Currency stability returns but outlook for travel retail remains uncertain

Most Latin American economies are experiencing a comparatively quiet start to the year. The currency devaluations that caused such problems in the middle of last year have dissipated, at least for the moment. Both the Argentine Peso and the Brazilian Real have been holding their own against the US Dollar although financial analysts worry that economic uncertainty in both countries may lead to further problems in the coming months.

Travel-wise, the relative stability has led to strong passenger figures at most airports in the region, but airport retailers are still short of shoppers with real disposable income to spend. Most duty free shops unofficially report slow sales and some suppliers are saying sales have fallen in excess of 10% in some airport and border locations.

In contrast to passenger flows at airports, traffic on the ferry companies linking Argentina and Uruguay has been poor during the high season months of December, January and February. Port authorities in Uruguay report that the number of summer travelers are down close to 30%. Although no official figures are available so far on traffic over the international road bridges linking Argentina and Uruguay, there appears to be a significant reduction in Argentine tourists driving to the beaches close to Punta del Este in Uruguay and in the south of Brazil.


Argentina:  High inflation stunts growth

In spite of high inflation and growing unemployment, the Argentine peso has been floating within a narrow band around 39/40 pesos to the Dollar for most of Q4 in 2018 and the first few weeks of this year. Argentina’s Central Bank has been active to ensure that the peso stayed close to the level it reached during the devaluation last May. The value was being shored up by interest rates as high as 70%, but which are now down closer to 50%.

High interest rates have certainly brought some degree of currency stability, but they have hit consumption hard and most department stores and supermarket groups have announced disappointing sales over the holiday period. Credit card interest remains at around 100% and even though the Central Bank has brought down the official rate, credit cards have yet to move downwards. The once prevalent payment plans offering interest free installments are very much a thing of the past, now only appearing very rarely.

Inflation remains stubbornly high at an annual rate of over 40% and although the government is targeting a year-end figure of 25%, experts and consumers alike are not confident. The International Monetary Fund says that it will announce an upward revision after its forthcoming meeting with the Argentine government at the end of this month.

The Macri government seriously miscalculated last year and 2019 started with hefty increases in public utilities, transport, and basic foodstuffs. In general, people have little faith in current forecasts and as the country enters the crucial months of the yearly salary negotiations in key industry sectors, there are calls for a general strike along with demands for salary increases in excess of 40%.

The government is revising growth forecasts downwards and even though the administration has met the fiscal objectives imposed by the International Monetary Fund, no significant recovery is expected before 2020, at the earliest.

The first round of the Argentine Presidential elections will be held in October and the government could untie the purse strings half-way through the year to soften up an undecided electorate. The only positive factor in favor of a second term for Macri is that the opposition remains divided. Former president Cristina Fernandez de Kircher is rumored to be looking at standing for election, but she is spending most of her time in Court fighting corruption allegations.

In spite of the economic situation, air transport is enjoying strong results. Passenger traffic increased 8.7% at Ezeiza International Airport to 11.2 million passengers (but traffic at Aeroparque dropped by 3.0% to 13.4 million.) The Aeroparque reduction was due to a government measure to transfer regional flights for Chile, Brazil and Paraguay to Ezeiza. Throughout the whole Argentine airport system, domestic passenger traffic increased by 11.2% to 14.4 million, mainly as a result of the launch of several low cost airlines. However international passengers only managed a 2.4% increase to 15.1 million as strong H1 growth slowed in the second half of the year.


Brazil: The Bolsonaro team takes over

The Brazilian situation differs slightly from that in Argentina. Last year’s Presidential elections brought a change of government with right-of-center President and former Army Captain Jair Bolsonaro taking office on January 1. His newly appointed government team appears to be taking stock before deciding on its next course of action.

The Brazilian Real has been floating at close to 3.5 to the dollar and has been quite stable for most of the last quarter. Even during Bolsonaro’s recent hospitalization the Real didn’t fluctuate outside the recent range. Unlike Argentina, the fundamentals in Brazil are positive. Inflation has stayed just under 4% over the last few months and the forecast for the year is 4.2%. Unemployment seems to be falling and business and consumer confidence is rising, which should lead to more investment and increases in private consumption.

The Central Bank’s benchmark interest rate is now at 6.5% and most experts are forecasting that it will remain close to this figure for the rest of the year. GDP growth is forecast at 2.4% for 2019, rising to 2.5% in 2020. The biggest difficulties that the new government faces are cutting the huge fiscal deficit and fulfilling its campaign promise to enact widescale social security reform.

Bolsonaro and his team have assumed office at a very opportune moment. The economy seems to be coming out of one of the most severe economic crises in living memory. The new economics minister Paulo Guedes has assembled a market friendly team to establish a program that will balance government finances. Pension reform will be one key to reduce government debt and we also expect more privatizations to be on the agenda. Aviation analysts suggest that state-controlled airport authority Infraero may be totally sold off (See page 66). A further round of regional airport privatizations has been confirmed for the end of March, but the large airport management companies are waiting to see what the government plans for the major government stakes (held via Infraero) in Sao Paulo Guarulhos and Rio de Janeiro Galeão.

Air traffic numbers at the two big airports in the country were contradictory.  Traffic at Sao Paulo Guarulhos jumped by 11.8 % to 42.23 milllion last year; a strong 14.95% rise in domestic passengers to 27.3 million was accompanied by a more modest 6.4% increase to 14.8 million in international travelers.

But total traffic at Rio De Janeiro Galeão, the country’s second biggest airport, was down 7.61% from 16.24 million to 15.00 million as domestic passenger numbers slumped 12.2% to 10.49 million. The number of international travelers showed a modest 5.1% increase to 4.51 million. Analysts forecast that domestic air travel will recover in 2019.

In related news, the first border duty free stores in Brazilian territory are expected to open in Q2, but many potential operators are not announcing their expectations. A continuing recovery in the Brazilian economy will be good news for the fledgling border travel retail trade but it is too early to assess potential performance.


Strong performance in Chile, Peru and Colombia

The economies on the Pacific Coast of Latin America continue to perform better than in Brazil and Argentina.

GDP in Chile grew by 4% last year, slowing to around 3.3% in 2019. Inflation was 2.0% in 2018, and is estimated to increase slightly to 3.3% by the end of 2019. Lower unemployment is expected to improve business and consumer confidence.

Economic expansion will also continue in Peru with GDP growth of 3.8% expected this year on the back of lower unemployment, and sustained investment will bring about increases in expenditure in infrastructure projects. In line with Chile and Peru, Colombia will also enjoy solid growth with GDP expected to grow by 3.2% as a result of strong domestic demand and increasing private consumption

Passenger flows at the leading airports in all three countries have been solid. Santiago in Chile saw total passengers grow to 23.3 million in 2018, an increase of 8.86% on the previous year; 23.7 million travelers used the domestic and international terminals in Lima, up 7.61% on 2017 and Bogota’s El Dorado saw total traffic increase by 5.57% to 32.7 million.


Mexico grows but outlook uncertain

If the Mexico – Canada – USA trade agreement is finally ratified, Mexico is expected to continue growing by around 2.0% this year. Strong domestic consumption and continuing exports to a strong U.S. economy should keep growth positive. Foreign direct investment is less certain, since new President Andres Lopez Obrador has not revealed a clear and coherent medium and long term economic strategy.

The cancellation of the new Mexico City International Airport at the greenfield site in Texcoco has unnerved some investors regarding the government’s future plans. The current airport continues to be at above capacity and traffic is forecast to grow by 6.6% to 47.7 million passengers in 2018. Lopez Obrador’s plan to renovate the Benito Juarez terminals and runways and convert the Santa Lucia airbase into a commercial airport is already underway but some critics are still convinced that it will not work, and operational problems will shortly result in a major slowdown of commercial aviation in the Mexican capital.

John Gallagher