Latin America shows resilience in the face of Covid-19
Of all the regions highlighted within Grant Thornton’s new Global business pulse, Latin America proved to be the healthiest in the first half of 2020. Its index score, a health check of mid-market firms, was down by just nine points to -5.6. This is the smallest fall and the best index score across APAC, EU and neighbouring North America.
The relatively late escalation of Covid-19 across the region goes some way to explaining the index strength, although the impact on Brazil, in particular, has become acute. However, fundamentally it also shows the resilience developed by Latin American mid-market businesses. This characteristic was highlighted by Grant Thornton earlier this year in the Thriving in 2020 report.
Roy Buddle, regional head of Americas at Grant Thornton International Ltd, noted that businesses in the region had developed skillsets and abilities over many years to deal with crises. “This has helped them tremendously in dealing with Coronavirus,” says Roy. “What has become very clear in the last few months is that the firms who have done the best are those that have savings, resources and reserves to draw on, and that is the direct outcome of lessons learnt in past crises.”
Robert Hannah, global head of strategic growth markets at Grant Thornton International Ltd, also notes that many mid-market companies in Latin America are family-owned which means they have much longer time horizons. “I’ve heard from our Mexico firm, that national businesses facing up to tough times are thinking ‘we don’t need to make as much money over the next two years because we are looking at a 10-year horizon’.”
While these businesses may be resilient, they are not immune and nor is the continent. The IMF forecasts over a $12 trillion loss of global economic growth from the pandemic and that 10% will stem from Latin America.[i] Roy Buddle notes that the region’s prosperity remains dependent on a strong US economy, and that further weaknesses in North America will have a ripple effect on every economy in Latin America.
Please take a look at our methodology section if you’d like further details about the nature of the index before reading further.
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Restrictions to growth are only marginally worse
The Global business pulse focuses on two main elements of business leaders’ sentiment: the ‘outlook’ and the ‘restrictions’ their companies face. The resilience of Latin American business is seen here in both branches of the index, but particularly on the restrictions side. This sub-index worsened by just 2.2 points – compared with a global fall of around 11 points – indicating that mid-market leaders think that conditions have become only marginally worse during the midst of the pandemic than they were prior to it.
The decline we see in the outlook is primarily due to a fall in economic optimism. Results for H1 2020 show that 40% of mid-market companies are currently optimistic about the economic outlook, down from 65% in H2 2019. Brazil registered the sharpest decline in optimism (-29 percentage points) — perhaps unsurprising given the severity of its Covid-19 outbreak — followed by Mexico and Argentina.
Latin American firms remain upbeat on exports
With the exception of economic optimism, outlook indicators in the region remain relatively buoyant. Investment intentions remained largely unchanged, with around 35-50% of firms reporting plans to increase investment across most areas, despite falls in revenue and profit growth expectations. Investments in R&D and technology remain a priority, which Roy Buddle notes is “related to process costs and optimization, so that companies can make processes more efficient, reduce costs and remain in business. It’s a route to survival as much as it is growth right now.” He predicts that this is going to be a significant trend both regionally and globally going forward.
And mid-market businesses are keeping their faith in exports, with expectations down just two percentage points (ppt) compared to H2 2019. In Argentina, Brazil, and Mexico, export expectations are all at similar levels to H2 2019. Mexico’s results may well have been boosted by the ratification by Canada in March of the United States Mexico Canada Agreement (USMCA), the successor to the North American Free Trade Agreement. This cleared the way for USMCA to take effect from July 2020 and ensures that Mexico maintains its preferential access to the all-important US market.
Demand and supply constraints show little change
While economic optimism fell sharply, the change to economic uncertainty was much more restrained, worsening by eight ppt, compared to 17 ppt globally. This speaks to the already high levels of volatility and economic uncertainty in the region. Amazingly, in H1 2020, levels of economic uncertainty in debt-ravaged Argentina actually improved following a change in government – one of only two countries in our sample of 29 to do so.
There was little movement in demand and supply constraints. The economic slowdown has yet to translate into fewer orders for mid-market businesses in the regions, and there hasn’t been the same jump in concerns around a shortage of finance that we’ve seen in most other parts of the world. This last point probably also reflects the financial reserves of Latin American businesses, highlighted by Roy.