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WORLD OF INDUSTRIES - LOGISTICS 3/2017

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WORLD OF INDUSTRIES - LOGISTICS 3/2017

Unlocking South

Unlocking South America’s potential NEWS AND MARKETS The South American region is a diverse kind of an emerging market. It offers a growth potential which is faster than most western economies and a consumer base with higher per capita income than most of Asia’s emerging markets. South America stretches from the Panama isthmus to the southern-most tip of Chile and Argentina. The largest countries in South America are Brazil, Argentina, Venezuela, Colombia, and Chile. As of 2015, the region had a combined GDP of more than $ 3.5 trillion. These economies are driven largely by production in the commodities sector like oil, silver, copper, iron ore, zinc and lead. All of the countries in the region are either a developing or an emerging markets. For a lot of companies today, South America forms an intrinsic part of their emerging market strategy. This is not surprising at all, as the region offers the potential to reach more than 400 million consumers. Economic snapshot of Latin America In 2015, South America’s economy was almost stagnated and is estimated to have contracted by more than 1 % in 2016. The contraction in the region’s economy in 2016 was deeper than expected mainly due to the combined effects of lower commodity prices and capital outflow as the commodity super cycle came to an end. South America is one of the largest producers of commodities in the world. As a proportion of total global production, it produces 40 % of copper and 15 % of iron ore and it is not surprising that the region’s fast- Author: Sushen Doshi, Correspondent India, World of Industries WORLD OF INDUSTRIES – INTRALOGISTICS & DISTRIBUTION 3/2017

Latin America. Another downside risk to the region is the tightening of monetary policy in the U.S. Higher interest rates in the U.S. could increase capital outflows in South and Central America, triggering exchange rate fluctuation in the region, leading to economic contraction. The impact of Trump’s protectionist policies will fall mostly on Mexico, given the deeply-integrated trade and business cycle links between the two countries. South America doesn’t appear to be on Trump’s radar. But the region’s agricultural exports to the U.S. could be severely damaged due to these protectionist policies of the new U.S. administration. Let’s take a look at the current scenario of major economies in South America individually. Argentina: growth in private consumption Argentina is showing some budding signs of economic recovery. A strong growth in automotive and some areas of fast moving consumer goods sectors is giving rise to increased industrial activity. The economy will bounce back this year as lower inflation will support private consumption. Moreover, the economic reforms being implemented will reinforce the business sentiment and drive up investments. Analysts foresee the economy expanding 3.0 % in 2017 and 2018. Brazil: rise in industrial production Towards the end of 2016, Industrial production in Brazil recorded the fastest growth in over 2 years, suggesting that the economy is heading towards a recovery phase. At the onset of 2017, signs of improvement continued to emerge, with rising business and consumer confidence. But, the growth and recovery will be small as the government’s austerity measures will hamper domestic consumption. Analysts see GDP growth at half a percent in 2017 and around 2 % in 2018, if the political scenario remains stable. Colombia: higher oil prices boost growth est growth period was during the commodities boom between 2002 and 2008. Due to the sharp drop in commodity prices, particularly after mid-2014, many countries experienced a substantial drop in revenues and a massive outflow of capital. As a result the region’s economic growth and investor confidence weakened. This also increased the fluctuations in the currency markets, causing severe recessions in Argentina, Brazil, Colombia and hyper-inflation in Venezuela. Forecast for 2017 After a setback in 2016, South America’s GDP is projected to increase to 1 % in 2017 and more than 1.5 % in 2018. The region is expected to return to steady and solid growth from 2018 onwards. 2017 began on a slightly positive note, but the picture isn’t rosy yet, as some risks loom over the horizon. Although Brexit has no direct impact, the negotiations between the UK and the EU have the potential to disrupt global financial markets and impact currencies in In general, 2016 was a bad year for Colombia’s economy, mainly due to a collapse in global oil prices. However, towards the end of 2016, a recovery in oil prices saw an upswing in Colombia’s exports. The growth in industrial production remains stagnated and consumer confidence continues to sink. Supported by higher global oil prices in 2017, fiscal loosening policy and inflation now being under control, Colombia’s GDP is likely to grow to 2.4 % in 2017 and 3 % in 2018. An overview of South America’s logistics sector With increasing globalization, the role of logistics as a parameter for economic performance and competitiveness keeps on increasing. The impact of logistics costs on competitiveness, productivity, trade, integration and inflation is significant. South American countries are mostly focusing on commodities and export oriented growth strategies. For such strategies to succeed, an efficient logistics network is vital. To unlock its true potential, it will require strategies to overcome the region’s complexities. Supply chain managers must first understand the region-specific challenges and then adopt flexible and pragmatic supply chains strategies. WORLD OF INDUSTRIES – INTRALOGISTICS & DISTRIBUTION 3/2017