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23 Sep 2014
The slowdown in the expansion of the middle class, the growth engine of Latin America, will affect Latin America's prospects
New York, September 23, 2014 -- After a steady rise during the past decade, Latin America's
middle class growth is moderating. This slowdown in middle class
growth will likely have a broad economic impact but will especially affect
certain industries, according to a new report from Moody's
Investors Service, "Latin America's Middle Class Growth
Slows, Tempering Prospects for Retailers, Banks and Homebuilders."
Among the worst affected companies will be retailers, auto manufacturers,
homebuilders, airlines, and sellers of high-ticket,
credit-dependent and non-essential items.
"Economic growth throughout Latin America is slowing down,
with growth in the first half of 2014 lower than we expected, negatively
affecting both consumption and investment," says Gersan Zurita,
a Moody's senior vice president and co-author of the report.
"This follows a decade of strong economic growth, rising wages
and increased consumer spending, which have lifted more Latin Americans
into the middle class than ever before."
Moody's is forecasting that growth in Argentina, Brazil,
Chile and Peru will fall below the average growth rate during the 2004-13
period. Mexico is the only country where growth will exceed its
historical average, but that is small consolation given its tepid
growth during the past decade.
"Investment and government spending, and not consumer spending,
will lead the modest expected recovery for most of the region in 2015,"
In Argentina the continuing economic decline threatens to undo much of
the social progress of the last decade, but the economic outlook
is a bit more optimistic for Mexico, Colombia and Peru, where
the main growth driver will be government spending.
Argentina is the most at risk. In the past year, uncontrolled
inflation, high interest rates and a painful recession have forced
consumers to cut back drastically. As a result, bank lending
is decreasing. Indeed, loan originations have already declined
20%-30%. The government's sovereign
default in July will further limit the funding options for businesses
and lead to further devaluation of the peso, adding to inflationary
pressures. The asset quality of securitizations backed by consumer
debt is also very likely to deteriorate.
While the long-term outlook for Brazil's middle class remains
positive, sentiment among consumers and investors has worsened significantly
in the past three years, and the economy's consumer-led
growth has reached the point of exhaustion. As a result,
credit availability is likely to decline. High interest rates and
high household debt could delay a rebound in consumer spending,
although companies are generally well prepared to weather the slowdown.
The homebuilding and related sectors will very likely be vulnerable,
as well as industrial sectors such as steel, auto and appliance
manufacturing. However, retailers are likely to benefit from
secular trends. Finally, the quality of collateral in securitizations
will weaken as lenders relax underwriting standards to accelerate originations.
Chile and Peru
In Chile and Peru, an economic slowdown this year has cooled consumer
spending, while declines in mining investment and global prices
for both countries' export commodities have resulted in slower growth.
In Chile, in the wake of declining business and consumer confidence,
rising inflation, and currency depreciation higher than that of
most of the emerging market currencies, only the government stimulus
measures are likely to lead to slightly stronger growth in 2015.
In Peru, a recovery in 2015 will be driven by stronger employment
and firmer consumer confidence. So far this year, however,
business confidence and investment have declined, reflecting investors'
concerns about global demand for the country's mining exports.
In addition, an inefficient bureaucracy, at both local and
regional levels, has created more impediments to investment,
which the authorities have sought to mitigate. However, the
positive impact of reforms will begin to be felt only next year.
Mexico and Colombia
Long-term prospects for the middle class in both Mexico and Colombia
remain encouraging. Mexico's recent economic reforms are
very likely to improve competitiveness, leading to faster growth
that will benefit middle class consumers over the long term. Higher
government spending, especially on infrastructure, and an
acceleration of the US economy, a major trading partner, will
boost demand and lead to faster job creation and wage growth. Over
the long term, the economy is likely to also benefit from reforms
in the energy, telecommunications and financial sectors that were
passed this year. Mortgages, as well as loans to small and
medium-sized enterprises, will further support growth.
Moody's expects that consumer loans will also continue to grow,
but at a slower pace, and although consumer delinquencies will remain
high, Moody's believes that they will stabilize, especially
if the economy accelerates as it expects.
In Colombia, economic conditions remain favorable, and consumer
spending is likely to hold at current levels as the economy continues
to expand. Loan growth will remain strong, although it will
start to moderate as the central bank tightens monetary policy.
House prices have risen at more than twice the inflation rate over the
last five years, but banks' ample loan loss reserves and conservative
LTV ratios will likely counteract a slowdown in the housing market.
In addition, asset quality remains strong.
"Latin America's Middle Class Growth Slows, Tempering
Prospects for Retailers, Banks and Homebuilders" is available
to subscribers at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_174846.
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Senior Vice President
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Nymia Thamara Cortes de Almeida
VP - Senior Credit Officer
Corporate Finance Group
Moody's: Slowing middle class growth to affect Latin America's prospects
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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