The End of Latin America’s Shopping Spree?

A consumer boom helped fuel Latin America's golden decade but now it seems that shoppers are watching their wallets. LatAm INVESTOR investigates how it will impact investors...

A surprise slowdown

Cut, cut, cut. That’s the sound being heard across Latin America as financial forecasts are being slashed to adjust to the region’s deteriorating economic outlook. For much of the region this is no surprise. After all Brazil, Argentina and Venezuela have been struggling with lower growth for more than a year now. But what’s more surprising is the trouble in Chile and Peru. Here policymakers and pundits alike have been caught out by a slowdown that’s more severe than anyone expected. So when Peru’s respected Finance Minister, Miguel Castilla, was suddenly axed from his job this month – it showed just how seriously the deceleration is being taken.

"What was a surprise, at least to me, was the simultaneous abrupt reduction of consumer spending…"

One part of this slowdown is very much old news. Much of Latin America’s golden decade at the start of this century was fuelled by China’s rising demand for a wide range of commodities. So it was obvious that eventually falling Chinese demand – and the subsequent lower prices – would hit exporters in Latin America. That’s why countries like Colombia, Chile and Peru used the boom to shore up their government finances and bolster their macroeconomic position, which has given them the fiscal and monetary tools to counteract the slowing growth.

Blame it on the consumers

But there is another element to the deceleration – a consumer slowdown – and that’s what’s caught policymakers by surprise. During the good times the rapid increase in consumer spending was a major driver of Latin American growth. According to World Bank figures the middle class grew by 50% to 150 million while poverty levels across the region were cut in half. This was down to a combination of rising wages and more generous social schemes from government. More purchasing power came from a positive credit cycle as banks in the region reached out to poorer consumers for the first time. Now many of those consumer supports have been taken away and the economy is starting to feel the effects.

Ratings agency Moody’s has just published a report on how the drop in consumer spending will hit economic growth. “We are forecasting that [2014] growth in Argentina, Brazil, Chile and Peru will fall below each country’s average growth rate experienced during the 2004-13 period.” Moody’s believes things will pick up in 2015 but stresses that “consumers will not be leading the recovery”. This view is supported by Juan Ignacio Langlois, a founding partner in Chilean investment bank Tyndall Group. He told LatAm INVESTOR: “To most of us the slowdown of the corporate side was not a surprise. What was a surprise, at least to me, was the simultaneous abrupt reduction of consumer spending.”

Of course middle class is a nebulous phrase and this doesn’t mean that all consumer-facing industries will suffer. The report highlights that the most at risk are those who’ve just joined the ranks of the middle class. “Companies that sell to Latin America’s new middle class, especially those who only recently exited poverty, will likely see slower growth in the coming years.”

Bet on reform

But the future is not completely bleak for these countries. With varying degrees of success Mexico, Colombia, Peru and Chile have all embarked upon reforms that should deliver growth.

In a recent interview, Chilean Finance Minister, Alberto Arenas, told LatAm INVESTOR that Chile’s growth will pick up. “We expect to see growth of around 2% this year, and in 2015 that should increase to between 3% and 4%, so we are already seeing a recovery.”

He also mentioned some of the measures the government is introducing to boost growth. “One key area is energy, where we are encouraging the development of lower-cost and environmentally friendly renewable energy. Also the Ministry of Economy is implementing a $1.5billion innovation agenda, which will help promote productivity growth in key industries. Then we also have the education reform which will help us boost our human capital.”

Officials in Peru are also upbeat. In an exclusive interview with LatAm INVESTOR, Governor of the Central Bank, Julio Velarde, explained why he isn’t too worried. “In our view, the slowdown is driven mainly by temporary factors that do not affect Peru’s medium-term growth. [We] expect higher growth over the next two years, as new mining projects, which are envisaged to double copper production.”

 It’s clear that Latin America still has plenty of promise for British investors. But with some of easy assumptions about Latin American growth being challenged, investors will need to pick and choose their portfolio carefully.