Marina Silva Is Shaking up Brazil’s Presidential Race

The tragic death of PSB presidential candidate Eduardo Campos in August and the subsequent nomination of Marina Silva as his replacement have dramatically changed the landscape of Brazil’s presidential race. A runoff is now the most likely scenario, and all recent polls predict a victory for Silva over President Dilma Rousseff in the second round.


Why has Silva risen so fast in the polls?

There are several reasons that explain Silva’s meteoric rise:

  1. Silva’s popularity: Marina Silva obtained 20 million votes in the 2010 elections, and despite having a great disadvantage in terms of her TV airtime for political advertisements (see graph below), she has been able to capture most of the votes from undecided voters following her nomination as the PSB’s candidate.


  1. PSB’s “third-way” alternative: Silva has been able to garner support from both sides of the political spectrum thanks to her commitments to deepening social spending and orthodox macroeconomic management, as well as her promise of a more business-friendly administration. As a matter of fact, Silva’s main economic advisor, Eduardo Giannetti da Fonseca, is a recognized champion of Brazil’s macroeconomic tripod, established during the Fernando Henrique Cardoso era, and someone often associated with the PSDB. 
  1. Brazilian society’s willingness for change: Around 79% of Brazilians say they want change, not continuity, which favors Silva’s “third way” political message. Indeed, some voices within the PSDB, the only other party that could pose a threat to Rousseff in the elections, have already confirmed, although not officially, that their party would shift support to Silva in a second round in order to oust Rousseff from power.

What would a victory of Marina Silva mean for multinationals?

Most of Silva’s electoral promises are encouraging from an economic growth and business enabling standpoint. Measures such as restoring Brazil’s fiscal responsibility, inflation targeting and a truly floating exchange rate, would reduce inflation and allow for a gradual depreciation of an overvalued real, helping Brazil’s manufacturing and export sectors, and favoring domestic consumption.

More predictable and consistent policies, especially in the management of administered prices such as gasoline and electricity, and the tax code, would certainly stimulate domestic and foreign direct investment. This would especially be the case were the government to establish a clear roadmap for the passage of key reforms, similar to what Mexico has done under Peña Nieto.

Finally, Silva would maintain PT’s flagship social spending policies while doubling down on education and healthcare spending, which would bode well for the consolidation of the middle class and future productivity gains.

Would Silva be able to execute on her promises?

While Silva’s policy aims are certainly appealing, most of the promises outlined above could very well end up becoming nothing more than a wish list is Silva is not able to form a coalition big enough to pass reforms in congress. As her coalition currently stands, Silva would only control around 80-120 votes in the 513-seat lower house. Silva has declared that she is prepared to partner with the “brightest” from all political parties and pass individual reforms through one-off agreements. However, given the tremendous number of political parties in Brazil, and its system of ingrained habits of patronage, her good intentions could become futile.

Additionally, some commentators see contradictions in her electoral promises, especially when it comes to doubling down on education and healthcare spending while at the same time reducing overall government spending. Silva maintains that she will be able to achieve these competing ends by making the government more efficient, but again, such efforts could also hit the given that around 49% of overall public spending is in hands of states and municipalities that she would not necessarily control.

Therefore, should Marina Silva win in October, she would have to lay out a very clear plan that explains how exactly she aims to fulfill all of her electoral promises. Otherwise, her government’s popularity could be short-lived.

If you wish to learn more about how this trend could affect businesses in Brazil, consider reading our full Q3 quarterly report, coming soon to the client portal. Not a client? Contact us for more information

Commercial Strategy Remains Top Priority for Brazil Execs

Frontier Strategy Group recently held an executive breakfast event in São Paulo, Brazil which gathered over twenty senior-level leaders of Latin America businesses, representing many US and European-based multinationals.  The event provided an opportunity for our executive clients to gain a deeper understanding of how Brazil is likely to perform over the coming quarters, along with key scenarios for Brazil’s upcoming elections.  Ryan Brier, FSG’s Head of Latin America research and moderator of the event, provided practical advice on how to position Brazil and make the case for investment relative to other emerging markets in LATAM and on a global scale.  Below are several of the key takeaways from the event:

Key Takeaway #1: Realigning Expectations around Targets for Brazil Will be Crucial Moving Forward
  • Confidence around the ability of multinationals to hit their 2014 targets is at a new low. 66% of executives in attendance have low or no confidence in their ability to hit their 2014 top-line targets for Brazil, while 72% of executives in attendance had low or no confidence in their ability to hit bottom-line targets. This is the lowest level of confidence that FSG has seen since it began polling clients around targets in 2011
  • Many executives voiced concern around rising costs in an environment of mediocre top-line growth, with several stating that they were forecasting flat or declining bottom-line growth this year despite an increase in top-line revenues. Rising energy and logistics cots were among the top reasons cited for this trend
  • Despite this poor performance, only 31% of the executives in attendance expected their 2015 targets to be lower than their 2014 targets, underscoring the need to realign corporate expectations around the potential for Brazil over the coming years
Key Takeaway #2: Executives Are Hopeful for Political Change, but Skeptical over Its Potential Impact
  • Executives are increasingly optimistic that Dima faces a serious challenger in Marina Silva, with many citing strong desire for change among the pragmatic voto útil as possibly providing a boost to Silva over Aécio Neves
  • The consensus was that a Silva victory would likely lead to a near-term boost in investment, which could serve to blunt the impact of declining government spending in 2015. However there was also a fair amount of skepticism that Silva would be able to tackle many of the structural reforms that multinationals feel Brazil requires
Key Takeaway #3: Setting the Right Commercial Strategy Remains the Top Priority for Executives
  • 42% of the executives in attendance reported that their top internal challenge over the next 18 months would be to set the right commercial strategy. This was in large part due to the fact that the top external challenge cited by executives was expected weak customer demand
  • For most executives, setting the right customer strategy went beyond rethinking customer segmentation and commercial resource allocation to also include ensuring that the targets they set for their teams were realistic in order to avoid a deterioration of morale among commercial staff

If you are an FSG client and would like more information about future events, please contact your client services director.  Not a client? Click here for more information about our services. 

Colombia’s Declining Oil Output Threatens Sustainability of Long-term Economic Growth

Declining oil production is a dark cloud that looms over the long-term sustainability of Colombia’s economic growth. The Latin American country’s oil output has experienced a significant downturn in 2014. In the first seven months of the year, production averaged 979 thousand barrels per day (bpd), somewhat below the government’s target of 1.095 million bpd and down from last year’s peak of 1.030 million bpd. Foreign investment in the hydrocarbons industry has also leveled off. FDI directed towards the oil sector fell 10% in 2013 YOY, and reached a mere US$655 million in Q1 2014, the lowest in any quarter since 2010, continuing the downward trend.

Why is Colombia’s declining oil output concerning?

The oil industry has been a key driver of Colombia’s impressive economic performance over the past few years with oil output nearly doubling between 2003-2007. Oil exports now make up over half of all export earnings and represent around 12% of GDP. Given the importance of oil production to the Colombian economy, declining output has two principal implications for multinationals to consider:

1. The Colombian government relies on oil rents to fund its expansionary fiscal agenda.  Reduced oil output will strain the government’s coffers at a time when it has pledged an increase in social projects and infrastructure development, but is simultaneously constrained by low tax revenues and legal limits on its ability to finance expenditures through debt issuance.

2. A decline in output increases the possibility of decelerated economic growth over the long-term.  According to the Colombian Petroleum Association, if output levels drop even slightly below current production levels, by 2016 Colombia could start to see an expansion of its trade deficit, which could widen from -2% of GDP in 2013, up to 4.2% within the next five years.  Similarly, overall FDI levels could fall from 4.4% of GDP in 2013 to 2.2% in 2016.


Why is oil output falling?

 There are three principal factors driving the decrease in oil production:

1. Regulatory hurdles: Significant delays in awarding environmental permits and stressed relations with communities have slowed production and have discouraged investors who see Colombia’s strict environmental regulations and structural bottlenecks as increasingly risky.

2. Sabotage against oil infrastructure: 2013 and 2014 have seen a substantial increase in acts of sabotage against oil infrastructure from Colombia’s guerilla groups. If peace negotiations were to fall through, Colombia is likely to experience a deterioration of its security environment, which would further depress oil output.

3. Low reserve replacement rates: Oil companies have been unsuccessful in finding significant new reserves. Officials estimate that current oil reserves will only last 6.5 years, and reserve replacement rates declined 67% between 2009–2013.Decelerating FDI suggests that the rate of reserve replacement will continue on a downward trend.

How could this trend affect FSG’s clients?

  • Given the dependency of the Colombian government’s fiscal agenda on oil rents, a decline in oil production will force the government to either cut fiscal spending or to look elsewhere for means to finance its initiatives, thus raising the probability of an increased tax burden on consumers and/or corporations.
  • A future deterioration of Colombia’s balance of payments due to a decline in oil exports could cause the government to considerably increase its external debt.  An increase in public debt, particularly if combined with a deteriorating economy, would raise Colombia’s risk premium, thereby increasing interest rates and borrowing costs for businesses seeking to invest in Colombia.
  • The overall pace of economic growth would slow, as oil rents are infused into the internal sector.  This would imply that companies planning to expand their presence in Colombia might have to reconsider their assumptions of Colombia’s long term growth trajectory.

If you wish to learn more about how this trend could affect businesses in Colombia, consider reading our full Q3 quarterly report, which you may access here. Not a client? Contact us for more information.


Brazil’s Second M&A Wave: Best Practices for Approaching Acquisitions in Brazil

Multinationals’ interest in mergers and acquisitions (M&A) in Brazil is increasing as valuations fall and the real depreciates. Additionally, the divestment of non-core assets by other companies and the need for growth capital in the SME space is generating new strategic acquisition targets for multinationals in Brazil.

However, M&A is a very time-consuming and resource-intensive activity, and many acquisitions fail to deliver expected returns to shareholders (see chart). In Brazil, M&A failure can stem from a multitude of factors, including not having a structured process for mapping and screening potential targets; failure to assess tax, labor and environmental contingencies correctly; not including price adjustment mechanisms; failure to retain key employees; and conducting a poorly-structured post-acquisition integration process.

Chart: Brazil M&AFSG recently published a report specifically addressing ways to overcome common pitfalls in the execution of an M&A deal in Brazil. In our research we focused on best practices in the following areas:

1. How to determine whether an acquisition is the right strategy for growth in Brazil

Not all companies are suited for a strategic acquisition in Brazil, and even if they feel they are, it might not be the right moment to embark on such a time- and resource-consuming endeavor. Before you decide on an acquisition in Brazil ask yourself whether growing inorganically fits your company’s culture and strategy, and whether your company is ready for an acquisition in Brazil.

Finally, even if the answers to the questions above in “Yes”, there is a final question you should be asking yourself, which is whether an acquisition is a better alternative than growing organically. The decision between organic and inorganic growth will depend on the capabilities you need to grow in Brazil, on whether or not you will be able to find an appropriate target that has those capabilities, and ultimately on the time and cost of building up those capabilities organically versus the time and cost of acquiring them through an acquisition.

2. Tactics for tackling key challenges that arise during the execution of a strategic acquisition in Brazil: 

Conducting a strategic acquisition in Brazil can prove a long and challenging road. From the first phase of an acquisition – mapping and screening potential targets, to the final step – post-acquisition integration, multinationals should be equipped with the tools and best practices to successfully navigate the acquisition process.Just to give an example, since observing tax, labor and environmental laws is so challenging for most SMEs in Brazil, many of them choose not to be fully compliant with those laws in order to gain cost advantages and stay profitable. As such, most companies in Brazil have learned to coexist with pending litigations, however a multinational is likely to attract more attention from regulators and tax authorities, which could result in significant contingencies were the multinational to acquire a non-compliant SME. Therefore, when conducting due diligence, multinationals should be very diligent in finding all the “skeletons in the closet”, which also implies getting external help from local lawyers and tax advisors.

3. Assessing the pros and cons of partnering with a private equity fund as an overarching risk mitigation strategy: 

The rise of private equity in Brazil and entry of foreign funds present interesting alternatives to standard acquisitions. Acquiring a company from a private equity fund is the most effective way to find a target that is already compliant with multinational corporate standards in areas such as governance, accounting or systems, as well as with local tax, labor and environmental standards.

Some private equity funds have specialized in investment opportunities that they can later exit selling to multinationals via strategic acquisitions. However, buying from a private equity fund comes at a price. Therefore, multinationals will need to assess whether they can generate enough additional value from the PE fund’s asset to still achieve the desired return on investment on that acquisition. This is especially crucial in Brazil, where payback periods tend to be longer than in other emerging markets as a consequence of “custo Brasil”, or the high cost of doing business in the country.

For more on best practices when approaching mergers and acquisitions in Brazil, FSG clients can access reports on the client portal.

Emerging Market View: What Our Analysts Are Reading

EM View

On Thursday, EU diplomats will consider increased Russian sanctions. The sanctions include a proposal to ban all Europeans from purchasing any new debt or stock issued by Russia’s largest banks, according to the Financial Times, and FSG’s Head of Research for EMEA says it’s time for multinationals to make contingency plans.

“If some or all of the proposed measures are approved by the EU, MNCs operating in Russia will be significantly affected. Executives should build a targeted contingency plan for their Russia operations to prepare. Read FSG’s report Protecting Your Russia Business for analysis and suggested actions for building a contingency plan in the case of further sanctions against Russia.” – Martina Bozadzhieva

In Southeast Asia, a rising middle class and strong demand for more expensive foods has led to increased investment by Japanese food companies, mirroring FSG predictions on the rising competition from multi-ASEAN corporations.

“The increasing sophistication of regional firms and growing demand is attracting several global players to partner/acquire ASEAN firms. MNCs should explore all types of partnerships with such regional firms; they understand the market better, tend to have deeper distribution networks, and lower-cost operations.” – Shishir Sinha, FSG’s Senior Analyst for Asia Pacific after reading this WSJ article.

Good news for Argentina this week. Last Friday, the Latin American country struck a deal to borrow $7.5 billion from China for power and rail projects, according to Reuters.

“Argentina has reached a deal with China to borrow US$ 7.5 billion to finance energy and railway projects, and the two countries have also signed a three year, US$ 11 billion currency swap, in which Argentina will receive Chinese yuan that it can then use to finance Chinese imports or exchange to USD to bolster reserves. This news is welcome given Argentina’s balance of payment concerns.” – Christine Herlihy, FSG’s Senior Analyst for Latin America.

FSG clients can keep up to date with the latest emerging markets headlines and exclusive analyst commentary on the client portal.

Protecting Profits and Managing Prices in Latin America

Companies are increasingly looking to adapt their pricing strategies and tactics to deal with macroeconomic volatility and shifting corporate mandates in Latin America.

As Latin America’s operating environment has become more volatile and bottom lines begin to receive more scrutiny from the corporate center, regional executives are focusing on how they can shift their pricing strategies to maximize profitability mandates while protecting volumes. FSG’s recent study Protecting Profits and Managing Costs: Pricing Strategies and Tactics for Latin America (clients only) focuses on the best approaches to manage pricing and maximize earnings in Latin America’s evolving operating environment.

LATAM Pricing ManagementIn this study, FSG concludes that multinationals’ approaches to pricing strategy are often dictated by organizational constraints, in particular  the degree to which regional teams have the capabilities to adjust prices in response to macroeconomic shocks. This depends in large part on how centralized both risk management and pricing strategies are within a given company.

Companies seeking to maximize the focus of local teams on executing a pre-determined market strategy often find that a centralized approach to pricing and risk management is optimal. By leaving the management of transaction and operational exposure to the corporate treasury, companies can help to ensure that local teams are not distracted by short-term fluctuations in the market environment.

However, a centralized approach to pricing and risk management often means that companies lose the ability to adapt pricing to local market conditions. This makes it more likely that an organization will leave money on the table or lose market share when adjusting prices.

To succeed, companies should ultimately seek to deploy a mix of hedging and operational strategies, coordinated across centralized and decentralized functions within the company. FSG’s study provides a set of best practices and case studies for companies to learn from and consider as they determine the optimal approach to pricing for their business in the region.

For FSG clients interested in learning more about these best practices, the full report is available here. Not a client? Contact us.

Central America Offers its Own Set of Challenges and Opportunities for MNCs

As Latin America’s largest markets have struggled in recent years, multinationals are taking a closer look at the opportunities that the smaller markets of Central America can offer, particularly they seek to diversify their regional portfolios. However, the opportunity must be kept in perspective, as Central America only represents around 3.5% of the Latin America’s GDP, making the region the eighth-largest market in Latin America, just behind Peru.

Graph 1 LATAM Blog Post

That said, Central America is expected to experience growth on par with some of the fastest growing markets in Latin America over the next few years. However, individual markets within Central America will experience widely divergent growth prospects, making prioritizing investments within the region absolutely essential.

  • Panama will remain one of the fastest-growing economies in the region, with multinationals increasingly considering the country as a viable hub for operations in Latin America
  • Costa Rica offers a solid business climate, but chronic budget deficits and legislative gridlock cloud its medium-term outlook
  • Guatemala, Honduras, and El Salvador continue to be plagued by weak government finances and drug-related violence, limiting the potential for higher economic growth that might alleviate these countries’ extreme poverty
  • Nicaragua is projected to experience solid growth over the next several years, in part because of its financial position, but the market also remains at risk of severe political and economic instability
  • Belize is suffering from high debt loads and limited opportunities for growth over the medium term

Graph 2 LATAM Blog post

FSG recently published a report that provides multinationals with an extensive overview of the region’s macroeconomic outlook, forward-looking market and industry sentiment, and deep-dives on each of these markets.

Chile’s Moderate Growth Path in 2014

As President-elect Michelle Bachelet prepares to take power in March, she will be tasked with responding to domestic demands for improved access to lower-cost, higher quality public services, including education and healthcare, and helping Chile to weather the impact of exchange rate depreciation and slowing growth, driven in part by weaker global copper prices.

Chile's Growth Trajectory 2014

Multinationals will be impacted by these dynamics in two primary ways:

  • Rising domestic demands and the need to fund ambitious education and healthcare reforms ensure that fiscal reform will be a priority. Corporate taxes are likely to rise from 20% to 25%, but Chile’s pro-market stance and sound economic management are expected to remain in place.
  • Currency depreciation and weaker copper prices will drag down gross fixed investment and pose pricing and profitability challenges for companies importing into the market. Companies selling capital-intensive goods and machinery will be most impacted, but the pass-through effects will be visible across the economy and will drag down expectations at the margins.

Copper Prices 2014

In general, the stage is set for slower, yet steady growth. Given strong labor market dynamics and relatively moderate price pressures, domestic demand will remain resilient, boding well for retailers. FSG clients can access our full Q1 quarterly report on Chile here.

Forging New Links: Overcoming Obstacles to Supply Chain Integration in Latin America

Latin America Supply ChainLatin America’s history of pervasive economic and physical trade barriers has proven a significant impediment to the integration of multinationals’ regional supply chains. Tariff and non-tariff trade barriers, complicated and inconsistent tax rules, and the nearly-impenetrable Amazon Basin and Andes Mountains have forced many companies to take an ad hoc approach to supply chain development in Latin America.

This ad hoc approach has meant that supply chains in Latin America are often a fragmented and inefficient drag on bottom-line performance, rather than the streamlined competitive advantage they can be in developed markets. Indeed, according to a report by JDA Software Group, longer lead times and less flexible supply chains means that days inventory outstanding for manufacturers averages 133% higher in Latin America than in the US, while days inventory outstanding for retailers averages 77% higher.

Despite these impediments to supply chain integration, growing corporate pressure to improve bottom-line performance, coupled with the threat posed by increasingly sophisticated local competitors, is causing some savvy LATAM executives to take a second look at opportunities to improve supply chain performance. Supporting this trend are emerging regional supply chain enablers like the recently-enacted Pacific Alliance agreement, growing government investment in transportation infrastructure, and the deepening presence of world-class third-party logistics providers.

Major companies taking advantage of these enablers include Diageo and Proctor & Gamble, both of which recently announced investments aimed at consolidating their Latin America supply chains. Companies that are able to differentiate themselves by cutting costs and improving customer service through supply chain integration will find themselves better positioned to navigate growing competitive threats as Latin America enters a phase of stronger macroeconomic headwinds.

Tomorrow’s Latin America Won’t be Won with Yesterday’s Playbook

Frontier Strategy Group is witnessing a dizzying array of changes to the business landscape in Latin America. Some are highly visible shifts in the external political and economic conditions in key markets such as Brazil, Mexico, and Venezuela, to name a few, while others involve subtle evolutions in internal corporate mandates for Latin American business units of multinational corporations. For this reason, FSG recently released a new Regional Overview of the factors influencing the results of our clients as well as emerging trends likely to impact performance and shape strategy for the coming years. The research is drawn from extensive interviews with senior executives at leading multinationals, independent experts, and analysis of surveys of FSG’s client base. Below are featured trends from the report, accessible to FSG clients:

Economic Performance is Strong, but Risk – and Skepticism – is Growing
Compared to global averages, and even in comparison to other emerging market regions, Latin American growth remains, in the aggregate, relatively robust. Yet many industries in Latin America in 2012 either just met or underperformed expectations, and now with a persistent slowdown and protests in Brazil and crisis always on the horizon in Venezuela and Argentina, skeptics are growing louder, forcing executives to justify further investments in the region. Furthermore, FSG’s data indicates that slow growth in Argentina, a weak Q1 in Mexico, and the devaluation in Venezuela threaten goal attainment of sales targets in 2013 as well.

2013 Performance Targets in Key LATAM Markets

2012 Sales Performance by Sector in LATAM

Latin America Splitting into Two Distinct Groups: Pacific and Atlantic
The dynamic Pacific economies are integrating rapidly, as evidenced by the creation of the Pacific Alliance trade group, creating new trade dynamics and opportunities for increasing scale and reorienting supply chains. In contrast, the Atlantic economies are increasingly insular and crisis prone, a trend typified by the increasingly dysfunctional Mercosur customs union. These distinctions are growing and becoming more tangible as companies position to mitigate risk from reliance on Mercosur and maneuver to gain from new opportunities presented by the Pacific Alliance.

The “Grow-fast, Worry about Profitability Later” Days are Coming to an End
Many executives perceive a strong shift in corporate mandates for Latin American business units towards bottom line results, rather than purely on top line growth. This shift is changing the way executives prioritize markets, evaluate organizational structures, measure and orient workforces, and make the case for resources.

New Blueprints for Success
As both internal corporate and external dynamics have changed, senior executives are drawing up new blue-prints for success by examining existing assumptions around optimal organizational footprints and structures and by prioritizing markets and communicate opportunity based new criteria such as relative profitability and operating margins.

3 Year Growth Outlook v Relative Profitability

FSG’s LATAM Regional Overview expands on these trends and shares analysis of client survey responses on how they are responding to these shifts. FSG believes that despite increasing volatility and growing macroeconomic and political risks, Latin America continues to offer excellent opportunities and high returns relative to other regions. That said, today’s business environment already is significantly different from that of just a year or two ago, and regionally-focused executives are wise to recognize that their strategies must evolve in tandem.