As 2017 winds down, it’s natural to focus on what 2018 will bring for Latin America. We recently shared our analysis of what’s next in a webinar last week.
We believe that 2018 will mark a welcome turnaround for most companies operating Latin American divisions, after three successive years of disappointing results. When metal and energy prices tumbled in 2013/14 respectively, South American currencies fell on average more than 25% versus the USD. Weakened currencies led to capital flight and cancelled FDI projects. Servicing foreign debt became too much to bear for many multi-latinas, especially in Brazil and Colombia. Three years of cost cutting and deleveraging has taken its toll, but Latin America’s corporate sector today is much healthier. Similarly, Latin American household balance sheets are largely re-balanced and banks are lending more.
There are signs abound of animal spirits. M&A activity in Brazil is up by 30% year-on-year, and shipping rates have rebounded as Latin American imports grow again on stronger consumption, buoyed by appreciating currencies. The economic funk experienced in Mexico following the election of U.S. President Trump has gradually given way to cautious optimism and the resumption of investment flows into Mexican manufacturing and service sectors, making for a potentially good outlook for Mexico in 2018. In the region’s resource economies, the early business cycle is characterized by investment in mining, export manufacturing and import substitution segments.
And in spite the dysfunction of Washington politics, the U.S. economy is healthy. A decade of gradual but consistent growth since the financial crisis is now creating wage inflation as full employment is realized. A strong dollar and high factory utilization bodes well for Mexico, as well as Central American and Caribbean markets.
Chinese demand remains strong as the largest consumer market in the world begins to balance its imports from mostly commodities to a broader range of goods that include food, high-tech and consumer goods. Chinese out-bound investment, which stalled when commodity prices fell and the Xi administration cleaned house, is now returning full force to Latin America in pursuit of infrastructure projects: China is now the largest bi-lateral lender in Latin America.
This cycle’s rebound, however, brings with it a couple of important headwinds. Many Latin American voters are fed up with the political status quo. The proliferation of smartphones and the ubiquitous nature of social media has been used repeatedly to expose Latin American politicians in the act of committing or plotting corruption. In Brazil, a surprisingly independent judiciary has indicted more than 100 politicians and corporate scions. The Odebrecht case has led to the arrest of former President Humala in Peru and has tarnished the legacy of President Santos in Colombia. Sitting presidents in Brazil, Mexico, Chile, Colombia and Peru, the engines of Latin American growth over the last decade, all have approval ratings below 15%. Most startlingly, a recent Latinobarómetro survey found that just under 50% of Latin Americans today believe that democracy is the best form of government, the lowest reading since the survey began. So will Latin America embrace populism? 2018 elections in Brazil, Colombia and Mexico will be telling.
The other obstacle to growth in some markets is low energy prices. The explosion of oil and gas production in the US has rebalanced global pricing and poses a threat to countries like Venezuela, Colombia, Mexico, Ecuador and Trinidad & Tobago. Recent oil finds in Brazil and Argentina are not viable with oil stuck at $50/barrel. The flip side of low oil is the tremendous boost it brings to Caribbean and Central American economies, whose import bills are dominated by energy products. Not surprisingly, Central America has outgrown the rest of Latin America since 2015, and will likely continue to do so for another two years.
So What Will Happen in Latin America in 2018?
That’s exactly what our analysis explores.
Beyond analyzing the region’s political and economic landscape, Americas Market Intelligence practice leaders included their insights as to what to expect in 2018 in 6 of Latin America’s leading industries: Healthcare, Payments, Consumer Goods & Retail, Logistics, Natural Resources and Infrastructure.