RegionsLatin AmericaLATAM economic activity hindered by political uncertainty

LATAM economic activity hindered by political uncertainty

Latin America’s election season is predicted to cause social and economic unrest due to corruption issues and high homicide rates, a report by CoFace reveals. The Global Treasurer spoke exclusively to Patricia Krause, LATAM economist, CoFace, to get her opinion on the recent study and what advice she would give to new and existing organizations.

Political uncertainties may cause equities and corporate/consumer confidence to decline, a recent Coface report highlights, as concerns over a public spending freeze gains momentum across Latin America.

With a poor political environment, the region’s image is argued in the report to be stained in the eyes of imperative foreign investors. This is not helped by the governmental corruption scandals since 2014.

An optimistic outlook for GDP growth in 2018 has been based on global trends as opposed to domestic merits at a generous +2.4%.

Two years of recession saw the growth forecast finally recover in 2017 by an estimated 1.1% year-on-year. The 2018 growth prediction will be revised and reduced if there is a decline in equity markets.

The Global Treasurer wanted to find out what this means for organizations and treasurers who were considering moving into these markets. We spoke exclusively to Patricia Krause, LATAM economist, Coface.

 

What impact are these political uncertainties having on local currency? What advice would you give to treasurers with assets in these currencies?

“We have seen currencies in Latin America depreciating in recent weeks. This movement, however, has been more related to the recent deterioration of financial conditions in emerging markets and the strengthening of the US dollar.

“Argentina’s peso is the world’s worst-performing currency this year ( -33% year-to-date).

“The Brazilian Real is the second worst-performing currency (-13% year-to-date). In Brazil, however, part of this depreciation might be reflecting the uncertainty related to the presidential elections to be held in October 2018.

“My advice is to follow closely the currency movements in the upcoming months, specifically in Brazil, Mexico and Argentina.”

 

What advice would you give to treasurers with suppliers in the region?

“Companies that export to Latin America are the ones that should pay higher attention.

“The strong volatility that currencies in the region have experienced might impact the capacity of companies in honoring their payments.”

 

With growth potentially being hampered by political uncertainties, do you think this will have an impact on organizations looking to expand into these regions?

“Yes. We believe that investments should remain lackluster this year, fueled by the uncertainties related to the long electoral calendar in Latin America.”

 

For the treasurers that are already operating in these regions and have concerns – what would you suggest to them?

“In terms of exposure to exchange rate and the recent volatility, it should keep a limited exposure and to hedge it.”

 

Do you think the corruption has a direct impact on organizations already in these areas?

“The serious of corruption scandals revealed in the recent years have impacted companies in the region, not only the ones directly involved in scandals, also companies that had a high representativeness of its sales related to investigated companies.

“The positive side of all these scandals is that it has increased the role of compliance in companies in the region.”

 

With the high rate of homicide, do you believe organizations will struggle to get new expatriates working in these areas?

“It is difficult to quantify this. The relatively higher crime rate in the region should exert some weight in the decision of some executives when they receive an expatriation offer.”

 

Political uncertainty unfortunately represents a major concern this year for Latin America and for all parties involved. The only thing left to do is wait and see what the rest of 2018 brings.

 

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