Latin America: Economic Forecast and Options for Banks

No region of the world went unscathed by the global financial crisis, but Latin America has not suffered as badly as have other regions. Indeed, Latin America’s top 500 companies increased revenues and profits in 2009, despite the global crisis.1 And prospects for growth in the region seem very good for 2010, if not quite so robust as had been the case prior to the crisis, when, for nearly a decade, annual growth was around 5%. Most predictions for 2010 are for growth of 3.5-4%,2 a more rapid rebound than can be seen or is expected for the majority of the Organisation for Economic Cooperation and Development (OECD) countries.

The International Monetary Fund (IMF) forecast for the region is that Chile and Peru will lead Latin American growth into 2011, each with annual growth of 6%. Within the past year, Peru’s and Brazil’s credit ratings have become investment grade, joining Chile, which has earned this rating for several years. Columbia’s economy has also improved, although its geographical position between the more liberal governments of Ecuador, Venezuela and Argentina on one side and the more conservative governments of Chile, Mexico and Costa Rica on the other, creates political tensions among what might otherwise be natural trading partners.

There are a number of reasons for Latin America’s relative stability through the crisis and fast rebound in its wake. One is that Latin America’s lending laws are stringent in comparison with more developed countries. Further, investments have been focused on exchange-traded and fixed-income products, rather than on the more exotic derivatives that caused so much of the financial instability in the OECD countries. Latin America’s economies have also been protected by monetary policies established by the region’s central banks to control high inflation in the 1980s and 1990s.

China

Another factor that has helped Latin America recovery relative to that in the OECD countries is Chinese interest and investment. China conducted over US$140bn in trade in 2009 with Latin America, a 40% increase since 2007 and a 20-fold increase in a decade. China is now in the top five among import sources for every major Latin American economy and in the top five among export destinations for nearly all. China is Brazil’s major trading partner, exceeding trade with the US, which has slipped to number two. The Chinese economy, driven by manufacture, has an immense need for raw materials, in many of which Latin America is rich. And China is not only buying to meet its immediate needs: it is looking as well to the long term, investing heavily and providing loans on attractive terms to help develop Latin American infrastructure, as necessary for China as it is for the Latin American beneficiary countries.

Chinese investment does come with some risk. Latin American countries need to balance their short-term gains against long-term losses. Put simply, they must avoid the prospect of buying back their own raw materials as finished goods and at a premium. This is not impossible, but it requires good governance and due diligence: tough bargaining, joint ventures, strict controls. Some nations are better-prepared and positioned than others to assure that the infusion of Chinese wealth is positive in the long-term. But it is in the interest of each country, however cash poor, and of the region as a whole, to resist the temptation of a quick fix if the long-term benefits are less than optimal.

The Economy and Banking

Despite Latin America’s relative strength in weathering the 2009 crisis, banks in the region have nevertheless been affected by the straitened global credit conditions. The key priority in a still-volatile period is getting the best possible returns in the current low-grade investment environment by choosing the most appropriate – and low-risk – investment vehicles. Investment margins are very low, with financial institutions struggling to cover their deposit rates – currently at 4% – with their investment income, even with longer-term instruments, such as fixed-income products.

Although improving investment margins is currently at the top of regional banks’ agendas, increasing the percentage of the banked population is also important. Cash is still king. Although the banked population and users of credit cards in Latin America are growing, in some areas, as little as 20% of the population has a bank account. Continued increase in that percentage will bring banks significant extra trade. Doing so is part of an increased regional focus on developing payments technology – and banks have been upgrading their infrastructures accordingly. Online banking has become relatively commonplace and other innovations in the payments space are gaining momentum, notably remittances.

Remittances

Banks are developing interfaces to allow Latin Americans abroad to send money home at a much lower rate than previously, but only provided that their domestic relatives open bank accounts. This allows banks to move more aggressively into a business now dominated by wire service companies like Western Union. Banks are also adding facilities to allow Latin Americans abroad to pay bills remotely at designated locations. This strategy is already showing success in Central America, where the percentage of the banked population has grown considerably in the past three years.

Despite this growth, the maturity of the remittance market varies widely between different Latin American countries. In Mexico, for example, the market is highly developed, owing to the large Mexican-American population in the US requiring remittance services. Remittance technology in Guatemala and El Salvador has also developed rapidly. Meanwhile, laggards in this space include Venezuela and Ecuador, which currently lack the infrastructure to develop this technology. Ecuador, however, has been active in the mobile payments space. Banco de Guayaquil, for example, allows customers to use their mobile phones to pay from pre-credited accounts using a one-off number provided by the merchant.

Other Banking Strategies

To attract a wider customer base in a region where payment in cash remains a regular means of doing business, many banks in the region have begun allotting a certain percentage of their credit portfolio to microfinance. In the past two years, banks have attracted small businesses – Pequeña y mediana empresa (PyMES) – with free transactions up to a certain amount per month as loss leaders. (The reliance on cash also suggests that many small businesses have been mostly unaffected by the global financial crisis.) In addition, these banks, primarily based in Brazil, Peru and Central America, are providing seminars and courses on financial planning and business.
Increasing Integration

Multinational corporates’ desire to cut costs in the wake of the global financial crisis has driven greater technological integration within both central and south America. Several US- and Europe-headquartered global financial institutions have started to bring their regional banks onto a single technology platform to allow them to provide a seamless service to multinational companies operating throughout the region. Large Latin American banks are also moving away from country-specific solutions to standardise their payment system throughout the region. However, even where it is possible to put the technology in place, a few countries in the region – Brazil, Argentina and Columbia – still have foreign exchange (FX) limitations.

Conclusion

Virtually all forecasts for Latin America predict steady economic growth into the foreseeable future. Continued political stability in the region will be necessary to ensure this, and that remains a problem to be watched in a few countries, but the overall picture is positive. Worldwide, Latin America is increasingly seen as an attractive destination for foreign capital: India, Japan, Korea, Russia, and Vietnam are all seeking investment opportunities in the area. This provides new opportunities across Latin America for both regional and global financial institutions, which are positioned to take advantage, both through greater integration and payments innovation.

1 The ‘Latin 500’ annual ranking of Latin America’s top 500 companies, Latin Business Chronicle and Latin Trade.

2 Latin American Economic Outlook 2010, Development Centre of the Organisation for Economic Co-operation and Development, 2010, Fitch Ratings 2010.

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