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Trendsetters: AMI’s John Price Sees 2014 as a Pivotal Year for Latin America

John Price is a Managing Director of Americas Market Intelligence, LLC and 21-year veteran of market research and competitive intelligence in Latin America. His insights on the region, particularly in terms of economic growth, are forward-thinking and accurate, so we listened when he suggested that 2014 would be a pivotal year for the region.

AMI’s latest report suggests there are challenges ahead that will affect even a region known for being one of the world’s most resilient, as well as smart opportunities. John Price outlines what he calls “eight episodes” that have the potential of reshaping Latin America and impacting business going forward. He also offers insights for marketers as they turn their attention to Brazil and its upcoming World Sporting Events.

His 8 pivotal trends include:

1. Falling Commodity Prices. Latin America is home to 30% of global mining investment,
   40% of the world’s arable land, 20% of its oil reserves and is a leading producer of gold, silver, copper iron ore, zinc, bauxite, soybean, and coffee. In spite of costly policy efforts to diversify its economy, Latin American GDP growth and currency strength remains highly correlated with commodity prices, which are now falling.
2. Chinese Debt Crisis. China was disproportionately influential in Latin America’s enviable rise, and now troubles in China will weigh upon the growth prospects of the region, especially South America.
3. South American social unrest continues. A record percentage of South America’s poor entered what some call the “emerging middle class”. However, relatively few of the established middle class rose to the next strata. It is this traditional middle class - who also pay the lion share of salary taxes - that is voicing their disgust at the incompetence, corruption and waste of their governments. While government spending across South America has grown at double digit rates each year since 2003, the public services and infrastructure most needed by the middle class and small business have failed to evolve at a similar pace.
4. Tapering Federal Reserve Support. Tapering will worsen the scarcity of dollars, further dividing official and informal exchange rates. Among the most vulnerable countries in Latin America are Chile and Brazil, both of which have proven to be favorite destinations for global capital flows. But also vulnerable are Venezuela and Argentina.
5. Mexican energy reform helps revive a lackluster economy. The euphoria over Mexico’s iconic energy reforms may be muted by the fact that energy prices are falling and competitive US fields are attracting the lion share of new investment in the Americas. Nonetheless, if Mexico can both modernize its energy sector and expand production, it will open up vast new opportunities to combine low cost skilled labor and cheap energy in a variety of new sectors that have not competed in Mexico.
6. Free trade fever returns to Latin America. A new spirit of free trade may be just what Latin America needs after resting on the laurels of high commodity prices for over a decade-- ten years that have generated enviable wealth but also eroded trade competitiveness and stagnated reform.
7. Successful negotiations with the FARC usher in a 2nd Colombian investment boom. A negotiated settlement with the FARC will go a long way to improving Colombia’s national brand in foreign markets, a potential boon for future investment, trade, and tourism with Colombia.
8. Palace coup in Caracas. Caracas is the most dangerous city in South America. Political and public support for leader Nicolas Maduro, and the Chavista economic model is shaky at best.

CLICK HERE TO DOWNLOAD THE FULL STUDY:
http://americasmi.com/archivos/Latin_America_2014_-_8_episodes_-_20140210_4mb.pdf

So how will these trends affect marketing to Latin America, especially marketing around the World Cup in Brazil later this spring?

According to John Price, “Ever since Brazil won the hosting rights to the world cup (2014) and the summer Olympics (2016), analysts have predicted that the South American giant would suffer a collapse soon after the tourists went home. In fact, neither event drives the Brazilian economy. Instead, it will be a lagging, potentially troubled economy in China combined with poor policy decisions in Brasilia that will culminate in disappointment this year for multinationals operating in Brazil. For the last decade, Brazil has outperformed expectations each year. For some, the streak ended in 2013. For the rest, the fiesta may end in 2014.”


He continues: “Strong commodity prices and low global interest rates, both the product of Chinese policies, allowed Brazil to attract record capital, lower inflation, and gave policy makers the flexibility to lower interest rates. Millions were lifted out of poverty into the middle class and thanks to parcelado sem juros (installments w/o interest), Brazil’s millions of working poor were able to purchase their first washing machine, blender, oven, refrigerator and other white goods that transform the consumer habits of an aspiring household and spawn demand for hosts of household consumables. But the proliferation of installment payments promoted by retailers may have reached a breaking point. Today, consumer debt payments eat up 23% of Brazilian disposable income, higher than the peak of 19% reached by American consumers in 2008. It took ten years for US houses to rise 92% before the bubble burst. Brazilian real-estate is up 413% over the last decade.

Brazil faces a triple threat to growth. Its currency is likely to devalue further, landing somewhere around 2.55 – 2.75 per dollar by the end of the year, depending upon the gravity of China’s slow down. Consumer debt, the fuel that has driven the economy since 2010 will decline this year as the Central Bank is forced to raise interest rates to evade a downgrade of its sovereign debt classification. Fiscal spending, which has fueled an infrastructure boom, will fall precipitously after the October election to keep bond holders happy. All told, growth in Brazil will barely exceed 1.5% and the currency will drop 5-10%. Anyone counting on dollarized growth from their Brazilian operations in 2014 may be in for a rude shock.

As companies wake to the China induced downside risk in many emerging markets but especially Brazil and Chile in Latin America, they are scrambling to recalibrate annual marketing budgets. Some monies will shift to more optimistic looking Mexico, whose reform agenda, competitive manufacturing base and a buoyant US economy are a welcome contrarian story to a declining South America. But Mexico and Central America together represent only a third of the region’s economy. Decent growth in Mexico is no match for disappointment in South America. Marketers brace yourselves…”

AMI is an active member of The Global Intelligence Alliance, the world's leading independent Market Intelligence service provider with 24 global offices spanning every major continent. AMI operates two of its 24 offices and leads GIA's efforts in Latin America.