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.
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.
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
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.
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.
N = 213 multinationals
Global multinationals are increasingly interested in Latin America, according to recently released numbers from The F10, Frontier Strategy Group’s monthly survey of the top ten most tracked emerging markets. While China, Brazil, India, Russia and Mexico have remained the top five most monitored since the beginning of the year, new countries, including Colombia and Chile, have broken onto the list. These rising stars are garnering particular interest from consumer-focused multinationals. Although Vietnam and Thailand have dropped out of the top ten, strong interest remains in both from pharmaceutical and medical devices firms.