Currency pressure in Argentina and Brazil is not getting any worse, but it’s also not getting any better

5 December, 2018

Currency devaluation in Argentina and Brazil has been a thorn in the sides of Latin Airlines throughout much of 2018, but even as conditions do not seem to improving, they're not worsening either.


Summary:

  • Currency devaluation in Argentina and Brazil has been a thorn in the sides of Latin Airlines throughout much of 2018;
  • There are no immediate signs that conditions will improve, but on a positive they're not worsening either;
  • Argentina's international passenger growth contracted 8% year-on-year in Oct-2018, which was fifth consecutive month of year-on-year declines.

Just a couple of years ago Argentina was seen as one of the key developing aviation markets in South America. A new government had lifted the currency controls and introduced a series of pro-market reforms with the aim of countering years of protectionism and high levels of government spending.

Just a couple of years ago Argentina was seen as one of the key developing aviation markets in South America. A new government had lifted the currency controls and introduced a series of pro-market reforms with the aim of countering years of protectionism and high levels of government spending as well as tackling double-digit inflation, boosting exports and spurring economic growth.

Coming around in the economic cycle from a previous collapse, there were high hopes that the country could boost exports and spur economic growth. But, it was always going to be a tough mission. This year the peso has lost more than half its value and Argentina's central bank has raised interest rates to a world record 60%.

Executives at Copa Airlines recently stated during 3Q2018 the ARS devalued more than 50% and industry sales were down more than 40% in the market. The weakness has resulted in a significant deterioration in demand in Argentina's international markets.

CHART - International passenger growth in Argentina contracted 8% year-on-year in Oct-2018 as growth levels continued their annual slideSource: Argentina Government

Data from Argentina's government show international passenger growth contracted 8% year-on-year in Oct-2018, which was fifth consecutive month of year-on-year declines. At the start of 4Q2018, Copa concluded load factors on routes to Argentina were beginning to rebound, but yields remained extremely weak.

LATAM Airlines Group, which is Argentina's second largest airline with a roughly 16% market share, has concluded demand in the country's domestic market is healthy, driven by passengers opting to travel within the country due to the currency devaluation. Argentina's domestic passenger levels grew by double digits year-on-year from Jan-2018 to Oct-2018 (the latest data available).

Latin America's largest market, Brazil, has also experienced currency pressure for most of this year, and uncertainty over the recent presidential election also contributed to headwinds for Latin American airlines. Political risk and a lacklustre economy are continuing to pressure the Brazilian real and the stock market and its currency remains one of the weakest against the dollar this year.

CHART - The number of seats in the Brazilian domestic market (top) will rise slightly in 2018, but will still be below the levels seen at the start of the decade. Meanwhile, international seats (bottom) will hit a new high Source: CAPA - Centre for Aviation and OAG

FocusEconomics, a leading provider of economic analysis and forecasts, predicts that next year Brazil's recovery "should gain steam" on the back of an improving labour market and robust fixed investment. On a positive note, it says Brazil's current account balance came in at a surplus of USD 329 million in Oct-2018, contrasting the USD 686 million deficit recorded in the same month last year.

The current account surplus was chiefly due to "a higher trade surplus," it says, which came in at USD 5.9 billion in October (October 2017: USD 5.2 billion). Both export and import growth picked up notably in October. Meanwhile, foreign direct investment came in at USD 10.4 billion in October, above the USD 8.9 billion recorded in October 2017.