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
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
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.
Frontier Strategy Group built a proprietary model in 2008 to test the assumption that “emerging markets are decoupled from western economies (G7)”. We found that certain markets such as Nigeria and Peru were not only decoupled but provided multinationals with consistently high growth opportunities. Conversely, growth in markets such as Turkey, were highly dependent on a recovery in western economies.
Surprisingly, in 2011, our model shifted to indicate that emerging markets are no longer thought to be as decoupled as before. Very few markets such as Morocco and Indonesia provide above average growth opportunities with less dependence on the status of western markets.
In 2008 we built a model to understand the global impact of a recession:
2011 data shows markets are more coupled than before
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.
