Latin America: beware the end of middle class boom.
by Samantha Pearson -Sep 23, 2014 5:01am
Type “Latin America” and “booming middle classes” into Google and you will get more than 40,000 results. The rise of millions of Latin Americans out of poverty over the past decade has defined the region socially, politically and economically. It has also made investors rich.
However, as Moody’s explains in a report on Tuesday, the middle class-led consumer “boom” is coming to an end and, for some companies in particular, the results won’t be pretty.
We are forecasting that growth in Argentina, Brazil, Chile and Peru will fall below each country’s average growth rate experienced during the 2004-13 period. In 2015, Mexico is the only country where we expect growth to exceed its historical average, but the country’s economic activity has lagged the region’s for years.
While we expect growth (other than in Argentina) to accelerate somewhat in 2015, consumers will not be leading the recovery. In Mexico, the most likely growth drivers are government spending and stimulus from a more dynamic US economy. In Peru, government spending and mining investment will drive growth, while in Colombia, government spending on infrastructure should help the country maintain a steady pace of growth.
One major casualty of the consumption slowdown across the entire region will be the insurance sector – Latin America has been its fastest-growing market for much of the past decade, according to Moody’s.
Pension and life insurers would be most negatively affected by a slowdown. Demand for these products has surged thanks to rising incomes and increased concern among the population about the future adequacy of social security programs.
Retailers, automakers, homebuilders and airlines and, more specifically, sellers of high-ticket, credit-dependent, non-essential items are also likely to suffer. Here are a few companies Moody’s believes could be vulnerable across the region:
- Brazil’s Usiminas. The steelmaker is particularly exposed to the country’s slowing auto industry, on which it relies for about 32 per cent of its domestic sales. (Vehicle lending has declined three years in a row in Brazil, causing a contraction in the country’s car industry). However, Brazilian companies are generally well-prepared to weather the wider consumer slowdown, says Moody’s.
- Argentina’s Quickfood. The frozen foods producer already has a weak credit and financial profile, and the decline in consumer demand will further strain its financial performance, especially in the highly competitive food industry. (Moody’s expects Argentina’s GDP to contract by 2 per cent this year and inflation to reach as high as 40 per cent.)
- Chile’s SMU. This supermarket chain is already facing difficulties and has defaulted on a portion of a syndicated loan.
- Peru’s Banco Internacional del Perú-Interbank. The bank has a larger-than-average exposure to unsecured consumer lending as a percentage of its total portfolio (48 per cent versus 30 per cent for its large peers).