EGADE Business School BREVIS, #19 [English] by EGADE Business School

BREVIS Reporte de Economía y Negocios en América Latina

Year II, Issue. 7 | March 13 , 2017

Dr. Sandra Núñez Daruich Director of Strategic Initiatives and Marketing professor EGADE Business School, Tecnológico de Monterrey snunezda@itesm.mx

REBUILDING LATIN AMERICAN CONSUMER CONFIDENCE

f you’ve been following media events in the United States, such as the Super Bowl, you’ve undoubtedly seen that several companies have tried to reach the Latino community. For example, Corona launched an ad about unity within the Latin American culture. An ad by Coca Cola, from 2015, but popular once again on social networking sites, showed soft drink cans with Hispanic surnames printed backwards; when you peeled off a layer of film, you could tattoo them to your skin. These ads were geared mainly toward Hispanics in the U.S., which make up approximately 17% of that country’s population, but their content went viral thanks to social media, reaching a public way beyond the borders. But do they really have an impact in other markets? The theory says yes, because a brand that deals with Latinos is also known in Latin American countries, since we identify with them thanks to our shared culture. It’s part of our identity. With more than 645 million inhabitants, approximately 8.62% of the world’s population, Latin America and the Caribbean is a very attractive community, as can be seen in a recent study by the McKinsey Global Institute, which ranks Mexico City, São Paulo, Buenos Aires, Lima, Santiago de Chile, Monterrey, and Bogotá among the 100 cities that will experience 45% growth in urban con-

sumption by 2030. It’s a good time to start building and strengthening the relationship between brands and consumers. In Mexico, the Consumer Confidence Index plunged 16.1% from December 2016 to January 2017, mostly due to the Trump effect; still, from January to February 2017, it rebounded 11.1%. Even though this growth hasn’t been enough to reach December confidence levels, it shows that the market is improving. One of the questions on the index is whether a family member can buy furniture or household appliances. Brands can have a direct influence on this index, offering payment plans, promotions, discounts, or other incentives to get consumers to buy. It’s a very direct way for brands to strengthen consumer confidence.

A brand that deals with Latinos is also known in Latin American countries, since we identify with them thanks to our shared culture.”

The other brands could see these times as an opportunity to learn more about consumer behavior and its evolution. When confidence is high, for example, consumers are less likely to place importance on promotions such as interest-free months, and they prefer to pay upfront or with U.S. dollars, especially consumers close to the border. With the current uncertainty, perhaps consumers will seek out security by buying in pesos and with fixed monthly payments.

The secret today, just like before, is to listen to and understand the consumer so that the brand has the right message and actions regarding consumer culture, motivations, or attitudes. ❚

1 BREVIS

BREVIS Macroeconomic developments in Latin America In Mexico, the annual rate of inflation in February reached its highest level in almost six years, 4.86 %, which represents 8 consecutive months of continuous increase. The Central Bank is expected to increase the benchmark rate again at this month’s meeting to deal not only with inflation but also with continued exchange rate volatility. Economic activity registered an annual growth of 2.3 % in 2016, but a slowdown is expected for this year; Banxico reduced its growth forecast from 1.5–2.5 % to 1.3 %–2.3 %. In 2016, the current account deficit with respect to GDP was 2.7 %, slightly lower than the 2.8 % recorded in 2015. The consumer confidence index showed a significant improvement in February to reach 75.7, following the historical decline recorded in January, when it was registered at 68.5, but the recovery did not reach the average level of 85 recorded last year. In Brazil, economic activity during the fourth quarter of 2016 saw a reduction of 2.5 % annually, much

lower than the 5.8 % drop registered in the same period of the previous year and accumulating 12 quarters of recession. Undoubtedly, the recent reduction in the benchmark interest rate, SELIC, will help the economy recover; the reduction announced at the February meeting was 75 basis points, to stand currently at 12.25 %; it represents a cumulative reduction of 200 basis points in the last 5 months. Inflation reported in February continues its downward trend, with an annual growth rate of 4.76 %; another reduction in the interest rate is expected at April´s meeting. It will certainly work as an incentive to reduce the rate of unemployment, which continues to increase, reaching an unprecedented level of 12.6 %, the highest since registration of the series began four years ago. In Chile, the annual rate of inflation for February was 2.7 %. At its February meeting, the Central Bank left the benchmark rate unchanged, having reduced it by 25

The Economic Strength of U.S. Latinos

basis points in January, to 3.25 %. Exports totaled $4.716 billion, representing an annualized reduction of 1.8 %. Despite the increase in the price of copper in February to 2.69 dollars per pound, an increase of 3.4 % compared to January, copper exports fell 13 %.

The economic contribution of Latin American immigrants in the United States is indisputable and will continue to grow in the coming years. The Latin American market is the fastest-growing in the U.S. economy; as consumers, as entrepreneurs, and as part of the labor force, the Latino community should not be overlooked. On the contrary, strategies should be directed to this group to take advantage of its growing potential.

Panama is expected to continue as one of the most-dynamic economies in the region. Despite the recent reduction in average growth, the annualized growth rate for the fourth quarter of 2016 was 4.5 %, whereas Latin America as a region suffered a recession during the same period. Recent economic outlook perspectives for the country anticipate 2017 to be a good year, with an expected rate of economic activity of above 5.5 %. In January, the government announced a total investment in infrastructure of $5.1 billion dollars for 2017, which will certainly provide incentives for continued growth. On the other hand, there have been six months of consecutive increments in the price level, with an annualized rate of inflation at 1.6 % in January. ❚

By 2060, the Latino population in the United States is expected to make up 30 % of the total; one in three consumers and one in three workers will be of Latino origin, making it a sizable market. It is estimated that about one million Latin Americans in the United States turn 18 every year. They currently represent a consumer market of more than 1.7 trillion dollars. Latinos are also at the forefront of entrepreneurial activity; the growth rate for Latino businesses was 46.9 % from 2007–2017, while the growth rate for other groups was only 0.7 %. The effects will be felt not only in the U.S. market but also in the countries that receive remittances. Workers send money to their families in the region, and remittances have a strong impact on the domestic economy, increasing the purchasing power of poor households in the region. In 2015, a total of 43.6 billion dollars were sent from the United States to Latina American countries, representing 71 % of the total flows that originated in that country. Most of the resources in Latin America are received by Mexico (55.8 %), Guatemala (13.7 %), and El Salvador (9.1 %).

These figures indicate that Latin American immigrants will have the greatest impact on economic development in the United States in the coming years. Therefore, business, marketing, and even political strategies should consider this important growing market. ❚ Total Population in the U.S. (315 millions)

Total Remittances from U.S. (61 383 millions)

18%

29%

57 millions

17 794 millions

82%

71%

258 millions

No Latin

43 589 millions

Latin

Latin America

Total Latin Population in the U.S.

Rest of the world

Total Latin Remittances from U.S.

21.4%

32% 63%

13.7%

2.6% 2.5%

55.8%

9.1% Mexico El Salvador

Stanford (2015). State of Latino Entrepreneurship Report 2 World Bank.

Guatemala Rest of Latin America

Monetary Policy in Latin America

Negative Outlook for Credit Ratings In 2016, sovereign credit ratings were revised for Latin American countries to include a negative outlook on a previously assigned grade. Recently, even Chile, the highest-rated country in the region, received a negative outlook from Fitch and Moody´s.

The rating agencies in the table report a negative outlook for Mexico, considering the significant increase in government debt over the last few years. In 2007, total government debt to GDP was only 21.3%, but it reached a worrisome level of 46 % in 2016. There may be a downward revision in the coming months. ❚ Moody’s

Low Risk Moderate Risk High Risk 2

Colombia

Baa2

Mexico

Fitch

S&P

BBB

BBB*

A3*

BBB+*

Brazil

Ba2*

BB*

Chile

Aa3*

A+*

AA-*

Source: Moody´s, Fitch and S&P. (last rating available, *negative outlook)

BREVIS

Source: Pew Hispanic Center and PMI. 2015 figures.

Mexico´s Central Bank, Banxico, continues to increase the benchmark interest rate for monetary policy not only to address exchange-rate depreciation due to high levels of volatility in international markets but also to face the recent increase in inflation, which is expected to reach levels of between 5 and 6% by the end of the year, above the inflation target.In contrast, Colombia and Chile are following Brazil’s strategies, reducing the benchmark rate, given recent reductions in inflation levels. The reduction is expected to have a positive impact on economic activity. ❚

Monetary Policy Interest Rate 16 14 12 10 8 6 4 2 0

2014 Chile

2015 Colombia

2016 Mexico

2017

Brazil

Source: Central Banks.

BREVIS

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