FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition covering the latest developments in the US-China trade war, Chile’s new constitution, and increased business confidence in Brazil. For the full complimentary newsletter, subscribe today.
Chilean peso plummets after new constitution is proposed
- This week, President Sebastián Piñera announced the administration’s intentions to draft a new constitution for Chile. The government affirmed that Congress would draft the charter, then obtain ultimate approval of the document via popular referendum.
- While a new constitution has emerged as a consensus demand from protesters, the opposition united on November 12th to reject the initiative. They argued that a constitutional assembly instead would be a more impartial vehicle for profound constitutional change.
- Nevertheless, any constitutional proposal would cause months of political negotiations before the constitutional body could propose any final draft for approval.
- Investors concerns are twofold: a lack of consensus around how to construct a new constitution and a deeper concern that changing the country’s Magna Carta would jeopardize the market-friendly economic policies that helped Chile become a relatively wealthy country in Latin America.
- The peso fell 5.3% on November 11th and 12th, reaching a record low of CLP:US$ 800.
Chile’s outlook has worsened as the constitutional proposal has failed to satisfy protesters. The peso’s depreciation this week has also signaled that private investors are losing confidence in Chile’s ability to emerge from this crisis in the short-term. We expect protests to likely continue in their current state through the end of 2019 and linger for the rest of Piñera’s presidency (which ends in early 2022). However, we have reformulated our downside scenario to include the explicit call for Piñera’s resignation and snap elections. We also have revised down our 2019 and 2020 Chile forecasts.
Even under our base-case scenario, firms should continue to brace for FX volatility, weak customer demand, and logistical interruptions. Firms should prioritize FX volatility management (e.g., reducing accounts receivable organically with channel partners, continuing traditional financial hedging techniques, etc.) and contingency planning. Further down the road, timing the recovery in customer demand will prove pivotal; customers are likely delaying investments now and will look to execute those purchases when uncertainty simmers. However, we do not see an all-encompassing agreement that would end the protests in the near-term, which highlights the need for strong scenario narratives and clear signposts to watch. Clients should schedule a briefing with their client services manager to learn more about the details of our scenarios and signposts to monitor for Chile.
Alex Schober, Senior Analyst for Latin America
FrontierView clients: See our more recent LATAM Market Review for further insights
US and China remain undecided on ‘Phase One’ deal
- For the past month, there has been a series of conflicting statements on the timing and substance of the ‘Phase one’ deal between the US and China.
- Rather than addressing all the US-China issues in a single deal, negotiators have seemingly opted to approach the trade deal in phases, leaving the more difficult issues for later phases.
- On November 7th, a spokesperson at the Chinese Ministry of Commerce stated that both sides agreed that a rollback of some previous tariffs would be part of a ‘Phase One’ deal.
- US advisor Peter Navarro refuted this assertion. Yesterday in a speech at the Economic Club of New York, President Donald Trump confirmed that the US had not agreed to rollback any previous tariffs.
- There is currently no agreed-upon meeting between Trump and President Xi Jinping for when the signature of such a deal could take place. The key deadline is December 15th, when then next round of US tariffs is scheduled to take effect.
When the US threatened further tariffs on China in the summer, we warned that these tariffs–which largely hit consumer goods not previously subject to tariffs–would be politically unpopular and risk tilting the US into a recession. It is not surprising that Trump delayed the round of tariffs scheduled to take effect in October, nor that he is willing to postpone the tariff round currently scheduled for December 15th. But delaying tariffs is very different politically from the rollback of existing tariffs. With the US economic news being quite positive recently, fears of a recession have fallen, which means that Trump’s predominate concern is being attacked by China hawks in the US as he enters the 2020 election season. Trump needs to secure more from Beijing than token agricultural purchases to ensure the rollback of previous tariffs.
The risk of further escalation of the US-China trade war into additional non-tariff restrictions on the cross-border movement of goods, people, and technology is one of the most substantial risks in our 2020 events to watch. Firms should not expect a rapid rollback of existing tariffs, nor a return to the pre-trade war status quo. The US-China trade war has triggered the beginning of permanent changes to US-China supply chains and product sourcing.
Ryan Connelly, Practice Leader for Global Economics and Scenarios
FrontierView clients: See our US-China Trade War LiveView dashboard for further insights
Firms look to Brazil in 2020 as regional unrest increases
- FrontierView’s latest Latin America Executive Survey results stress that market sentiment toward Brazil has become increasingly bullish for 2020. Not only are multinationals performing more strongly this year in terms of top-line growth, but global executives have taken note and prioritized Brazil in global investment portfolios for next year.
- Despite modest growth in 2019, multinationals reported robust top-line performance compared to 2018: 70% of respondents claimed top-line performance was either somewhat or significantly better compared to this point last year. This has peaked interest in the market with 84% of respondents reporting increased prioritization of Brazil from a global perspective over the past 12 months.
- Another factor boosting sentiment is that following the passing of pension reform, firms have now shifted their attention to tax reform, which they expect to be passed by 2020 and to be beneficial for their businesses.
FrontierView shares the sense of improved optimism toward Brazil, which stands out as a key accelerating market in the Latin American region in 2020. We expect growth to pick up from a modest 1.1% in 2019 to 2.5% in 2020 largely on the back of consumption fueled by expanding credit. The growth risks to the Brazilian outlook have now significantly shifted in nature from being largely internal, stemming from pension reform, to now being external amid a global slowdown, US-China trade war risks, and the crisis in neighboring Argentina.
Although we believe a greater sense of optimism toward Brazil is warranted, firms will need to closely monitor the expansion of credit in the economy, which will be key for this growth acceleration to materialize. Local teams should ensure a strong alignment with corporate on Brazil’s growth expectations and the potential risks to the outlook. Additionally, our base case for Brazil sees the government’s tax reform implemented by Q2 2020, which should boost business confidence. This would generate long-term benefits from a more simplified tax system despite potential short-term costs as firms adapt to a new tax framework.
Ramiro Sugranes, Analyst for Latin America Research
FrontierView clients: See our more recent Brazil Industry Roundtable for further insights