Economic Storm Threatening Argentina and Brazil

As the Southern Cone was getting ready to welcome Spring, consumers and investors in Argentina were shocked by the rapidly depreciating Peso; dropping more than 25% during the last week of August 2018, with an accumulated depreciation of more than 42% during the month.

Chart 1: USD-ARS August 2018 X-Rate

Source: Bloomberg.com

A few days after the foreign exchange earthquake hit Argentina, the contagious effects of the depreciation reached Brazil.  In response, the Brazilian Real also depreciated more than 11% in less than a week. However, the Brazilian market has been soft since returning from its Summer recess in March. Brazilian presidential elections will be in October this year. The uncertainty of who might win has created a crisis of confidence among investors and consumers. This has triggered soft economic growth for most of 2018.

The Hurricane

Argentina is not facing a crisis of same magnitude as the one it had in 2001.  However, given the current economic and political scenario, consumer behavior will suffer in the short term, but most likely return to normal over the midterm.  Below are some of the main foreseeable areas that will be impacted:

  • Mobile device sales could decrease around 15%-20% in volume as mobile phone users will postpone any plans to upgrade and will purchase a device only in case of absolute necessity.
  • Smuggling of mobile devices (grey market) is decreasing, while refurbished smartphones are increasing.
  • The share of ultra-low-cost smartphones likely increases. That means increasing the share of 3G smartphones, which are currently non-existent in Argentina. The Argentine government has also been slowly opening the market, giving opportunities to selected brands to import mobile devices.
  • Internet access will become costlier, as wholesale access costs are priced in USD.  So many consumers will most likely to migrate to a lower-cost access plan.
  • Mobile Postpaid subscribers will downgrade their current access plan. Argentina has one of the biggest bases of postpaid subscribers in all LATAM. The carrier that can offer the best plan for price, will increase its subscriber base.
  • Android and Apple app stores are both billed in USD. The consumption of these apps will likely decrease.
  • Services such as Netflix, Spotify, which are popular in Argentina, are both billed in Pesos. Netflix for example has around 1M subscribers in Argentina. Both services have already announced that they would not modify their subscription price, despite of the Peso depreciation. By maintaining the service price, they have not only secured their paid subscriber base, but even open the opportunity to increase their user base.

Argentina had many years of governments that were too worried about winning elections rather than fixing the economy.  Therefore, Argentina’s Central Bank was pumping Pesos into the economy which fueled more than 10 years of double-digit inflation, 30% annual inflation on average.  This inflation has been gnawing at the economy and consumer confidence, and it became a never-ending vicious circle.  Therefore, even though this whole crisis is painful for Argentina in the short term, this hopefully will offer a better picture for the midterm and a positive one for the long term.

The Tropical Storm

In the case of Brazil as mentioned above, economic growth has been soft during most of 2018. According to the Brazilian Statistics Institute, inflation has risen to around 4.5% in July, the highest in the last 16 months, after rising prices in fuels such as gasoline and diesel.  However, the unemployment rate has not increased during 2018.  Forex on the other hand has been stable, until Argentina’s Peso depreciated which has impacted the Real. Argentina is the third biggest trading partner of Brazil, according to the OECD  (Organization for Economic Co-operation and Development).

 Chart 2: Inflation Rate Variation in Brazil 2017-2018

Source: tradieconomics.com

  • According to our Market Monitor, Q2 2018, Brazil mobile device sales suffered a -5% YoY decrease. This single digit decline will likely continue due to the uncertainty; end users are postponing their mobile device replacement plans.
  • Feature phone sales should continue to increase. As there are very few ultra-low cost smartphones available in Brazil, people will turn to feature phones as a temporary solution.

This crises will impact the investment plans of both countries.  However, the degree of impact will differ. In Argentina at least 60% of the short-term investment projects in telecommunications have been paused. The impact on projects from small and medium enterprises might be even higher.

Most of the new Brazilian investment projects are delayed until the end of the year. As Brazil is totally influenced by political uncertainty, the impact should fade away after the elections, that is by the end of 2018.  But in the case of Argentina the uncertainty might extend until at least mid-2019.

Finally, retailers and OEMs in the region, that can endure without increasing prices, and/or continue to offer installment payment schemes, will have more of a competitive edge.  As consumers will most likely purchase a new device if they perceive it as an “opportunity”.