Taking the plunge and setting up an operation or establishing a partnership in the CALA region always includes a host of considerations. General economic growth, security and stability in the region are priority, as well as a legal immigration framework easy to navigate. Cost of living is a significant category in that checklist, but it tends to be downplayed in favor of aspects such as average salary and a friendly business environment. However, it affects the cost of relocation for an expatriate as well as impacting the wages that a company can afford to pay local talent.
In this sense, there’s a pervasive myth in the way Latin American countries are perceived in the United States. Americans tend to believe that “down there” goods and services are cheaper. This is not necessarily true in every case. Many would be surprised to learn that Caracas in Venezuela is currently the most expensive city in the world for an expat, according to the 2014 Cost of Living survey by ECA International – more so than Oslo, Tokyo and Manhattan – while Sao Paulo, Buenos Aires and Bogota are more expensive than Miami.
To better understand the map of Latin America’s costs of living, we gathered recent reports and surveys compiling data about inflation, consumer price index (CPI), currency exchange rates and purchasing-power parity (PPP). The outcome is a list of the most expensive cities in Latin America which are also considered top tier within the ITO industry.
Sao Paulo, Brazil
This city is the second priciest location in South America only after Caracas, according the ECA’s ranking which doesn’t contemplate accommodation prices. Meanwhile, it ranks 1st in Mercer’s 2014 Cost of Living Survey, which doesn’t include the Venezuelan capital but does observe cost of housing.
Interestingly, The Economist’s Big Mac Index, taken as reference for countries’ PPP, shows that by July 2014 the Brazilian Real (BRL) was overvalued by 22.1%. But Sao Paulo actually has fallen in rankings since last year. “Much of Latin America became cheaper when we did this analysis because of the strengthening of the US Dollar (USD); in certain locations where you would have very costly housing in safe international neighborhoods, once the price is converted to US dollars, it drops,” says Ed Hannibal, Partner and Global Leader for Mercer’s Mobility practice.
Steven Kilfedder, Manager of Cost of Living and Remuneration at ECA International, points to the devaluation of the Brazilian currency, explaining why “although inflation has been relatively high in Brazil in recent years, in fact 7.3% in Sao Paulo, the index doesn’t rise but has come down in the last six months.”
Santiago also dropped in Mercer’s global ranking from 63rd in 2013 to 88th in 2014. Although the inflation in Chile has risen around 2% over the continental average, the strength of the USD remains a rather important factor here. Since the second quarter of 2013, the Chilean Peso (CLP) has depreciated 19.4%.
Not only Chile is reported to have the costliest education in the region, but figures in Numbeo show that renting a one-bedroom apartment in the city center ranges between US$ 332 and US$ 582, and paying the monthly utilities such as water, electricity, heating and garbage can reach as high as US$ 188.
However, salary level can play a crucial role. Kilfedder argues that “many people in the USA may not realize that wages in places like Brazil, Chile and Mexico are quite significantly higher than in the USA for similar job types and certainly at most senior levels”. Therefore, purchase power in these countries may grow in real terms.
ECA International produces a separate ranking for accommodation. Results from 2014 reveal that housing prices in Bogota are only more affordable than in Caracas and New York. Considering that a salary for an expat can be four or five times the salary of a local, a strategy to operate in the Colombian capital should consider the competitiveness of local salaries. Hannibal from Mercer points out that while “the allowance for an expat should depend on the relationship of the USD with local currencies, the salary paid to a national worker should contemplate inflation and consumer prices”. In Colombia real wages have been reported to rise annually between 1.5% and 3.5%, but not as much as in Santiago or Sao Paulo.
In terms of costs, Numbeo shows that a fitness club monthly fee is almost US$ 60, a liter of gasoline costs US$ 1.08 and a dinner for two on a mid-range restaurant can be around US$ 30.
For Mercer, Bogota is the fourth most expensive city in the continent and it ranks 98th globally.
CEPAL reports that except for Argentina and Venezuela, Uruguay’s “cumulative inflation for the 12 months to April 2014 was highest (9.2%).” However, the Uruguayan currency is just slightly overvalued by 2.6% (Bic Mac Index), hence the prices are quite affordable for the expat. That’s why Mercer concludes that Montevideo is cheaper than Bogota, located in the 114 spot globally.
“When comparing any two locations, a large part of the comparison will come down to exchange rates and prices, those two basic factors would affect any cost of living index,” explains Kilfedder from ECA International.
San Jose, Costa Rica
The inclusion of San Jose in this list may surprise to those unaware of how expensive real estates are in certain areas of Costa Rica’s capital. Prices are also going up, given the modest growth in real wages (1.01%) which doesn’t catch up to the rising cumulative inflation (3.7%). Even if slightly undervalued against the USD (16.5%), predicting exchange rates is the admittedly hardest thing to do when calculating costs of livings and allowances, “it’s important to note that relative costs shift with currency volatility, making overseas assignment costs sometimes greater and sometimes smaller,” adds Haanibal from Mercer.
San Jose dropped to 132nd in Mercer’s global ranking while it’s considered the ninth most expensive location in the Americas by ECA International.
Less Expensive Are…
Inflation hasn’t grown as fast in Peru (3.5%) and Mexico (3.5%), therefore consumer prices remained also lower. In fact, Peru and Mexico are two of the main recipients of FDI in the region along Brazil, Chile and Colombia. Both countries have also performed well in terms of GDP growth to the extent that “risk rating agencies have upgraded their outlook” for them. In Mexico, the national currency was appreciated against the USD by 3.0%.
Consequently, Lima ranks 135th in Mercer’s global ranking while Monterrey goes below to the 183rd spot. In addition, salaries tend to be higher in Mexico, so purchasing power rises. All of this makes it a very appealing location for both expats and companies interested in investing there.