Emerging Markets Insights

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

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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

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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.

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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.

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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.

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Fear over a stalling global economy stalks the region as volatility returns to the local bolsas. Frontier Strategy Group expects the overall impact of a slowdown to be smaller than in 2008 as Latin America has grown less reliant on global trade flows than other regions. Mexico has the most to fear, given its dependence on the US economy, while Brazil and Colombia could actually benefit from a currency depreciating financial flight to quality.

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In a stable year, Q3 is a time MNCs use to adjust strategic plans and finalize budgets for 2012. However, 2011 is not a stable year. Volatility in the global economy has generated significant uncertainty in all planning processes. GDP growth projections for 2012 in Argentina range from 1.2% to 6.5%. For Russia, executives are making decisions based on GDP forecasts that range from -8% to 5.4%. These figures are critical to budget allocation, target setting, and strategic planning for 2012, and will continue to fluctuate in the coming weeks and months.

It will be increasingly difficult for MNCs such as Apple (Nasdaq: APPL) and General Electric (NYSE: GE) that have large exposures to volatile markets to manage through various scenarios. Through working with over 200 of the world’s most progressive multinational firms, Frontier Strategy Group understands what matters most to executives operating in emerging markets. In response to the economic slowdown Frontier Strategy Group launched FSG Monitor, and online resource  for senior executives around the world to track the impact of the economic slowdown on their business performance in real-time.

For a limited time, FSG Monitor is available to the public, for anyone to access and view our proprietary intelligence platform.

Click on this link to view FSG Monitor yourself, or contact us for additional information.

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Latin American executives are reporting lost opportunities and revenue due to increasing trade restrictions on imports into Brazil. Costs and frustrations are mounting for businesses dependent upon a smooth flow of commerce across Brazil’s borders, forcing a reconsideration of previous business models due to critical vulnerabilities to import restriction. In this interview Clinton Carter, Frontier Strategy Group’s Director of Latin America Research,  discusses the impact of Brazil trade restrictions on the Latin American region.

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Frontier Strategy Group’s Latin American clients are reporting lost opportunities and revenue due to increasing trade restrictions on imports into Brazil. Costs and frustrations are mounting for businesses dependent upon a smooth flow of commerce across Brazil’s borders, forcing a reconsideration of previous business models due to critical vulnerabilities to import restriction.

In a recent example, Argentine auto parts piled up at customs on one side of the Argentine-Brazilian border, and on the other side, Brazilian white goods gathered dust in crates awaiting processing. Skyrocketing demand for appliances went unmet in Argentina, and automakers, already straining to meet production targets for the Brazilian market, missed critical opportunities to capitalize on the country’s boom in car ownership.

At their core, such disputes stem from the imbalances brought on by the persistent strength of the Brazilian real. The strong Brazilian currency is making imports cheaper and threatening the competitive position of Brazilian industry. As the Brazilian real has climbed in value over the last several years, import volume and value has followed, creating competitive pressure on the normally insulated Brazilian industry sector. In response, influential Brazilian industry groups are pressuring the new Dilma administration to restrict imports and protect their businesses. These pressure tactics are bearing fruit, and the government has applied a variety of non-tariff trade barriers such as denial of import licenses and postponement of customs processing.

To illustrate the strategic business implications of this situation, consider that in the first quarter of 2011, in response to the real’s appreciation, 28% of Frontier Strategy Group executive poll respondents reported shifting sourcing to cheaper markets for import of goods into Brazil. Argentina was the primary beneficiary of this business. But Argentina has emerged as the most obvious target for Brazilian import restrictions, as Argentina is also using its own import restrictions, in this case to protect currency reserves from a surge in imports brought on by an overheating economy. The result has been a series of tit-for-tat trade restrictions enacted by the neighbors, paralyzing trade in certain goods and damaging the top line for executives expected to meet meteoric targets for growth in Latin America in 2011. Additionally, it is not just imports from Argentina that are targeted for restriction: increasingly, goods from nations such as China and Mexico are subject to anti-dumping investigations and delays at the border.

In terms of practical steps, Brazil and Latin America-focused executives are advised to identify inputs and products that may be vulnerable to trade restrictions and develop backup sourcing strategies; this is particularly important for at-risk industries such as farm equipment, furniture, footwear, textiles, and auto parts and automobiles. In the meantime, companies may be forced to look at sourcing inside Brazil and compensate for the expensive real through further price increases passed on to customers, traditional financial hedging strategies, and additional resources devoted to government relations and import and export regulation compliance.

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