Emerging Markets Insights

Despite general optimism at the opportunities provided by the new US-Colombia Free Trade Agreement, FSG clients have reported unwelcome delays and roadblocks in efforts to take advantage of the agreement, as noted in our recent Quarterly Market Review of Colombia.

On a recent visit to Colombia, I sat down with FSG Expert Advisor Juan David Barbosa to discuss the first 9 months of implementation of the accord. Juan David specializes in trade law at the Bogota law firm of Posse, Herrera, and Ruiz, and previously served as the Deputy Director of Trade Remedies at the Ministry of Commerce of Colombia. Juan David has advised numerous multinationals on trade and market entry in Colombia, and was the featured expert in last year’s FSG teleconference on the new agreement.

The Promise

According to Juan David, the FTA’s would change the landscape for FSG clients, particularly those based in the United States or importing products to Colombia from the United States in the following ways:

• Import tariffs on 80% of U.S. exports to Colombia would drop to zero, including strategic industries such as agriculture, construction, auto and aviation parts, medical products, and IT.
• Legal and regulatory hurdles would fall as companies no longer needed local branches, suppliers were afforded more protection, and new rules made it easier to exit agreements with local companies.
• Many of the key provisions of the agreement would enter into force between September of 2012 and March of 2013.

Because of these sweeping changes, 90% of FSG clients expected the FTA to be a factor in increased investment for their companies in Colombia, and 54% of FSG’s expert advisors said the FTA would provide significant advantage for US companies over competitors from other countries without such an agreement.

The Problem

According to Juan David, and in line with recent experiences of FSG clients, Colombia is lagging in implementation of a number of key provisions:

• Intellectual property rights protections
• Increased safeguards in agency agreements for multinationals
• New rules on taxes of alcoholic drinks
• Electronic certification of origin
• Rules on urgent shipping requests
• Implementation of sanitation codes equivalent to the United States

Accordingly, multinationals expecting the FTA to be a panacea for bureaucratic and logistical headaches are growing frustrated with delays of their products at customs and an unclear regulatory and compliance environment.

The Causes:

• Bureaucratic Entropy:
  • The root of the problem, says Barbosa, is not with laws and regulations now on the books, but rather with the capacity and will of the institutions charged with enforcing and acting under them. Comprehension and processes to enact the new rules is lagging the actual implementation timelines. In short, Colombia’s bureaucracy has not kept pace with the rapid evolution in the rules of the game.
  • Infrastructure Constraints:
    • Likewise, the boom in trade with Colombia has created a parallel capacity constraint in logistics infrastructure. Ports and roads are clogged with an influx of goods. Construction and investment, while significant, has yet to catch up with the expansion in trade (see map below).
    • Protectionist Backlash:
      • Also concerning are recent import tariff hikes slapped on certain sectors of imported goods such as garments, textiles, footwear, agricultural goods, paper products, and some used machinery. While these don’t necessarily violate existing FTAs, they are indicative of political pushback from domestic manufactures threatened by the growth in imports. New free trade agreements, which have come into effect at the same time as a strong appreciation of the Colombia peso, have led to politically powerful domestic producers seeking relief in the form of protection and safeguards from the government.

The Outlook

The good news is that the Colombian government has recognized that it may have bitten off more than it can currently chew in regards to implementing multiple trade agreements over a short amount of time with limited bureaucratic resources. In response, the government has spaced out the implementation processes of current and upcoming agreements and will promulgate new guidelines by mid-May, 2013. This may buy U.S. based companies more time with a head start in Colombia as upcoming FTAs between Colombia and the EU and South Korean could take longer than anticipated to come into full effect.

Less promising is the outlook for short term improvements in infrastructure bottlenecks. Though the government is currently investing heavily in construction of fixed infrastructure assets, project cycles are long and payoff takes years. Even here, the pace of investment has been hampered by bureaucratic constraints, as the second half of 2012 saw construction spending stumble because of poor project planning and lack of capacity to execute on the ambitious agenda.

Fears of a broader protectionist backlash are probably overblown. Colombia has a strong political orientation towards free trade, and is eager to establish itself as one of Latin America’s most open economies. All politics are local, however, and local producers have shown they have the power to win temporary measures to shield themselves from competition in certain cases. Multinationals, no matter the industry or the country of origin, would be wise to monitor the local political winds to anticipate if their products could be on the wrong side of a tariff.

The Big Picture

Despite these early difficulties, Juan David remains optimistic; “The FTA will mature and offer excellent opportunities for U.S. corporations. Both for more established multinationals and newer entrants, Colombia remains an excellent investment destination. In fact, Colombia is an increasingly attractive place for U.S. companies to open their first emerging markets operation. For now, however, the FTA is less than a year old. It is still a newborn baby and has a lot of growing up to do”, stresses Juan David.

___________________________________________________________________________________________________

Juan David has more than 10 years of experience in customs and international trade proceedings and litigation, as well as in the development of import-export tax efficient strategies. Juan David has also worked in several international unfair trade practices (dumping) and safeguard investigations, as well as in the negotiation and implementation of free trade agreements. Before joining Posse Herrera & Ruiz, he worked in the Colombian Government as Deputy Director of Trade Remedies at the Ministry of Commerce, Industry and Tourism where he was responsible for all anti-dumping and safeguard investigations. He has a JD and a graduate degree in Taxation from Pontificia Universidad Javeriana and an LL.M. in International Business and Economic Law from Georgetown University.

Share/Bookmark

Making the Case for Latin America Has Historically Revolved around the Region’s Untapped Growth Potential

Making the case for resources has long been a challenge for emerging markets executives—while emerging markets represent tremendous growth opportunities, they have historically been viewed as risky, volatile, and fragmented, undermining corporate willingness to commit large amounts of resources. On a regional level, many of the Latin America executives we work with have expressed frustration at having to defend the region’s potential when top-line growth has been higher elsewhere in the world, particularly in Asia.

At Frontier Strategy Group, we have long strived to help our clients overcome such skepticism and communicate upwards effectively by emphasizing the region’s hard-won macroeconomic stability, relatively under-penetrated markets, and growing middle class. While these drivers remain in place and multinationals’ growth targets for Latin America are now on par with those seen in Asia, sluggish global growth has raised the stakes, and emerging markets are increasingly expected to deliver both top- and bottom-line growth.

However, Sluggish Global Growth & Underperformance in 2012 Have Undermined Confidence in Latin America

In the wake of Venezuela’s recent devaluation and the death of President Hugo Chávez, as Argentina continues to impose heterodox capital and import controls and Brazil edges towards stagflation, it is easy to understand why multinational executives face growing skepticism from risk-averse corporate centers as they strive to make the case for resources in Latin America.

Fortunately, Executives Compelled to Reassess the Region’s Potential Can Walk Away Reassured

While we certainly acknowledge the endogenous and exogenous factors undermining Latin America’s near-term outlook, we remain bullish about the region’s potential over the medium-to-long term, and our optimism is grounded in a demonstrable belief that the region’s core advantages have in fact remained intact, and will be reinforced by positive secular trends.

Not Only Do Latin America’s Core Advantages Remain Intact…

Latin America’s core advantages can be divided into four buckets, including profitability, relative growth, stability, and concentrated financial resources. Of these four advantages, profitability stands out as the most salient given the pivot to profitability that emerging markets executives are experiencing. As growth remains stalled in developed economies and corporate places increasing pressure on emerging markets, 73% of FSG clients in Latin America have experienced or expect to experience a shift in corporate emphasis towards bottom-line growth over the near-term. With this in mind, it is certainly reassuring to consider that available data on publicly traded companies indicate that average operating margins in Latin America are 55% higher than in the BRICs excluding Brazil.

At present, Latin America derives its profitability advantage vis-à-vis other emerging market regions primarily from a host of demand-side factors which allow multinationals to sell at higher margins and maximize the gains associated with realizing economies of scale. However, these advantages have the potential to diminish over time as competition within the region increases, meaning the time to build market share and brand loyalty is now.

When it comes to GDP growth, while the pace of growth in other emerging markets is expected to decelerate in comparison with pre-crisis rates, LATAM has remained relatively resilient and will accelerate in the coming years.

If you’re tempted to dismiss growth and profitability out of fear of resurgent instability, think again. More conservative corporate centers have historically associated Latin America with hyperinflation, uneven growth, and overexposure to commodity boom-and-bust cycles. Part of the story we’re striving to help our clients communicate is that while these sorts of risks persist in specific markets, the region as a whole has progressed tremendously thanks to orthodox macroeconomic reforms.

Inflation targeting regimes, reduced deficit spending, and the liberalization of trade and capital flows have brought down inflation, empowered consumers and provided the stability necessary for sustained growth. Latin America also remains well-positioned to ride out any future global downturn, as its economy is less dependent on trade than APAC, and less integrated into the global financial system, reducing the risk of Eurozone contagion. Concentrated financial resources also bode well for B2C and B2B multinationals—per capita private consumption spending and government expenditure in LATAM outpace other EM markets including India and EMEA, and are on par with China.

But investment and reform are positioning the region to build on these strengths moving forwards, unlocking new opportunities for multinationals:

Most importantly, Latin America is well-positioned to build on these core advantages, and secular trends are already yielding proof points. Trends we’re tracking range from Peña Nieto’s ambitious reform agenda and the resurgence of manufacturing in Mexico to Colombia’s peace dividend and Peru’s rapid rise. On a pan-regional level, energy resources will bolster government coffers and empower investment in infrastructure and human capital, while the rise of the Pacific Alliance will provide a decidedly pro-business counterweight to the increasingly anachronistic Mercosur. The region is on the rise, and there has never been a better moment to make—and win—the case.

Share/Bookmark

Listen as Frontier Strategy Group’s CEO, Richard Leggett, interviews Senior Analyst for Latin America, Antonio Martinez, regarding trends likely to impact multinationals’ performance in Colombia during Q1 2013.

Key points discussed include:

1. Multinationals have seen the benefits from recent free trade agreements somewhat delayed due to difficulties in modernizing customs processes and delayed government implementation of some of its commitments

2. The Colombian government is expected to propose more pro-investment reforms in the mining and hydrocarbon industries in 2013, which will lead to greater inflows of foreign direct investment into these industries. This could exacerbate the imbalances in the economy that are hurting the manufacturing sector

3. The financial duress facing Colombia’s healthcare system will lead the government to increase its role in the country’s private healthcare markets and to be more assertive in its use of reference pricing for patented products

To listen to or download the podcast, click on  this link to access the iTunes store.

Share/Bookmark

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.

Share/Bookmark

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.

Share/Bookmark

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

Share/Bookmark

US President Obama’s visit to Colombia signals a significant shift in how Western multinationals are approaching the Colombian market. Juan Carlos Echeverry, Finance Minister, was quoted in a recent article in the Washington Post alongside Clinton Carter, Frontier Strategy Group’s head of Latin America research, about the Colombian miracle:

Clinton Carter, head of Latin America research, said that there is still “an outdated mentality” about Colombia but that it is becoming easier to convince investors of the country’s possibilities. Frontier Strategy Group works with more than 200 Fortune 500 companies, the majority of which have substantial investments in Latin America.

Carter ticked off the advantages of Colombia: a free-trade agreement with the United States, its location in the center of the hemisphere, institutions that are more stable than in some neighboring countries and a well-trained workforce.

“It’s a sophisticated business community that places a premium on education,” Carter said.

ThyssenKrupp Elevator, a division of the German conglomerate, said Colombia is now its fastest-growing market in Latin America. The company is installing elevators and escalators in the country’s airport projects and newly built malls and is bidding on other projects, said Stuart Prior, the Texas-based chief operating officer of ThyssenKrupp Elevator.

“It’s a place we decided 10 or 12 years ago to invest in, and each year it got better and better,” he said. “We saw this coming five or six years ago.”

The full article can be found here:

http://www.washingtonpost.com/world/the_americas/colombian-miracle-takes-off/2012/04/13/gIQAsnEdET_story_1.html

Share/Bookmark

Latin America continues to look strong as 2012 gets rolling. Brazil’s growth remains subdued, but stimulus efforts are beginning to have an effect, and Mexico continuing to spend heavily in the run-up to the July presidential elections. Meanwhile Peru and Colombia continue to perform well despite a volatile international environment.

• Argentina: Risks to multinationals are growing as Argentina doubles down on trade restrictions in response to deteriorating economic fundamentals
• Brazil: Stimulus efforts are beginning to take effect, but Brazil is not out of the woods yet as industrial output continues to stall
• Chile: Chile is poised to weather global economic volatility with strong macroeconomic fundamentals and a sovereign wealth fund
• Colombia: Retailers and manufacturers remain confident as the economy continues to grow, buoyed by strong investment and stable commodity prices
• 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: Better-than-expected US growth has not stopped government authorities from pursuing stimulative policies to boost consumer spending
• Panama: An increasingly unpopular Martinelli administration will face a cooling but still high-performing economy in 2012
• Paraguay: Paraguay is developing a two-track economy with consumption thriving as exports falter
• Peru: President Humala is doubling down on his centrist, pro-business policies by pushing out leftists from key government posts
• Uruguay: Uruguay is at the mercy of economic developments in Argentina and Brazil, with current trends pointing to a slowdown in 2012
• Venezuela: Chávez’s erratic decision-making indicates an increasingly toxic business environment for MNCs

Share/Bookmark

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

Share/Bookmark

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.

Share/Bookmark