KEY RISKS OF LATIN AMERICA FOR THE FOREIGN EXPORTER AND HOW TO MITIGATE THEM
Latin America, both in its central and southern areas, is a region with a strong tendency to import all kinds of goods and services. This makes it a promising market for exporting companies anywhere in the world. However, the economic outlook for this 2020 suggests caution when reviewing projections.
The Economic Commission for Latin America and the Caribbean (ECLAC) estimates that this will be a year of “widespread slowdown” in the region. Specifically, only an average of 0.1% growth in gross domestic product (GDP) is expected. Brazil and Mexico will continue to be the two main Latin American engines with an expansion of 1.7% and 1.3% respectively.
This outlook makes clear that different Latin American countries offer niche opportunities for exporting companies from the United States, Canada, the European Union, and Asia. The important thing is that before giving in to the lure of an “untapped market”, one must consider what the most important risks are in this region and what may be the most efficient ways to mitigate them.
Let us review, then, the two main risks for foreign exporters in both South and Central America:
Risk 1: Forgetting the Latin American political environment
Although most of Latin America share a common language and some common economic trends, the reality is that the political particularities of each country have nothing to do with those of other nations, even when they are neighbors and share a border.
Foreign export companies are obliged to consider the political volatility within each Latin American country they wish to reach with their products, before anything else. This is because it is a diverse region where each country exhibits its own conditions for political instability and social inequality, which could trigger a wave of protest.
In most cases, this political risk outweighs the economic risk, and since it is not covered by a large number of commercial insurers, it is best to thoroughly assess the levels of governance and the threats in the outlook before any other point.
The best recipe for assessing the political risk dimension is to cross-check specialized information sources such as The Economist’s intelligence reports with other analyses provided by local member firms of the Latin American Association of Economic Consultants (LAECO), such as Credit Report.
This mix of information and data is a simple way to get a good estimate of what the key points to consider in each country might be, before starting business negotiations with a Latin American company.
Risk 2: The variety of local laws
Unlike the European Union, which provides a common framework of financial and trade rules for the 27 member nations, in Latin America, each country has its own framework of local laws on trade negotiations, without mentioning the disparities in collection practices.
The trade guidelines considered as “usual” or “normal” in Brazil may be very different from those used in other countries such as Mexico, Chile, Peru, Bolivia or Ecuador. Likewise, there are economic sectors that have tariff preferences that can be temporary and change in very short periods.
This diverse range of trade laws also affects collection practices. Most of the publicly available information on how long it takes a company to pay most of its commitments comes from references provided by the companies themselves through individual contacts.
For example, after analyzing the collection terms of 40,000 business operations in Colombia over one year, we learned that the average is 45 days, and more specifically:
Furthermore, the other major node of public financial information comes from the business community. For example, chambers in Colombia usually publish total assets and current liabilities, as well as a sales and profits financial statement of companies, but without checking these figures through quality control. This limits the reliability of such reports and makes it essential to rely on a secondary source to cross-check data and verify the consistency of the figures. Hence, this is precisely our job.
Latin America is a market with a lot of potential for exporting companies in the world. Credit Report is your best partner to make preliminary evaluations of both the specific market and the partner company, always with accurate data, honesty, and reliability, as we have been doing in these 55 years of operations.