Latin Loans Still Slack

Bank lending to Latin America has never recovered from the debt crises of the 1980s, when negotiators repackaged defaulted sovereign loans as Brady bonds and gave rise to the bond market bonanza of the 1990s. Bond issuance tumbled after the onset of the emerging market crises in 1997, but bank lending has not taken up the slack. In fact, bank loans to Latin America are lower than they were in 1998 prior to Brazil’s devaluation. However, it is clear that Argentina – the biggest issuer of bonds – is also the biggest bank borrower. Mexican demand for international bank loans has declined steadily whereas Brazil’s appetite for loans has increased recently.


Room to Grow

Credit cards are still relatively scarce in Latin America. Argentina, where they are most common, still lags way behind Europe and the US in card use and only 8% of Mexicans use cards. Banks and other issuers want to increase the number of credit cards in circulation. Several issuers are now providing affinity cards in Latin America that offer discounts at gas stations or accumulate frequent flyer miles. These are radical innovations for a region still starved of financial products. Ease of use is improving too, as more retail outlets begin to accept cards. Falling interest rates in most countries and the end of heavy inflation should also encourage their use.

Banks prefer credit cards to checks because they are cheaper to administer and provide valuable market data that they can sell or process internally.


Brazilian Behemoth’s Growing Value

Brazil’s big companies have become significantly more productive and profitable in recent years as a result of major economic reforms plus a series of improvements in the general business environment. These include deregulation of the oil industry, privatization of the telecoms industry and a partial privatization of the electricity sector. Analysts at Santander Central Hispano Investment calculated economic value added (EVA) by the region’s main publicly listed companies using 1999 data and found that of the 10 most productive companies in the region, five are Brazilian. In 1995, no Brazilian company made the top 10.

Curiously, though, it is Petrobras, the state-owned oil company, that emerges at the top of the EVA pile. The company has undergone a radical internal restructuring, won a New York Stock Exchange listing and made the pursuit of profits its main objective. CVRD, a privatized iron ore exporter, is second, and Embraer, a privatized aircraft manufacturer, is ranked seventh.

According to Santander’s analysis, the worst big company in Latin America is Eletrobras, the Brazilian state-owned electricity generator, although it is improving steadily. CANTV, the Venezuelan fixed line company, which until last year enjoyed a legal monopoly, is plummeting. Siderca, the Argentine steel company, is also destroying value on an increasing scale.


Mexico’s Considerable US Exposure

The US economy is slowing down, which is bad news for Latin America in general. However, a weaker US economy affects some countries much more than others. As one would expect, Mexico – the biggest exporting nation in Latin America – depends the most on the US, its Nafta partner and by far its biggest export market. Next comes Venezuela, still one of the biggest oil suppliers to the US.

It is surprising how little Argentina, Chile and Brazil sell to the US. Argentina, a significant exporter of agricultural commodities, competes in the farm markets against the US, an even bigger producer of soy, wheat and corn. Furthermore, Argentina’s biggest trade partner is Brazil, its neighbor and fellow member of Mercosur. Chile, a prospective member of Nafta, trades relatively little with the US. Brazil, the biggest economy in Latin America, sells only about one-fifth of its exports in the US. Argentina, the European Union and the US are all important export markets for Brazil.

Although Mexico’s extraordinary dependence on the US is explained by maquiladoras, operations that assemble imported components for re-export to the US, big Mexican companies also rely on the American market for a large proportion of their sales revenues. Four major corporations generate more than 20% of their sales in the US.



Users Abound, but Revenue is Elusive

The Internet has lost much of its appeal after last year’s Nasdaq collapse and the demise or near-death experience of several Latin American Internet service operators and portals. Even so, use of the Web is likely to continue growing explosively in the region. Last year, there were close to 10 million adults actively surfing the Web in Latin America. This year, there could be 15 million, and by 2004 this number could exceed 40 million. Many Internet forecasts have become discredited, particularly e-commerce projections. However, the spread of cheap computers, lower access charges and the phenomenal rise in number of working phone lines accompanied by a collapse in telephone calling charges in Latin America all suggest that aggressive Internet usage forecasts remain reasonable. The only trouble is that so few companies have found a way to make money using Web technology, with the exception of pornographic sites.