According to Venezuela’s vice president, Nicolas Maduro, Hugo Chavez died at 4:25 PM, local time, on Tuesday from complications related to cancer.
FSG has been predicting for some time that it was unlikely that Hugo Chavez would be able return to lead the country, as his health has been in serious decline since he underwent his fourth cancer-related surgery in December.
While there might be a temptation for multinationals with operations in Venezuela to greet this news with cautious optimism, FSG stresses that executives should focus on managing expectations for any material change in the operating environment over the near-term.
The government is constitutionally mandated to hold presidential elections within 30 days; however, there is a possibility that this requirement could be ignored, with elections falling as far out as June.
Regardless of the timing of the elections, the most likely candidates will be Vice President Nicolas Maduro and Governor Henrique Capriles. FSG expects Maduro to win a clear electoral mandate due to a strong sympathy vote as well as the relative weakness of the opposition, which is still suffering the after effects of two big electoral defeats at the end of 2012. Recent poll results casting Maduro as a legitimate heir to Chavismo bear this prediction out.
Given Maduro’s ideological affinity for the key social tenets of Chavismo, as well as the fact that most legislators will not be up for reelection until 2015, it is highly unlikely that multinationals will see any major policy adjustments over the near-to-medium term. The one exception to this is a probable second devaluation sometime after the elections, along with the establishment of a new parallel exchange rate system to replace SITME.
The long-term picture is somewhat more optimistic as it is unlikely that Chavismo will hold together as a cohesive political force without a strong and charismatic leader at the helm. As such, there is a strong possibility that the opposition will slowly gain strength, leading to a modest opening of the economy to investment over the next few years. While this would be a welcome scenario for multinationals, it is also one fraught with a good deal of risk if the fragmentation of Chavismo leads to social unrest and instability.
If you’ve been focusing on end-of-year business performance this week instead India’s macroeconomy, you’ve missed a lot. This flowchart highlights key events of the past week and the ultimate drivers: Global uncertainty, inflation, and upcoming state elections.
Frontier Strategy Group’s prognosis for India’s economy in 2012 is relatively grim. However, we continue to hear from clients that India is a critical growth market. A “grim” outlook for India still means 7.7% GDP growth in 2012, compared to 3.5% in Brazil and Russia.
- FSG is monitoring ongoing developments in Europe and its impact on key emerging markets like India
- In November inflation slowed to its slowest in a year, but still missed expectations. The expected wholesale price index was 9.02%; the actual was slightly higher at 9.11%.
- Seven states will go to the polls in 2012 to elect their legislative assemblies, among them Uttar Pradesh, Gujarat, and Punjab, some of the most important political states in the country.
- News on December 9 showed export data was overstated by about 5% across 2011, due to misclassification and errors in the Commerce Ministry.
- The rupee closed at an all-time low of 53.7 to the dollar on Wednesday, spurred by European debt concerns, a flight to the dollar, and bad news on industrial production.
- The rupee is likely to fall lower in the next month, as local companies buy up dollars to hedge their exposure from dollar-denominated debt.
- India’s Index of Industrial Production (IIP) contracted 5.1% percent in November, its steepest fall in over two years.
- In response to the IIP contraction, the Prime Minister is asking key ministries like power, coal, and steel to submit a wish list of legislation that is currently stuck in committee, with the intent of hastening implementation.
- Discussions around the Food Security Bill at the beginning of this week were inconclusive, and iIt is likely to be discussed during the next Cabinet meeting on December 18. The Bill gives 64% of the population the legal entitlement to subsidized food grain, and would expand the government’s food grain procurement by 20%.
- The Union Cabinet just cleared 3 bills on judicial accountability, protection of whistleblowers, and a Citizens’ Charter for grievance redressal.
- Anna Hazare is threatening a hunger strike starting December 27 if the Lokpal Bill does not pass.
- The Lokpal Bill is building up to a vote in the next two weeks. The government has an ambitious agenda: December 19, the Cabinet clears the bill; December 20, the bill is introduced in the Lok Sabha; and on December 21, the bill is introduced in Rajya Sabha. December 22 is the end of the winter session.
(Image from Euronews)
The popular protests following the latest Duma elections revealed a fundamental shift in Russian popular opinion which has been forming for over a year now: as Russians realize that the economic prosperity of the pre-crisis 2000s is slowly but surely turning into long-term stagnation, they are no longer ready to pay for it with their political freedom and sense of personal dignity. Russians feel humiliated by a state they see as increasingly captive to interest groups and corrupt officials. This is bad news for Russia’s political elite, but good news for multinationals.
We are not seeing an Arab Spring in Russia, and neither is any opposition group or personality powerful enough to galvanize the disenchanted voters. Barring a major Black Swan event, Putin will return to the presidency in March for a six-year term. However, the legitimacy of his power has been undermined and will continue to be, making him a weaker leader. As Russians increasingly demand change, he may be able to last through his six-year term, but he is unlikely to be elected for another one. Meanwhile, the power groups that stand behind him may decide an unpopular Putin is a liability they don’t want to bother with. A post-Putin Russia is much more likely to be ruled by a political leader unofficially promoted to national prominence by the established elite, than by an opposition leader who will be an outsider to Russia’s power circles.
For multinationals, this means that the overarching political environment in the country will remain unaffected in the short term, but there will likely be some reshuffles and instability within Russia’s elite, including among high-level state officials. To respond to demands for change, Putin will introduce some new faces to the government after the March elections, and MNCs should be positioned to engage with them through a more nuanced government relations strategy.
The perception of increased political risk will continue to drive capital outflows from Russia, putting downward pressure on the ruble and contributing to rising inflation. Capital markets, already highly sensitive to risk in Emerging Europe as a result of the eurozone crisis, will be cautious at best on Russia, making financing more costly to Russian companies. As a result, MNCs should expect high volatility on the Russian market at least until the outcome of and reactions to the presidential elections in March are clear.
And while MNCs will likely see some of their Russian partners struggle with tighter lending and a weaker ruble, this period will create opportunities as well. We expect high government spending through the March elections as Putin seeks to appease the population. The weaker ruble and higher volatility also make this an opportune time for MNCs interested in pursuing M&A. Even major Russian companies are increasingly struggling to raise money on the global capital markets, creating opportunities for strategic acquisitions by MNCs with a long-term vision for the Russian market.
Indonesia is the fourth largest country in the world in terms of population. Fast growing consumption, powered by growing affluence of the middle class, is the main driver of Indonesia’s economic growth
Favorable Demographic Profile
- With a total population of 238 million, Indonesia is the fourth most populous country in the world after China, India, and the US
- Indonesia has a favorable demographic profile with 60% of population aged below 40
Consumption Driven Economy
- Private consumption is the biggest driver of Indonesia’s economic growth, representing 56% of total GDP output
- Private consumption per capita is expected to double from its current level of US$1,500 to US$3,000 in 2015
Indonesia’s Growing Middle Class
50 million households in Indonesia have a disposable income of US$3,000 or more, and this number is expected to reach 150 million by 2015
- 8 million scooters, a favored form of transportation among urban residents, were sold in 2010, compared to 1.7 million in Thailand
For MNCs, this could mean:
- Consumer goods companies should look at Indonesia seriously as the consumer spending boom is just getting started
- Despite various operating difficulties in doing business in Indonesia, MNCs should establish on-the-ground presence, either through wholly owned subsidiaries or partnerships, to catch this growth opportunity at its onset
Growth Beyond Oil
- Real GDP growth is projected at 7.4% in 2011. At this rate, Nigeria’s economy will double in the next 10 years
- Nigeria depends on oil exports for more than 80% of government revenue and 95% of foreign-exchange income. The government has recently announced a 10-year plan to cut oil dependence
- Nigeria’s non-oil sector continues to be a major driver of the economy, largely driven by improved activities in wholesale and retail trade, finance and insurance, telecommunications, and building and construction. The non-oil sector is projected to grow at 8.8% in 2011 compared to 8.5% in 2010
Nigeria’s Bullish Consumer
- Plentiful: Nigeria is the world’s 8th largest country by population. In the next 5 years, Nigeria will increase its population by the size of Romania
- Urban: Lagos (GDP $37bn), Kano (GDP $5.5bn), and Ibadan (GDP $9.5bn) are three of Africa’s largest cities
- Optimistic: Nigeria is ranked as the most optimistic consumer market in Africa
FDI in Nigeria
- Recent FDI in Nigeria includes investments by NSN, Google, Diageo, and Nestle (US$94.4m plant) as well as the construction of the Lekki Free Trade Zone (LFTZ)
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.
Frontier Strategy Group appeared in yesterday’s Financial Times in an article titled, Gems: Making the case for Gems
According to the Frontier Strategy Group, while China’s growth may be slowing down, India’s is increasing, and by 2014, India’s growth rate will outstrip China’s, at 8.6 per cent compared with 8.2 per cent. This has prompted fears of a hard landing for China.
For much of the past year, China’s policymakers have been grappling with how to temper sharply rising asset and consumer prices and dampen the ill-effects of an unprecedented economic stimulus following the global financial crisis – without torpedoing strong economic growth.
China first set about reining in credit in April 2010, following a record RMB12.2trn (£1.1trn) surge in bank lending since the start of 2009, according to China Economic Research.
The Frontier Strategy Group predicts that China will have trouble in tackling its public debt and its debt to GDP ration will rise from 16.2 per cent in 2011, to 16.3 per cent in 2012, 2013 and 2014, before going back down to 16.2 per cent in 2015.
The economic environment is full of uncertainties for companies operating in both developed and emerging markets. However, uncertainty can be the best environment for stimulation of long-term growth. To make the best investment decisions in this climate, managers will require reliable, up-to-date data and best practices and must learn from those who have succeeded and failed ahead of them. Companies that move first to pursue growth during this downturn will become the market leaders when the global economy inevitably recovers.
Prioritizing markets and thoroughly performing due diligence are essential pre-integration procedures that need to be carefully considered. An estimated 50-70% of acquisitions fail to deliver on their expected value. The information presented in this paper aims at significantly reducing the likelihood that your acquisition will fail to deliver on its expected value.
Frontier Strategy Group recently released an exclusive white paper titled, Opportunistic M&A – Upside Potential in a Downturn Environment.
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Recent policy choices indicate that political considerations are being placed ahead of sound economic management
The central bank’s decision to cut interest rates, despite high inflation and employment, and subsequent intervention to arrest the depreciation of the real has created a tremendous amount of volatility
Industrial policy has become paramount as protectionism leaps into the fore, jeopardizing long-term competitiveness
Import taxes and foreign ownership laws are worsening regulatory uncertainty, leading some companies to rethink investment decisions
By choosing to shelter local producers rather than cut red tape and invest in infrastructure and human capital, the government is further distorting market incentives
The government is betting that inflation will decrease as the global economy cools, making growth a higher priority
Financial markets are pricing in an additional 100 basis points worth of cuts to the SELIC rate by the end of the year
Political pressure to address the currency has been building ever since the Dilma administration took office
Dilma is hemmed in by a governing coalition and constitution that makes it difficult to enact long-term reforms to boost competitiveness
Frontier Strategy Group View
The recent spate of pro-inflationary policies poses serious risks to the Brazilian economy, especially given recent demands by workers to raise wages in 2012. If the global economy fails to deteriorate as much as Brazilian officials are expecting, a scenario that is not currently FSG’s base case, inflation could become a major problem
B2C companies selling to low and lower-middle income consumer segments should be wary as inflation reduces the purchasing power of these demographics the most