Posted September 13, 2016
By Larz Soper
Selling goods overseas, particularly in Latin America, has become an attractive and lucrative endeavor for many companies. The ability to grow sales and increase profit presents huge opportunities.
Of course, selling to Latin America can be a difficult “risk/reward” tradeoff for any company. In order to recoup one significant loss resulting from non-payment could require 10 times the loss or more in sales. In the current environment, Latin American markets are truly “high risk/high gain.”
In March, Bloomberg reported that a new wave of debt restructuring was happening in several Latin American countries. Companies were unable to find the cash they needed for operations and growth due to the combination of recession, political turmoil, falling commodity and oil prices and rising interest rates. This shortage of cash has also been driving increased merger and acquisition activity across the region.
In an April report released by Euler Hermes, the largest credit insurance carrier in the U.S., insolvencies in Latin America were forecasted to increase by 17 percent for 2016 and 13 percent for 2017. Companies were being affected be eroding terms of trade as currencies deprecate and commodity prices remain low.
BLOG: To Your Credit …
Walking a fine line in 'high-risk/high-gain' Latin America
In August, Ricardo Aceves, an economist at FocusEconomics, warned of continued risk in Latin America, citing heightened volatility in the global financial markets. Falling commodities prices have caused enormous financial and economic stress in Latin America over 2015 and have continued into 2016, to date. Aceves confirmed that Latin American economies had not improved as expected and that renewed volatility was experienced toward the end of Q2 2016 resulting from the impending Brexit vote and associated uncertainty.
In the wake of the Brexit vote, Aceves continued, global stock markets fell and the recovery in commodities prices halted abruptly. These factors were felt especially hard in Latin America, resulting in the devaluation of several Latin American currencies, due to Latin America vulnerability to outside market pressures. Ongoing Brexit concerns and continued uncertainty regarding commodities prices are leading to increasing withdrawal of investment capital from Latin America and other emerging markets. According to a survey of economists conducted by FocusEconomics in August, Latin America’s economy is expected to continue to deteriorate through the balance of 2016, delaying any recovery until 2017.
What does this all mean?
Undeniably, risk is increasing in Latin America. However, increased risk can also mean increased opportunity. The question is: How does a U.S. company continue to grow sales in Latin America while protecting against continued volatility and uncertainty? Confirmed letters of credit or advance payment are the safest ways to protect receivables. However, while not extending credit terms may be a safe bet this strategy most often limits sales and can significantly hinder market penetration.
Alternatively, extending credit to Latin American companies can help increase sales and gain market share, but increase your risk. Credit decisions based primarily on existing relationships or recent payment history is far from a safe strategy. There is reason that most all investment opportunities come with the following warning: Past performance is no indication or guarantee of future performance.
How could your company capitalize on the potential of increased sales and profitability in Latin American markets without dramatically increasing financial risk?
For answers to this critically important question or any others you may have, please contact Larz Soper, expert credit advisor by email here.