LatinFinance - May/June 2014 - 16

Closing wallets

Consumption growth forecasts (% year-on-year)
Average

Average

2006-2008

2009

2010-2013

2014-2015 f

Brazil

5.7

4.4

4.1

1.5

chile

6.2

-0.8

7.5

4.2

Colombia

5.7

0.6

4.9

4.4

Mexico

3.5

-6.5

4.3

3.4

Peru

7.8

2.4

5.9

4.1

12.9

-2.9

2.7

-1.3

5.8

5.3

3.5

Venezuela
Country
average

Source: BofA Merrill Lynch Global Research

where there is room for growth in domestic demand, the consumer
sectors tend to lack both the size and the entrepreneurial vigor of
their equivalent in Brazil. that may be bad news for the sector's
potential to yield dealflow in latin america, especially iPos, via upand-coming new firms.
there have been rumors of sales of mexican supermarket chains
including S-mart, which in april hired citigroup as an advisor, and
controladora comercial mexicana, which is reported to have hired
Rothschild. However, says one banker, case-specific factors - rather
than the mexican consumer sector's dynamism - are the main
driver of these deals, despite expectations of an uptick in economic
growth in mexico.
Successful businesspeople in colombia also tend to be more
reluctant to embrace the publicity involved in an iPo - a hangover
from the country's violent past. one banker based in new York
complains there is no colombian equivalent of Brazilian consumer
firms like magazine luiza, the household goods store which listed
in 2011 and is run by its president, luiza Helena, a member of the
founding family.
colombia's corporate landscape, says the banker, tends to be
more dominated by a few large conglomerates. "Brazil is a much
larger country, so it's harder for the conglomerates to take over," he
says.
there is still room for growth in latin america's consumer sector
- especially relative to that of developed markets. "We continue to
see strong growth on the asset and liability side in latin america, as
economies become more bankerized, thanks to the growth of the
middle class and social programs to stimulate financial inclusion,"
says Stacey madge, senior vice president of retail banking at
Scotiabank's international division.
Scotiabank does not operate in Brazil. But madge says the bank's
credit card business may see an uptick in growth in its colombia,
mexico, and Peru operations over the next five years. luiz Ribeiro,
portfolio manager at Deutsche Bank's funds arm, says that even
for Brazil, after it spent a year spent clearing up bad debt in 2013,
consumer credit and mortgages, rather than corporate lending, will
be the main driver of a recovery in lending at the private banks.
Not so fast
nevertheless, there are both structural and cyclical reasons why
latin american consumption will be less attractive to investors -
and less fertile ground for investment bankers - in the years ahead.

16 l atinfina nce.com - May/June 2014

the past decade's growth in spending and borrowing in Brazil -
which led the region's consumer boom - is unlikely to be replicated,
partly because the benefits of greater macroeconomic stability,
including structurally lower interest rates, were a one-off.
over the past decade, the ratio of loans-to-GDP in Brazil has more
than doubled to over 60%. on a regional basis, there is now more
limited scope for a large increase in the number of people accessing
credit for the first time, partly because of the more saturated credit
market in Brazil, the biggest market. mexico has a loans-to-GDP
ratio of less than 20%, but it is not certain mexico can dramatically
increase credit penetration, at least not in the short term (see box).
around 40 million Brazilians officially entered the middle class
in the ten years to 2011. today, less than a third of the country's
population is below middle class, notes Will landers, latin america
fund manager at Blackrock. Partly as a result, the middle class will
likely still expand, but at a much slower pace than a decade ago, he
says.
"the amount of pent-up demand in Brazil is much smaller than
before," says landers.
others worry that consumption in Brazil is already out of step
with longer-term investment. JPmorgan's carrillo says that for the
last four years the country has had a "pull strategy" for managing its
economy: lowering taxes on consumer goods, encouraging stateowned banks to extend consumer credit, and subsidizing energy
prices to make them more affordable for individuals to run their new
washing machines, televisions and cars.
"they forgot about the supply side, about getting the private
sector to invest, to avoid inflation," says carrillo. Ben laidler, head
of americas research at HSBc, tells a similar story. "Brazil has an
exhausted consumer-focused growth model, which is beginning to
generate inflation," he says. "Regardless of who wins the election in
october, there need to be adjustments, tighter fiscal and monetary
policy. that means lower consumer growth."
Research from Bank of america merrill lynch suggests the
outlook for the Brazilian consumer over the next couple of years
is one of slower wage growth and higher unemployment. the
public sector banks have already begun to withdraw. With inflation
touching 6% and a base interest rate now at 11%, the middle class
is already being squeezed. after the election, fiscal and monetary
tightening, and hikes in state-controlled prices will likely make
things worse.
a tax on beer announced in april - a few months before the
soccer World cup in Brazil will boost demand for the beverage -
may be an early indication of how the Brazilian government needs
to tighten its fiscal accounts; it might also give a sense of likely
ramifications for consumer companies. overall, the World cup will
give Brazil's consumer economy only a short-lived lived boost, says

GIANFRANCO FERRARI, BCP

"OUR CONSUMER BUSINESS HAS
MORE THAN DOUBLED IN THE
PAST FIVE YEARS, AND CREDIT
PENETRATION IS NOW MUCH
HIGHER. IT IS NOT GROWING FROM
SUCH A LOW BASE"

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LatinFinance - May/June 2014

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