in negotiations with holdout creditors,” says Gabriela Mallory.

On Tuesday, South African publication The Daily Maverick asserted that “corrupt, incompetent governments and their repeated failure to protect their citizens” was more to blame for the Ebola outbreak than the disease itself. FSG’s Sub-Saharan Africa analyst Alexa Lion agrees, adding that the virus will have little affect on Western businesses involved in the region.

“Ebola is scary but is fairly isolated from Western economic interests. Its spread speaks more of government inability to contain the virus rather than high risk of contagion. MNCs must be vigilant and articulate health precautions to their partners, but also remain aware that it is business as usual in West Africa’s largest hubs,” she says.

In Indonesia, members of losing presidential candidate Prabowo Subainto’s political coalition are planning to form a special committee, or pansus, in the House of Representatives, claiming electoral fraud. Despite Prabowo’s large presence in the legislature, FSG’s Adam Jarcysk says it is unlikely the court will rule in his favor.

“The Prabowo camp’s decision to begin saber-rattling now about launching a pansus in October suggests that the Constitutional Court is likely to support Jokowi in its ruling later this month,” says Adam Jarczyk, FSG’s Asia Pacific Practice Leader.

FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client?  Contact us for more information.

Default Redux: Argentina Fails to Reach Agreement with Holdout Creditors

Argentina’s thirty day grace period to pay holdout creditors in full and make a scheduled interest payment to restructured bondholders expired on Wednesday (July 30). Argentina was negotiating with holdout creditors through a court-appointed mediator, but ultimately no agreement was reached, and Judge Griesa denied Argentina’s request for a stay, which would have allowed negotiations to continue without triggering default. As a result, Standard & Poor’s downgraded Argentina’s foreign-currency credit rating to technical default at the close of the business day on Wednesday.

S&P has indicated that this rating downgrade may be reversed if and when Argentina makes its missed coupon payment—which, in accordance with the US Supreme Court’s ruling on the matter, can only happen when Argentina either pays or reaches a deal with holdout creditors.

What does this mean for Argentina and the business environment?

As we noted in our previous post on this subject, there is little risk of regional contagion, as Argentina has been locked out of international capital markets since its earlier default in 2001-2002. The most significant consequence of this default is that Argentina will remain locked out of capital markets unless and until a deal with holdout creditors is reached and they are able to resume coupon payments to restructured bond holders.

This means that domestic companies, government agencies, municipalities, and consumers will face more restrictive credit conditions and may in fact see their access to credit dry up. The default will also prevent the Argentine government from returning to capital markets to borrow abroad to bolster reserves and fund deficit spending, increasing the likelihood of either a forced shift to austerity or a reversion to expansionary monetary policy which will stoke already-high inflation. There are also negative implications for the exchange rate and increased likelihood of additional one-off devaluation(s), as Argentine reserves remain precipitously low, capital flight is likely, and the likelihood of kick-starting FDI is much lower in the wake of default.

Argentina Default Chart

Default also has financial implications for Argentina, in that cross-default clauses give other bondholders the right to demand immediate payment of the principal and all interest due. There are also cross-default provisions which would allow investors owning other series of bonds worth an estimated US$ 29 billion (roughly equal to Argentina’s total foreign exchange reserves) to make acceleration demands as well, even if they themselves were not owed a coupon payment on June 30. Most observers feel that it is unlikely this would happen over the near term, but in absence of a deal, the risk of such troubles would increase.

Key signposts to monitor include:

  • Possibility of a deal: Argentina can still emerge from default if a settlement is reached in the next few days and the missed coupon payment is issued. Given the financial liabilities entailed by the threat of acceleration, it is certainly in Argentina’s interest to reach a deal, either bilaterally or, perhaps, as yesterday’s events suggest, through a third party such as the banking association.
  • Bond prices: Much will depend on government actions; at present, prices have fallen but remain above levels seen in Argentina’s previous default; future movements will depend on likelihood of a deal being reached
  • International Swaps and Derivatives Association’s ruling: The ISDA’s ruling is expected later this week/early next week, and will formally trigger CDS payments

What can you do to help protect your business?

  • FSG has a host of resources on contingency planning and management challenges in risky markets, including Argentina and Venezuela. We encourage FSG clients to take a look at these resources on our portal, and reach out to your account manager to set up an analyst conversation for an in-depth walk through.
  • We recently released a piece on scenario planning for Argentina, which will help you set expectations regarding the implications of Argentina’s near- to medium-term outlook for your business.

Emerging Market View: What Our Analysts Are Reading

EM View

On Saturday, the United States closed its embassy in Libya and evacuated its staff under military guard. The closing was a response to escalated violence in Tripoli, according to the New York Times, and FSG’s Matthew Spivack says it will have a significant impact on western businesses in the area.

“The news that the US closed its embassy and the UK is evacuating some staff in Libya means that US- and UK-based companies will have little or no on-the-ground government resources to assist on investment issues. While the ongoing instability has kept away much of Western investment, companies with a local presence should already be enacting contingency plans to protect local staff and partners,” says FSG’s Practice Leader for the Middle East & North Africa, Matthew Spivack.

In Latin America this week, Argentina approached its second default in 13 years as it failed to reach a deal with creditors. Despite hope that a last-minute agreement could be reached, the Wall Street Journal reported that talks with bondholders Wednesday sent the country’s stocks plummeting.

“As the business day comes to a close on Wednesday, Argentina has failed to reach a deal with holdout creditors, and S&P has downgraded its foreign-currency credit rating to selective default. Bond and stock prices rose throughout the day in anticipation of a deal that has yet to materialize, although Argentine banks are reportedly scrambling to come up with a plan to help prevent default,” says Christine Herlihy, FSG’s Senior Analyst for Latin America.

Meanwhile in India, the founders of Flipkart, an e-commerce company that wishes to be “the first $100 billion internet company from India,” raised an additional $1 billion in funding, according to the Economic Times. With investors including Tiger Global, Naspers, and Singapore’s GIC, Flipkart has become the largest online retailer in the country.

“The potential for E-commerce in a country with a humongous young and tech savvy population and one that suffers from perpetual traffic issues is becoming clear as its online-retail poster child goes even bigger. Having hit more than USD 1 billion in revenues recently, India’s Flipkart has now raised 1 billion in funding, indicative of investor confidence in the rise of this new channel of commerce,” says FSG’s Senior Analyst for Asia Pacific, Shishir Sinha

FSG clients can keep up to date with analyst commentary on the headlines that affect their business on the client portal.

Emerging Market View: What Our Analysts Are Reading

EM View

On Thursday, EU diplomats will consider increased Russian sanctions. The sanctions include a proposal to ban all Europeans from purchasing any new debt or stock issued by Russia’s largest banks, according to the Financial Times, and FSG’s Head of Research for EMEA says it’s time for multinationals to make contingency plans.

“If some or all of the proposed measures are approved by the EU, MNCs operating in Russia will be significantly affected. Executives should build a targeted contingency plan for their Russia operations to prepare. Read FSG’s report Protecting Your Russia Business for analysis and suggested actions for building a contingency plan in the case of further sanctions against Russia.” – Martina Bozadzhieva

In Southeast Asia, a rising middle class and strong demand for more expensive foods has led to increased investment by Japanese food companies, mirroring FSG predictions on the rising competition from multi-ASEAN corporations.

“The increasing sophistication of regional firms and growing demand is attracting several global players to partner/acquire ASEAN firms. MNCs should explore all types of partnerships with such regional firms; they understand the market better, tend to have deeper distribution networks, and lower-cost operations.” – Shishir Sinha, FSG’s Senior Analyst for Asia Pacific after reading this WSJ article.

Good news for Argentina this week. Last Friday, the Latin American country struck a deal to borrow $7.5 billion from China for power and rail projects, according to Reuters.

“Argentina has reached a deal with China to borrow US$ 7.5 billion to finance energy and railway projects, and the two countries have also signed a three year, US$ 11 billion currency swap, in which Argentina will receive Chinese yuan that it can then use to finance Chinese imports or exchange to USD to bolster reserves. This news is welcome given Argentina’s balance of payment concerns.” – Christine Herlihy, FSG’s Senior Analyst for Latin America.

FSG clients can keep up to date with the latest emerging markets headlines and exclusive analyst commentary on the client portal.

Protecting Profits and Managing Prices in Latin America

Companies are increasingly looking to adapt their pricing strategies and tactics to deal with macroeconomic volatility and shifting corporate mandates in Latin America.

As Latin America’s operating environment has become more volatile and bottom lines begin to receive more scrutiny from the corporate center, regional executives are focusing on how they can shift their pricing strategies to maximize profitability mandates while protecting volumes. FSG’s recent study Protecting Profits and Managing Costs: Pricing Strategies and Tactics for Latin America (clients only) focuses on the best approaches to manage pricing and maximize earnings in Latin America’s evolving operating environment.

LATAM Pricing ManagementIn this study, FSG concludes that multinationals’ approaches to pricing strategy are often dictated by organizational constraints, in particular  the degree to which regional teams have the capabilities to adjust prices in response to macroeconomic shocks. This depends in large part on how centralized both risk management and pricing strategies are within a given company.

Companies seeking to maximize the focus of local teams on executing a pre-determined market strategy often find that a centralized approach to pricing and risk management is optimal. By leaving the management of transaction and operational exposure to the corporate treasury, companies can help to ensure that local teams are not distracted by short-term fluctuations in the market environment.

However, a centralized approach to pricing and risk management often means that companies lose the ability to adapt pricing to local market conditions. This makes it more likely that an organization will leave money on the table or lose market share when adjusting prices.

To succeed, companies should ultimately seek to deploy a mix of hedging and operational strategies, coordinated across centralized and decentralized functions within the company. FSG’s study provides a set of best practices and case studies for companies to learn from and consider as they determine the optimal approach to pricing for their business in the region.

For FSG clients interested in learning more about these best practices, the full report is available here. Not a client? Contact us.

Emerging Market View: What Our Analysts Are Reading

EM View

India’s newly elected Bharatiya Janata Party (BJP) government announced its first budget last week, and according to the Wall Street Journal, it proved a letdown for those expecting big-bang reform, MNCs included.

“While it is a well-balanced fiscal plan with focus on reviving consumption and investments, markets have not been overly pleased and experts find certain growth targets to be quite unrealistic. The absence of specifics on several big-ticket items and lack of an overarching vision should rightfully disappoint companies,” says Shishir Sinha, FSG’s Senior Analyst for Asia Pacific.

(Readers can view FSG’s original expectations for India’s BJP government here.)

Last week, Portugal’s Banco Espirito Santo SA bonds hit record lows after parent company Espirito Santo International reportedly missed a debt payment, rekindling market fears and reminding investors that the eurozone’s woes are far from over.

“Executives should be wary of headlines for recovery in WEUR, and prepared for the heavy downside that could accompany bank failure. Banco Espirito Santo, a Portuguese bank, delayed payments on some securities, reminding us that just because banks have not been in the news does not imply that they are healthy. FSG’s WEUR Regional Outlook outlines how banks could impact MNCs throughout the region,” says Lauren Goodwin, Senior analyst for Western Europe.

In Latin America, Argentine presidential hopefuls are dealing with the issue of debt negotiations and exploring opportunities for business-friendly reform, according to Reuters.

“As Argentina strives to negotiate with holdouts to avoid default, executives should consider the potential for improvement as elections approach in 2015. The current frontrunners favor negotiating with holdouts and would likely be more pragmatic and business-friendly than President Fernandez,” says Christine Herlihy, FSG’s Senior Analyst for Latin America.

In global news, Forbes recently released an article on local companies competing with foreign investors in emerging markets, citing a new study by Boston Consulting Group and echoing past FSG reports.

“Echoing the same message in FSG’s report Winning the Race For The Market Diamond, local competition gaining market share in emerging markets is an increasing concern for multinationals, particularly for MNCs that focus on the burgeoning emerging market middle class. Read the report to understand the strategies other companies have used to battle the evolution of growing domestic companies,” says Sam Osborn, Associate Practice Leader for FSG’s global analytics.

Adverse US Supreme Court Ruling Undermines Argentina’s Ability to Return to Capital Markets

What happened, in brief?

Argentina has recently taken strides toward making amends with international lenders, including the IMF and the Paris Club. Such efforts were motivated in large part by the government’s desire to regain access to international capital markets; however, hopes of such a return were dashed by the US Supreme Court decision compelling Argentina to pay its holdout creditors in full if and when it issues coupon payments to restructured bondholders. Argentina has long held, and is in fact bound by domestic legislation to insist, that it will not pay holdout creditors, but has maintained that it is willing and able to pay restructured bondholders.

Argentina’s obligations to holdout creditors participating in this round of litigation amount to a relatively manageable US$ 1.33 billion, but this ruling opens the door for other holdouts to come forward, leaving Argentina potentially liable for close to US$ 15 billion dollars, which is more than half of Argentina’s current stock of foreign exchange reserves. This would leave Argentina in a dire situation, and thus, the government is likely to maintain its hardline stance against paying holdouts in full. This leaves policymakers with a handful of unappealing options and a ticking clock, as the next coupon payment to restructured bondholders is due on June 30th, and a technical default could occur as soon as 30 days after this date, when the grace period will expire.

What are Argentina’s options?
  • It could pay holdout creditors in full—that is, the US$ 1.33 billion that is the subject of current litigation—and continue to pay restructured bondholders. This option is feasible but politically unpalatable, and opens up the risk of additional claims that will prove overwhelming given scarce reserves and existing external financing requirements
  • It could attempt to negotiate with holdout creditors and offer to let them participate in the restructuring process. Domestic legislation prohibits this option, but this legislation is set to expire in December; some holdout creditors have indicated that they would be open to such a swap
  • It could attempt to avoid paying holdout creditors while simultaneously swapping restructured bonds currently governed by US law for bonds governed by local law. Given the extraterritoriality concerns and lack of transparency regarding ownership of bonds, this option would be difficult to execute, but it is one of the only concrete proposals made by the government thus far.
    • It is also worth noting that any failure to pay holdouts would amount to technical default and bar Argentina from the US financial system
  • It could enter into technical default, refusing to pay both holdout and restructured bondholders
Among these options, what is the government’s most likely course of action?

The government thus far has opted for a hybrid solution—on the one hand, there is talk of swapping restructured bonds for local bonds, so that restructured bondholders can still be paid, albeit outside of the US financial system. The government reportedly also plans to negotiate with holdout creditors outside of court, in the hopes of reaching an agreement that will allow it to avoid default. There is sure to be little good will and considerable animosity on both sides of the negotiating table, but ultimately, nearly all parties involved—holdouts, restructured bondholders, and the Argentine government included - will prefer a settlement to default.

What does the increased possibility of technical default mean for the business environment? 

Regardless of which course of action is chosen, the ruling has negative implications for the Argentine economy and business environment. Even if we assume that technical default is avoided—which is by no means a safe assumption at this point—Argentina’s borrowing costs and risk premiums have already increased, and its reserves—not to mention potential future dollar inflows—will decrease, putting downward pressure on the overvalued peso.

Had the court ruling proven more favorable and the government been able to resolve its legal dispute with holdouts and return to capital markets this year, dollar inflows could have helped to boost reserves and stabilize the exchange rate. As it stands, such a return is highly unlikely and the chance of additional currency depreciation, perhaps on par with that seen in January, has increased markedly.

FSG will be closely monitoring the government’s response this evening, and will ensure that you are kept informed of developments and their implications for the business environment.

What can you do today to help protect your business?
  • FSG has a host of resources on contingency planning and management challenges in risky markets, including Argentina and Venezuela. We encourage FSG clients to take a look at these resources on our portal, and reach out to your account manager to set up an analyst conversation for an in-depth walk through.
  • We will soon be releasing research on scenario planning for Argentina, which will help you set expectations regarding the implications of Argentina’s near- to medium-term outlook for your business.

Argentina’s piecemeal shift toward pragmatism bodes poorly for growth in 2014

While it is too early to say if Argentina’s recent efforts to correct imbalances represent a genuine shift toward pragmatism or are merely calculated forms of damage control aimed at limiting the magnitude of future devaluations and helping Argentina regain access to international capital markets, it is clear that recent adjustments will raise borrowing costs and erode consumer purchasing power and business confidence in the months ahead.

Recent adjustments and their implications for the business environment include:

  • Argentina allowed the peso to fall in January and has also begun to raise interest rates, cut transportation and energy subsidies, and improve relations with external lenders in an effort to stabilize the exchange rate and regain access to capital markets
    • While these efforts are beginning to bear fruit, macroeconomic imbalances, including a dwindling supply of foreign exchange reserves and perniciously high inflation, remain, and the government has resisted a complete shift toward orthodoxy, preferring instead to expand price controls and leave import controls in place.
    • Argentina’s ability to successfully course-correct remains vulnerable and could be undermined by several key events, including wage negotiations, the soy harvest, and a forthcoming US Supreme Court decision regarding Argentina’s obligations to holdout creditors
  • Nearly all key growth drivers, including consumption, investment, and government spending, are expected to contract in the wake of monetary tightening, exchange rate uncertainty, double-digit inflation, falling real wages, and the potential for additional shifts toward fiscal austerity
  • As regional and country heads come under increasing pressure from corporate to make the case for continued presence in Argentina, executives are emphasizing the market’s enduring economic and demographic potential