With an estimated US$23 billion in annual unmet demand for dollars, multinationals report that currency repatriation is one of the greatest challenges they face in Venezuela. Foreign exchange controls are unlikely to improve in the short term, regardless of the outcome in upcoming elections. Political instability after the elections could lead to even further shortages of CADIVI and SITME dollars. Given the insufficient supply of US dollars, multinationals have had to find creative ways to source capital in order to keep their operations moving in Venezuela.
The following three strategies are typically followed:
- Trade-based repatriation
- Dollarization of physical assets
- Panama swap
The case study below outlines how Chemical Company Alpha was able to successfully repatriate funds from Venezuela:
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Clinton Carter, head of Latin America research, said that there is still “an outdated mentality” about Colombia but that it is becoming easier to convince investors of the country’s possibilities.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
Brazil remains a growth engine for multinationals in Latin America:
Despite the economic slowdown, multinationals are counting on Brazil to deliver significant growth in 2012.
But the high cost of doing business, known as Custo Brasil, is eroding the profitability of Latin American business portfolios:
92.3% of executives believe that doing business in Brazil is at least somewhat more costly than the in other Latin American countries.
Multinationals in the consumer space are looking increasingly to the middle class for growth as high-end segments mature.
Local firms are following their traditional customer base as it moves into the middle and upper middle class, putting them on a competitive collision course with multinationals moving down market.
“New middle class consumers are bringing their traditional tastes and preferences with them, helping incumbent local producers tap into the emerging consumer segments.” – FSG Executive FMCG Company
Drivers
The middle class is surpassing the lower class in quantity of households, which changes the traditional shape of the market pyramid and demands a change in strategy.
Leading multinationals are acquiring local producers to enhance their product portfolio and distribution infrastructure in order to meet emerging middle class demand.
Companies that are reluctant to adapt products or stretch their brand equity risk losing middle class customers to more nimble local competitors.
Middle- and higher-end segments are becoming more competitive.
As more multinationals enter Brazil, higher-end segments are becoming increasingly saturated, forcing multinationals to look down-market for new opportunity.
Frontier Strategy Group View
Multinationals that continue to focus primarily on the higher-end segments risk losing emerging middle class consumers to local competitors who are consistently improving and expanding their capabilities in the medium and high-tier segments in order to gain first-mover advantage.
A failure to plan accordingly will result in MNCs being restricted in their maneuverability as local companies grow in strength.
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
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
Original Article in MarketWatch
Matt Lasov, director of global research at Frontier Strategy Group, said the emerging markets’ performance in 2012 depends on their relationship to the euro zone.
“The euro zone is in a recession that is likely to get worse,” Lasov said. “We see a two in three chance that there is a breakup of the euro zone in 2012 — most likely Greece leaving.”
And “success for emerging markets will be determined by linkages to the euro zone,” he said.
“The clear outperformers in the short term are India, Indonesia, and Sub-Saharan Africa,” according to a research note from Frontier Strategy Group, referring to those markets as having “low linkage” to the euro zone. “These markets are characterized by rapidly growing domestic demand and diversifying economies that are creating middle class growth” and they have limited trade relationships with Europe.
The Middle East and Latin America are linked to Europe because of trading in commodities, the note said, referring to these markets as having “medium linkage” to the euro zone. “Reduced European demand for oil will impact state revenues, but most markets have more than enough reserves to weather a crisis.”
Russia, meanwhile, is “positioned to be the biggest underperformer,” the note said. “Oil exports to Europe are driving Russia GDP growth more than ever before,” and as oil prices fall below the $110 per barrel built into the Russian budget, “Russia will enter deficit.”
Multinationals can count on increased consumer spending as the evolution of the Mexican economy toward higher value manufacturing supports a more resilient and prosperous Mexican middle class. Companies servicing the automobile and heavy machinery sectors are set to benefit the most from the continued diversification of the Mexican economy.
