LatinFinance - May/June 2014 - 12

COVER
STORY
The Latin American consumer story is changing dramatically.
The days when the sector was a mainstay of growth - and investment
banking deal flow - may be gone forever. By Dominic O'Neill

The
consumer
boom breaks
T
he Latin American consumer has reached a turning point. After more than a decade
of ever-increasing wages, visitors to the region's newly built malls and department stores are
beginning to forego new televisions, new sofas and dining tables, and new clothes. Middleclass aspirations are still growing, but the means - the cash and the credit - are no longer
keeping up at the same pace.
Financiers and investors, already hit by a slowdown in the commodities sector, must now
rethink the most reliable deal-making theme of the past decade: the emerging consumer.
As Morgan Stanley outlined last year in its "Fragile Five" report on the emerging nations
most vulnerable to US rate rises, this is not a story specific to Latin America. Brazil and the
other four countries (India, Indonesia, South Africa and Turkey) on that list must rebalance
their economies, tightening fiscal and monetary policies - inevitably to the detriment of the
local consumer. Many who have recently joined the ranks of the middle class are at risk of
falling back down the income ladder.
For Latin America, the consumer slowdown has begun - and it's getting worse. Growth
in consumption in Brazil, according to Bank of America Merrill Lynch, is set to fall to 1.5% in
2014 and 2015. That is less than half the rate of increase between 2010 and 2013, and about a
third of the increase between 2006 and 2008. Consumption in Chile and Peru is set to grow a
little over 4% in 2014 and 2015 - between a half and a third lower than the rate between 2006
and 2013.
Figures from research firm Capital Economics tell a similar story. "Combined with a
tightening of local credit conditions, the boom in domestic demand that has driven growth
in Latin America over the past decade looks set to fizzle out," it said in its first quarter 2014
report. A slowdown in China, the report noted, will have most impact on Chile, Peru and
Brazil; and with tighter global monetary conditions, financing current account deficits will

12 L ATINFINA NCE.COM - May/June 2014

become much harder.
Fitch's March report on Brazilian
corporates offers another gloomy forecast:
"Consumers have been hit hard by inflation
and demand is not likely to pick up soon".
Rising interest rates in Brazil (heading
towards almost double the historic low
of just a year ago) and a slowdown in
consumer lending is dragging on these
firms' sales potential, Fitch warned.
All this could force a drastic reevaluation
of investors' long-held views on the most
attractive companies in Latin America.
"The consumer won't be the driver of
GDP growth in Latin America for the
next five years," says Luis Carrillo, head
of the Latin America group at JPMorgan
Asset Management. "Latin American
consumption will grow, but at a similar level
to GDP growth, rather than much above, as
was the case in previous years."
For much of the past decade, consumerorientated firms were the "darlings of
the stock market", says Michael Reynal,

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