In Eco-political analysis

John Price
Managing Director
AMI

Latin America and Caribbean markets will grow this year in “real” terms by 1.6% but in PPP terms, the region will expand by over 6% and per capita consumption, when measured in USD will grow by a whopping 11%. The figures owe their divergence to the impressive appreciation (vs the USD) of the region’s most actively traded currencies: the Mexican Peso, Brazilian Real and Chilean Peso, buoyed by hawkish local monetary policies. Strong local F/X combined with high costs of local debt provides a once-in-a-decade opportunity for multinationals to gain market share. Multinationals can access capital at much cheaper rates than local Latin American firms. The cost structure of foreign providers is more dollarized than that of local firms. In a year when the USD was cheap compared to the Peso or Real, multinationals have a cost advantage.

Latin American consumers feel much wealthier in 2023. 2023 real growth in LatAm vs PPT growth and vs Per capita consumption growth.

So why are multinationals hesitant to invest in Latin American markets this year?  The reasons tell us a great deal about how global companies continue to over centralize their decision making and have failed to update their forecasting methods.

HQ Myopia

Most global companies rely disproportionately on their home market to drive both sales and profits. That is especially true for multinationals headquartered in large domestic markets like the US, Japan, China, Germany, or France. When their home market slows, as US and EU markets have done this year, cost cutting ensues. With so much of their ‘essential’ fixed costs based at home, international operations often bear the brunt of cost cutting. And then there is the very human bias of laying off people far from home before those close to home, not to mention the political backlash at home that can arise when companies exercise large layoffs.

The one notable exception to this may be Switzerland’s sizeable roster of global firms. Swiss operating costs (people, rent, suppliers) are some of the highest in the world, thanks to the all-powerful Swiss Franc, valued 35% above the USD according to the Economist Big Mac Index. For a long time now, Swiss companies have rigorously cut costs at home, pushing all their investments into global expansion. The rest of the world could learn from the Swiss.

USA ‘Navel-Gazing’

When America sneezes, Latin America catches cold”. The old adage should be taken with a grain of salt these days. US customers and capital are no longer the only game in town. More precisely, US economic influence remains dominant in Mexico, Central America, and most of the Caribbean. But South America increasingly belongs to the Chinese.

China provides more bi-lateral lending to South American countries than all the world’s development banks combined.

China is South America’s largest customer and leading supplier. China provides more bi-lateral lending to South American countries than all the world’s development banks combined. China may* be the largest source of foreign direct investment in South American markets today. (*Much of China’s FDI flows through offshore tax havens and can be difficult to track). The biggest reason why most South American economies received a positive adjustment to their 2023 growth forecast was the unforeseen speed with which the PRC shed its COVID controls and Chinese consumers raised their spending, providing welcome stimulus to South American exporters.

An even larger alternative to American capital is the gradually expanding domestic savings that stays inside Latin America’s economies. Since the 1990s, Chile, Brazil, Colombia, Peru, Mexico, and other nations developed privately managed pension systems that help slow capital flight and reduce the region’s reliance on imported capital. In Mexico the SAR system manages close to $330bn USD (equivalent of 20% of GDP) of the savings of some 70 million Mexicans. The vast majority of those funds are invested in Mexican assets, including government bonds. US Fed policy still impacts the Mexican Peso, but so does any change to Banco de Mexico’s interest rates.

Latin American regional forecasters, most of whom reside in the USA, overstated the impact of rising US rates in their 2023 economic predictions of Latin America. They failed to consider the growing supply of alternative capital (Chinese and LatAm domestic).

The Remarkable Role of LatAm Central Banks

The biggest economic surprise this year in Latin America has been the outsized role of leading central banks. First Brazil — then Mexico, followed by Chile —opened the floodgates to inbound capital by posting the highest real interest rates in the world. The dramatic re-appreciation of their currencies has underpinned a 5% increase in imports and a dramatic 11% increase in per capita consumption, when measured in dollars.

CountryNominal interest rate*Real interest rate*Global rank*
🇧🇷 Brazil13.75%6.94%1
🇲🇽 Mexico11.00%6.05%2
🇨🇱 Chile11.25%4.92%3
*Based upon March 2023 measures. Source: visual capitalist

Central banks around the world pride themselves on being politically agnostic, a prerequisite to their coveted independence. But it is no secret that central bank leadership in Brazil and Mexico has been at loggerheads with the presidents of their respective countries. Hawkish central bank policy has been an important counterweight to the populist spending instincts of President Lula in Brazil, Boric in Chile, and Petro in Colombia. AMLO in Mexico, though a populist, is unusually parsimonious, hell-bent on balancing budgets.

High interest rates hurt domestic investment and asset prices — a blow to the local entrepreneurial class. But high real interest rates curb reckless fiscal spending, which sceptics anticipated from the region’s new roster of populist presidents. They also deliver strong F/X, which both ignites consumer spending and enables business to modernize through the purchase of imported technology. High real interest rates usher in billions in the form of hot money from yield seeking mega funds, temporarily bolstering local currencies.

High interest rates and strong F/X is the biggest economic wildcard that 2023 forecasters missed. Latin America’s central banks unwittingly created market conditions that strongly favor foreign multinationals and foreign suppliers whose dollar-costed goods are suddenly very competitive in the largest Latin American and Caribbean markets.


Liquidity squeeze

How a US Liquidity Squeeze Will Impact Latin America

“When America sneezes, Latin America catches a cold”


A Call to Action

Latin America’s unusual market conditions won’t prevail for long — perhaps another 6-12 months at the most. Foreign exporters to LatAm and global firms operating in the region should act now to gain market share while the going is easy. Some tactics that come to mind:

  • Foreign suppliers enjoy a momentary pricing advantage over Mexican and Brazilian competitors. Add to your offering the availability of credit and you have a winning combination that local suppliers cannot match. Use that advantage to sign up more distributors and local VARs, introduce new products and enter new markets.

  • Multinationals operating in the region should front-load investment in equipment and technology now, while their locally retained profits enjoy additional spending power (in USD). The productivity gains earned with new equipment will become essential in 2024 when local currencies come back down to earth. The same goes for any investments in the offshore training of local employees, assuming said training enhances productivity.

  • The penetration of e-commerce marketplaces in Latin America has created millions of new customers for small and mid-size suppliers around the world who have never visited LAC nor ever signed a local distributor. Latin American customers find these products on US and Chinese e-commerce sites, overcoming many hurdles to import them. With a toe hold in the market, now is the time to boost your LatAm sales by signing up local distributors and placing products on Mercadolibre and other local e-commerce sites.

  • Latin America’s mass consumer market continues to recover from the economic blow of COVID lockdowns. Multinationals who compete for this market have an opportunity to (re)capture market share from local providers by dropping prices thanks to their greater degree of dollar-costing and cheaper access to capital. Credit starved local competitors who cannot finance a pricing war will have no choice but to cede market share.

Next Steps

Contact us if any of the above resonates and you’d like to chat with our practice leaders about how your firm can pursue Latin American growth this year.

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