MercadoLibre Confidence Reflects Short-Term Outlook

Online retailer MercadoLibre has identified Venezuela and Argentina as markets with strong growth prospects for 2013. Despite difficult political and economic environments, MercadoLibre's CFO Pedro Arnt says its business in Venezuela remains profitable. While BMI has strong forecasts for growth in the IT markets of both countries, we believe that the long-term ou tlook may be more difficult than present growth rates suggest.

Cautious Outlook For Services Sector
Venezuela IT Market By Segment

To some extent, the growth in ICT-based services and products in Latin America is continuing regardless of the economic performance of individual countries. The growing middle class and increasing awareness and availability of internet services is driving these developments, which is being supported - but not dominated - by economic expansion. BMI 's IT market forecasts suggest this will continue in the short to medium term, with growth tapering off in the latter years of our forecast. Venezuela's government, which has been hostile towards international investors and private ownership, may prove the market's downfall.

Much of the IT market's growth relies on government and company spending. Venezuela's growth has been supported by booming oil prices, but economic forecasts show growth slowing to 2.6% in 2013 from 5.6% in 2012. The IT market may well be boosted by high social spending and decisions to use IT to make government departments more efficient, but the economic outlook will hurt companies in the market. With the IT market still relatively small in comparison with peer markets and more developed states, the potential rate of growth is high.

Nevertheless, a strong growth rate could be hampered by further devaluation of the bolivar fuerte. IT products are often purchased in dollars, making a devaluation a considerable concern for companies operating in Venezuela's IT market trying to purchase software and hardware from abroad. For MercadoLibre, growth is likely to remain strong as more users come online and get access to computing devices. Government subsidies for internet network expansion will help bring more Venezuelans to the e-retail market, but we believe the majority will still have limited spending power.

Although we expect the IT market to continue growing, the IT services sector will remain the smallest area of the market over our forecast period. We believe that more Venezuelans will need the incentive and the confidence to purchase online before this starts to really grow. As an early presence in the market, MercadoLibre stands to benefit from the country's short term growth opportunities. However, we caution that spending could easily be curtailed by the downside risks to our economic outlook and the creeping inflation rate that will diminish spending power among those Venezuelans already online.

This article is tagged to:
Geography: Venezuela, Venezuela, Venezuela, Venezuela

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