CFO Alberto Vargas talks about Latin America's economic outlook for 2023
By: Clara Briggs
At the start of this year, it is worth reflecting on the economic scenario and on how the market is likely to behave in the coming months. With that in mind, Jorge Alberto Vargas, an experienced CFO, shared his view on the subject with us – which we share below with our friends, clients and collaborators.
We are experiencing rising inflation not only in Brazil but in several Latin American countries. Although the evolution of this important indicator varies from country to country, the issue is directly related to supply chain matters and to governments' fiscal policies, and is therefore liable to change over the course of the year. Alberto explains that intervention by Central Banks, raising interest rates, is forcing inflation back down in the region, as was the case in Brazil, which ended 2022 with a rate of 5.8%.
For a better understanding, a few factors can be singled out as the villains of inflation:
- Fiscal policy: it can cause the economy to overheat if planned spending exceeds the gap between actual and potential output;
- Tax increases: a measure adopted by some governments to balance their accounts;
- Currency devaluation: direct interference in imports and exports;
- Rapid changes in supply and demand conditions.
According to Alberto, endemic inflation creates uncertainty for investors, who then demand a risk premium to part with their money. Some countries with a history of high inflation in the region have extraordinarily high borrowing costs which, in turn, suppress business investment – something that could harm economic growth and create distortions in the economy.
Internationally, there are signs that supply chain efficiency is beginning to improve. Industrial production in Japan, Singapore and South Korea, for example, has returned to growth, mainly in automobile production, which until then had been hampered by the semiconductor shortage. In Brazil, industrial production, still low, is expected to recover, but the fiscal policies (interest rates and inflation) to be implemented need to build confidence in the private sector so that it can respond positively. We therefore understand that the situation is not yet resolved and requires work from central banks and governments to stabilize inflation and interest rates.
It is important for governments to define fiscal policies that encourage investment, in order to create competitive service centers, stimulate Tourism, create innovation Hubs and, as a result, expand job creation. Fiscal policies cannot be focused on collecting or generating higher taxes; they must be balanced, aiming at the development of each of the countries in the region.
There is no doubt that the pandemic completely disrupted the supply chain and increased global demand for a number of items. In this scenario, rising commodity prices, input costs and transportation costs were inevitable, leading to a sharp rise in inflation overall. In this context, companies suffered from shrinking profit margins, input shortages and high complexity in supply chain management.
To offset rising costs, companies need to balance pricing with market competitiveness, which has been a challenge in itself. In addition, interest rate increases by Central Banks tightened monetary conditions, adding further stress to the situation.
In light of the above, several strategies can be adopted to help organizations remain more financially balanced, regardless of how inflation, interest rates and the economy evolve, such as the always important discipline over costs, operational efficiency, talent retention, investments in technology and automation, as well as constant monitoring of internal KPIs and market economic factors. Innovation cannot be left out, nor can the use of digital tools, customer understanding, and clarity and transparency in management.
About Alberto Vargas
Jorge Alberto Vargas holds a Master of Business Administration from the University of Warwick in England. He has experience in financial management, planning, accounting, compliance and the development of high-performance teams. He has helped several companies of different sizes achieve goals in innovation, cost reduction and growth. Before living in Brazil, he worked in Mexico, Colombia, Venezuela and Peru, always seeking to understand companies' needs and the economic reality of each country.
