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Forthcoming elections in Brazil: Lula wins again!


Financial markets have already voted: Petrobras is raising US$67 billions in the largest secondary offer ever in Brazil. What a dramatic change from 10 years ago.

Lula has achieved a rare feat in Latin America: Balancing the right and the leftist agendas. The continent is littered with ruinous leftist governments, while the right has often paid lip service to the poor. Hence the endless cycles of military coups and revolutions in Latin America. Lula has stuck to economic policies that produced wealth: Containing inflation, diversifying exports and riding the commodity boom, keeping in check deficits, etc. As a result the middle class is cheerfully rising. Yet Lula also put in place innovative social policies that actually reached the poor. No wonder approval rates for the President have stayed in the range of 70-80%. Hats off to Lula! Deservedly.

Yet behind the celebrations and the good times, lie the shadows of corruption. Corruption in several emerging countries is often the political wedge to alternate regimes. Corruption starts discreetly, but grows under the radar, and eventually becomes manifest under media scrutiny, often before the end of a second term. Mrs. Dilma, the widely expected winner of the presidential elections, will now lead her party straight onto a third term. Instead of seeing corruption drop to a low level, the forces to push it further up will be formidable. How long will she be able to walk the fine line in policies as Lula did?

She will have a lot to prove.

Posted in Country visits, World economy.

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By André Dusault – October 1, 2010

Chronique à l’AMBAQ (Stratégie et mondialisation): La stagnation économique aux États-Unis favorisera l’émergence de nouveaux instincts en affaire


Les indices s’accumulent que la croissance aux États-Unis risque de passer par une période de mollesse prolongée. Le taux du chômage semble s’accrocher obstinément au dessus de la barre des 9%. Le stimulus économique de l’administration Obama a été juste suffisant pour endiguer la crise financière, mais pas assez pour propulser l’économie américaine dans un élan de création d’emplois stables, comme cela avait été le cas à la fin des années 30. Le chômage constitue le poids lourd qui freine la réanimation du secteur immobilier, et de la consommation. Le marché américain s’aligne maintenant vers un taux de croissance qui demeurera somme toute légèrement positif, mais sans le vrombissement auquel nous étions habitués. Ces dernières années la réponse des entreprises américaines a été de sauvegarder leur cash flow et profitabilité, en pliant vers le bas leurs structures de coûts et la main d’œuvre.

Nos entreprises canadiennes seront désappointées de voir un tel scénario se prolonger. D’une part les clients américains vont continuer d’exiger des baisses de prix, alors que les nouveaux compétiteurs des pays émergents s’acharneront à gagner leur espace dans le marché américain. Les marchés de niche sont soudainement devenus moins profitables qu’ils ne l’étaient avant la crise. Pour contrer des perspectives de croissance apparaissant plutôt stagnantes, la réflexion stratégique pourra à juste titre remplir ses lettres de noblesse et pointer vers de nouveaux chemins de croissance. Mais cette réponse sera-t-elle suffisante, si elle est agrafée de l’espérance de retourner un jour aux conditions antérieures du 20ème siècle et de maintenir les mêmes pratiques de gestion? Ou ne nous retrouvons-nous pas aujourd’hui à quelque point tournant, contemplant ainsi une opportunité de revitaliser nos habilités et compétences, de restaurer nos perspectives sur le monde, d’imaginer notre organisation du futur?

En fait si nous nous dirigeons vers une nouvelle normalité en affaires, c’est aussi une nouvelle forme de leadership qui cherchera tentativement à s’installer dans nos entreprises. Sous l’égide d’un leadership adapté aux conditions du 21ème siècle s’inscrivent cinq compétences en émergence. Elles font appel à de nouvelles connaissances, mais aussi à des formes d’instinct encore mal développées et comprises, mais non moins essentielles:

1) La maîtrise de l’international (global fluency)
Nous transportons malheureusement un angle mort sur l’évolution de la compétition globale. Nous ne voyons pas comment elle augmente ses forces dans des marchés périphériques, peu visibles du Canada. Comment de nouveaux modèles d’affaires compétitifs prennent forme et comment les meilleures opportunités dans les nouveaux marchés émergents sont capturées par les ‘early-movers’.
2) Une prédisposition à innover (predisposition to innovate)
Nous avons plutôt une prédisposition à préférer le statuquo et à demeurer égal. Nous savons bien que l’innovation est l’acte d’introduire de nouvelles idées et nouveaux produits dans les marchés. Malheureusement nous constatons que les entreprises ne savent pas vraiment comment différencier un processus d’innovation d’un processus de créativité, et comment le gérer à tous les jours. Pour beaucoup, l’innovation n’en est qu’à un stade de ‘branding’ dans leur organisation.
3) La capacité de prédire les besoins des clients (capability to predict customer needs)
Nous observons que les clients sont plus enclins à changer leurs habitudes et leurs exigences. La segmentation des marchés doit être étudiée et suivie de près, en isolant les mécanismes dynamiques derrière ces changements. Pour certains il est plus facile de continuer à comprendre les clients comme ils étaient il y a 15-20 ans, à la recherche de l’assurance d’être encore bien sûr de les saisir.
4) L’assemblage de la stratégie (strategy assembling)
Les analyses du type ‘SWOT’ ont la vie dure, nourries de l’espérance d’en tirer des insights. Les réflexions stratégiques exigent d’aller plus loin, d’avoir la capacité d’imaginer le futur et son organisation, et de rajuster le tracé en cours de route.
5) L’ajustement organisationnel (organisational tuning)
Restructurer son organisation est devenu trop souvent le paronyme à un programme de coupures de coûts. Rarement explore t’on comment modifier l’organisation pour mieux la faire fonctionner, pour diffuser le savoir-faire entre les employés et avec les clients.

A la base de ces 5 compétences, il faudra accepter que la seule logique ne sera plus suffisante pour comprendre comment le monde fonctionne, comment les clients pensent et pourront réagir à nos propositions commerciales. De nouveaux instincts, développés par la pratique et les compétences, s’inscriront comme leviers de succès. Pour avoir raison au 21ème siècle, il sera normal de se tromper et d’errer, mais il sera fondamental d’aller de l’avant.

André Du Sault
André J Haddad

Posted in Management ideas, Strategy & globalisation.

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By André Dusault – September 24, 2010

Strong elbowing in foreign exchange markets

Foreign exchange policies are becoming a critical tool for countries affected by the financial crisis. With much uncertainty surrounding future economic growth, many countries are turning to protect their export base and employment by cherishing their low exchange rate:
-A lower US$ was meant to stimulate US exports and tilt the country into sustainable economic growth. It is not working out as planned. The drop in the Euro this year has at long last clipped the overvaluation of the Euro, a source of major complaints for the Europeans. You can now bet the Euro will remain on the down side for a while. This in turn will complicate economic recovery in the USA.
-China is shifting its Yuan policy from a US$ peg to a basket of currencies. This is unlikely to lead to a stronger Yuan, as it means buying other currencies for reserves purposes, such as the Yen. And as a result, the Yen has recently shot up, much to the annoyance of Tokyo and Japanese exporters.
-The massive reserves of the Chinese Central Bank, estimated at US$ 2.4 trillion, are proving to be a reliable source of power and influence: China now has the muscle to intervene in various markets: Commodities, currencies, metals, distressed banks, etc… Just recently China was one of the players that moved in to limit the drop of the Euro. This ‘reserve’ power rests on the capacity of the country to attract FDI and turn them into export machines. Thus low manufacturing costs and an undervalued currency will continue to serve not only to generate the employment required to absorb urban migration, but also to buy influence around. This source of power is too comfortable and politically useful to let it go. China is essentially using the Capital money of foreigners to push forward its own agenda. The Yuan needle will not move up by very much for the time being.
-Interestingly other Asian currencies, such as the Korean Won, are still lower than at the outset of the financial crisis in 2008.

At the other end, strongish currencies propped up by high commodities prices, such as the C$ or the A$, have no choice but to work on the competitiveness of their exporting firms. They have little room to devalue. No wonder a host of countries have started to play elbows in the currency markets. We can expect volatility in currencies to carry on for a quite a while.

André Du Sault

Posted in CFO & treasury, World economy.

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By André Dusault – August 16, 2010

Field visits to Boston: Consumers receding, businesses hesitant.


Three visits to the Boston area in the last 8 months have shown me that the American consumer has lost some zest, and zeal. Discount sales in outlets have hardly abated. We now receive plenty of time and attention from staff in smart shops, either in shopping malls or in Newbury street. Beaches on the coast are not exactly crowded and last minute vacationers can find accommodation. There is less than the traditional ‘cheerfulness’ around, in the United States.

Business leaders are hesitant too. There are plenty of uncertainties about the American economy. The initial rebound witnessed in the stock markets served as testimony to the remarkable resilience of the American economy. The financial industry was bailed and saved by the federal government, shifting concerns and debates to getting the right policy mix of extended stimulus and future budgetary restrictions. Yet there is nagging feeling that this economic crisis might bear deep lasting damages: Big cuts in State budgets for health, education and infrastructures; sticky high unemployment, impairing a turnaround in real estate. Finally growth prospects are clouded by a stronger American dollar, and by increased competition from the emerging champions of Asia.

Resilience in company profits might well cheer the financial market participants. But the economic mess might actually take a few more years to clean up than expected. We should by all means avoid the lost decade of Japan, but this is clearly not the standard recession. We are coming to see higher deflation threats in advanced economies, while inflation and asset bubbles are heating up in key emerging economies. This all points to international volatility for the rest of 2010 and patchy growth prospects. The winds are shifting: Clouds or sunshine ahead?

André Du Sault

Posted in Country visits, World economy.

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By André Dusault – July 19, 2010

The US$/Euro exchange rate below 1.20 ! Time to review treasury operations.

US$/Euro rate, from the FT


US$/Euro rate, from the FT.

Since the beginning of 2008, exchange rates have played yo-yo in currency markets.

Just in the first five months of 2010, the US$/Euro has moved from 1.50 to 1.20, a significant drop of 20% for the Euro. That is big enough to take a hit on margins for exporters to Europe.

Since 2008, the C$/US$ moved from 0.95 to a high of 1.30, to recede back to nearly 1.00 earlier this year. Combine the two exchange rates, and you will see that the C$/Euro has moved between a high of 1.70 and a current low of 1.26.

Many treasurers expected the volatility in the currency markets to fold back. We think it is there to stay with us, up and kicking for the next 3-5 years. Here are a couple of reasons for this:
– Interest rate scenarios are still murky, with threats of inflation or disinflation rather unclear.
– Many countries face years of deleveraging. Deficits are expected to be cut down by budget cuts AND export-led growth. It is a recipe that will work for a few, but not for all.
– We can expect political disruptions in some of those countries.
– Fund flows to stock markets and money markets will remain volatile, reflecting changing growth prospects.
– Some of the winners of this financial crisis, notably China, Brazil, India, are planning to aggressively expand overseas. This will eventually come as a shock to many Westerners.

It therefore becomes increasingly important for Canadian companies to spruce up their treasury operations. The period of 2000-2008 was more stable and often one-sided in currency movements. For that reason, skills and competences in currency risks drifted away. Now is the time to review treasury operations:
– Establish a better frame for decision-making in hedging operations
– Get a better reading of market noise and turbulence in currency markets.
– Take better decisions in hedging, at the right time.

André Du Sault.

Posted in CFO & treasury, World economy.

5 comments

By André Dusault – June 7, 2010

Field trip to Mexico City (03.10): Uphill for a while

Mexico is recovering from a hard punch in 2009: A drop of 9 % in GDP. In February 2009 Carlos Slim had thrown a stone in the pool when he suggested in the media that the country should brace for a tough recession. An uproar had followed amongst economists and politicians. He was right.
The country grew by 4.3 % in the first quarter of 2010. That is giving a breather to President Felipe Calderon. But sustainable growth faces three main challenges:
1. Constitutional reforms: Pemex and the energy sector are bankrolling the state. And this vital sector is protected by the constitution.
2. Business reform: The Mexican economy is notoriously known for its oligopolies in several key sectors.
3 Security reform: The drug war has escalated. And so have the indirect costs: a drop in foreign direct investments and tourists as well.
Quite interestingly support remains high for President Calderon, who has moved into the second half of his ‘sexenio’. Now how far can he progress in these three areas of changes?
In the 10 years following the crisis of 1994, Mexico proved to the international community that it could reestablish a stable and steady management of its economy. The Central Bank and the Hacienda are now the hawkish guardians of that hard-earned credibility. Yet progress has been slow on other fronts in this first decade of the 21st century.
It will probably take much of the best goodwill of President Calderon and that of his successor to put Mexico back on a sure footing as a top tier emerging economy.
That is about ten years. Mexico will muddle along while others, like Brazil and China will be racing ahead.
André Du Sault.

Posted in Country visits.

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By André Dusault – May 26, 2010

Field visit to Sao Paulo (05.10): The mood is upswing.

Sao Paulo, and its 20 M residents


Brazil is on a roll economically. Streets of Sao Paulo are filled with new cars, modern shopping centers are bustling with new consumers and real estate is towering in the city. This is a marked change from the 1990s when hyper inflation was dragging the whole middle class down. I saw people then selling their car to buy an older one! People selling their house to move farther away. Now the middle class is moving up again and it shows. The medium term outlook for economic growth is rosy for a couple of solid reasons:
1. Exports are doing well, with China as the first buyer of Brazilian commodities.
2. Consumption is lifted by the expanding middle class.
3. Governments remain big spenders in Brazil and they hire plenty of workers.
4. Brazilian companies are investing, after years of speculation.

The upbeat mood is likely to continue for the next 5-10 years.  Brazil has announced an infrastructure program in excess of US$500 billion, from ports to highways.  This will sustain the export of commodities.  Multinationals are now positively investing in Brazil to tap on increased domestic consumption.   Even the Chinese are thinking about building car factories in the country.  And the Central Bank remains relatively safe from undue government pressures. Thus the management of the economy should remain on the safe and conservative side.

Yet I wonder as well if the seeds of future trouble are not being planted today.   Interestingly, an article in the Folha de Sao Paulo highlighted the fact that 68% of political party funding comes from construction companies.  The next day, another article complained that large infrastructure projects were running over budget by 20-30%.  This sounds eerily familiar to us.  Corruption is enjoying a field day in Brazil.  Will this ‘samba’ boom take the same turn as previous booms in Latin America?

The next presidential election scheduled for October 2010 will probably serve us an appetizer.

André Du Sault

Posted in Country visits, World economy.

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By André Dusault – May 18, 2010