Analysis
23 Sep 19

Latin America inflation, and its impact on the automobile industry

When conducting business in Latin America, there are economic and political uncertainties companies must face and among them is the impact of high inflation in some parts of the region.

Although most of the largest economies in Latin America are doing okay (see table below), the two countries which have been bearing the blow of high inflation for some time now are Argentina and Venezuela.

Inflation in Latin America, in order of largest economies 


Brazil, 3.43% (August)

Mexico, 3.16% (August)

*Argentina, 53.6% (August)

Colombia, 3.75% (August)

Chile, 2.30% (August)

Peru, 2.04% (August)

*Venezuela, 282,973% (April)

Dominican Republic, 1.72% (August)

Ecuador, 0.33% (August)

Guatemala, 4.37% (July)

*of high concern

 

Source: Trading Economics

 

 

Venezuela

As a result of its ongoing crisis, the United Nations estimates that 7% of the population (2.3 million people) in Venezuela has emigrated to escape poverty and violence. Moreover, the country is ranked as the most insecure nation in the world by Gallup due to shortage and hunger.

Meanwhile, the automotive sector certainly has not been spared. Imports have fallen and internal production has slumped from 450,000 registrations in 2007 down to 2,000 in 2018. Drivers are finding increasing difficulties to keep their vehicles on roads. Fuel is almost free (one cent per liter) but petrol shortages are ever more common creating long lines at stations.

Transport union leaders have also estimated that the country’s fleet of 280,000 passenger buses has dwindled down to 30,000 in just a two-year period.

In 2018, Ford produced and sold 1,000 cars, followed by Toyota with 600 and FCA/Chrysler with the remaining 400. The government has tried to remedy the situation by teaming up with Chinese companies to produce cars in Venezuela. Between 2005 and 2017, the China Development Bank and China Export-Import Bank have loaned more than $62 billion to Venezuela.

Argentina

Hit with high inflation and a devaluating currency, Argentina has been facing an economic crisis since mid-2018. Besides last year’s GDP falling 19.5% year-over-year to some US$519 billion, inflation is above 50% and the benchmark interest rate is topping 85%.

As a result, in January-August, new car sales were down 47% to 327,206 units. The best-selling brand during the eight-month period was Volkswagen, (down 47.3% to 49,466 units), followed by Toyota (-30.8% to 47,228), Renault (-47.4% to 46,531), Ford (-50% to 38,305), and Chevrolet which dropped 54.2% to 36,748 units.

“We used to favor leasing in Argentina, but due to inflation we are now moving toward purchasing,” regional procurement manager for food and beverage company Nestlé Polo Palmen told Global Fleet in an interview.
 

As for exports, Argentina relies heavily on its Mercosur partners, Paraguay, Uruguay, and Brazil, mainly the latter. Approximately 60% of the local car production is sent, for the most part, to these countries. To help matters, tax refunds in Argentina have been increased to 6.5% from 2% in hopes to increase exports to these three countries.

Meanwhile, it has also been negative for Brazil where Brazilian car exports to Argentina plummeted 45% in the first quarter of this year.

In the end, its key to remember that the automobile markets in Latin America, much like other regions of the world, depend on each other. Let’s hope that healthy economies in the neighboring countries will trickle on over to Argentina soon, and eventually Venezuela.

Authored by: Daniel Bland
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