Drought most expensive weather disaster in Argentinian history

01 May 2018 Consultancy.lat

The drought across Southern America has had an adverse effect on the regions food production. With 47% of the region's soy crops said to be in poor condition, local economies are at breaking point. In Argentina, the arrival of rains just in time for the sewing of wheat drove the price tag of the drought past $4 billion across the country.

Stretching from Uruguay, Argentina and into southern Brazil, the 2017 - 2018 drought is now one of the most expensive disasters these countries have seen. The worst drought in decades has seen both soybean and corn crops directly affected. In Argentina, billions have been shaved of the national economy affecting plans for infrastructure projects and sending insurance companies scrambling to set their policy in order.

The drought began in late 2017 and has caused both livestock and crops to deteriorate, alarming local businesses and regional governments alike. Large swaths of land used for farming and livestocks remain barren or scorched making the weather event one of the worst droughts in years. 

In monetary terms, the drought is said to have caused between $4 billion and $5 billion worth of economic damages depending on sources. The weather disaster in Argentina alone, according to the Buenos Aires Grain Exchange has caused damages of up to $3.4 billion. 

Córdoba-based consultant Pablo Adreani of Agripac consulting indicated recently that he estimates Argentina’s soybean production for this year to fall 10 million metric tons on earlier estimates. This revised estimate drops from 57 to 47 million metric tons due to the elongation of the recent drought. For corn, his estimate drops a further 5 million metric tons from 40 to 35 million metric tons.

Adreani presumes that this will cause accumulated financial losses of roughly $5 billion, due to the lack of yield in oilseed from soy crops and corn losses. The estimates are $1 billion more pessimistic than that of local insurance companies who are becoming inundated with farmers' calls for help.

Drought most expensive weather disaster in Argentinian history

Argentinian President Macri had initially hoped that economic growth would increase 3.5% this year but the drought has caused the equivalent of a reduction of approximately 0.5 in annual GDP. The country heavily relies on agriculture as the commodity exports make up a third of its economy. 

The states that have been most heavily impacted by the lack of rain include Buenos Aires, La Pampa, Cordoba, and Santiago del Estero. The end may be in sight, however, with the province of Buenos Aires recently receiving between 30mm and 100mm of rainfall, and Cordoba and La Pampa looking set to see rain by next weekend.

Whilst the rains may replenish the moisture in the soil and prepare the region for the next cycle of wheat crops, the damage to soy and corn has been done. "It will complicate the crop, which had little soybeans (due to the loss of yields)," said an Argentinian agro-climatology specialist. The process has seen over 20 million tons of soybean lost in comparison to last year's yield. 

The effects on the Argentine economy

Depending on which estimates are taken into account, the damage to the Argentinian economy could be anywhere between $4 billion and $5 billion. Conservative estimates do not take into account the knock-on effect of economic loss on other sectors such as transport, beef and poultry. The meat and dairy industry which use soy grain for animal feed have reported $600 million in economic damage themselves. 

Argentina is the worlds number 3 producer of raw soy products and number 1 for both soymeal and soy oil. As Argentina will see much lower annual exports of these soy products, the market is turning to both Brazil and the US to fill the gap. At home, the effects of the drought will be seen throughout the entire economy. 

"A reduced soybean crop in Argentina could, in turn cut its soymeal exports and so transfer export demand to the United States," said Matt Ammermann, a commodity risk manager at INTL FCStone. "The debate is now about how much Argentinas soybean crop will be cut.” 

For the Macri Government in Argentina’s new liberal economic agenda, the setback is fierce. According to one Fausto Spotorno from the Buenos Aires-based consulting firm, Orlando Ferreres & Asociados, “this situation is frustrating because it impedes the government from reaching its expected growth, and it hits other sectors.”

Uruguay bracing for rain, Brazil sends in army

Whilst parts of Uruguay anticipate up to 200mm of rain across the country during the next week the damage has been done to the national economy. According to agricultural consultancy firm Unicampo Uruguay, the drought is going to cost an estimated $600 million. The country's corn production has dropped significantly throughout the current cycle and for soy production, it could be a yield half the size of last year.

Esteban Hoffman of Unicampo Uruguay said; “given the impact of the drought in Uruguay, we are forecasting the soybean crop will have an estimated yield of 1.5 or 1.6 mt/ha during the current crop season, which will represent a decrease of 50% versus the 2016/17 cycle.” Loosing such a substantial amount of the regions corn production has had a knock-on effect, driving prices in the US up 14%.

In the southern state of Rio Grande do Sul, the Brazilian army is delivering water to citizens who are rapidly running out of options. The city closest to the border with Uruguay, Bagé, was most affected by the drought. Urban citizens are rationing water in 12 hour cycles whilst rural areas sporadically go without water.

The Brazilian army has been delivering water in military grade trucks with large water tanks attached on the back since February 2018. Municipalities in the southern part of Rio Grande do Sol as well as cities close to the Uruguayan or Argentinian border. 

The Civil Defence Agency, who are helping the army in their relief efforts have put the economic cost of the disaster at just under $300 million. Most of this damage has been within the state’s soy industry and other grain crops.

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Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019 Consultancy.lat

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of gob.mx, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of gob.mx, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.