Latin American Business Outlook
Part of the Global Business Outlook
A joint survey effort between
Duke University
Fundação Getúlio Vargas
CFO magazine
El IMEF
Latin American Business Outlook
PyME
Duke University / FGV / CFO Magazine
June 2017
1
Top Concerns of Latin American CFOs
1. Economic Uncertainty
2. Weak demand for product/services
3. Government policies
4. Access to capita
5. Cost of borrowing
6. Corporate tax code (domestic)
7. Cost of benefits
8. Employee productivity
9. Currency risk
10. Regulatory requirements
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
2
Business Optimism Index
Latin American CFO optimism continues to increase, led by Mexico and Peru.
Global Trends
June 2017 Response
Country Business Optimism Index
Country / Region
75
65
55
45
35
Jun 2016
Sept 2016
Dec 2016
Mar 2017
Latin America
United States
Asia
Africa
Jun 2017
80
70
60
50
40
30
20
10
0
Brazil
Europe
Peru
Chile
Mexico
Ecuador
Own-Firm Business Optimism Index
Own Company
75
65
55
45
35
Jun 2016
Sept 2016
Dec 2016
Mar 2017
Latin America
United States
Asia
Africa
Jun 2017
80
70
60
50
40
30
20
10
0
Europe
Brazil
Peru
Chile
Mexico
Ecuador
Notes: Presented data are the mean value for each region or country, Scale from 0-100
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
3
Expected Product Price Inflation
Latin American inflationary expectations are similar as last quarter, highest in Mexico
Global Trends
June 2017 Outlook
6%
Product Prices
10%
4%
5%
2%
0%
Jun 2016
Sept 2016
Dec 2016
Mar 2017
Jun 2017
0%
-5%
Latin America
United States
Asia
Africa
Europe
Inflationary expectations moderate in Latin
America


Latin American CFOs expect highest price
increases among all the regions
CFOs in Asia expect no change in prices
Inflation expectations highest in Mexico
 Of responding Latam countries, Mexico has the
highest inflationary expectations
 Import prices drive some of the Latin American
price inflation
Notes: Presented data are the mean or median values for each region or country.
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
4
Expected Growth in Sales Revenue
Latin America sales revenue expectations decrease
June 2017 Outlook
Global Trends
15%
8%
Revenue
10%
6%
4%
5%
2%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Latin America
United States
Asia
Africa
Jun 2017
Europe
-2%
Latin American revenue growth decreases


0%
Revenue expectations decrease from last quarter
Asian revenue growth expectations remain low
Peru and Mexico expect most rapid revenue growth
 Overall Latin American revenues pulled down by
Brazil and Ecuador
 Mexico expects rapid sales growth, due in part to
relatively high inflation
Notes: Presented data are the mean or median values for each region or country.
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
5
Capital Spending Plans
Latin American capital spending expectations remain the weakest among all continents in 2017
June 2017 Outlook
Global Trends
15%
Capital Spending
10%
8%
10%
6%
4%
5%
2%
0%
0%
Jun 2016
Sept 2016
Dec 2016
Mar 2017
Jun 2017
-2%
-5%
Latin America
United States
Asia
Africa
Europe
Modest capital spending plans


-4%
Business spending varies within Latin America
Latin American CFOs expect little business spending growth
Business spending is ramping up in Europe and Asia,
softening in US
 Mexico and Peru anticipate moderate growth in
capital expenditures
 Spending expected to decline in Chile and remain
almost constant in Brazil
Notes: Presented data are the mean or median values for each region or country.
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
6
Expected Change in Earnings
Earnings growth expectations decline slightly from last quarter
June 2017 Outlook
Global Trends
15%
10%
8%
Earnings
10%
6%
5%
4%
2%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Latin America
Asia
Mar 2017
United States
Jun 2017
-2%
Africa
Latam earnings expectations soften


0%
Europe
Latin America and Europe have the lowest
earnings growth expectations for the next year
Africa expects the highest earnings growth,
rebounding somewhat from very low levels
United Europe
States
Asia
Latin
Peru
America
Chile
Mexico Ecuador
Positive earnings growth in Latin America
 Peru and Chile have the strongest earnings
expectations
 Earnings are expected to grow moderately in
Mexico and Ecuador
Notes: Presented data are the mean public company value for each region or country.
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
7
Fulltime Employment Outlook
Latin American CFOs expect little fulltime employment growth in 2017
June 2017 Outlook
Global Trends
# FT Employees
10%
6%
4%
5%
2%
0%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Latin America
United States
Asia
Africa
Jun 2017
Europe
-2%
-4%
-6%
Weak employment outlook in Latin America


L.A. And African CFOs expect zero employment
growth in 2017.
Employment growth stays strong in US
Employment growth varies across L.A.
 Expected employment reductions in Brazil, Peru,
Chile and Ecuador pull down the average for all of
Latin America
 Employment in Mexico is expected to grow
Notes: Presented data are the mean value for each region or country
#FT=Number of Fulltime Employees
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
8
Expected Wage and Salary Increases
Latin American wages and salaries are projected to increase by 3.8% in 2017
June 2017 Outlook
Global Trends
6%
Wages & Salaries
10%
4%
5%
2%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Latin America
United States
Asia
Africa
Jun 2017
Europe
-2%
Similar wage growth expectations cross all regions


0%
US expects wages to grow 4.1% in 2017, which is the
highest among all regions
Asia expects the lowest wage growth
Latin American wages to grow 4% on average
 All participating Latam countries expect positive
wage growth except Ecuador
 Wage growth in Brazil beats inflation
Notes: Presented data are the mean value for each region or country
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
9
How Uncertain is the Current Business Climate?
Compared to the typical amount of uncertainty that your company faces, how would
you rank the current level of uncertainty facing your firm?
Above average
Average
Below average
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
US
Europe
Asia
Latin America
Africa
Peru
Brazil
Chile
Mexico
10
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Actions Taken in Response to Uncertainty
Compared to an average or normal amount of uncertainty, has the current amount of
uncertainty about governmental policies and/or economic conditions led your firm to?
70%
60%
50%
40%
30%
20%
10%
0%
Proceed more aggresively
Proceed at a normal pace
uncertainty above average
Delay or proceed at a slower pace
cancel expansion/new projects
uncertainty below average
11
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Best Practices When Uncertainty is High
What are the best practices for running a company when uncertainty is high about
governmental policies and/or economic conditions?
• Stay the course Continue to pursue core strategies built on the companies’ strengths. For the most part, don’t expand into
new projects that stretch the firm in new directions. Focus on what you can control.
• Be cautious Many firms pull back and operate very cautiously, making changes slowly. Some cut existing projects or cancel
new projects but this is the exception rather than the rule
• Focus on the short-term Focus on getting through the short-term, remain flexible, but don’t lose sight of long-run
objectives
• Reduce costs
• Carefully study analyses and scenarios Have a plan and contingencies for how to react if various scenarios occur.
Hire consultants or other experts.
• Engage in risk management Be more active in risk management and hedging. Understand the economic outlook of
various scenarios very well.
• Accumulate liquid assets Reduce financial risk by accumulating liquid assets, especially cash. Don’t increase debt loads.
• Take care of the customer Communicate more with, and take extra care of, key customers.
12
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Uncertainty About Policies/Conditions Slowing Expansion
About which if any of the following items is uncertainty (about policy details or timing, etc.)
holding back your company's plans for expansion and new projects?
60%
50%
40%
30%
20%
10%
0%
Economic growth
Tax policy
Regulatory policy
Interest rates
Trade policy
Other
Immigration Policy
13
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Uncertainty About Policies/Conditions Slowing Expansion
About which if any of the following items is uncertainty (about policy details or timing, etc.)
holding back your company's plans for expansion and new projects?
80%
70%
60%
50%
40%
30%
20%
10%
0%
Latin America
Peru
Economic growth
Brazil
Tax policy
Regulatory policy
Chile
Interest rates
Mexico
Trade policy
14
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Hurdle Rates and Investment Decisions
What hurdle rate does your company use to evaluate investment projects? (red line)
80%
20
Yes
No
Hurdle Rate
18
16
60%
14
12
40%
10
8
Hurdle Rate
Yes/No, pursue all E(return)>hurdle projects
Does your company pursue all projects that are expected to earn a return > the hurdle rate? (gray
and blue rectangles)
6
20%
4
2
0%
0
US
Europe
Asia
Latin
America
Africa
Peru
Brazil
Chile
Mexico
15
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing some projects that are expected to earn a return > hurdle rate?
Shortage of production capacity
Shortage of employees
Pressure to cut expenses
Project is not consistent with company's core strategy
Some projects appear attractive only due to optimistic projections
There is too much uncertainty about some projects
The risk of the project is too high
Shortage of management time and expertise
Shortage of funding
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
16
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing some projects that are expected to earn a return > hurdle rate?
70%
US
60%
Europe
50%
Asia
40%
Latin
America
30%
20%
10%
0%
Shortage of
management time
and expertise
Project is not
consistent with
company's core
strategy
The risk of the
Shortage of funding There is too much
project is too high
uncertainty about
some projects
Shortage of
employees
Some projects
appear attractive
only due to
optimistic
projections
Pressure to cut
expenses
17
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing some projects that are expected to earn a return > hurdle rate?
60%
Peru
Brazil
Chile
Mexico
50%
40%
30%
20%
10%
0%
Shortage of funding
Shortage of management
time and expertise
The risk of the project is
too high
There is too much
uncertainty about some
projects
Some projects appear
attractive only due to
optimistic projections
Project is not consistent
with company's core
strategy
Pressure to cut expenses
18
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Weighted Average Cost of Capital
US
Europe
Asia
Latin America
Africa
What is your company's overall
weighted average cost of capital
(WACC) for 2017?
10.6
8.8
9.3
11.7
13.4
What cost of debt do you use in
your WACC calculation?
7.1
6.7
6.5
9.3
12.2
Cost of equity?
11.8
10.7
8.2
13.4
13.7
Approximately what proportion
of debt financing do you use in
your WACC calculation?
36.4
30.9
29.8
33.4
28.3
19
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
WACC vs Hurdle Rate
WACC
Hurdle Rate
20
18
16
14
12
10
8
6
4
2
0
US
Europe
Asia
Latin America
Africa
Peru
Brazil
Chile
Mexico
20
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Why Do You Set Your Hurdle Rate > WACC?
•
•
•
•
•
•
•
•
•
•
So that we choose only the best available projects
To ration – because we can’t pursue all projects
To account for riskiness of projects being evaluated
To account for costs not captured by WACC
To provide a margin of error in calculations and in investment outcomes
So that we earn excess return and increase firm value
Hurdle rate is cost of equity, to ensure we create value for shareholders
To help us select projects that are profitable every year
Expect cost of capital/mkt conditions to increase/change in near future
To preserve funding (because we have limited access to funds)
21
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
Peru’s reconstruction after flood
In aggregate terms, how will the reconstruction of Peru after the floods increase
your company's revenue?
50%
40%
30%
20%
10%
0%
decrease
Latin American Business Outlook
stay the same
increase < 5%
incr. > 5% but < 10%
Duke University / FGV / CFO Magazine
increase > 10%
Dec 2016
22
Return on Assets (ROA)
Profit growth in Latin America is strong compared to US and Europe
30%
25%
20%
15%
10%
5%
0%
US
Europe
Asia
Latin America
Approximate ROA in 2016
Africa
Peru
Brazil
Expected ROA in 2017
Chile
Mexico
Profit margins are expected to increase in all regions in 2017 except Africa
 CFOs in Latin America expect profits to grow as measured by ROA
 Mexico has the highest profit expectations
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
23
Duke/FGV Latin American Business Outlook in Press
The Latin American Business Outlook is frequently reported in the press
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
24
Duke/FGV Latin American Business Outlook in Press
The Latin American Business Outlook is frequently reported in the press
Latin American Business Outlook
Duke University / FGV / CFO Magazine
June 2017
25
Latin American Business Outlook
Part of the Global Business Outlook
A joint survey effort between
Duke University
Fundação Getúlio Vargas
CFO magazine
El IMEF
Latin American Business Outlook
PyME
Duke University / FGV / CFO Magazine
June 2017
26