Seeking Opportunity in Latin America

Latin American GDP is expected to slump to 0.7% in 2015, following on from a dismal 2014. Some of the region’s largest economies are struggling the most – with Brazil, Argentina and Venezuela mired in slowdowns and recession. Overall, 23 of the 40 Latin American countries for which we have data, will see a decline in growth in 2015 over 2014. Yet beneath these topline figures business opportunities remain – with those with a thorough understanding of the region’s economies and nuances of their business environments at an advantage.

Real GDP Growth in Selected Latin American Economies: 2009-2015

Latam-gdp

Source: Euromonitor International from national statistics/OECD/UN/IMF

Note: Data for 2015 are forecast

Broader horizons

Despite the slowdown, the region’s middle class remains a big draw for consumer goods companies. In 2014, there were more than 109 million households with an income over US$10,000, compared to 60.3 million in 2000 (in 2014 prices). Multinationals are drawn to these households with significant income for discretionary spending. Although Brazil’s middle class dominates the region, there remains significant potential outside of the country. Although Brazil accounted for 69.1% of growth of sales of beauty and personal care products, in other fast-growing categories, such as spending on consumer electronics and alcoholic drinks, it accounted for a much smaller proportion of growth.

Fastest-growing Consumer Markets in Latin America: 2010-2015

Latam-consumer-markets

 

Source: Euromonitor from trade sources/national statistics

Note: Soft and alcoholic drinks data refer to off-trade sales

The region’s proximity to the USA – the world’s largest consumer market – is an advantage, with strong growth in the USA having positive flow-on effects on the region. 41.4% of the region’s exports went to the USA in 2014 with 80.2% of Mexico’s exports headed for the USA. Yet countries within the region differ in terms of their openness to trade. The World Economic Forum’s Enabling Trade Index, which assesses the extent to which economies have in place institutions, policies, infrastructures and services facilitating the free flow of goods over borders and to their destination, shows that Chile ranks 8th globally – above high-income countries such as Sweden, Germany and Japan and the only Latin American economy in the top 10. At the other end of the scale comes Venezuela, ranked 137 – above only Chad globally.

Latin America in the Global Enabling Trade Index 2014

Country Global Rank
Chile 8
Costa Rica 42
Peru 51
Panama 52
Uruguay 60
Mexico 61
Guatemala 62
Ecuador 65
Nicaragua 68
El Salvador 71
Colombia 73
Dominican Republic 79
Jamaica 80
Honduras 85
Brazil 86
Bolivia 87
Argentina 95
Guyana 104
Paraguay 113
Haiti 125
Venezuela 137

Source: World Economic Forum, Global Enabling Trade Report 2014

A key country of interest for many companies since the thaw with the USA is Cuba. Yet it’s essential that a Cuba strategy should be seen as a long-term one, gains and change will not be realised overnight. It would also be wrong to see Cuba as an entirely virgin market. Cuba trades heavily with Venezuela, China and Spain and companies from these countries have first-mover advantage in some sectors. It also suffers from serious economic challenges – including crumbling infrastructure, low productivity and a lack of investment – and its economic development should be monitored closely. Although 55.7% of Cuban imports originate in Latin America, 72.4% of these are from Venezuela. Other countries in the region have limited exposure to the economy. Nevertheless its population of 11.3 million and total consumer expenditure of US$45.1 billion in 2014 will make it an attractive proposition. Success will be most likely for those who take an approach based on tailoring to local tastes and aspirations, whilst striving to build brand and in some cases category awareness.

Forecast Growth Rates of Selected Markets in Cuba: 2014-2018

Cuba-Forecast

Source: Euromonitor International Markets of the Future reports. Data from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Sidestep the challenges

There are of course many challenges in doing business in the region, particularly in an era of slowing growth. One of the most obvious is infrastructure. The region is infamous for its infrastructure deficit. Particularly Brazil, where in the WEF Global Competitiveness Report 2014-15 infrastructure was ranked the 3rd most problematic factor for doing business in the country. Yet other economies perform better – notably Chile, the region’s 5th largest economy.

Top and Bottom 5 Latin American Economies for Quality of Overall Infrastructure

Latam-economies

Source: World Economic Forum Global Competitiveness Report 2014-15

Note: Respondents were asked: “How would you assess general infrastructure (e.g., transport, telephony, and energy) in your country? [1 = extremely underdeveloped—among the worst in the world; 7 = extensive and efficient—among the best in the world]”. Data in brackets refer to the country’s position in the global rankings of 144 countries

Corruption and crime are further challenges. Economies in the region are amongst some of the worst offenders on Transparency International’s Corruption Perceptions Index. In its most recent rankings, Venezuela and Haiti (joint 161st out of 175 economies globally) were perceived as the most corrupt economies in the region, followed by Paraguay, Nicaragua and Honduras. At the other end of the scale Barbados, Chile and Uruguay ranked highest, outperforming Western European economies such as France and Austria. Another organisation, InSight Crime, has ranked Latin American countries based on an assessment of organized crime’s earning power and ability to corrupt elements of the state. In this ranking Mexico, Colombia and Honduras come out worst, with Honduras also suffering a startlingly high homicide rate of 92.6 unlawful killings per ‘000 population in 2014 – the highest rate in the world and compared to a global average of 5.5. Peru, Paraguay and Argentina perform best in this ranking.

A pan-regional strategy for success

The key to success in Latin America, is gaining a thorough understanding of the business environment, consumers, and markets in a given country. The region has many opportunities, particularly outside of the obvious choices of Brazil and Mexico. Chile consistently scores high across many global rankings related to business environment, and some of the smaller, faster-growing economies such as Peru and Colombia offer great potential and also have fast-improving business climates – outperforming Chile in the World Bank’s Ease of Doing Business Rankings.  Latin American firms are well situated for the opening up of the Cuban economy and to take advantage of the US recovery. A pan-regional strategy is a must, in an era of slow regional economic growth in order to capitalise on growth markets and new opportunities.

Latin America’s Fastest-Growing Economies: 2015-2020

Latam-growth

Source: Euromonitor International from national statistics/OECD/UN/IMF

Note: Data are forecast. 2015 total GDP data are in constant 2014 US$