Latin America – the financial crisis and its impact on the telecom market.
The financial crisis
In mid-September 2008, several Latin American governments were claiming that the US financial predicament would have no impact on Latin America, because after its recession of 2001-2003, the region had taken sufficiently strong economic and fiscal measures to avert the reoccurrence of such a crisis.
But in the first week of October, stock markets from Sao Paulo to Mexico City took a hit and national currencies slumped against the US dollar. Bovespa, the Sao Paulo exchange, saw a weekly decline of 12% percent, its worst result in six years, while Mexico’s Bolsa index had its biggest weekly decline in eight years. Trading on Sao Paulo’s stock exchange was halted more than once after the Ibovespa crossed the 10% percent loss threshold.
Following the stock exchange panic, the region’s heads of government drastically revised their position, expressing alarm at a situation that could devastate the economies of Latin America, which have been reaping for the past few years the rewards of high global demand for commodities. Falling markets could stem that demand and the region could lose the ground it managed to gain since its economic debacle of 2001-2003.
Particularly dire is the outlook for the large percentage of Latin America’s population already living below the poverty line. Faced with rising food prices, the number of people dying from malnutrition is likely to start escalating again. The president of Panama in a speech noted how US$700 billion were quickly made available to bail out wealthy speculators while for years the world has turned a blind eye to all the children who die every day of hunger and deprivation.
On the plus side, the socialist and populist oriented governments in a number of Latin American countries are less likely to use foreign income for extravagances and reckless speculation. Instead, they are funding poverty alleviation programs and infrastructure to support growth. Also, the major Latin American economies have built up solid national reserves. Brazil for example is using part of its foreign exchange reserves to help its exporters weather the crisis.
Most Latin American countries are highly dependent on the US Free Trade Agreements and the US economy, although the region has been building strong relationships with China as a result of the latter’s increasing demand for resources.
In its World Economic Outlook published in early October 2008, the IMF revised downward its previous forecasts for global economic growth. The revision is not too dire for Latin America, although the IMF warns that all forecasts are subject to change and that the outlook is highly uncertain. In its World Economic Outlook Database published in April 2008, the IMF predicted 4.4% GDP growth for Latin America in 2008 and 3.6% in 2009. In October 2008, the forecast was 4.6% growth in 2008 and 3.2% in 2009 – so the 2008 forecast is slightly higher (by 0.2%) and the 2009 slightly lower (by 0.4%) compared with the outlook five months earlier.
After four years of strong GDP growth, the pace already began to slow in most Latin American economies during the first half of 2008 largely due to decreasing exports, although domestic demand remained robust. With the worsening of the global financial crisis, export earnings are likely to fall further as Latin America is primarily an exporter of commodities and raw materials, which would be the worst hit by a global recession. Lower export prices would also place the region’s exchange rates under pressure. Domestic demand is also likely to drop due to probable monetary policy tightening to contain inflation.
High inflation is a problem in several Latin American economies, especially Venezuela, Bolivia, Paraguay, Argentina, and several Central American nations. The IMF predicts 7.9% inflation in 2008 and 7.3% in 2009 for the whole of Latin America.
Besides inflation and decreasing exports, the region faces severe deceleration due to curtailed investments. As the global credit crunch trickles down to Latin America, risk-averse investors are pulling cash from the region, dumping company shares amid fears that the financial crisis will tighten access to credit and slow growth around the world. As a result, both households and companies in Latin America are likely to slash some planned spending in order to increase precautionary savings. This means individuals will postpone purchases of non-essential items and corporations will delay their investment projects.
Brazil is likely to take the biggest hit because it has the largest amount of foreign investors. Mexico and Colombia could be seriously affected due to their close political, economic, and trade ties with the US. In Argentina, the crisis is likely to cause capital flight, interest rate hikes, and reductions in consumption and bank lending. Venezuela will suffer from a projected drop in oil prices, with November crude futures having fallen 6.5% to below $88 a barrel.
Mexican billionaire Carlos Slim has described the financial crisis as ‘the worst I have known in all of my life, and the most complex since 1929,’ which was the year of the Great Depression. ‘It’s obviously bigger,’ he added, ‘because we are talking about an economy that is a lot bigger.’
Impact on the telecom market
In Latin America, the markets worst hit by the financial crisis have been those involved in the commodity, mineral, and petroleum sectors. To date, telecom companies appear to have dodged the worst of the crisis. For example, on 6 October, only two out of the 35 stocks listed on Mexico’s IPC managed to close higher, and they were both telecom stocks: Telmex rose 1.5%, while Carso Global Telecom gained 3.1%. Both Telmex and Carso Global Telecom are controlled by Carlos Slim. His other major investment, pan-regional mobile giant América Móvil, pared its losses to finish 1% down, a far smaller loss than that experienced by most other companies.
The effect of a prolonged financial crisis on Latin America can be anticipated to some extent based on the region’s recession of 2001-2003. At that time, the sector that suffered the most was cable television, while mobile telephony only slumped slightly. The fixed line market came to a halt and never recovered, as countries joined the global mobile substitution trend. The broadband market, still in its infancy, experienced a delay in growth that is still evident today, in that Latin American broadband penetration is lower than would be expected given the region’s other economic indicators.
If the present financial crisis deepens, the telecom services worst affected are likely to be those that provide entertainment, such as pay TV, digital media, and non-corporate mobile data services. The fixed line market is likely to remain in its present stagnant condition, and government universalisation projects may also become paralysed due to fund shortages. Mobile telephony has become such an essential facility that it is likely to continue growing, though at a reduced rate. Broadband, on the other hand, may take a direct hit, as companies reduce investments in new networks and individuals find they have less money to spend.
Broadband development will be more than ever dependant on government and regulatory efforts, and hopefully the lessons learned from the disaster of unfettered speculation may lead to a more methodical and far-sighted approach to telecom investment, with a view to public wellbeing such as E-health, E-education, E-government, and other social services. Internet cafés will also become more and more important in a region where education is high and many, especially among the younger population, are becoming accustomed to online activities.
See also:
- Brazil – Key Statistics, Telecom Market and Regulatory Overview
- Colombia – Key Statistics Telecom Market and Regulatory Overview
- Argentina – Key Statistics, Regulatory Overview and Fixed Network Markets
- Mexico – Key Statistics, Telecom Market and Regulatory Overview
- Venezuela – Key Statistics, Regulatory Overview and Fixed Network Markets
- Latin America – Telecom Market, Regulatory Overview & Infrastructure
- Latin America – Convergence, Broadband, & Internet Market
- Latin America – Mobile Market – Overview & Statistics
January 29th, 2009 at 5:33 am
[...] late than never, this week I stumbled upon Paul’s blog entry of October 13th 2008, in which he discusses how the region’s telcos are expected to fare in the near [...]